As filed with the Securities and Exchange Commission on August 18, 1998
Registration No. 333-
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
PAINEWEBBER MORTGAGE ACCEPTANCE CORPORATION IV
(Exact name of Registrant as specified in its Charter)
Delaware
(State of Incorporation)
06-1204982
(I.R.S. Employer Identification Number)
1285 Avenue of the Americas
New York, New York 10019
212-713-2000
(Address and telephone number of Registrant's principal executive offices)
John L. Fearey, Esq.
PaineWebber Mortgage Acceptance Corporation IV
1285 Avenue of the Americas
New York, New York 10019
212-713-2000
(Name, address and telephone number of agent for service)
----------------
Copies to:
Michael S. Gambro, Esq.
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
212-504-6000
================================================================================
Approximate date of commencement of proposed sale to the public: From time
to time on or after the effective date of this Registration Statement, as
determined by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
<TABLE>
CALCULATION OF REGISTRATION FEE
========================= ===================== ===================== ========================== ====================
<CAPTION>
Title of each class of Proposed maximum Proposed maximum Amount of
securities to be Amount to be offering price per aggregate offering registration
registered registered (2) unit (1) price (1) fee (2)
========================= ===================== ===================== ========================== ====================
<S> <C> <C> <C> <C>
Asset-Backed $1,500,000,000 100% $1,500,000,000 $442,500
Certificates and
Asset-Backed Notes,
issued in series
========================= ===================== ===================== ========================== ====================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) In accordance with Rule 429(b) of the Securities and Exchange Commission's
Rules and Regulations under the Securities Act of 1933, as amended, see the
second succeeding paragraph.
-------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 of the Securities and Exchange Commission's Rules and
Regulations under the Securities Act of 1933, as amended, the Prospectus and
Prospectus Supplements contained in this Registration Statement also relate to
the Registrant's Registration Statement on Form S-3 (Registration No. 333-51375)
and the Registrant's Registration Statement on Form S-3 (Registration No.
333-15685). $674,497,206.00 aggregate principal amount of securities previously
registered, with respect to Asset-Backed Certificates and Asset-Backed Notes,
pursuant to Registration Statement on Form S-3 (Registration No. 333-51375) are
being carried forward and the related filing fee of $198,976.68 was previously
paid with such earlier registration statement. $389,852,350.52 aggregate
principal amount of securities previously registered, with respect to
Asset-Backed Certificates, pursuant to Registration Statement on Form S-3
(Registration No. 333-15685) are being carried forward and the related filing
fee of $118,137.08 was previously paid with such earlier registration statement.
EXPLANATORY NOTE
This Registration Statement includes a basic prospectus and six forms of
prospectus supplement. Version 1 shall be used in offering a series of
Certificates with various combinations of Credit Support, Version 2 shall be
used in offering a typical "shifting interest" Senior/Subordinate series,
Version 3 shall be used in offering a typical Senior/Subordinate series without
"shifting interests", Version 4 shall be used in offering a typical multi-class
series, Version 5 shall be used in offering a series of Certificates evidencing
ownership interests in a Trust Fund including Agency Securities, and Version 6
shall be used in offering a series of Notes. Each basic prospectus used (in
either preliminary or final form) will be accompanied by the applicable
prospectus supplement.
<PAGE>
PROSPECTUS
August 18, 1998
PaineWebber Mortgage Acceptance Corporation IV
Depositor
Asset-Backed Certificates
Asset-Backed Notes
(Issuable in Series)
Principal and interest with respect to Securities will be payable monthly,
quarterly, semiannually or at such other intervals on the dates specified in the
related Prospectus Supplement.
The mortgage pass-through certificates ("Certificates") or mortgaged-backed
notes ("Notes") offered hereby (together, "Securities") and by Supplements to
this Prospectus will be offered from time to time in one or more series (each, a
"Series"). Each Series of Securities will represent in the aggregate the entire
beneficial ownership interest in a Trust Fund consisting primarily of a
segregated pool of various types of single-family and multifamily residential
mortgage loans, home improvement contracts, cooperative apartment loans or
manufactured housing conditional sales contracts and installment loan agreements
(collectively, the "Residential Loans"), or beneficial interests therein (which
may include Mortgage Securities as defined herein), pass-through or
participation certificates issued or guaranteed by the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") (any such
certificates, "Agency Securities"). Information regarding a Series of Securities
and the composition of the related Trust Fund will be furnished at the time of
offering in a Prospectus Supplement.
Each Series of Securities will include one or more classes. Each class of
Securities of any Series will represent the right, which right may be senior to
the rights of one or more of the other classes of the Certificates, to receive a
specified portion of payments of principal and interest on the Residential Loans
or Agency Securities in the related Trust Fund in the manner described herein
and in the related Prospectus Supplement. A Series may include one or more
classes of Securities entitled to principal distributions, with
disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no principal distributions. See
"Description of the Certificates." A Series may include two or more classes of
Securities which differ as to the timing, sequential order or amount of
distributions of principal or interest or both. If so specified in the related
Prospectus Supplement, the Trust Fund for a Series of Securities may include
insurance policies, surety bonds, guarantees, letters of credit, reserve funds,
cash accounts, reinvestment income or other types of credit support, or any
combination thereof. See "Description of Credit Support."
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE 17.
The only obligations of the Depositor with respect to a Series of
Securities will be pursuant to its representations and warranties as described
herein. The Master Servicer with respect to a Series of Securities evidencing
interests in a Trust Fund including Residential Loans will be named in the
related Prospectus Supplement. The principal obligations of a Master Servicer
will be limited to its contractual servicing obligations, and, to the extent
described in the related Prospectus Supplement, its obligation to make certain
cash advances in the event of payment delinquencies on the Residential Loans.
Each Trust Fund will be held in trust for the benefit of the holders of the
related Series of Securities as more fully described herein. With respect to
each Series of Certificates, if specified in the related Prospectus Supplement,
one or more elections may be made to treat the related Trust Fund as a "real
estate mortgage investment conduit" ("REMIC") for federal income tax purposes.
See "Certain Federal Income Tax Consequences."
PaineWebber Incorporated
<PAGE>
THE SECURITIES OF EACH SERIES WILL NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF THE DEPOSITOR, THE MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES, EXCEPT AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT. NEITHER THE SECURITIES NOR, EXCEPT AS SET FORTH HEREIN OR IN THE
RELATED PROSPECTUS SUPPLEMENT, ANY UNDERLYING RESIDENTIAL LOAN (OTHER THAN
RESIDENTIAL LOANS IDENTIFIED AS FHA LOANS OR VA LOANS IN THE RELATED PROSPECTUS
SUPPLEMENT) OR ANY MORTGAGE SECURITY, WILL BE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY. ALTHOUGH PAYMENT OF PRINCIPAL AND
INTEREST ON AGENCY SECURITIES WILL BE GUARANTEED AS DESCRIBED HEREIN AND IN THE
RELATED PROSPECTUS SUPPLEMENT BY GNMA, FNMA OR FHLMC, THE CERTIFICATES OF ANY
SERIES EVIDENCING INTERESTS IN A TRUST FUND INCLUDING SUCH AGENCY SECURITIES
WILL NOT BE SO GUARANTEED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Securities may be offered through one or more different methods,
including offerings through underwriters, as more fully described under "Plans
of Distribution" and in the related Prospectus Supplement. The Depositor may
retain or hold for sale, from time to time, one or more classes of a Series of
Securities.
The Depositor does not intend to list any of the Securities on any
securities exchange and has not made any other arrangement for secondary trading
of the Securities. With respect to each Series, all of the Securities of each
class offered hereby will be rated in one of the four highest rating categories
by one or more nationally recognized statistical rating organizations. There
will have been no public market for any Series of Securities prior to the
offering thereof. No assurance can be given that such a market will develop as a
result of such an offering.
The Securities are offered when, as and if delivered to and accepted by the
underwriters subject to prior sale, withdrawal or modification of the offer
without notice, the approval of counsel and other conditions. Retain this
Prospectus for future reference. This Prospectus may not be used to consummate
sales of the securities offered hereby unless accompanied by a Prospectus
Supplement.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus or the related
Prospectus Supplement and, if given or made, such information or representations
must not be relied upon. This Prospectus and the related Prospectus Supplement
do not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the Securities offered hereby and thereby nor an offer of
the Securities to any person in any state or other jurisdiction in which such
offer would be unlawful. The delivery of this Prospectus or the related
Prospectus Supplement at any time does not imply that information therein is
correct as of any time subsequent to their respective date.
<PAGE>
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports and
other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information filed by the Depositor can be
inspected and copied at the public reference facilities maintained by the
Commission at its Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, and its Regional Offices located as follows: Chicago Regional
Office, Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661; New York Regional Office, Seven World Trade Center, New
York, New York 10048. Copies of such material can also be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Depositor does not intend to send any
financial reports to Securityholders. The Commission also maintains a site on
the World Wide Web at "http://www.sec.gov" at which users can view and download
copies of reports, proxy and information statements and other information filed
electronically through the Electronic Data Gathering, Analysis and Retrieval
("EDGAR") system. The Depositor has filed the Registration Statement, including
all exhibits thereto, through the EDGAR system and therefore such materials
should be available by logging onto the Commission's Web site. The Commission
maintains computer terminals providing access to the EDGAR system at each of the
offices referred to above.
This Prospectus does not contain all of the information set forth in the
Registration Statement (of which this Prospectus forms a part) and exhibits
thereto which the Depositor has filed with the Commission under the Securities
Act of 1933 and to which reference is hereby made.
Copies of FHLMC's most recent Offering Circular for FHLMC Certificates,
FHLMC's most recent Information Statement and any subsequent information
statement, any supplement to any information statement relating to FHLMC and any
quarterly report made available by FHLMC after December 31, 1983 can be obtained
by writing or calling the FHLMC Investor Inquiry Department at 8200 Jones Branch
Drive, Mail Stop 319, McLean, Virginia 22102 (800-336-3672). The Depositor did
not participate in the preparation of FHLMC's Offering Circular, Information
Statement or any supplement and, accordingly, makes no representation as to the
accuracy or completeness of the information set forth therein.
Copies of FNMA's most recent Prospectus for FNMA Certificates are available
from FNMA's Mortgage Backed Securities Office, 3900 Wisconsin Avenue, N.W.,
Washington, D.C. 20016 (202-752-6547). FNMA's annual report and quarterly
financial statements, as well as other financial information, are available from
FNMA's Office of the Treasurer, 3900 Wisconsin Avenue, N.W., Washington, D.C.
20016 (202-752-7000) or the Office of the Vice President of Investor Relations,
3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7000). The
Depositor did not participate in the preparation of FNMA's Prospectus and,
accordingly, makes no representations as to the accuracy or completeness of the
information set forth therein.
REPORTS TO CERTIFICATEHOLDERS
The Master Servicer or the Trustee (as specified in the related Prospectus
Supplement) will furnish to all registered holders of Securities of the related
Series monthly, quarterly, semi-annually or at such other intervals specified in
the related Prospectus Supplement, reports and annual statements containing
information with respect to each Trust Fund described herein and in the related
Prospectus Supplement. See "Description of the Securities--Statements to
Securityholders."
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to each Series of Securities offered hereby, there are
incorporated herein and in the related Prospectus Supplement by reference all
documents and reports filed or caused to be filed by the Depositor pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, prior
to the termination of the offering of the related Series of Securities, that
relate specifically to such related Series of Securities. The Depositor will
provide or cause to be provided without charge to each person to whom this
Prospectus and a related Prospectus Supplement is delivered in connection with
the offering of one or more classes of such Series of Securities, upon written
or oral request of such person, a copy of any or all such reports incorporated
herein by reference, in each case to the extent such reports relate to one or
more of such classes of such Series of Securities, other than the exhibits to
such documents, unless such exhibits are specifically incorporated by reference
in such documents. Requests should be directed in writing to PaineWebber
Mortgage Acceptance Corporation IV, 1285 Avenue of the Americas, New York, New
York 10019 or by telephone at (212) 713-2000.
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things, set
forth with respect to such Securities, as appropriate: (i) a description of the
class or classes of Securities and the Security Interest Rate or method of
determining the rate or the amount of interest, if any, to be paid to each such
class; (ii) the aggregate principal amount and Distribution Dates relating to
such Series and, if applicable, the initial and final scheduled Distribution
Dates for each class; (iii) information as to the assets comprising the Trust
Fund, including the general characteristics of the Trust Fund Assets included
therein and, if applicable, the insurance policies, surety bonds, guarantees,
letters of credit, reserve funds, cash accounts, reinvestment income or other
instruments or agreements included in the Trust Fund or otherwise, and the
amount and source of any reserve account or cash account; (iv) the
circumstances, if any, under which the Trust Fund may be subject to early
termination; (v) the method used to calculate the amount of principal to be
distributed with respect to each class of Securities; (vi) the order of
application of distributions to each of the classes within such Series, whether
sequential, pro rata, or otherwise; (vii) additional information with respect to
the method of distribution of such Securities; (viii) whether one or more REMIC
elections will be made and designation of the regular interests and residual
interests; (ix) the aggregate original percentage ownership interest in the
Trust Fund to be evidenced by each class of Securities; (x) information as to
the Trustee; (xi) information as to the nature and extent of subordination with
respect to any class of Securities that is subordinate in right of payment to
any other class; and (xii) information as to the Master Servicer.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus Supplement and the Prospectus
when acting as underwriters of the Securities covered by such Prospectus
Supplement and with respect to their unsold allotments or subscriptions.
<PAGE>
SUMMARY OF TERMS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and in each Prospectus Supplement with respect to the Series
offered thereby and the terms and provisions of the related Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement") or Trust Agreement
(the "Trust Agreement"; each Pooling and Servicing Agreement or Trust
Agreement, an "Agreement") to be prepared and delivered in connection with the
offering of such Series. Unless otherwise specified, capitalized terms used and
not defined in this Summary of Terms have the meanings ascribed to them in this
Prospectus and in the related Prospectus Supplement.
Securities Offered .....................Mortgage pass-through certificates
("Certificates") or mortgage-backed
notes ("Notes", and together with the
Certificates, the "Securities").
Depositor ..............................PaineWebber Mortgage Acceptance
Corporation IV (the "Depositor"), a
Delaware corporation, is a wholly-owned
limited purpose finance subsidiary of
PaineWebber Group Inc. The Depositor's
principal offices are located at 1285
Avenue of the Americas, New York, New
York 10019 and its telephone number is
(212) 713-2000. See "The Depositor."
Master Servicer ........................The entity or entities named as Master
Servicer (the "Master Servicer") for
each Series of Securities evidencing
interests in a Trust Fund including
Residential Loans as specified in the
related Prospectus Supplement. See
"Description of the Securities--Certain
Matters Regarding the Master Servicer,
the Depositor and the Trustee."
Trustees ...............................The trustee or indenture trustee (the
"Trustee") for each Series of Securities
will be named in the related Prospectus
Supplement. The owner trustee (the
"Owner Trustee") for each Series of
Notes will be named in the Prospectus
Supplement. See "Description of the
Securities--Certain Matters Regarding
the Master Servicer, the Depositor and
The Trustee."
Issuer of Notes ........................With respect to each Series of Notes,
the issuer (the "Issuer") will be the
Depositor or an owner trust established
by it for the purpose of issuing such
Series of Notes. Each such owner trust
will be created pursuant to a trust
agreement (the "Owner Trust Agreement")
between the Depositor, acting as
depositor, and the Owner Trustee. Each
Series of Notes will represent
indebtedness of the Issuer and will be
issued pursuant to an indenture between
the Issuer and the Trustee (the
"Indenture") whereby the Issuer will
pledge the Trust Fund to secure the
Notes under the lien of the Indenture.
As to each Series of Notes where the
Issuer is an owner trust, the ownership
of the Trust Fund will be evidenced by
certificates (the "Equity Certificates")
issued under the Owner Trust Agreement,
which, unless otherwise specified in the
Prospectus Supplement, are not offered
hereby. The Notes will represent
nonrecourse obligations solely of the
Issuer, and the proceeds of the Trust
Fund will be the sole source of payments
on the Notes, except as described herein
under "Description of Credit Support"
and in the related Prospectus
Supplement.
Description of Securities ..............Each Series of Securities will include
one or more classes. Each Series of
Securities (including any class or
classes of Securities of such Series not
offered hereby) will represent either
(i) with respect to each Series of
Certificates, in the aggregate the
entire beneficial ownership interest in,
or (ii) with respect to each Series of
Notes, indebtedness of, a segregated
pool of Residential Loans or Agency
Securities, or beneficial interests
therein (which may include Mortgage
Securities as defined herein) (each, a
"Trust Fund Asset"), and certain other
assets described below (together, all
such Trust Fund Assets and other assets
with respect to a Series of Securities
shall constitute a "Trust Fund"). Unless
otherwise specified in the related
Prospectus Supplement, each class of
Securities will have a stated principal
amount (a "Security Principal Balance")
and will be entitled to distributions of
interest thereon based on a specified
interest rate (the "Security Interest
Rate"). The Security Interest Rate may
vary for each class of Securities and
may be fixed, variable or adjustable.
The related Prospectus Supplement will
specify the Security Interest Rate for
each Series of Securities or each class
thereof, or the method for determining
the Security Interest Rate.
If so provided in the related Prospectus
Supplement, a Series of Securities
evidencing interests in a Trust Fund
including Residential Loans may include
one or more classes of Securities
(collectively, the "Senior Securities")
which are senior to one or more classes
of Securities (collectively, the
"Subordinate Securities") in respect of
certain distributions of principal and
interest and allocations of losses on
the Residential Loans to the extent and
in the manner provided in the related
Prospectus Supplement. Credit
enhancement may also be provided with
respect to any Series by means of
various insurance policies, surety
bonds, guarantees, letters of credit,
reserve funds, cash accounts,
reinvestment income or other types of
credit support, or any combination of
the foregoing, as described herein and
in the related Prospectus Supplement.
See "Description of Credit Support."
A Series may include one or more classes
of Securities that (i) may be entitled
to principal distributions, with
disproportionate, nominal or no interest
distributions, (ii) may be entitled to
interest distributions, with
disproportionate, nominal or no
principal distributions ("Strip
Securities"), (iii) may be entitled to
receive distributions only of
prepayments of principal throughout the
lives of the Securities or during
specified periods, (iv) may be
subordinated in the right to receive
distributions of scheduled payments of
principal, prepayments of principal,
interest or any combination thereof to
one or more other classes of Securities
of such Series throughout the lives of
the Securities or during specified
periods, (v) may be entitled to receive
such distributions only after the
occurrence of events specified in the
related Prospectus Supplement, (vi) may
be entitled to receive distributions in
accordance with a schedule or formula or
on the basis of collections from
designated portions of the assets in the
related Trust Fund, (vii) as to
Securities entitled to distributions
allocable to interest, may be entitled
to receive interest at a fixed rate or a
rate that is subject to change from time
to time, and (viii) as to Securities
entitled to distributions allocable to
interest, may be entitled to
distributions allocable to interest only
after the occurrence of events specified
in the related Prospectus Supplement and
may accrue interest until such events
occur, in each case as specified in the
related Prospectus Supplement. The
timing and amounts of such distributions
may vary among classes, over time, or
otherwise as specified in the related
Prospectus Supplement. In addition, a
Series may include two or more classes
of Securities which differ as to timing,
sequential order or amount of
distributions of principal or interest,
or both, or which may include one or
more classes of Securities ("Accrual
Securities"), as to which accrued
interest will not be distributed but
rather will be added to the Security
Principal Balance thereof on each
Distribution Date, as hereinafter
defined, in the manner described in the
related Prospectus Supplement.
As to each Series relating only to
Certificates, one or more elections may
be made to treat the related Trust Fund
or a designated portion thereof as a
"real estate mortgage investment
conduit" or "REMIC" as defined in the
Internal Revenue Code of 1986 (the
"Code"). If any such election is made as
to any Series, one of the classes of
Certificates comprising such Series will
be designated as evidencing all
"residual interests" in the related
REMIC as defined in the Code. See
"Description of the Securities."
The Securities will not represent an
interest in or obligation of the
Depositor or any affiliate thereof
except as set forth herein, nor will the
Securities, any Residential Loans (other
than Residential Loans identified as FHA
Loans or VA Loans in the related
Prospectus Supplement) or Mortgage
Securities be insured or guaranteed by
any governmental agency or
instrumentality. Although payment of
principal and interest on Agency
Securities will be guaranteed as
described herein and in the related
Prospectus Supplement by GNMA, FNMA or
FHLMC, the Securities of any Series
including such Agency Securities will
not be so guaranteed.
Interest................................Interest on each class of Securities
other than certain classes of Strip
Securities or Accrual Securities (prior
to the time when accrued interest
becomes payable thereon) of each Series
will accrue at the applicable Security
Interest Rate on the outstanding
Security Principal Balances thereof and
will be distributed to Securityholders
as provided in the related Prospectus
Supplement (each of the specified dates
on which distributions are to be made, a
"Distribution Date"). Distributions with
respect to interest on Strip Securities
with no or, in certain cases, a nominal
Security Principal Balance will be made
on each Distribution Date on the basis
of a notional amount as described herein
and in the related Prospectus
Supplement. Interest that has accrued
but is not yet payable on any Accrual
Securities will be added to the Security
Principal Balance thereof on each
Distribution Date. Distributions of
interest with respect to one or more
classes of Securities (or accruals
thereof in the case of Accrual
Securities) may be reduced to the extent
of certain delinquencies or other
contingencies described herein and in
the related Prospectus Supplement. See
"Yield Considerations", "Maturity and
Prepayment Considerations" and
"Description of the Securities."
Principal ..............................The Securities of each Series (other
than certain Strip Securities) initially
will have an aggregate Security
Principal Balance equal to either (i)
unless the related Prospectus Supplement
provides otherwise, the outstanding
principal balance of the Trust Fund
Assets included in the related Trust
Fund, as of the close of business on the
first day of the month of formation of
the related Trust Fund (the "Cut-off
Date"), after application of scheduled
payments due on or before such date,
whether or not received, or, (ii) if so
specified in the related Prospectus
Supplement with respect to a Series
having more than one class of
Securities, the total of the Cash Flow
Values (as defined herein) of the
Residential Loans as of such date. The
Security Principal Balance of a Security
represents the maximum dollar amount
(exclusive of interest thereon) which
the holder thereof is entitled to
receive in respect of principal from
future cash flow on the assets in the
related Trust Fund. The initial Security
Principal Balance of each class of
Securities will be set forth on the
cover of the related Prospectus
Supplement. Except as otherwise
specified in the related Prospectus
Supplement, distributions in respect of
principal on the Securities of each
Series will be payable on each
Distribution Date to the class or
classes of Securities entitled thereto
until the Security Principal Balance of
such class has been reduced to zero, on
a pro rata basis among all of the
Securities of such class, in proportion
to their respective outstanding Security
Principal Balances, or in the priority
and manner otherwise specified in the
related Prospectus Supplement. Strip
Securities not having a Security
Principal Balance will not receive
distributions in respect of principal.
See "The Trust Funds", "Maturity and
Prepayment Considerations" and
"Description of the Securities."
The Trust Funds ........................Each Trust Fund will consist of a
segregated pool of Residential Loans or
Agency Securities and certain other
assets as described herein and in the
related Prospectus Supplement. Unless
otherwise specified in the related
Prospectus Supplement, all Trust Fund
Assets will be purchased by the
Depositor, either directly or through an
affiliate, from unaffiliated sellers and
will be deposited into the related Trust
Fund as of the first day of the month in
which the Securities evidencing
interests therein are initially issued.
In addition, if the related Prospectus
Supplement so provides, the related
Trust Fund Assets will include funds on
deposit in an account (a "Pre-Funding
Account") which will be used to purchase
additional Residential Loans during the
period specified in the related
Prospectus Supplement. See "Description
of the Securities--Pre-Funding
Accounts."
A. Residential Loans ..................The Residential Loans will consist of
(i) mortgage loans (the "Mortgage
Loans") secured by first or junior liens
on one- to four-family residential
properties (each, a "Mortgaged
Property", collectively, "Mortgaged
Properties") or mortgage loans (the
"Multifamily Loans") secured by first or
junior liens on multifamily residential
properties consisting of five or more
dwelling units (also, "Mortgaged
Properties), (ii) home improvement
installment sales contracts and
installment loan agreements (the "Home
Improvement Contracts") which may be
unsecured or secured by a lien on the
related Mortgaged Property or a
Manufactured Home, which lien may be
subordinated to one or more senior liens
on the related Mortgaged Property, as
described in the related Prospectus
Supplement, (iii) one- to four-family
first or junior lien closed end home
equity loans for property improvement,
debt consolidation or home equity
purposes (the "Home Equity Loans"), (iv)
cooperative loans (the "Cooperative
Loans") secured primarily by shares in a
private cooperative housing corporation
(a "Cooperative") which with the related
proprietary lease or occupancy agreement
give the owner thereof the right to
occupy a particular dwelling unit in the
Cooperative or (v) manufactured housing
conditional sales contracts and
installment loan agreements (the
"Manufactured Housing Contracts"), which
may be secured by either liens on (a)
new or used Manufactured Homes (as
defined herein) or (b) the real property
and any improvements thereon (the
"Mortgaged Property", which may include
the related Manufactured Home if deemed
to be part of the real property under
applicable state law) relating to a
Manufactured Housing Contract as well as
in certain cases a lien on a new or used
Manufactured Home which is not deemed to
be a part of the related real property
under applicable state law (such
Manufactured Housing Contracts that are
secured by Mortgaged Property are
referred to herein as "Land Contracts").
The Mortgaged Properties, Cooperative
shares (together with the right to
occupy a particular dwelling unit
evidenced thereby) and Manufactured
Homes (collectively, the "Residential
Properties") may be located in any one
of the fifty states, the District of
Columbia or the Commonwealth of Puerto
Rico. Unless otherwise specified in the
related Prospectus Supplement, each
Trust Fund will contain only one of the
following types of residential loans:
(1) fully amortizing loans with a fixed
rate of interest (such rate, an
"Interest Rate") and level monthly
payments to maturity; (2) fully
amortizing loans with a fixed Interest
Rate providing for level monthly
payments, or for payments of interest
that increase annually at a
predetermined rate until the loan is
repaid or for a specified number of
years, after which level monthly
payments resume; (3) fully amortizing
loans with a fixed Interest Rate
providing for monthly payments during
the early years of the term that are
calculated on the basis of an interest
rate below the Interest Rate, followed
by monthly payments of principal and
interest that increase annually by a
predetermined percentage over the
monthly payments payable in the previous
year until the loan is repaid or for a
specified number of years, followed by
level monthly payments; (4) fixed
Interest Rate loans providing for level
payments of principal and interest on
the basis of an assumed amortization
schedule and a balloon payment of
principal at the end of a specified
term; (5) fully amortizing loans with an
Interest Rate adjusted periodically
(with corresponding adjustments in the
amount of monthly payments) to equal the
sum (which may be rounded) of a fixed
margin and an index as described in the
related Prospectus Supplement, which may
provide for an election, at the
mortgagor's option during a specified
period after origination of the loan, to
convert the adjustable Interest Rate to
a fixed Interest Rate, as described in
the related Prospectus Supplement; (6)
fully amortizing loans with an
adjustable Interest Rate providing for
monthly payments less than the amount of
interest accruing on such loan and for
such amount of interest accrued but not
paid currently to be added to the
principal balance of such loan; (7)
adjustable Interest Rate loans providing
for an election at the mortgagor's
option, in the event of an adjustment to
the Interest Rate resulting in an
Interest Rate in excess of the Interest
Rate at origination of the loan, to
extend the term to maturity for such
period as will result in level monthly
payments to maturity; or (8) such other
types of Residential Loans as may be
described in the related Prospectus
Supplement.
If specified in the related Prospectus
Supplement, the Residential Loans will
be covered by standard hazard insurance
policies with extended coverage insuring
against losses due to fire and various
other causes. If specified in the
related Prospectus Supplement, the
Residential Loans will be covered by
flood insurance policies if the related
Residential Property is located in a
federally designated flood area and if
such insurance is available. If
specified in the related Prospectus
Supplement, the Residential Loans will
be covered by primary credit insurance
policies or will be insured by the
Federal Housing Administration (the
"FHA") or partially guaranteed by the
Veterans Administration (the "VA"). See
"Description of Primary Insurance
Coverage."
B. Agency Securities...................The Agency Securities will consist of
any combination of "fully modified
pass-through mortgage-backed
certificates ("GNMA Certificates")
guaranteed by the Government National
Mortgage Association ("GNMA"),
guaranteed mortgage pass-through
securities ("FNMA Certificates") issued
by the Federal National Mortgage
Association ("FNMA") and mortgage
participation certificates ("FHLMC
Certificates") issued by the Federal
Home Loan Mortgage Corporation
("FHLMC").
C. Mortgage Securities ................If specified in the related Prospectus
Supplement, a Trust Fund may include
previously issued asset-backed
certificates, collateralized mortgage
obligations or participation
certificates (each, and collectively,
"Mortgage Securities") evidencing
interests in, or collateralized by,
Residential Loans or Agency Securities
as defined herein.
D. Trust Account ......................Each Trust Fund will include one or more
accounts (collectively, the "Trust
Account") established and maintained on
behalf of the Securityholders into which
the Master Servicer or the Trustee will,
to the extent described herein and in
the related Prospectus Supplement,
deposit all payments and collections
received or advanced with respect to the
related Trust Fund Assets. A Trust
Account may be maintained as an interest
bearing or a non-interest bearing
account, or funds held therein may be
invested in certain short-term
high-quality obligations. See
"Description of the Securities--Deposits
to the Trust Account."
E. Credit Support......................If so specified in the Prospectus
Supplement, one or more classes of
Securities within any Series evidencing
interests in a Trust Fund that includes
Residential Loans may be covered by any
combination of a surety bond, a
guarantee, letter of credit, an
insurance policy, a bankruptcy bond, a
reserve fund, a cash account,
reinvestment income, subordination of
one or more classes of Securities in a
Series (or, with respect to any Series
of Notes, the related Equity
Certificates) to the extent provided in
the related Prospectus Supplement,
cross-support between Securities
evidencing beneficial ownership in
different asset groups within the same
Trust Fund or another type of credit
support to provide partial or full
coverage for certain defaults and losses
relating to the Residential Loans. The
amount and types of coverage, the
identification of the entity providing
the coverage (if applicable), the terms
of any subordination and related
information with respect to each type of
credit support, if any, will be set
forth in the related Prospectus
Supplement for a Series of Securities.
If specified in the related Prospectus
Supplement, the coverage provided by one
or more forms of credit support may
apply concurrently to two or more
separate Trust Funds. If applicable, the
related Prospectus Supplement will
identify the Trust Funds to which such
credit support relates and the manner of
determining the amount of the coverage
provided thereby and the application of
such coverage to the identified Trust
Funds. See "Description of Credit
Support" and "Description of the
Securities--Subordination."
Servicing and Advances..................The Master Servicer, directly or through
sub-servicers, will service and
administer the Residential Loans
included in a Trust Fund and, unless the
related Prospectus Supplement provides
otherwise, in connection therewith (and
pursuant to the terms of the related
Mortgage Securities, if applicable) will
be obligated to make certain cash
advances with respect to delinquent
scheduled payments on the Residential
Loans or will be obligated to make such
cash advances only to the extent that
the Master Servicer determines that such
advances will be recoverable (any such
advance, an "Advance"). Advances made by
the Master Servicer will be reimbursable
to the extent described herein and in
the related Prospectus Supplement. The
Prospectus Supplement with respect to
any Series may provide that the Master
Servicer will obtain a cash advance
surety bond, or maintain a cash advance
reserve fund, to cover any obligation of
the Master Servicer to make advances.
The obligor on any such surety bond will
be named, and the terms applicable to
any such cash advance reserve fund will
be described in the related Prospectus
Supplement. See "Description of the
Securities--Advances."
Optional Termination ...................If so specified in the related
Prospectus Supplement, a Series of
Securities may be subject to optional
early termination ("Optional
Termination") through the repurchase of
the assets in the related Trust Fund by
the party entitled to effect such
termination, under the circumstances and
in the manner set forth herein under
"Description of the
Securities--Termination" herein and in
the related Prospectus Supplement.
Certain Federal Income
Tax Consequences .......................The Certificates of each Series offered
hereby will constitute either (i)
interests ("Grantor Trust Certificates")
in a Trust Fund treated as a grantor
trust under applicable provisions of the
Code, or (ii) "regular interests"
("REMIC Regular Certificates") or
"residual interests" ("REMIC Residual
Certificates") in a Trust Fund treated
as a REMIC under Sections 860A through
860G of the Code. Notes will represent
indebtedness of the related Trust Fund.
Investors are advised to consult their
tax advisors and to review "Certain
Federal Income Tax Consequences" herein
and in the related Prospectus
Supplement.
ERISA Considerations....................A fiduciary of a retirement plan or
other employee benefit plan or
arrangement, including an individual
retirement account or annuity or a Keogh
plan and any bank collective investment
fund or insurance company general or
separate account in which such plans,
accounts, annuities or arrangements are
invested, that is subject to Title I of
the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or
Section 4975 of the Code should
carefully review with its counsel
whether the purchase or holding of
Securities could give rise to a
transaction that is prohibited or is not
otherwise permissible either under ERISA
or Section 4975 of the Code. Plan
investors are advised to consult their
counsel and to review "ERISA
Considerations" herein and in the
related Prospectus Supplement.
Legal Investment .......................The Prospectus Supplement for each
Series of Securities will specify which,
if any, of the Securities offered
thereby constitute at the date of
issuance "mortgage related securities"
for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as
amended ("SMMEA"). Institutions whose
investment activities are subject to
review by federal or state authorities
should consult with their counsel or the
applicable authorities to determine
whether and to what extent a class of
Securities constitutes a legal
investment for them. See "Legal
Investment."
Use of Proceeds.........................The Depositor will use the net proceeds
from the sale of each Series for one or
more of the following purposes: (i) to
purchase the related Trust Fund Assets,
(ii) to repay indebtedness which has
been incurred to obtain funds to acquire
such Trust Fund Assets, (iii) to
establish any Reserve Funds described in
the related Prospectus Supplement and
(iv) to pay costs of structuring,
guaranteeing and issuing such
Securities. If so specified in the
related Prospectus Supplement, the
purchase of the Trust Fund Assets for a
Series may be effected by an exchange of
Securities with the Depositor of such
Trust Fund Assets. See "Use of
Proceeds."
Ratings.................................Unless otherwise specified in the
related Prospectus Supplement, it will
be a requirement for issuance of any
Series that the Securities offered by
this Prospectus and such Prospectus
Supplement be rated by at least one
Rating Agency in one of its four highest
applicable rating categories. The rating
or ratings applicable to Securities of
each Series offered hereby and by the
related Prospectus Supplement will be as
set forth in the related Prospectus
Supplement. A securities rating should
be evaluated independently of similar
ratings on different types of
securities. A security rating does not
address the effect that the rate of
prepayments on Residential Loans
comprising or underlying the Trust Fund
Assets may have on the yield to
investors in the Securities. See "Risk
Factors."
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities offered hereby and by the related
Prospectus Supplement.
Limited Liquidity
There can be no assurance that a secondary market for the Securities of any
Series will develop or, if it does develop, that it will provide holders with
liquidity of investment or will continue while Securities of such Series remain
outstanding. The market value of Securities of each Series will fluctuate with
changes in prevailing rates of interest. Consequently, sale of the Securities by
a holder in any secondary market that may develop may be at a discount from par
value or from its purchase price. Holders of Securities have no optional
redemption rights. Unless otherwise provided in the related Prospectus
Supplement, PaineWebber expects to make a secondary market in the Securities
offered hereby, but is not obligated to do so.
Limited Assets
The Depositor does not have, nor is it expected to have, any significant
assets. Unless otherwise specified in the related Prospectus Supplement, the
Securities of a Series will be payable solely from the Trust Fund for such
Securities and will not have any claim against or security interest in the Trust
Fund for any other Series. There will be no recourse to the Depositor or any
other person for any failure to receive distributions on the Securities.
Furthermore, at the times set forth in the related Prospectus Supplement,
certain Trust Fund Assets and/or any balance remaining in the Trust Account
immediately after making all payments due on the Securities of such Series,
after making adequate provision for future payments on certain classes of
Securities and after making any other payments specified in the related
Prospectus Supplement, may be promptly released or remitted to the Depositor,
the Master Servicer, any credit enhancement provider or any other person
entitled thereto and will no longer be available for making payments to
Securityholders. Consequently, holders of Securities of each Series must rely
solely upon payments with respect to the Trust Fund Assets and the other assets
constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any credit enhancement for such
Series, for the payment of principal of and interest on the Securities of such
Series.
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their respective affiliates. The only
obligations, if any, of the Depositor with respect to the Trust Fund Assets and
the other assets constituting the Trust Fund for a Series of Securities, or the
Securities of any Series will be pursuant to certain representations and
warranties. The Depositor does not have, and is not expected in the future to
have, any significant assets with which to meet any obligation to repurchase
Trust Fund Assets with respect to which there has been a breach of any
representation or warranty. If, for example, the Depositor were required to
repurchase a Residential Loan, its only sources of funds to make such repurchase
would be from funds obtained (i) from the enforcement of a corresponding
obligation, if any, on the part of the seller or originator of such Residential
Loan, or (ii) from a reserve account or similar credit enhancement established
to provide funds for such repurchases. The Master Servicer's servicing
obligations under the related Agreement may include its limited obligation to
make certain advances in the event of delinquencies on the Residential Loans,
but only to the extent deemed recoverable. To the extent described in the
related Prospectus Supplement, the Depositor, Master Servicer or Trustee will be
obligated under certain limited circumstances to purchase or act as a
remarketing agent with respect to a convertible Residential Loan upon the
conversion of the interest rate thereon to a fixed rate.
Credit Enhancement
Although credit enhancement is intended to reduce the risk of delinquent
payments or losses to holders of Securities entitled to the benefit thereof, the
amount of such credit enhancement will be limited, as set forth in the related
Prospectus Supplement, and may decline and could be depleted under certain
circumstances prior to the payment in full of the related Series of Securities,
and as a result Securityholders may suffer losses. Moreover, such credit
enhancement may not cover all potential losses or risks. For example, credit
enhancement may or may not cover, or may cover only in part, fraud or negligence
by a loan originator or other parties. See "Description of Credit Support."
Prepayment and Yield Considerations
The timing of principal payments of the Securities of a Series will be
affected by a number of factors, including the following: (i) the extent of
prepayments of the Residential Loans and, in the case of Agency Securities, the
underlying loans related thereto, comprising the Trust Fund, which prepayments
may be influenced by a variety of factors, (ii) the manner of allocating
principal and/or payment among the classes of Securities of a Series as
specified in the related Prospectus Supplement, (iii) the exercise by the party
entitled thereto of any right of optional termination and (iv) the rate and
timing of payment defaults and losses incurred with respect to the Trust Fund
Assets. Prepayments of principal may also result from repurchases of Trust Fund
Assets due to material breaches of the Unaffiliated Seller's (as defined
herein), originator's, Depositor's or Master Servicer's representations and
warranties, as applicable. The yield to maturity experienced by a holder of
Securities may be affected by the rate of prepayment of the Residential Loans
comprising or underlying the Trust Fund Assets. See "Yield Considerations" and
"Maturity and Prepayment Considerations."
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two or
more days prior to a Distribution Date, the effective yield to Securityholders
will be reduced from the yield that would otherwise be obtainable if interest
payable on the Certificates were to accrue through the day immediately preceding
each Distribution Date, and the effective yield (at par) to Securityholders will
be less than the indicated coupon rate. See "Description of the
Securities--Distributions" and "--Principal Interest on the Securities."
Balloon Payments
Certain of the Residential Loans as of the Cut-off Date may not be fully
amortizing over their terms to maturity and, thus, will require principal
payments (i.e., balloon payments) at their stated maturity. Residential Loans
with balloon payments involve a greater degree of risk because the ability of a
borrower to make a balloon payment typically will depend upon its ability either
to timely refinance the loan or to timely sell the related Residential Property.
The ability of a borrower to accomplish either of these goals will be affected
by a number of factors, including the level of available mortgage rates at the
time of sale or refinancing, the borrower's equity in the related Residential
Property, the financial condition of the borrower and tax laws.
Nature of Mortgages
There are several factors that could adversely affect the value of the
Residential Properties such that the outstanding balance of the related
Residential Loans, together with any senior financing on the Residential
Properties, if applicable, would equal or exceed the value of the Residential
Properties. Among the factors that could adversely affect the value of the
Residential Properties are an overall decline in the residential real estate
market in the areas in which the Residential Properties are located or a decline
in the general condition of the Residential Properties as a result of failure of
borrowers to adequately maintain the Residential Properties or of natural
disasters that are not necessarily covered by insurance, such as earthquakes and
floods. In the case of Home Improvement Contracts or other Residential Loans
that are secured by junior liens, such decline could extinguish the value of the
interest of a junior mortgagee in the Residential Property before having any
effect on the interest of the related senior mortgagee. If such a decline
occurs, the actual rates of delinquencies, foreclosures and losses on all
Residential Loans could be higher than those currently experienced in the
mortgage lending industry in general.
Even assuming that the Residential Properties provide adequate security for
the Residential Loans, substantial delays could be encountered with the
liquidation of defaulted Residential Loans and corresponding delays in the
receipt of related proceeds by Securityholders could occur. An action to
foreclose on a Residential Property securing a Residential Loan is regulated by
state statutes and rules and is subject to many of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
several years to complete. Furthermore, in some states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a
Residential Property. In the event of a default by a borrower, these
restrictions, among other things, may impede the ability of the Master Servicer
to foreclose on or sell the Residential Property or to obtain liquidation
proceeds sufficient to repay all amounts due on the related Residential Loan. In
addition, the Master Servicer will be entitled to deduct from related
liquidation proceeds all expenses reasonably incurred in attempting to recover
amounts due on defaulted Residential Loans and not yet reimbursed, including
payments to senior lienholders, legal fees and costs of legal action, real
estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted loans do not vary directly
with the outstanding principal balances of the loan at the time of default.
Therefore, assuming that a servicer took the same steps in realizing upon a
defaulted loan having a small remaining principal balance as it would in the
case of a defaulted loan having a large remaining principal balance, the amount
realized after expenses of liquidation would be smaller as a percentage of the
outstanding principal of the small loan than would be the case with the
defaulted loan having a large remaining principal balance. Since the mortgages
and deeds of trust securing certain Mortgage Loans, Multifamily Loans and Home
Improvement Contracts will be primarily junior liens subordinate to the rights
of the mortgagee under the related senior mortgage(s) or deed(s) of trust, the
proceeds from the liquidation, insurance or condemnation proceeds will be
available to satisfy the outstanding balance of such junior lien only to the
extent that the claims of the senior mortgagees have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may not
foreclose on the property securing a junior mortgage unless it forecloses
subject to any senior mortgage, in which case it must either pay the entire
amount due on any senior mortgage to the related senior mortgagee at or prior to
the foreclosure sale or undertake the obligation to make payments on any such
senior mortgage in the event the mortgagor is in default thereunder. The Trust
Fund will not have any source of funds to satisfy any senior mortgages or make
payments due to any senior mortgagees, although the Master Servicer or
Sub-Servicer may, at its option, advance such amounts to the extent deemed
recoverable and prudent. In the event that such proceeds from a foreclosure or
similar sale of the related Mortgaged Property are insufficient to satisfy all
senior liens and the Mortgage Loan, Multifamily Loan or Home Improvement
Contract in the aggregate, the Trust Fund, as the holder of the junior lien,
and, accordingly, holders of one or more classes of the Securities, to the
extent not covered by credit enhancement, are likely to (i) incur losses in
jurisdictions in which a deficiency judgment against the borrower is not
available, and (ii) incur losses if any deficiency judgment obtained is not
realized upon. In addition, the rate of default of junior mortgage loans,
multifamily loans and home improvement contracts may be greater than that of
mortgage loans secured by first liens on comparable properties.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of certain originators and
servicers of Residential Loans. In addition, most states have other laws, public
policy and general principles of equity relating to the protection of consumers,
unfair and deceptive practices and practices which may apply to the origination,
servicing and collection of the Residential Loans. Depending on the provisions
of the applicable law and the specific facts and circumstances involved,
violations of these laws, policies and principles may limit the ability of the
Master Servicer to collect all or part of the principal of or interest on the
Residential Loans, may entitle the borrower to a refund of amounts previously
paid and, in addition, could subject the Master Servicer to damages and
administrative sanctions. See "Certain Legal Aspects of Residential Loans."
Environmental Risks
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of cleanup.
In several states, such a lien has priority over the lien of an existing
mortgage against such property. In addition, under the laws of some states and
under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"), a lender may be liable, as an "owner" or
"operator", for costs of addressing releases or threatened releases of hazardous
substances that require remedy on a property, if agents or employees of the
lender have become sufficiently involved in the operations of the borrower,
regardless of whether the environmental damage or threat was caused by a prior
owner. A lender also risks such liability on foreclosure of the related
property. See "Risk Factors--Environmental Risks" and "Certain Legal Aspects of
Residential Loans--Environmental Legislation."
Certain Other Legal Considerations Regarding Residential Loans
The Residential Loans may also be subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Residential Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and
(iv) for Residential Loans that were originated or closed after
November 7, 1989, the Home Equity Loan Consumer Protection Act of 1988,
which requires additional disclosures, limits changes that may be made to
the loan documents without the borrower's consent and restricts a lender's
ability to declare a default or to suspend or reduce a borrower's credit
limit to certain enumerated events.
The Riegle Act. Certain mortgage loans are subject to the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "Riegle Act") which
incorporates the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money mortgage loans with high interest rates or high
up-front fees and charges. The provisions of the Riegle Act apply on a mandatory
basis to all mortgage loans originated on or after October 1, 1995. These
provisions can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the related
loans. In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations (collectively, the
"Holder in Due Course Rules"), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the obligor
to withhold payment if the work does not meet the quality and durability
standards agreed to by the homeowner and the contractor. The Holder in Due
Course Rules have the effect of subjecting any assignee of the seller in a
consumer credit transaction to all claims and defenses which the obligor in the
credit sale transaction could assert against the seller of the goods.
Violations of certain provisions of these federal laws may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Residential Loans and in addition could subject the Trust Fund
to damages and administrative enforcement. See "Certain Legal Aspects of
Residential Loans."
Rating of the Securities
Unless otherwise specified in the related Prospectus Supplement, it will be
a condition to the issuance of a class of Securities that they be rated in one
of the four highest rating categories by the Rating Agency identified in the
related Prospectus Supplement. Any such rating would be based on among other
things, the adequacy of the value of the Trust Fund Assets and any credit
enhancement with respect to such class and such Rating Agency's assessment
solely of the likelihood that holders of a class of Securities will receive
payments to which such Securityholders are entitled under the related Agreement.
Such rating will not constitute an assessment of the likelihood that principal
prepayments on the related Residential Loans will be made, the degree to which
such prepayments might differ from that originally anticipated or the likelihood
of early optional termination of the Series of Securities. Such rating shall not
be deemed a recommendation to purchase, hold or sell Securities, inasmuch as it
does not address market price or suitability for a particular investor. Such
rating will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a Series, such rating might also be lowered or withdrawn, among other
reasons, because of an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a class of Securities will be determined on the basis of criteria
established by each Rating Agency rating classes of such Series. Such criteria
are sometimes based upon an actuarial analysis of the behavior of similar loans
in a larger group. Such analysis is often the basis upon which each Rating
Agency determines the amount of credit enhancement required with respect to each
such class. There can be no assurance that the historical data supporting any
such actuarial analysis will accurately reflect future experience nor any
assurance that the data derived from a large pool of similar loans accurately
predicts the delinquency, foreclosure or loss experience of any particular pool
of Residential Loans. No assurance can be given that the values of any
Residential Properties have remained or will remain at their levels on the
respective dates of origination of the related Residential Loans. If the
residential real estate markets should experience an overall decline in property
values such that the outstanding principal balances of the Residential Loans in
a particular Trust Fund and any secondary financing on the related Residential
Properties become equal to or greater than the value of the Residential
Properties, the rate of delinquencies, foreclosures and losses could be higher
than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by mortgagors of scheduled payments of
principal and interest on the Residential Loans and, accordingly, the rates of
delinquencies, foreclosures and losses with respect to any Trust Fund. To the
extent that such losses are not covered by credit enhancement, such losses will
be borne, at least in part, by the holders of one or more classes of the
Securities of the related Series. See "Rating."
Book-Entry Registration
If issued in book-entry form, such registration may reduce the liquidity of
the Securities in the secondary trading market since investors may be unwilling
to purchase Securities for which they cannot obtain physical certificates. Since
transactions in Certificates can be effected only through the Depository Trust
Company ("DTC"), participating organizations ("Participants"), Financial
Intermediaries and certain banks, the ability of a Certificateholder to pledge a
Certificate to persons or entities that do not participate in the DTC system, or
otherwise to take action in respect of such Securities, may be limited due to
lack of a physical certificate representing the Securities.
In addition, Securityholders may experience some delay in their receipt of
distributions of interest and principal on the Certificates since distributions
are required to be forwarded by the Trustee to DTC and DTC will then be required
to credit such distributions to the accounts of Participants which thereafter
will be required to credit them to the accounts of Securityholders either
directly or indirectly through Financial Intermediaries. See "Description of the
Securities--Book-Entry Registration of Securities" herein.
Certain Home Improvement Contracts
Contracts Unsecured. The obligations of a borrower under an unsecured Home
Improvement Contract will not be secured by an interest in the related real
estate or otherwise, and the related Trust Fund, as the owner of such unsecured
Home Improvement Contract, will be a general unsecured creditor as to such
obligations. As a consequence, in the event of a default under an unsecured Home
Improvement Contract, the related Trust Fund will have recourse only against the
obligor's (the "Obligor") assets generally, along with all other general
unsecured creditors of the Obligor. In a bankruptcy or insolvency proceeding
relating to an Obligor on an unsecured Home Improvement Contract, the
obligations of the Obligor under such unsecured Home Improvement Contract may be
discharged in their entirety, notwithstanding the fact that the portion of such
Obligor's assets made available to the related Trust Fund as a general unsecured
creditor to pay amounts due and owing thereunder are sufficient to pay such
amounts in whole or part. An Obligor on an unsecured Home Improvement Contract
may not demonstrate the same degree of concern over performance of the Obligor's
obligations under such unsecured Home Improvement Contract as if such
obligations were secured by the real estate owned by such Obligor.
Mortgage Loans Underwritten as Non-Conforming Credits May Experience
Relatively Higher Losses
If so specified in the related Prospectus Supplement, the single family
Mortgage Loans assigned and transferred to the related Trust Fund may include
Mortgage Loans underwritten in accordance with the underwriting standards for
"non-conforming credits", which include borrowers whose creditworthiness and
repayment ability do not satisfy FNMA or FHLMC underwriting guidelines. A
Mortgage Loan made to a "non-conforming credit" means a residential loan that is
ineligible for purchase by FNMA or FHLMC due to borrower credit characteristics,
property characteristics, loan documentation guidelines or other characteristics
that do not meet FNMA or FHLMC underwriting guidelines, including a loan made to
a borrower whose creditworthiness and repayment ability do not satisfy such FNMA
or FHLMC underwriting guidelines and a borrower who may have a record of major
derogatory credit items such as default on a prior residential loan, credit
write-offs, outstanding judgments or prior bankruptcies. Because the borrowers
on such Mortgage Loans are less creditworthy than borrowers who meet FNMA or
FHLMC underwriting guidelines, delinquencies and foreclosures can be expected to
be more prevalent with respect to such Mortgage Loans than with respect to
residential loans originated in accordance with FNMA or FHLMC underwriting
guidelines. As a result, changes in the values of the Mortgaged Properties may
have a greater effect on the loss experience of such Mortgage Loans than on
residential loans originated in accordance with FNMA or FHLMC underwriting
guidelines. If the values of the Mortgaged Properties decline after the dates of
origination of such Mortgage Loans, the rate of losses on such Mortgage Loans
may increase and such increase may be substantial. See "Residential Loan
Program--Underwriting Standards."
Trust Fund Assets May Include Delinquent, Sub-Performing and Non-Performing
Residential Loans
If so specified in the related Prospectus Supplement, the Trust Fund Assets
in the related Trust Fund may include Residential Loans that are delinquent,
sub-performing or non-performing. Credit enhancement provided with respect to a
particular Series of Certificates may not cover all losses related to such
delinquent, sub-performing or non-performing Residential Loans. Prospective
investors should consider the risk that the inclusion of such Residential Loans
in the Trust Fund for a Series may cause the rate of defaults and prepayments on
the Residential Loans to increase and, in turn, may cause losses to exceed the
available credit enhancement for such Series and affect the yield on the
Securities of such Series. See "The Trust Funds--Residential Loans."
Pre-Funding Accounts
If so provided in the related Prospectus Supplement, on the Closing Date
the Depositor will deposit an amount (the "Pre-Funded Amount") specified in such
Prospectus Supplement into the Pre-Funding Account. The Pre-Funded Amount will
be used to purchase Residential Loans ("Subsequent Loans") within a period
commencing from the Closing Date and ending on a date not more than three months
after the Closing Date (such period, the "Funding Period") from the Depositor
(which, in turn, will acquire such Subsequent Loans from the seller or sellers
specified in the related Prospectus Supplement). To the extent that the entire
Pre-Funded Amount has not been applied to the purchase of Subsequent Loans by
the end of the related Funding Period, any amounts remaining in the Pre-Funding
Account will be distributed as a prepayment of principal to Securityholders on
the Distribution Date immediately following the end of the Funding Period, in
the amounts and pursuant to the priorities set forth in the related Prospectus
Supplement.
Other Considerations
There is no assurance that the market value of the Trust Fund Assets or any
other assets of a Trust Fund will at any time be equal to or greater than the
principal amount of the Securities of the related Series then outstanding, plus
accrued interest thereon. Moreover, upon an event of default under the Agreement
for a Series and a sale of the assets in the Trust Fund or upon a sale of the
assets of a Trust Fund for a Series of Securities, the Trustee, the Master
Servicer, the credit enhancer, if any, and any other service provider specified
in the related Prospectus Supplement generally will be entitled to receive the
proceeds of any such sale to the extent of unpaid fees and other amounts owing
to such persons under the related Agreement prior to distributions to
Securityholders. Upon any such sale, the proceeds thereof may be insufficient to
pay in full the principal of and interest on the Securities of such Series.
THE TRUST FUNDS
Each Trust Fund Asset will be selected by the Depositor for inclusion in a
Trust Fund from among those purchased, either directly or through affiliates,
from sellers not affiliated with the Depositor (any such sellers of Residential
Loans, hereinafter "Unaffiliated Sellers"), or, if provided in the related
Prospectus Supplement, from sellers affiliated with the Depositor.
Residential Loans
The Residential Loans will consist of mortgage loans (the "Mortgage Loans")
secured by first or junior liens on one- to four-family residential properties
(each, a "Mortgaged Property", collectively, "Mortgaged Properties") (which may
include Mortgage Securities) or mortgage loans (the "Multifamily Loans") secured
by first or junior liens on multifamily residential properties consisting of
five or more dwelling units (also, "Mortgaged Properties"), home improvement
installment sales contracts and installment loan agreements (the "Home
Improvement Contracts") which may be unsecured or secured by a lien on the
related Mortgaged Property or a Manufactured Home, which lien may be
subordinated to one or more senior liens on the related Mortgaged Property,
cooperative loans (the "Cooperative Loans") secured primarily by shares in the
related private cooperative housing corporation (a "Cooperative") that, with the
related proprietary lease or occupancy agreement, give the owner thereof the
right to occupy a particular dwelling unit (each, a "Cooperative Unit") in the
Cooperative or manufactured housing conditional sales contracts and installment
loan agreements (the "Manufactured Housing Contracts"), which may be secured by
either liens on (a) new or used Manufactured Homes or (b) the real property and
any improvements thereon (the "Mortgaged Property", which may include the
related Manufactured Home if deemed to be part of the real property under
applicable state law) relating to a Manufactured Housing Contract as well as in
certain cases a lien on a new or used Manufactured Home which is not deemed to
be a part of the related real property under applicable state law (such
Manufactured Housing Contracts that are secured by Mortgaged Property are
referred to herein as "Land Contracts"). The Mortgaged Properties, Cooperative
shares (together with the right to occupy a particular Cooperative Unit
evidenced thereby) and Manufactured Homes (collectively, the "Residential
Properties") may be located in any one of the fifty states, the District of
Columbia or the Commonwealth of Puerto Rico. Unless otherwise provided in the
related Prospectus Supplement, each Trust Fund will contain (and any
participation interest in any of the foregoing will relate to) only one of the
following types of Residential Loans:
(1) Fully amortizing loans with a fixed rate of interest (such rate, an
"Interest Rate") and level monthly payments to maturity;
(2) Fully amortizing loans with a fixed Interest Rate providing for level
monthly payments, or for payments of interest only during the early years of the
term, followed by monthly payments of principal and interest that increase
annually at a predetermined rate until the loan is repaid or for a specified
number of years, after which level monthly payments resume;
(3) Fully amortizing loans with a fixed Interest Rate providing for monthly
payments during the early years of the term that are calculated on the basis of
an interest rate below the Interest Rate, followed by monthly payments of
principal and interest that increase annually by a predetermined percentage over
the monthly payments payable in the previous year until the loan is repaid or
for a specified number of years, followed by level monthly payments;
(4) Fixed Interest Rate loans providing for level payments of principal and
interest on the basis of an assumed amortization schedule and a balloon payment
of principal at the end of a specified term;
(5) Fully amortizing loans with an Interest Rate adjusted periodically
("ARM Loans") (with corresponding adjustments in the amount of monthly
payments), to equal the sum (which may be rounded) of a fixed margin and an
index as described in the related Prospectus Supplement, which may provide for
an election, at the mortgagor's option during a specified period after
origination of the loan, to convert the adjustable Interest Rate to a fixed
Interest Rate, as described in the related Prospectus Supplement;
(6) Fully amortizing loans with an adjustable Interest Rate providing for
monthly payments less than the amount of interest accruing on such loan and for
such amount of interest accrued but not paid currently to be added to the
principal balance of such loan;
(7) ARM Loans providing for an election at the mortgagor's option, in the
event of an adjustment to the Interest Rate resulting in an Interest Rate in
excess of the Interest Rate at origination of the loan, to extend the term to
maturity for such period as will result in level monthly payments to maturity;
or
(8) Such other types of Residential Loans as may be described in the
related Prospectus Supplement.
If specified in the related Prospectus Supplement, the Trust Fund
underlying a Series of Securities may include previously issued asset-backed
certificates, collateralized mortgage obligations or participation certificates
(each, and collectively, "Mortgage Securities"), evidencing interests in, or
collateralized by, Residential Loans or Agency Securities as described herein.
The Mortgage Securities may have been issued previously by the Depositor or an
affiliate thereof, a financial institution or other entity engaged generally in
the business of lending or a limited purpose corporation organized for the
purpose of, among other things, establishing trusts, acquiring and depositing
loans into such trusts, and selling beneficial interests in such trusts. Except
as otherwise set forth in the related Prospectus Supplement, such Mortgage
Securities will be generally similar to Securities offered hereunder. As to any
such Series of Securities, the related Prospectus Supplement will include a
description of such Mortgage Securities and any related credit enhancement, and
the Residential Loans underlying such Mortgage Securities will be described
together with any other Residential Loans included in the Trust Fund relating to
such Series. As to any such Series of Securities, as used herein the term
"Residential Loans" includes the Residential Loans underlying such Mortgage
Securities. Notwithstanding any other reference herein to the Master Servicer,
with respect to a Series of Securities as to which the Trust Fund includes
Mortgage Securities, the entity that services and administers such Mortgage
Securities on behalf of the holders of such Securities may be referred to as the
"Manager", if so specified in the related Prospectus Supplement. References
herein to advances to be made and other actions to be taken by the Master
Servicer in connection with the Residential Loans may include such advances made
and other actions taken pursuant to the terms of such Mortgage Securities.
If so specified in the related Prospectus Supplement, certain Residential
Loans may contain provisions prohibiting prepayments for a specified period
after their origination date (a "Lockout Period"), prohibiting prepayments
entirely or requiring the payment of a prepayment penalty upon prepayment in
full or in part.
If so specified in the related Prospectus Supplement, the Trust Fund Assets
in the related Trust Fund may include Residential Loans that are delinquent,
sub-performing or non-performing. The inclusion of such Residential Loans in the
Trust Fund for a Series may cause the rate of defaults and prepayments on the
Residential Loans to increase and, in turn, may cause losses to exceed the
available credit enhancement for such Series and affect the yield on the
Certificates of such Series.
Mortgage Loans
The Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by mortgages or deeds of trust (the "Mortgages") creating first
or junior liens on the Mortgaged Properties. The Mortgage Loans will be secured
by one- to four-family residences, including detached and attached dwellings,
townhouses, rowhouses, individual condominium units, individual units in
planned-unit developments and individual units in de minimis planned-unit
developments. If so provided in the related Prospectus Supplement, the Mortgage
Loans will be insured by the FHA ("FHA Loans") or partially guaranteed by the VA
("VA Loans"). See "The Trust Funds--Residential Loans-FHA Loans and VA Loans"
and "Description of Primary Insurance Coverage--FHA Insurance and VA
Guarantees."
Certain of the Mortgage Loans may be secured by junior liens, and the
related senior liens ("Senior Liens") may not be included in the mortgage pool.
The primary risk to holders of Mortgage Loans secured by junior liens is the
possibility that adequate funds will not be received in connection with a
foreclosure of the related Senior Liens to satisfy fully both the Senior Liens
and the Mortgage Loan. In the event that a holder of a 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 Liens. The claims of the holders
of Senior Liens will be satisfied in full out of proceeds of the liquidation of
the Mortgage Loan, if such proceeds are sufficient, before the Trust Fund as
holder of the junior lien receives any payments in respect of the Mortgage Loan.
If the Master Servicer were to foreclose on any Mortgage Loan, it would do so
subject to any related Senior Liens. In order for the debt related to the
Mortgage Loan to be paid in full at such sale, a bidder at the foreclosure sale
of such Mortgage Loan would have to bid an amount sufficient to pay off all sums
due under the Mortgage Loan and the Senior Liens or purchase the Mortgaged
Property subject to the Senior Liens. In the event that such proceeds from a
foreclosure or similar sale of the related Mortgaged Property are insufficient
to satisfy all Senior Liens and the Mortgage Loan in the aggregate, the Trust
Fund, as the holder of the junior lien, and, accordingly, holders of one or more
classes of the Securities bear (i) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (ii) the risk of loss
if the deficiency judgment is 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 mortgages.
Liquidation expenses with respect to defaulted junior mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted junior mortgage loan having a small remaining principal balance
as it would in the case of a defaulted junior mortgage loan having a large
remaining principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the outstanding principal balance of the
small junior mortgage loan than would be the case with the defaulted junior
mortgage loan having a large remaining principal balance. Because the average
outstanding principal balance of the Mortgage Loans is smaller relative to the
size of the average outstanding principal balance of the loans in a typical pool
of conventional first priority mortgage loans, liquidation proceeds may also be
smaller as a percentage of the principal balance of a Mortgage Loan than would
be the case in a typical pool of conventional first priority mortgage loans.
Multifamily Loans
The Multifamily Loans will be evidenced by Mortgage Notes secured by
Mortgages creating first or junior liens on rental apartment buildings or
projects containing five or more dwelling units. Unless otherwise specified in
the related Prospectus Supplement, Multifamily Loans will have had original
terms to stated maturity of not more than 30 years. If so provided in the
related Prospectus Supplement, the Multifamily Loans will be FHA Loans.
Mortgaged Properties which secure Multifamily Loans may include high-rise,
mid-rise and garden apartments. See "The Trust Funds--Residential Loans--FHA
Loans and VA Loans" and "Description of Primary Insurance Coverage--FHA
Insurance and VA Guarantees."
If so provided in the related Prospectus Supplement, the Multifamily Loans
may contain provisions containing a Lockout Period, prohibiting prepayments
entirely or requiring the payment of a prepayment penalty upon prepayment in
full or in part. In the event that Securityholders will be entitled to all or a
portion of any prepayment penalties collected in respect of the related
Multifamily Loans, the related Prospectus Supplement will specify the method or
methods by which the prepayment penalties are calculated.
Home Equity Loans and Home Improvement Contracts
As specified in the related Prospectus Supplement, the Home Equity Loans
will be secured by first or junior liens on the related Mortgaged Properties for
property improvement, debt consolidation or home equity purposes. The Home
Improvement Contracts will either be unsecured or secured by Mortgages on one-
to four-family, multifamily properties or manufactured housing which Mortgages
are generally subordinate to other mortgages on the same property. Except as
otherwise specified in the related Prospectus Supplement, the Home Improvement
Contracts will be fully amortizing and may have fixed or adjustable rates of
interest and may provide for other payment characteristics. Except as specified
in the related Prospectus Supplement, the home improvements relating to the Home
Equity Loans and Home Improvement Contracts may include replacement windows,
house siding, new roofs, swimming pools, satellite dishes, kitchen and bathroom
remodeling and solar heating panels. If so provided in the related Prospectus
Supplement certain of the Home Improvement Contracts may be FHA Loans. See "The
Trust Funds--Residential Loans--FHA Loans and VA Loans" and "Description of
Primary Insurance Coverage--FHA Insurance and VA Guarantees."
Cooperative Loans
The Cooperative Loans will be evidenced by promissory notes (the
"Cooperative Notes") secured by security interests in shares issued by
Cooperatives and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific Cooperative Units in the related
buildings.
Manufactured Housing Contracts
The Manufactured Housing Contracts will consist of manufactured housing
conditional sales contracts and installment loan agreements each secured by a
Manufactured Home, or in the case of a Land Contract, by a lien on the real
estate to which the Manufactured Home is deemed permanently affixed and, in some
cases, the related Manufactured Home which is not real property under the
applicable state law. The Manufactured Homes securing the Manufactured Housing
Contracts will generally consist of manufactured homes within the meaning of 42
United States Code, Section 5402(6), which defines a "manufactured home" as "a
structure, transportable in one or more sections, which in the traveling mode,
is eight body feet or more in width or forty body feet or more in length, or,
when erected on site, is three hundred twenty or more square feet, and which is
built on a permanent chassis and designed to be used as a dwelling with or
without a permanent foundation when connected to the required utilities, and
includes the plumbing, heating, air conditioning, and electrical systems
contained therein; except that such term shall include any structure which meets
all the requirements of this paragraph except the size requirements and with
respect to which the manufacturer voluntarily files a certification required by
the Secretary of Housing and Urban Development and complies with the standards
established under this chapter."
If so provided in the related Prospectus Supplement, the Manufactured
Housing Contracts may be FHA Loans or VA Loans. See "The Trust
Funds--Residential Loans--FHA Loans and VA Loans" and "Description of Primary
Insurance Coverage--FHA Insurance and VA Guarantees."
Buydown Loans
If provided in the related Prospectus Supplement, certain of the
Residential Loans may be subject to temporary buydown plans ("Buydown Loans"),
pursuant to which the monthly payments made by the borrower in the early years
of the Buydown Loan (the "Buydown Period") will be less than the scheduled
payments on the Buydown Loan, the resulting difference to be made up from (i) an
amount contributed by the borrower, the seller of the Residential Property or
another source and placed in a custodial account and (ii) unless otherwise
specified in the related Prospectus Supplement, investment earnings on the
buydown funds. Generally, the borrower under each Buydown Loan will be qualified
at a reduced interest rate. Accordingly, the repayment of a Buydown Loan is
dependent on the ability of the borrower to make larger monthly payments after
the buydown funds have been depleted and, for certain Buydown Loans, during the
Buydown Period. See "Residential Loan Program--Underwriting Standards."
FHA Loans and VA Loans
FHA Loans will be insured by the FHA as authorized under the National
Housing Act of 1934, as amended (the "Housing Act"), and the United States
Housing Act of 1937, as amended. One- to four-family FHA Loans will be insured
under various FHA programs including the standard FHA 203-b programs to finance
the acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. Such FHA Loans generally require a minimum down
payment of approximately 5% of the original principal amount of the FHA Loan. No
FHA Loan may have an interest rate or original principal balance exceeding the
applicable FHA limits at the time of origination of such FHA Loan. See
"Description of Primary Insurance Coverage--FHA Insurance and VA Guarantees."
Home Improvement Contracts and Manufactured Housing Contracts that are FHA
Loans are insured by the FHA (as described in the related Prospectus Supplement,
up to an amount equal to 90% of the sum of the unpaid principal of the FHA Loan,
a portion of the unpaid interest and certain other liquidation costs) pursuant
to Title I of the Housing Act.
There are two primary FHA insurance programs that are available for
Multifamily FHA Loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow
HUD to insure multifamily loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of such loans made under Sections
221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of such a multifamily loan may be up to 40 years and the ratio of the loan
amount to property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure multifamily loans
made for the purchase or refinancing of existing apartment projects that are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project and a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan-to-value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
VA Loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act"). The
Servicemen's Readjustment Act permits a veteran (or in certain instances the
spouse of a veteran) to obtain a mortgage loan guarantee by the VA covering
mortgage financing of the purchase of a one- to four-family dwelling unit at
interest rates permitted by the VA. The program has no mortgage loan limits,
requires no down payment from the purchasers and permits the guarantee of
mortgage loans of up to 30 years' duration. However, no VA Loan will have an
original principal amount greater than five times the partial VA guarantee for
such VA Loan. The maximum guarantee that may be issued by the VA under this
program will be set forth in the related Prospectus Supplement. See "Description
of Primary Insurance Coverage--FHA Insurance and VA Guarantees."
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a Residential Loan at any given time is the
ratio, expressed as a percentage, of the then outstanding principal balance of
the Residential Loan, plus, in the case of a Mortgage Loan secured by a junior
lien, the outstanding principal balance of the related Senior Liens, to the
Collateral Value of the related Residential Property. Except as otherwise
specified in the Prospectus Supplement, the "Collateral Value" of a Residential
Property or Cooperative Unit, other than with respect to Refinance Loans, is 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 or loans
made to a borrower who was a tenant in a building prior to its conversion to
cooperative ownership. The "Collateral Value" of the Residential Property
securing a Refinance Loan is the appraised value thereof determined in an
appraisal obtained at the time of origination of the Refinance Loan. Unless
otherwise specified in the related Prospectus Supplement, for purposes of
calculating the Loan-to-Value Ratio of a Manufactured Housing Contract relating
to a new Manufactured Home, the Collateral Value is no greater than the sum of a
fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site) including
"accessories" identified in the invoice (the "Manufacturer's Invoice Price"),
plus the actual cost of any accessories purchased from the dealer, a delivery
and set-up allowance, depending on the size of the unit, and the cost of state
and local taxes, filing fees and up to three years prepaid hazard insurance
premiums. Unless otherwise specified in the related Prospectus Supplement, with
respect to used Manufactured Homes, the Collateral Value is the least of the
sales price, appraised value, and National Automobile Dealer's Association book
value plus prepaid taxes and hazard insurance premiums. The appraised value of a
Manufactured Home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable.
Residential Properties may be subject to subordinate financing at the time
of origination. As is customary in residential lending, subordinate financing
may be obtained with respect to a Residential Property after the origination of
the Residential Loan without the lender's consent.
No assurance can be given that values of the Residential Properties have
remained or will remain at their historic levels on the respective dates of
origination of the related Residential Loans. If the residential real estate
market were to experience an overall decline in property values such that the
outstanding principal balances of the Residential Loans, and any other financing
on the related Residential Properties, become equal to or greater than the value
of the Residential Properties, the actual rates of delinquencies, foreclosures
and losses may be higher than those now generally experienced in the mortgage
lending industry. In addition, adverse economic conditions (which may or may not
affect real property values) may affect the timely payment by borrowers of
scheduled payments of principal and interest on the Residential Loans and,
accordingly, the actual rates of delinquencies, foreclosures and losses. To the
extent that such losses are not covered by the applicable insurance policies and
other forms of credit support described herein and in the related Prospectus
Supplement, such losses will be borne, at least in part, by the holders of one
or more classes of the Securities of the related Series. See "Description of the
Securities" and "Description of Credit Support."
Agency Securities
The Agency Securities will consist of any combination of "fully modified
pass-through" mortgage-backed certificates guaranteed by the GNMA ("GNMA
Certificates"), guaranteed mortgage pass-through securities issued by the FNMA
("FNMA Certificates") and mortgage participation certificates issued by the
FHLMC ("FHLMC Certificates").
GNMA
GNMA is a wholly-owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. Section 306(g) of Title
III of the Housing Act authorizes GNMA to guarantee the timely payment of the
principal of and interest on certificates that are based on and backed by a pool
of FHA Loans, VA Loans or by pools of other eligible residential loans.
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection." In order to meet
its obligations under such guaranty, GNMA is authorized, under Section 306(d) of
the Housing Act, to borrow from the United States Treasury with no limitations
as to amount, to perform its obligations under its guarantee.
GNMA Certificates
Each GNMA Certificate will be a "fully modified pass-through"
mortgage-backed certificate issued and serviced by an issuer approved by GNMA or
FNMA as a seller-servicer of FHA Loans or VA Loans, except as described below
with respect to Stripped Agency Securities (as defined below). The loans
underlying GNMA Certificates may consist of FHA Loans, VA Loans and other loans
eligible for inclusion in loan pools underlying GNMA Certificates. GNMA
Certificates may be issued under either or both of the GNMA I program and the
GNMA II program, as described in the related Prospectus Supplement. The
Prospectus Supplement for Certificates of each Series evidencing interests in a
Trust Fund including GNMA Certificates will set forth additional information
regarding the GNMA guaranty program, the characteristics of the pool underlying
such GNMA Certificates, the servicing of the related pool, the payment of
principal and interest on GNMA Certificates to the extent not described herein
and other relevant matters with respect to the GNMA Certificates.
Except as otherwise specified in the related Prospectus Supplement or as
described below with respect to Stripped Agency Securities, each GNMA
Certificate will provide for the payment, by or on behalf of the issuer, to the
registered holder of such GNMA Certificate of monthly payments of principal and
interest equal to the holder's proportionate interest in the aggregate amount of
the monthly principal and interest payments on each related FHA Loan or VA Loan,
less servicing and guaranty fees aggregating the excess of the interest on such
FHA Loan or VA Loan over the GNMA Certificates pass-through rate. In addition,
each payment to a holder of a GNMA Certificate will include proportionate
pass-through payments to such holder of any prepayments of principal of the FHA
Loans or VA Loans underlying the GNMA Certificate and the holder's proportionate
interest in the remaining principal balance in the event of a foreclosure or
other disposition of any such FHA Loan or VA Loan.
The GNMA Certificates do not constitute a liability of, or evidence any
recourse against, the issuer of the GNMA Certificates, the Depositor or any
affiliates thereof, and the only recourse of a registered holder, such as the
Trustee, is to enforce the guaranty of GNMA.
GNMA will have approved the issuance of each of the GNMA Certificates
included in a Trust Fund in accordance with a guaranty agreement or contract
between GNMA and the issuer of such GNMA Certificates. Pursuant to such
agreement, such issuer, in its capacity as servicer, is required to perform
customary functions of a servicer of FHA Loans and VA Loans, including
collecting payments from borrowers and remitting such collections to the
registered holder, maintaining escrow and impoundment accounts of borrowers for
payments of taxes, insurance and other items required to be paid by the
borrower, maintaining primary hazard insurance, and advancing from its own funds
in order to make timely payments of all amounts due on the GNMA Certificate,
even if the payments received by such issuer on the loans backing the GNMA
Certificate are less than the amounts due thereon. If the issuer is unable to
make payments on a GNMA Certificate as they become due, it must promptly notify
GNMA and request GNMA to make such payment. Upon such notification and request,
GNMA will make such payments directly to the registered holder of the GNMA
Certificate. In the event no payment is made by the issuer and the issuer fails
to notify and request GNMA to make such payment, the registered holder of the
GNMA Certificate has recourse against only GNMA to obtain such payment. The
Trustee or its nominee, as registered holder of the GNMA Certificates included
in a Trust Fund, is entitled to proceed directly against GNMA under the terms of
the guaranty agreement or contract relating to such GNMA Certificates for any
amounts that are not paid when due under each GNMA Certificate.
The GNMA Certificates included in a Trust Fund may have other
characteristics and terms, different from those described above so long as such
GNMA Certificates and underlying residential loans meet the criteria of the
Rating Agency or Agencies. Such GNMA Certificates and underlying residential
loans will be described in the related Prospectus Supplement.
FNMA
FNMA is a federally chartered and stockholder-owned corporation organized
and existing under the Federal National Mortgage Association Charter Act, as
amended (the "Charter Act"). FNMA was originally established in 1938 as a United
States government agency to provide supplemental liquidity to the mortgage
market and was transformed into a stockholder-owned and privately managed
corporation by legislation enacted in 1968.
FNMA provides funds to the mortgage market by purchasing mortgage loans
from lenders. FNMA acquires funds to purchase loans from many capital market
investors, thereby expanding the total amount of funds available for housing.
Operating nationwide, FNMA helps to redistribute mortgage funds from
capital-surplus to capital-short areas. In addition, FNMA issues mortgage-backed
securities primarily in exchange for pools of mortgage loans from lenders. FNMA
receives fees for its guaranty of timely payment of principal and interest on
its mortgage-backed securities.
FNMA Certificates
FNMA Certificates are Guaranteed Mortgage Pass-Through Certificates
typically issued pursuant to a prospectus which is periodically revised by FNMA.
FNMA Certificates represent fractional undivided interests in a pool of mortgage
loans formed by FNMA. Each mortgage loan must meet the applicable standards of
the FNMA purchase program. Mortgage loans comprising a pool are either provided
by FNMA from its own portfolio or purchased pursuant to the criteria of the FNMA
purchase program. Mortgage loans underlying FNMA Certificates included in a
Trust Fund will consist of conventional mortgage loans, FHA Loans or VA Loans.
The Prospectus Supplement for Securities of each Series evidencing interests in
a Trust Fund including FNMA Certificates will set forth additional information
regarding the FNMA program, the characteristics of the pool underlying such FNMA
Certificates, the servicing of the related pool, payment of principal and
interest on the FNMA Certificates to the extent not described herein and other
relevant matters with respect to the FNMA Certificates.
Except as described below with respect to Stripped Agency Securities, FNMA
guarantees to each registered holder of a FNMA Certificate that it will
distribute amounts representing such holder's proportionate share of scheduled
principal and interest at the applicable pass-through rate provided for by such
FNMA Certificate on the underlying mortgage loans, whether or not received, and
such holder's proportionate share of the full principal amount of any prepayment
or foreclosed or other finally liquidated mortgage loan, whether or not such
principal amount is actually recovered.
The obligations of FNMA under its guarantees are obligations solely of FNMA
and are not backed by, nor entitled to, the full faith and credit of the United
States. If FNMA were unable to satisfy such obligations, distributions to the
holders of FNMA Certificates would consist solely of payments and other
recoveries on the underlying loans and, accordingly, monthly distributions to
the holders of FNMA Certificates would be affected by delinquent payments and
defaults on such loans.
FNMA Certificates evidencing interests in pools of mortgage loans formed on
or after May 1, 1985 (other than FNMA Certificates backed by pools containing
graduated payment mortgage loans or multifamily loans) are available in
book-entry form only. With respect to a FNMA Certificate issued in book-entry
form, distributions thereon will be made by wire, and with respect to a fully
registered FNMA Certificate, distributions thereon will be made by check.
The FNMA Certificates included in a Trust Fund may have other
characteristics and terms, different from those described above, so long as such
FNMA Certificates and underlying mortgage loans meet the criteria of the Rating
Agency or Rating Agencies rating the Certificates of such Series. Such FNMA
Certificates and underlying mortgage loans will be described in the related
Prospectus Supplement.
FHLMC
FHLMC is a corporate instrumentality of the United States created pursuant
to Title III of the Emergency Home Finance Act of 1970, as amended (the "FHLMC
Act"). FHLMC was established primarily for the purpose of increasing the
availability of mortgage credit for the financing of needed housing. It seeks to
provide an enhanced degree of liquidity for residential mortgage investments
primarily by assisting in the development of secondary markets for conventional
mortgages. The principal activity of FHLMC currently consists of the purchase of
first lien, conventional residential mortgage loans or participation interests
in such mortgage loans and the resale of the mortgage loans so purchased in the
form of mortgage securities, primarily FHLMC Certificates. FHLMC is confined to
purchasing, so far as practicable, mortgage loans and participation interests
therein which it deems to be of such quality, type and class as to meet
generally the purchase standards imposed by private institutional mortgage
investors.
FHLMC Certificates
Each FHLMC Certificate represents an undivided interest in a pool of
residential loans that may consist of first lien conventional residential loans,
FHA Loans or VA Loans ("FHLMC Certificate Group"). Each such mortgage loan must
meet the applicable standards set forth in the FHLMC Act. A FHLMC Certificate
Group may include whole loans, participation interests in whole loans and
undivided interests in whole loans and/or participations comprising another
FHLMC Certificate Group. The Prospectus Supplement for Securities of each Series
evidencing interests in a Trust Fund including FHLMC Certificates will set forth
additional information regarding the FHLMC guaranty program, the characteristics
of the pool underlying such FHLMC Certificate, the servicing of the related
pool, payment of principal and interest on the FHLMC Certificate to the extent
not described herein and other relevant matters with respect to the FHLMC
Certificates.
Except as described below with respect to Stripped Agency Securities, FHLMC
guarantees to each registered holder of a FHLMC Certificate the timely payment
of interest on the underlying mortgage loans to the extent of the applicable
pass-through rate on the registered holder's pro rata share of the unpaid
principal balance outstanding on the underlying mortgage loans in the FHLMC
Certificate Group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
collection by such holder of all principal on the underlying mortgage loans,
without any offset or deduction, to the extent of such holder's pro rata share
thereof, but does not, except if and to the extent specified in the related
Prospectus Supplement, guarantee the timely payment of scheduled principal.
Pursuant to its guarantees, FHLMC also guarantees ultimate collection of
scheduled principal payments, prepayments of principal and the remaining
principal balance in the event of a foreclosure or other disposition of a
mortgage loan. FHLMC may remit the amount due on account of its guarantee of
collection of principal at any time after default on an underlying mortgage
loan, but not later than 30 days following the latest of (i) foreclosure sale,
(ii) payment of the claim by any mortgage insurer and (iii) the expiration of
any right of redemption, but in any event no later than one year after demand
has been made upon the mortgagor for accelerated payment of principal. In taking
actions regarding the collection of principal after default on the mortgage
loans underlying FHLMC Certificates, including the timing of demand for
acceleration, FHLMC reserves the right to exercise its servicing judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and FHLMC has not adopted servicing standards
that require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of FHLMC Certificates would
be affected by delinquent payments and defaults on such Mortgage Loans.
The FHLMC Certificates included in a Trust Fund may have other
characteristics and terms, different from those described above, so long as such
FHLMC Certificates and underlying mortgage loans meet the criteria of the Rating
Agency or Rating Agencies rating the Securities of such Series. Such FHLMC
Certificates and underlying mortgage loans will be described in the related
Prospectus Supplement.
Stripped Agency Securities
The GNMA Certificates, FNMA Certificates or FHLMC Certificates may be
issued in the form of certificates ("Stripped Agency Securities") which
represent an undivided interest in all or part of either the principal
distributions (but not the interest distributions) or the interest distributions
(but not the principal distributions), or in some specified portion of the
principal or interest distributions (but not all of such distributions), on an
underlying pool of mortgage loans or certain other GNMA Certificates, FNMA
Certificates or FHLMC Certificates. GNMA, FNMA or FHLMC, as applicable, will
guarantee each Stripped Agency Security to the same extent as such entity
guarantees the underlying securities backing such Stripped Agency Securities or
to the extent described above with respect to a Stripped Agency Security backed
by a pool of mortgage loans, unless otherwise specified in the related
Prospectus Supplement. The Prospectus Supplement for Securities of each Series
evidencing interests in a Trust Fund including Stripped Agency Securities will
set forth additional information regarding the characteristics of the assets
underlying such Stripped Agency Securities, the payments of principal and
interest on the Stripped Agency Securities and other relevant matters with
respect to the Stripped Agency Securities.
Additional Information Concerning the Trust Funds
Each Prospectus Supplement relating to a Series of Securities will contain
information, as of the date of such Prospectus Supplement, if applicable and to
the extent specifically known to the Depositor, with respect to the Residential
Loans or Agency Securities contained in the related Trust Fund, including, but
not limited to (i) the aggregate outstanding principal balance and the average
outstanding principal balance of the Trust Fund Assets as of the applicable
Cut-off Date, (ii) the types of related Residential Properties (e.g., one- to
four-family dwellings, multifamily residential properties, shares in
Cooperatives and the related proprietary leases or occupancy agreements,
condominiums and planned-unit development units, vacation and second homes and
new or used Manufactured Homes), (iii) the original terms to maturity, (iv) the
outstanding principal balances, (v) the origination dates, (vi) with respect to
Multifamily Loans, the Lockout Periods and prepayment penalties, (vii) the
loan-to-value ratios or, with respect to Residential Loans secured by a junior
lien, the combined loan-to-value ratios at origination, (viii) the Interest
Rates or range of Interest Rates borne by the Residential Loans or residential
loans underlying the Agency Securities, (ix) the geographical distribution of
the Residential Properties on a state-by-state basis, (x) the fixed Security
Interest Rate, or the initial Security Interest Rate in the case of a Series or
class of Securities with a variable or adjustable Security Interest Rate, (xi)
the number and aggregate principal balance of Buydown Loans, if any, (xii) the
Retained Interest, if any, (xiii) with respect to ARM Loans, the adjustment
dates, the highest, lowest and weighted average margin, and the maximum Interest
Rate variations at the time of adjustments and over the lives of the ARM Loans,
and (xiv) information as to the payment characteristics of the Residential
Loans. If specific information respecting the Trust Fund Assets is not known to
the Depositor at the time a Series of Securities is initially offered, more
general information of the nature described above will be provided in the
related Prospectus Supplement, and specific information will be set forth in a
report made available at or before the issuance of such Securities, which
information will be included in a report on Form 8-K which will be available to
purchasers of the related Securities at or before the initial issuance thereof
and will be filed with the Commission within fifteen days after the initial
issuance of such Securities. If Mortgage Loans are added to or deleted from a
Trust Fund after the date of the related Prospectus Supplement, such addition or
deletion will be noted in a report on Form 8-K.
The Depositor will cause the Residential Loans comprising each Trust Fund
(or Mortgage Securities evidencing interests therein) to be assigned to the
Trustee for the benefit of the holders of the Certificates of the related
Series. The Master Servicer will service the Residential Loans comprising any
Trust Fund, either directly or through other servicing institutions (each, a
"Sub-Servicer"), pursuant to a Pooling and Servicing Agreement or Servicing
Agreement among itself, the Depositor and the Trustee (each, a "Servicing
Agreement"), and will receive a fee for such services. See "Residential Loan
Program" and "Description of the Securities." With respect to Residential Loans
serviced through a Sub-Servicer, the Master Servicer will remain liable for its
servicing obligations under the related Servicing Agreement as if the Master
Servicer alone were servicing such Residential Loans.
The Depositor will assign the Residential Loans to the related Trustee on a
non-recourse basis. Unless otherwise specified in the related Prospectus
Supplement, the obligations of the Depositor with respect to the Residential
Loans will be limited to certain representations and warranties made by it. See
"Description of the Securities--Assignment of Trust Fund Assets." The
obligations of the Master Servicer with respect to the Residential Loans will
consist principally of its contractual servicing obligations under the related
Servicing Agreement (including its obligation to enforce certain purchase and
other obligations of Sub-Servicers or Unaffiliated Sellers, or both, as more
fully described herein under "Residential Loan Program--Representations by
Unaffiliated Sellers; Repurchases"; "--Sub-Servicing" and "Description of the
Certificates--Assignment of Trust Fund Assets") and, unless otherwise provided
in the related Prospectus Supplement, its obligation to make certain cash
advances in the event of delinquencies in payments on or with respect to the
Residential Loans in amounts described herein under "Description of the
Certificates--Advances" or pursuant to the terms of any Mortgage Securities. Any
obligation of the Master Servicer to make advances may be subject to
limitations, to the extent provided herein and in the related Prospectus
Supplement.
The Depositor will cause the Agency Securities comprising each Trust Fund
to be registered in the name of the Trustee or its nominee on the books of the
issuer or guarantor or its agent or, in the case of Agency Securities issued
only in book-entry form, through the Federal Reserve System, in accordance with
the procedures established by the issuer or guarantor for registration of such
certificates with a member of the Federal Reserve System, and distributions on
such securities to which the Trust Fund is entitled will be made directly to the
Trustee. The Trustee will administer the Trust Fund Assets comprising any Trust
Fund including Agency Securities pursuant to a Trust Agreement between the
Depositor and the Trustee, and will receive a fee for such service. The Agency
Securities and any moneys attributable to distributions on such Agency
Securities will not be subject to any right, charge, security interest, lien or
claim of any kind in favor of the Trustee or any person claiming through it. The
Trustee will not have the power or authority to assign, transfer, pledge or
otherwise dispose of any assets of any Trust Fund to any person, except to a
successor trustee, to the Depositor or the Securityholders to the extent they
are entitled thereto or to such other persons as may be specified in the related
Prospectus Supplement and except for its power and authority to invest assets of
the Trust Fund in Permitted Instruments (as hereinafter defined) in compliance
with the Trust Agreement. The Trustee will have no responsibility for
distributions on the Securities, other than to pass through all distributions
received with respect to the Agency Securities to the holders of the related
Securities without deduction, other than for any applicable trust administration
fee payable to the Trustee, certain expenses of the Trustee, if any, in
connection with legal actions relating to the Agency Securities, any applicable
withholding tax required to be withheld by the Trustee and as otherwise
described in the related Prospectus Supplement.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
(i) to purchase the related Trust Fund Assets, (ii) to repay indebtedness which
has been incurred to obtain funds to acquire such Trust Fund Assets, (iii) to
establish any Reserve Funds or other funds described in the related Prospectus
Supplement and (iv) to pay costs of structuring, guaranteeing and issuing such
Securities, including the costs of obtaining credit support, if any. If so
specified in the related Prospectus Supplement, the purchase of the Trust Fund
Assets for a Series may be effected by an exchange of Securities with the seller
of such Trust Fund Assets.
YIELD CONSIDERATIONS
Unless otherwise specified in the related Prospectus Supplement, each
monthly or other periodic interest payment on a Trust Fund Asset is calculated
as one-twelfth of the applicable interest rate multiplied by the unpaid
principal balance thereof. The amount of such interest payment distributed (or
accrued in the case of Accrual Securities) to Securityholders (other than
holders of Strip Securities) with respect to each Trust Fund Asset will be
similarly calculated for the applicable period, based on the applicable Security
Interest Rate. In the case of Strip Securities, except as otherwise described in
the related Prospectus Supplement, such distributions of Stripped Interest will
be made in the manner and amount described in the related Prospectus Supplement.
The Securities of each Series may bear a fixed, variable or adjustable Security
Interest Rate.
The effective yield to Securityholders will be below the yield otherwise
produced by the applicable Security Interest Rate (or as to a Strip Security,
the distributions of interest thereon ("Stripped Interest")) and purchase price
paid by the investors, because while interest will accrue on each Trust Fund
Asset from the first day of each month (the related
Prospectus Supplement), the distribution of such interest (or the accrual
thereof in the case of Accrual Securities) will not be made until the
Distribution Date occurring in the month or other periodic interval (as
specified in the related Prospectus Supplement) following the month or other
period of accrual in the case of Residential Loans, and in later months in the
case of Agency Securities and in the case of a Series of Securities having
Distribution Dates occurring at intervals less frequently than monthly.
Unless otherwise provided in the related Prospectus Supplement, when a full
prepayment is made on a Residential Loan, the borrower is charged interest only
for the number of days actually elapsed from the due date of the preceding
monthly payment up to the date of such prepayment, instead of for a full month
and accordingly, the effect of such prepayments is to reduce the aggregate
amount of interest collected that is available for distribution to
Securityholders. However, if so provided in the related Prospectus Supplement,
certain of the Residential Loans may contain provisions limiting prepayments
thereof or requiring the payment of a prepayment penalty upon prepayment in full
or in part. Unless otherwise provided in the Prospectus Supplement, the
prepayment penalty collected with respect to the Residential Loans will be
applied to offset such shortfalls in interest collections on the related
Distribution Date. Holders of Agency Securities are entitled to a full month's
interest in connection with prepayments in full of the underlying residential
loans. Unless otherwise specified in the related Prospectus Supplement, partial
principal prepayments are applied on the first day of the month following
receipt, with no resulting reduction in interest payable by the borrower for the
month in which the partial principal prepayment is made. Unless provided
otherwise in the related Prospectus Supplement, neither the Trustee, the Master
Servicer nor the Depositor will be obligated to fund shortfalls in interest
collections resulting from full prepayments. Full and partial prepayments
collected during the applicable Prepayment Period will be available for
distribution to Securityholders on the related Distribution Date. Unless
otherwise provided in the related Prospectus Supplement, a "Prepayment Period"
in respect of any Distribution Date will commence in the case of Distribution
Dates that occur monthly, on the first day of the preceding calendar month and,
in the case of Distribution Dates that occur less frequently than monthly, on
the first day of the month in which the immediately preceding Distribution Date
occurred (or, with respect to the first Prepayment Period, the Cut-off Date) and
will end in both cases on the last day of the preceding calendar month. See
"Maturity and Prepayment Considerations" and "Description of the Securities."
Even assuming that the Mortgaged Properties provide adequate security for
the Mortgage Loans, substantial delays could be encountered in connection with
the liquidation of defaulted Mortgaged Loans and corresponding delays in the
receipt of related proceeds by Securityholders could occur. An action to
foreclose on a Mortgaged Property securing a Mortgaged Loan is regulated by
state statutes and rules and is subject to many of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
several years to complete. Furthermore, in some states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a property.
In the event of a default by a borrower, these restrictions among other things,
may impede the ability of the Master Servicer to foreclose on or sell the
Mortgaged Property or to obtain liquidation proceeds sufficient to repay all
amounts due on the related Mortgaged Loan. In addition, the Master Servicer will
be entitled to deduct from related liquidation proceeds all expenses reasonably
incurred in attempting to recover amounts due on defaulted Mortgaged Loans and
not yet reimbursed, including payments to senior lienholders, legal fees and
costs of legal action, real estate taxes and maintenance and preservation
expenses.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a large remaining
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the remaining principal balance of the small mortgage
loan than would be the case with the other defaulted mortgage loan having a
large remaining principal balance.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of certain originators and
servicers of Residential Loans. In addition, most have other laws, public policy
and general principles of equity relating to the protection of consumers, unfair
and deceptive practices and practices which may apply to the origination,
servicing and collection of the Residential Loans. Depending on the provisions
of the applicable law and the specific facts and circumstances involved,
violations of these laws, policies and principles may limit the ability of the
Master Servicer to collect all or part of the principal of or interest on the
Residential Loans, may entitle the borrower to a refund of amounts previously
paid and, in addition, could subject to the Trustee or Master Servicer to
damages and administrative sanctions which could reduce the amount of
distributions available to holders of the Certificates.
The Prospectus Supplement for each Series of Securities may set forth
additional information regarding yield considerations.
MATURITY AND PREPAYMENT CONSIDERATIONS
The original terms to maturity of the Trust Fund Assets in a given Trust
Fund may vary depending upon the type of Residential Loans or the residential
loans underlying the Agency Securities included therein. Each Prospectus
Supplement will contain information with respect to the type and maturities of
the Trust Fund Assets in the related Trust Fund. Unless otherwise specified in
the related Prospectus Supplement, the Residential Loans or residential loans
underlying the Agency Securities may be prepaid in full or in part at any time
without penalty. The prepayment experience on the Residential Loans or
residential loans underlying the Agency Securities will affect the life of the
related Securities. The average life of a Security refers to the average amount
of time that will elapse from the date of issuance of a Security until the
principal amount of such Security has been reduced to zero. The average life of
the Securities will be affected by, among other things, the rate at which
principal on the related Residential Loans is paid, which may be in the form of
scheduled amortization payments or unscheduled prepayments and liquidations due
to default, casualty, insurance, condemnation and similar sources. If
substantial principal prepayments on the Residential Loans are received, the
actual average life of the Securities may be significantly shorter than would
otherwise be the case. As to any Series of Securities, based on the public
information with respect to the residential lending industry, it may be
anticipated that a significant number of the related Residential Loans will be
paid in full prior to stated maturity.
Prepayments on residential loans are commonly measured relative to a
prepayment standard or model. For certain Series of Securities comprised of more
than one class, or as to other types of Series where applicable, the Prospectus
Supplement will describe the prepayment standard or model used in connection
with the offering of such Series and, if applicable, will contain tables setting
forth the projected weighted average life of the Securities of such Series and
the percentage of the initial Security Principal Balance that would be
outstanding on specified Distribution Dates based on the assumptions stated in
the Prospectus Supplement, including assumptions that prepayments on the related
Residential Loans or residential loans underlying the Agency Securities are made
at rates corresponding to various percentages of the prepayment standard or
model specified in the Prospectus Supplement.
It is unlikely that prepayment of the Trust Fund Assets will conform to any
model specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of residential loans is influenced by a variety of
economic, social, geographic, demographic and other factors, including homeowner
mobility, economic conditions, enforceability of due-on-sale clauses, market
interest rates and the availability of funds, the existence of lockout
provisions and prepayment penalties, the inclusion of delinquent, non-performing
or sub-performing Residential Loans in the Trust Fund Assets, the relative tax
benefits associated with the ownership of property and, in the case of
Multifamily Loans, the quality of management of the property. The rate of
prepayments of conventional residential loans has fluctuated significantly in
recent years. In general, however, if prevailing interest rates fall
significantly below the interest rates on the Trust Fund Assets, such Trust Fund
Assets are likely to be the subject of higher principal prepayments than if
prevailing rates remain at or above the interest rates borne by such Trust Fund
Assets.
Other factors that might be expected to affect the prepayment rate of
Securities backed by junior lien mortgage loans or Home Improvement Contracts
include the amounts of, and interest rates on, the underlying senior mortgage
loans, and the use of first mortgage loans as long-term financing for home
purchase and subordinate mortgage loans as shorter-term financing for a variety
of purposes, including home improvement, education expenses and purchases of
consumer durables such as automobiles. In addition, any future limitations on
the right of borrowers to deduct interest payments on junior liens that are home
equity loans for federal income tax purposes may increase the rate of
prepayments on such Residential Loans.
In addition, acceleration of payments on the Residential Loans or
residential loans underlying the Agency Securities as a result of certain
transfers of the underlying properties is another factor affecting prepayment
rates. Unless otherwise provided in the related Prospectus Supplement, all
Residential Loans, except for FHA Loans and VA Loans, will contain "due-on-sale"
provisions permitting the lender to accelerate the maturity of the Residential
Loan upon sale or certain transfers by the borrower with respect to the
underlying Residential Property. Conventional residential loans that underlie
FHLMC Certificates and FNMA Certificates may contain, and in certain cases must
contain, "due-on-sale" clauses permitting the lender to accelerate the unpaid
balance of the loan upon transfer of the property by the borrower. FHA Loans and
VA Loans and all residential loans underlying GNMA Certificates contain no such
clause and may be assumed by the purchaser of the property. In addition,
Multifamily Loans may contain "due-on-encumbrance" clauses permitting the lender
to accelerate the maturity of the Multifamily Loan upon further encumbrance by
the borrower of the underlying Residential Property. In general, where a
"due-on-sale" or "due-on-encumbrance" clause is contained in a conventional
residential loan under a FHLMC or the FNMA program, the lender's right to
accelerate the maturity of the residential loan upon transfer or further
encumbrance of the property must be exercised, so long as such acceleration is
permitted under applicable law.
With respect to a Series of Securities evidencing interests in a Trust Fund
including Residential Loans, unless otherwise provided in the related Prospectus
Supplement, the Master Servicer generally will enforce any provision limiting
prepayments and any due-on-sale or due-on-encumbrance clause, to the extent it
has knowledge of the conveyance or encumbrance or the proposed conveyance or
encumbrance of the underlying Residential Property and reasonably believes that
it is entitled to do so under applicable law; provided, however, that the Master
Servicer will not take any enforcement action that would impair or threaten to
impair any recovery under any related insurance policy. See "Description of the
Securities--Collection and Other Servicing Procedures" and "Certain Legal
Aspects of Residential Loans--Enforceability of Certain Provisions" and
"Prepayment Charges and Prepayments" for a description of certain provisions of
each Pooling and Servicing Agreement and certain legal developments that may
affect the prepayment experience on the Residential Loans. See also "Description
of the Securities--Termination" for a description of the possible early
termination of any Series of Securities. See also "Residential Loan
Program--Representations by Unaffiliated Sellers; Repurchases" and "Description
of the Securities--Assignment of Trust Fund Assets" for a description of the
obligation of the Unaffiliated Sellers, the Master Servicer and the Depositor to
repurchase Residential Loans under certain circumstances.
With respect to a Series of Securities evidencing interests in a Trust Fund
including Agency Securities, principal prepayments may also result from guaranty
payments and from the exercise by the issuer or guarantor of the related Agency
Securities of any right to repurchase the underlying residential loans. The
Prospectus Supplement relating to each Series of Securities will describe the
circumstances and the manner in which such optional repurchase right, if any,
may be exercised.
In addition, certain Mortgage Securities included in the Trust Fund may be
backed by underlying Residential Loans having differing interest rates.
Accordingly, the rate at which principal payments are received on the related
Securities will, to a certain extent, depend on the interest rates on such
underlying Residential Loans.
The Prospectus Supplement for each Series of Securities may set forth
additional information regarding related maturity and prepayment considerations.
THE DEPOSITOR
PaineWebber Mortgage Acceptance Corporation IV, the Depositor, is a
Delaware corporation organized on April 23, 1987, as a wholly-owned limited
purpose finance subsidiary of PaineWebber Group Inc. The Depositor maintains its
principal office at 1285 Avenue of the Americas, New York, New York. Its
telephone number is (212) 713-2000.
The Depositor does not have, nor is it expected in the future to have, any
significant assets. It is not expected that the Depositor will have any business
operations other than acquiring and pooling residential loans and agency
securities, offering Certificates of the type described herein or other
mortgage- or asset-related securities, and related activities.
Neither the Depositor nor any of the Depositor's affiliates will insure or
guarantee distributions on the Securities of any Series.
RESIDENTIAL LOAN PROGRAM
The Residential Loans will have been purchased by the Depositor, either
directly or through affiliates, from sellers. Unless otherwise specified in the
related Prospectus Supplement, all Residential Loans will have been originated
in general accordance with the criteria specified below. The underwriting
standards applicable to Residential Loans underlying Mortgage Securities may
vary substantially from the underwriting standards set forth below.
Underwriting Standards
Unless otherwise specified in the related Prospectus Supplement, each
seller will represent and warrant that all Residential Loans originated and/or
sold by it to the Depositor or one of its affiliates will have been underwritten
in general accordance with standards consistent with those utilized by mortgage
lenders generally during the period of origination for similar types of loans.
As to any Residential Loan insured by the FHA or partially guaranteed by the VA,
the seller will represent that it has complied with underwriting policies of the
FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the Residential Property as collateral. In general, a prospective borrower
applying for a Residential Loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information,
including the principal balance and payment history with respect to any senior
mortgage, if any. Unless otherwise specified in the related Prospectus
Supplement, a verification of the borrower's income will be obtained from an
independent source and, as part of the description of the borrower's financial
condition, the borrower generally is required to provide a current list of
assets and liabilities and a statement of income and expenses, as well as an
authorization to apply for a credit report which summarizes the borrower's
credit history with local merchants and lenders and any record of bankruptcy.
Unless otherwise specified in the related Prospectus Supplement, an employment
verification is obtained from an independent source (typically the borrower's
employer) which verification reports the length of employment with that
organization, the current salary, and whether it is expected that the borrower
will continue such employment in the future. If a prospective borrower is
self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has demand, savings or brokerage
accounts.
In determining the adequacy of the property to be used as collateral, an
appraisal will generally be made of each property considered for financing. The
appraiser is generally required to inspect the property, issue a report on its
condition and, if applicable, verify that construction, if new, has been
completed. The appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the home.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (generally determined on the
basis of the monthly payments due in the year of origination) and other expenses
related to the property (such as property taxes and hazard insurance) and (ii)
to meet monthly housing expenses and other financial obligations and monthly
living expenses. The underwriting standards applied by Sellers, particularly
with respect to the level of loan documentation and the mortgagor's income and
credit history, may be varied in appropriate cases where factors such as low
loan-to-value ratios, or combined-loan-to-value ratios, as applicable, or other
favorable and compensating credit factors exist.
The underwriting guidelines with respect to some Unaffiliated Sellers' loan
programs may be less stringent than those of FNMA or FHLMC, primarily in that
they generally may permit the borrower to have a higher debt-to-income ratio and
a larger number of derogatory credit items than do the guidelines of FNMA or
FHLMC. These underwriting guidelines are intended to provide for the origination
of single family mortgage loans for non-conforming credits. A mortgage loan made
to a "non-conforming credit" means a mortgage loan that is ineligible for
purchase by FNMA or FHLMC due to borrower credit characteristics that do not
meet FNMA or FHLMC underwriting guidelines, including a loan made to a borrower
whose creditworthiness and repayment ability do not satisfy such FNMA or FHLMC
underwriting guidelines or a borrower who may have a record of major derogatory
credit items such as default on a prior mortgage loan, credit write-offs,
outstanding judgments and prior bankruptcies. Accordingly, Mortgage Loans
underwritten pursuant to these guidelines are likely to experience rates of
delinquency and foreclosure that are higher, and may be substantially higher,
than mortgage loans originated in accordance with FNMA or FHLMC underwriting
guidelines.
Qualifications of Unaffiliated Sellers
Unless otherwise specified in the related Prospectus Supplement, each
Unaffiliated Seller will be required to satisfy the qualifications set forth
herein. Each Unaffiliated Seller must be an institution experienced in
originating and servicing the types of residential loans sold by it for
inclusion in a Trust Fund in accordance with accepted practices and prudent
guidelines, and must maintain satisfactory facilities to originate and service
those loans. Unless otherwise specified in the related Prospectus Supplement,
each Unaffiliated Seller must be a seller/servicer approved by either FNMA or
FHLMC, and must be a mortgagee approved by the FHA or an institution the deposit
accounts in which are insured by the Bank Insurance Fund ("BIF") or Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
(the "FDIC"). In addition, each Unaffiliated Seller must satisfy certain
criteria as to financial stability evaluated on a case by case basis by the
Depositor.
Representations by Unaffiliated Sellers; Repurchases
Each Unaffiliated Seller will have made representations and warranties in
respect of the Residential Loans sold by such Unaffiliated Seller. Unless
otherwise provided in the related Prospectus Supplement, such representations
and warranties include, among other things: (i) that title insurance (or in the
case of Residential Properties located in areas where such policies are
generally not available, an attorney's certificate of title) and any FHA
insurance, VA guarantee and any required hazard and primary credit insurance was
effective at the origination of each Residential Loan, and that each policy (or
certificate of title) remained in effect on the date of purchase of the
Residential Loan from the Unaffiliated Seller by or on behalf of the Depositor;
(ii) that the Unaffiliated Seller had good title to each such Residential Loan
and such Residential Loan was subject to no offsets, defenses, counterclaims or
rights of rescission except to the extent that any buydown agreement described
herein may forgive certain indebtedness of a borrower; (iii) if the Trust Fund
includes Mortgage Loans, that each Mortgage constituted a valid lien on the
Mortgaged Property (subject only to permissible title insurance exceptions and
Senior Liens, if any); (iv) if the Trust Fund includes Manufactured Housing
Contracts, each Manufactured Housing Contract creates a valid, subsisting and
enforceable first priority security interest in the Manufactured Home covered
thereby; (v) that the Residential Property was free from damage and was in good
repair; (vi) that there were no delinquent tax or assessment liens against the
Residential Property; (vii) that each Residential Loan was current as to all
required payments; and (viii) that each Residential Loan was made in compliance
with, and is enforceable under, all applicable local, state and federal laws and
regulations in all material respects.
In certain cases, the representations and warranties of an Unaffiliated
Seller in respect of a Residential Loan may have been made as of the date on
which such Unaffiliated Seller sold the Residential Loan to the Depositor or its
affiliate. A substantial period of time may have elapsed between such date and
the date of initial issuance of the Series of Securities evidencing an interest
in such Residential Loan. Since the representations and warranties of an
Unaffiliated Seller do not address events that may occur following the sale of a
Residential Loan by such Unaffiliated Seller, its repurchase obligation
described below will not arise if the relevant event that would otherwise have
given rise to such an obligation occurs after the date of such sale to or on
behalf of the Depositor.
The only representations and warranties, if any, to be made for the benefit
of holders of Securities in respect of any Residential Loan relating to the
period commencing on the date of sale of such Residential Loan to the Depositor
or its affiliates will be certain limited representations of the Depositor and
of the Master Servicer described below under "Description of the
Securities--Assignment of Trust Fund Assets." If the Master Servicer is also an
Unaffiliated Seller of Residential Loans with respect to a particular Series,
such representations will be in addition to the representations and warranties
made by the Master Servicer in its capacity as an Unaffiliated Seller.
The Master Servicer will promptly notify the relevant Unaffiliated Seller
of any breach of any representation or warranty made by it in respect of a
Residential Loan which materially and adversely affects the interests of the
Securityholders in such Residential Loan. If such Unaffiliated Seller cannot
cure such breach within 60 days (or such other time period set forth in the
related Prospectus Supplement) from the date on which the Unaffiliated Seller
was notified of such breach, then such Unaffiliated Seller will be obligated to
repurchase such Residential Loan from the Trustee within 90 days (or such other
time period set forth in the related Prospectus Supplement) from the date on
which the Unaffiliated Seller was notified of such breach, at the Purchase Price
therefor. As to any Residential Loan, unless otherwise specified in the related
Prospectus Supplement, the "Purchase Price" is equal to the sum of (i) the
unpaid principal balance thereof, (ii) unpaid accrued interest on the Stated
Principal Balance (as defined below) from the date as to which interest was last
paid by the borrower to the end of the calendar month in which the purchase is
to occur at a rate equal to the Net Mortgage Rate minus the rate at which the
Sub-Servicer's servicing fee is calculated if the Sub-Servicer is the purchaser,
(iii) any unpaid servicing fees and certain unreimbursed servicing expenses
payable or reimbursable to the Master Servicer with respect to such Residential
Loan, (iv) any unpaid Retained Interest with respect to such Residential Loan,
(v) any Realized Losses incurred with respect to such Residential Loan, as
described below under "Description of the Certificates--Subordination", and (vi)
if applicable, any expenses reasonably incurred or to be incurred by the Master
Servicer or the Trustee in respect of the breach or defect giving rise to a
purchase obligation. If so provided in the related Prospectus Supplement, an
Unaffiliated Seller, rather than repurchase a Residential Loan as to which a
breach has occurred, will have the option, within a specified period after
initial issuance of the related Series of Securities, to cause the removal of
such Residential Loan from the Trust Fund and substitute in its place one or
more other Residential Loans, in accordance with the standards described in the
related Prospectus Supplement. The Master Servicer or the Trustee, unless
otherwise specified in the related Prospectus Supplement, will be required under
the applicable Servicing Agreement to use its best efforts to enforce such
obligations of the Unaffiliated Seller for the benefit of the Trustee and the
holders of the Securities, following the practices it would employ in its good
faith business judgment were it the owner of such Residential Loan. Unless
otherwise specified in the related Prospectus Supplement, this repurchase or
substitution obligation will constitute the sole remedy available to holders of
Certificates or the Trustee for a breach of representation by an Unaffiliated
Seller. For each Series with respect to which a REMIC election is to be made,
unless the related Prospectus Supplement provides otherwise, the Master Servicer
will be obligated to pay any prohibited transaction tax which may arise in
connection with such repurchase or substitution. See "Description of the
Certificates--General."
The "Stated Principal Balance" of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by all amounts, including
advances by the Master Servicer, allocable to principal that are distributed to
Securityholders on or before the date of determination, and as further reduced
to the extent that any Realized Loss (as hereinafter defined) thereon has been
(or, if it had not been covered by any form of credit support, would have been)
allocated to one or more class of Securities on or before the date of
determination.
Neither the Depositor nor the Master Servicer (unless the Master Servicer
is an Unaffiliated Seller) will be obligated to purchase or substitute for a
Residential Loan if an Unaffiliated Seller defaults on its obligation to do so,
and no assurance can be given that Unaffiliated Sellers will carry out such
obligations with respect to Residential Loans. To the extent that a breach of
the representations and warranties of an Unaffiliated Seller also constitutes a
breach of a representation made by the Depositor, the Depositor may have a
repurchase or substitution obligation as described below under "Description of
the Securities--Assignment of Trust Fund Assets." Any Residential Loan that is
not repurchased or substituted for shall remain in the related Trust Fund and
any losses thereon shall be borne by Securityholders, to the extent not covered
by credit enhancement.
Sub-Servicing
Any Master Servicer may delegate its servicing obligations in respect of a
Residential Loan to Sub-Servicers pursuant to a sub-servicing agreement (a
"Sub-Servicing Agreement"), which will be consistent with the terms of the
Servicing Agreement relating to the Trust Fund that includes such Residential
Loan. Although each Sub-Servicing Agreement will be a contract solely between
the Master Servicer and the Sub-Servicer, the Pooling and Servicing Agreement
pursuant to which a Series of Securities is issued will provide that, if for any
reason the Master Servicer for such Series of Securities is no longer acting in
such capacity, the Trustee or any successor Master Servicer must recognize the
Sub-Servicer's rights and obligations under such Sub-Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate its
servicing obligations to third-party servicers, but such Sub-Servicer will
remain primarily liable for such obligations under the related Sub-Servicing
Agreement. Each Sub-Servicer will be required to perform the customary functions
of a servicer of residential loans, including collecting payments from borrowers
and remitting such collections to the Master Servicer; maintaining FHA
insurance, any VA guarantee, and primary hazard and credit insurance as
described herein and in any related Prospectus Supplement, and filing and
settling claims thereunder, subject in certain cases to the right of the Master
Servicer to approve in advance any such settlement; maintaining escrow or
impoundment accounts of borrowers for payment of taxes, insurance and other
items required to be paid by the borrower pursuant to the Residential Loan;
processing assumptions or substitutions, although, unless otherwise specified in
the related Prospectus Supplement, the Master Servicer generally is required to
exercise due-on-sale and due-on-encumbrance clauses to the extent such exercise
is permitted by law and would not adversely affect insurance coverage;
attempting to cure delinquencies; effecting foreclosures or repossessions;
inspecting and managing Residential Properties under certain circumstances; and
maintaining accounting records relating to the Residential Loans. The Master
Servicer will be responsible for filing and settling claims in respect of
Residential Loans in a particular Trust Fund under any applicable pool insurance
policy, bankruptcy bond, special hazard insurance policy or letter of credit.
See "Description of Credit Support." To the extent specified in the related
Prospectus Supplement, a Sub-Servicer will also be obligated to make advances in
respect of delinquent installments of principal and interest on Residential
Loans, as described more fully under "Description of the Securities--Payments on
Residential Loans" and "--Deposits to Certificate Account", and in respect of
certain taxes and insurance premiums not paid on a timely basis by borrowers.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the related Residential Loan
payment has been collected) in the amount set forth in the related Prospectus
Supplement. Each Sub-Servicer is also entitled to collect and retain, as part of
its servicing compensation late charges provided in the Mortgage Note,
Cooperative Note or Manufactured Housing Contract or related instruments. If so
provided in the related Prospectus Supplement, a Sub-Servicer may be entitled to
any prepayment penalties and a Retained Interest in certain Residential 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 a Pooling and Servicing Agreement. See "Description of
the Securities--Retained Interest, Administration Compensation and Payment of
Expenses."
Each Sub-Servicer may be required to agree to indemnify the Master Servicer
for any liability or obligation sustained by the Master Servicer in connection
with any act or failure to act by the Sub-Servicer in its servicing capacity.
Unless otherwise provided in the related Prospectus Supplement, each
Sub-Servicer is required to maintain a fidelity bond and an errors and omissions
policy with respect to its officers, employees and other persons acting on its
behalf or on behalf of the Master Servicer.
DESCRIPTION OF THE SECURITIES
The Certificates of each Series evidencing interests in a Trust Fund
including Residential Loans will be issued pursuant to a separate Pooling and
Servicing Agreement among the Depositor, the Master Servicer and the Trustee and
the Securities of each Series evidencing interests in a Trust Fund including
Agency Securities will be issued pursuant to a separate Trust Agreement ("Trust
Agreement") between the Depositor and the Trustee. Each Series of Notes (or, in
certain instances, two or more Series of Notes) will be issued pursuant to an
Indenture between the related Issuer and the Trustee. The related Trust Fund
will be created pursuant to an Owner Trust Agreement (the "Owner Trust
Agreement"; an Owner Trust Agreement, Pooling and Servicing Agreement, Servicing
Agreement, Indenture, an "Agreement") between the Depositor and the Owner
Trustee. As to each Series of Notes where the Issuer is an Owner Trust, the
ownership of the Trust Fund will be evidenced by certificates (the "Equity
Certificates") issued under the Owner Trust Agreement, which, unless otherwise
specified in the Prospectus Supplement, are not offered thereby. Forms of each
of the Agreements are filed as exhibits to the Registration Statement of which
this Prospectus is a part. The Agreement relating to each Series of Securities
will be filed as an exhibit to a report on Form 8-K to be filed with the
Commission within fifteen days after the initial issuance of such Securities and
a copy thereof will be available for inspection at the corporate trust office of
the Trustee specified in the related Prospectus Supplement (the "Corporate Trust
Office"). The following summaries describe certain provisions of the Agreements.
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 related Prospectus Supplement.
General
The Certificates of each Series (including any class of Certificates not
offered hereby) will be issued in fully registered form only and will represent
the entire beneficial ownership interest in the Trust Fund created pursuant to
the related Agreement. Unless otherwise specified in the related Prospectus
Supplement, each Series of Notes covered by a particular Indenture will evidence
indebtedness of a separate Trust Fund created pursuant to the related Owner
Trust Agreement. As to each Series, the Securities will be issued in authorized
denominations evidencing a portion of all of the Securities of such Series (a
"Percentage Interest"), as set forth in the related Prospectus Supplement. Each
Trust Fund will consist of (i) such Residential Loans (including any Mortgage
Securities) or Agency Securities (exclusive of any portion of interest payments
relating thereto retained by the Depositor, any of its affiliates or its
predecessor in interest (the "Retained Interest") and exclusive of principal and
interest due on or before the Cut-off Date) as from time to time are subject to
the Agreement; (ii) such funds or assets as from time to time are deposited in
the Trust Account described below and any other account held for the benefit of
Securityholders; (iii) with respect to Trust Funds that include Residential
Loans, (a) property acquired by foreclosure or deed in lieu of foreclosure of
Mortgage Loans on behalf of the Securityholders, or, in the case of Manufactured
Housing Contracts that are not Land Contracts, by repossession; (b) any Primary
Credit Insurance Policies and Primary Hazard Insurance Policies (as defined
under "Description of Primary Insurance Coverage"); (c) any combination of a
Pool Insurance Policy, a Bankruptcy Bond, a special hazard insurance policy or
other type of credit support (as defined under "Description of Credit Support");
and (d) the rights of the Trustee to any cash advance reserve fund or surety
bond as described under "Advances"; (iv) if specified in the related Prospectus
Supplement, the Reserve Fund and (v) any other assets as described in the
related Prospectus Supplement. The Securities will be transferable and
exchangeable for Securities of the same class and Series in authorized
denominations at the Corporate Trust Office. No service charge will be made for
any registration of exchange or transfer of Securities on the Certificate
Register maintained by the Certificate Registrar, but the Depositor may require
payment of a sum sufficient to cover any tax or other governmental charge.
Each Series of Securities may consist of either (i) a single class of
Securities; (ii) two or more classes of Securities, one or more classes of which
("Senior Securities") will be senior in right of payment to one or more of the
other classes ("Subordinate Securities") to the extent described in the related
Prospectus Supplement (any such Series, a "Senior/Subordinate Series"); (iii)
two or more classes of Securities, one or more classes of which will be entitled
to (a) principal distributions, with disproportionate, nominal or no interest
distributions or (b) interest distributions, with disproportionate, nominal or
no principal distributions ("Strip Securities"); (iv) two or more classes of
Securities that differ as to the timing, sequential order or amount of
distributions of principal or interest or both, which may include one or more
classes of Securities ("Accrual Securities") with respect to which accrued
interest will not be distributed but rather will be added to the Security
Principal Balance thereof on each Distribution Date for the period described in
the related Prospectus Supplement; or (v) other types of classes of Securities,
as described in the related Prospectus Supplement. Credit support for each
Series of Securities evidencing interests in a Trust Fund that includes
Residential Loans will be provided by a Pool Insurance Policy, a special hazard
insurance policy, a Bankruptcy Bond, a letter of credit, a Reserve Fund or a
similar credit support instrument as described under "Description of Credit
Support", by the subordination of one or more classes of Securities as described
under "Description of the Securities--Subordination", or by any combination of
the foregoing.
Each class of Securities (other than certain Strip Securities) will have a
Security Principal Balance and, unless otherwise provided in the related
Prospectus Supplement, will be entitled to payments of interest thereon based on
a specified Security Interest Rate. See "Principal and Interest on the
Securities" below. The Security Interest Rates of the various classes of
Securities of each Series may differ, and as to some classes may be in excess of
the lowest Net Interest Rate in a Trust Fund; however, the weighted average of
the Security Interest Rates on the Securities based on their respective Security
Principal Balances will not exceed the lowest Net Interest Rate. The specific
percentage ownership interests of each class of Securities and the minimum
denomination per Security will be set forth in the related Prospectus
Supplement. As to any Mortgage Loan, the "Net Interest Rate" is equal to the
Interest Rate minus the sum of the Administration Fee Rate and the rate at which
the Retained Interest, if any is calculated (the "Retained Interest Rate").
If so provided in the related Prospectus Supplement relating to a Series of
Certificates, one or more elections may be made to treat the related Trust Fund,
or designated portions thereof, as a "real estate mortgage investment conduit"
(a "REMIC") as defined in the Code. If such an election is made with respect to
a Series, one of the classes will be designated as evidencing all "residual
interests" in the related REMIC as defined under the Code. All other classes of
Securities in such a Series will constitute "regular interests" in the related
REMIC as defined in the Code. As to each Series, all of the Securities of each
class offered hereby will be rated in one of the four highest rating categories
by one or more Rating Agencies. As to each Series of Certificates as to which a
REMIC election is to be made, the Trustee or the Master Servicer, if any, will
be obligated to take all actions required in order to comply with applicable
laws and regulations and, unless otherwise specified in the related Prospectus
Supplement, will be obligated to pay any prohibited transaction taxes or
contribution taxes arising out of a breach of its obligations with respect to
such compliance without any right of reimbursement therefor from the Trust Fund
or from any Certificateholder. Unless otherwise provided in the related
Prospectus Supplement, a prohibited transaction tax or contribution tax
resulting from any other cause will be charged against the related Trust Fund,
resulting in a reduction in amounts otherwise distributable to
Certificateholders. See "Certain Federal Income Tax Consequences--REMICs--Taxes
that may be Imposed on the REMIC Pool--Prohibited Transactions."
Assignment of Trust Fund Assets
At the time of issuance of each Series of Securities, the Depositor will
cause the assets comprising the related Trust Fund or Mortgage Securities being
included in the related Trust Fund to be assigned to the Trustee, together with
all principal and interest received by or on behalf of the Depositor with
respect to the Trust Fund Assets after the applicable Cut-off Date, other than
principal and interest due on or before the applicable Cut-off Date and other
than any Retained Interest. The Residential Loan or Agency Security documents
described below will be delivered to the Trustee (or to the custodian
hereinafter referred to). The Trustee will, concurrently with such assignment,
deliver the Securities to the Depositor in exchange for the Trust Fund Assets.
Each Trust Fund Asset will be identified in a schedule appearing as an exhibit
to the related Agreement. Such schedule will include, among other things,
information as to the outstanding principal balance of each Trust Fund Asset
after application of payments due on or before the Cut-off Date, the maturity of
the Mortgage Note, Cooperative Note, Manufactured Housing Contract or Agency
Securities, the Net Interest Rate, any Retained Interest, with respect to a
Series of Securities evidencing interests in a Trust Fund including Agency
Securities, the pass-through rate on the Agency Securities, and with respect to
a Series of Securities evidencing interests in Residential Loans, information
respecting the Interest Rate, the current scheduled payment of principal and
interest, the original Loan-to-Value Ratio and certain other information.
Mortgage Loans and Multifamily Loans
The Depositor will, as to each Mortgage Loan (other than Mortgage Loans
underlying any Mortgage Securities) and Multifamily Loan, deliver or cause to be
delivered to the Trustee (or to the custodian) the mortgage file for each
Mortgage Loan, containing legal documents relating to such Mortgage Loan,
including the Mortgage Note endorsed without recourse to the order of the
Trustee, the Mortgage with evidence of recording indicated thereon (except for
any Mortgage not returned from the public recording office, in which case the
Depositor will deliver or cause to be delivered a copy of such Mortgage
certified by the related Unaffiliated Seller that it is a true and complete copy
of the original of such Mortgage submitted for recording) and an assignment in
recordable form of the Mortgage to the Trustee. Unless otherwise provided in the
related Prospectus Supplement, the Depositor will promptly cause the assignment
of each related Mortgage Loan and Multifamily Loan to be recorded in the
appropriate public office for real property records, except in states where, in
the opinion of counsel acceptable to the Trustee, such recording is not required
to protect the Trustee's interest in the Mortgage Loan or Multifamily Loan
against the claim of any subsequent transferee or any successor to or creditor
of the Depositor or the originator of such Mortgage Loan.
Home Equity Loans and Home Improvement Contracts
Unless otherwise provided in the related Prospectus Supplement, the
Depositor will, as to each Home Equity Loan and Home Improvement Contract,
deliver or cause to be delivered to the Trustee (or to the custodian) the note
endorsed to the order of the Trustee, with respect to Home Equity Loans and
secured Home Improvement Contracts, the Mortgage with evidence of recording
indicated thereon (except for any Mortgage not returned from the public
recording office, in which case the Depositor will deliver or cause to be
delivered a copy of such Mortgage certified by the related Unaffiliated Seller
that it is a true and complete copy of the original of such Mortgage submitted
for recording) and, with respect to Home Equity Loans and secured Home
Improvement Contracts, an assignment in recordable form of the Mortgage to the
Trustee. Unless otherwise provided in the related Prospectus Supplement, the
Depositor will promptly cause the assignment of each related Home Equity Loan
and secured Home Improvement Contract to be recorded in the appropriate public
office for real property records, except in states where, in the opinion of
counsel acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in the Home Equity Loan and Home Improvement Contract against
the claim of any subsequent transferee or any successor to or creditor of the
Depositor or the originator of such Home Equity Loan or Home Improvement
Contract. With respect to unsecured Home Improvement Contracts, the Depositor or
Unaffiliated Seller, under the related Agreement, will transfer physical
possession of the Home Improvement Contracts to the Trustee or a designated
custodian or, in the case of an Unaffiliated Seller, may retain possession of
the Home Improvement Contracts as custodian for the Trustee. In addition, the
Depositor will cause to be made, an appropriate filing of a UCC-1 financing
statement in the appropriate states to give notice of the Trustee's ownership of
the Home Improvement Contracts. Unless otherwise specified in the related
Prospectus Supplement, the Home Improvement Contracts will not be stamped or
otherwise marked to reflect their assignment from the Unaffiliated Seller or the
Depositor, as the case may be, to the Trustee. Therefore, if through negligence,
fraud or otherwise, a subsequent purchaser were able to take physical possession
of the contracts without notice of such assignment, the Trustee's interest in
the contracts could be defeated.
Cooperative Loans
The Depositor will, as to each Cooperative Loan, deliver or cause to be
delivered to the Trustee (or to the custodian) the related Cooperative Note, the
original security agreement, the proprietary lease or occupancy agreement, the
related stock certificate and related stock powers endorsed in blank, and a copy
of the original filed financing statement together with an assignment thereof to
the Trustee in a form sufficient for filing. The Depositor will promptly cause
the assignment and financing statement of each related Cooperative Loan to be
filed in the appropriate public office, except in states where in the opinion of
counsel acceptable to the Trustee, such filing is not required to protect the
Trustee's interest in the Cooperative Loan against the claim of any subsequent
transferee or any successor to or creditor of the Depositor or the originator of
such Cooperative Loan.
Manufactured Housing Contracts
Unless otherwise provided in the related Prospectus Supplement, the
Depositor will, as to each Manufactured Housing Contract, deliver or cause to be
delivered to the Trustee (or to the custodian) the original Manufactured Housing
Contract endorsed to the order of the Trustee and copies of documents and
instruments related to each Manufactured Housing Contract and the security
interest in the Manufactured Home securing each Manufactured Housing Contract,
together with a blanket assignment to the Trustee of the Manufactured Housing
Contracts in the related Trust Fund and such documents and instruments. Unless
otherwise provided in the related Prospectus Supplement, in order to give notice
of the right, title and interest of the Securityholders to the Manufactured
Housing Contracts, the Depositor will cause to be executed and delivered to the
Trustee a UCC-1 financing statement identifying the Trustee as the secured party
and identifying all Manufactured Housing Contracts as collateral of the Trust
Fund.
Agency Securities
Agency Securities will be registered in the name of the Trustee or its
nominee on the books of the issuer or guarantor or its agent or, in the case of
Agency Securities issued only in book-entry form, through the Federal Reserve
System, in accordance with the procedures established by the issuer or guarantor
for registration of such certificates with a member of the Federal Reserve
System, and distributions on such securities to which the Trust Fund is entitled
will be made directly to the Trustee.
Review of Residential Loans
The Trustee (or the custodian) will review the Residential Loan documents
within 45 days (or such other period specified in the Prospectus Supplement)
after receipt thereof, and the Trustee (or such custodian) will hold such
documents in trust for the benefit of the Securityholders. 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 applicable Unaffiliated Seller. If the
Unaffiliated Seller cannot cure the omission or defect within 90 days (or such
other period specified in the Prospectus Supplement) after receipt of such
notice, the Unaffiliated Seller will be obligated to repurchase the related
Residential Loan from the Trustee at the Purchase Price or, in certain cases,
substitute for such Residential Loan. There can be no assurance that an
Unaffiliated Seller will fulfill this repurchase or substitution obligation.
Although the Master Servicer or Trustee is obligated to enforce such obligation
to the extent described above under "Residential Loan Program--Representations
by Unaffiliated Sellers; Repurchases", neither the Master Servicer nor the
Depositor will be obligated to repurchase or substitute for such Residential
Loan if the Unaffiliated Seller defaults on its obligation. Unless otherwise
specified in the related Prospectus Supplement, this repurchase or substitution
obligation, if applicable, constitutes the sole remedy available to the
Securityholders or the Trustee for omission of, or a material defect in, a
constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and review the documents relating
to the Residential Loans as agent of the Trustee.
Unless otherwise provided in the related Prospectus Supplement, with
respect to Residential Loans, except as to Mortgage Loans underlying any
Mortgage Securities, in a Trust Fund, the Depositor will make representations
and warranties as to the types and geographical distribution of such Residential
Loans and as to the accuracy in all material respects of certain identifying
information furnished to the Trustee in respect of each such Residential Loan
(e.g., original Loan-to-Value Ratio, principal balance as of the Cut-off Date,
Interest Rate and maturity). In addition, unless otherwise provided in the
related Prospectus Supplement, the Depositor will represent and warrant that, as
of the Cut-off Date for the related Series of Securities, no Residential Loan
was currently more than 30 days delinquent as to payment of principal and
interest and no Residential Loan was 30 days or more delinquent more than once
during the previous 12 months. Upon a breach of any such representation of the
Depositor that materially and adversely affects the interests of the
Securityholders in a Residential Loan, the Depositor will be obligated either to
cure the breach in all material respects, repurchase the Residential Loan at the
Purchase Price or, if provided in the related Prospectus Supplement, substitute
for such Residential Loan.
With respect to any Series of Securities evidencing interests in a Trust
Fund including Residential Loans as to which credit support is provided by means
of a pool insurance policy, in addition to making the representations and
warranties described above, the Depositor or the Unaffiliated Seller will, to
the extent required by the Rating Agency or Agencies, represent and warrant to
the Trustee for such Series of Securities that no action, inaction or event has
occurred and no state of facts exists or has existed on or prior to the date of
the initial issuance of the Securities that has resulted or will result in the
exclusion from, denial of or defense to coverage under any applicable primary
credit insurance policy, pool insurance policy, special hazard insurance policy
or bankruptcy bond, irrespective of the cause of such failure of coverage but
excluding any failure of an insurer to pay by reason of the insurer's own breach
of its insurance policy or its financial inability to pay (such representation
being referred to herein as the "insurability representation"). See "Description
of Primary Insurance Coverage" and "Description of Credit Support" herein and in
the related Prospectus Supplement for information regarding the extent of
coverage under the aforementioned insurance policies. As described in the
related Prospectus Supplement, upon a breach of the insurability representation
that materially and adversely affects the interests of the Securityholders in a
Residential Loan, the Depositor or the Unaffiliated Seller may be obligated
either to cure the breach in all material respects or to purchase such
Residential Loan at the Purchase Price, subject to the limitations specified in
the related Prospectus Supplement. The related Prospectus Supplement may provide
that the performance of the Depositor of its obligation to repurchase
Residential Loans following a breach of its insurability representation will be
ensured in the manner specified therein.
The related Prospectus Supplement may provide that, the obligation to
repurchase or, other than with respect to the insurability representation, if
applicable, to substitute Residential Loans as described above constitutes the
sole remedy available to the Securityholders or the Trustee for any breach of
the Depositor's representations.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Pooling and Servicing Agreement. Upon the
occurrence of an Event of Default under the related Pooling and Servicing
Agreement for which the Master Servicer is responsible, the Master Servicer will
be obligated to remedy such Event of Default within the time period set forth in
the related Pooling and Servicing Agreement or be subject to termination
pursuant thereto. See "Description of the Securities--Events of Default" and
"--Rights Upon Event of Default" herein.
Deposits to the Trust Account
The Master Servicer or the Trustee shall, as to each Trust Fund, establish
and maintain or cause to be established and maintained a separate Trust Account
or Trust Accounts for the collection of payments on the related Trust Fund
Assets, which must either be (i) maintained with a federal or state chartered
depository institution, and in a manner, satisfactory to each Rating Agency
rating the Securities of such Series at the time any amounts are held on deposit
therein or (ii) maintained with a federal or state chartered depository
institution, the deposits in which are insured by the BIF or the SAIF (to the
limits established by the FDIC) and any uninsured deposits in which are
otherwise secured such that the Securityholders have a claim with respect to the
funds in the Trust 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 depository institution with which
the Trust Account is maintained. The collateral eligible to secure amounts in
the Trust Account is limited to United States government securities and other
high quality investments ("Permitted Instruments"). A Trust Account may be
maintained as an interest bearing or non-interest bearing account, or the funds
held therein may be invested pending the distribution on each succeeding
Distribution Date in Permitted Instruments. Unless otherwise provided in the
related Prospectus Supplement, the Trustee or the Master Servicer will be
entitled to receive any such interest or other income earned on funds in the
Trust Account as additional compensation for administration of the Trust Fund
Assets. In respect of any Series of Securities having Distribution Dates
occurring less frequently than monthly, the Master Servicer may obtain from an
obligor named in the related Prospectus Supplement a guaranteed investment
contract to assure a specified rate of return on funds held in the Trust
Account. If permitted by each Rating Agency rating the Securities of such
Series, a Trust Account may contain funds relating to more than one Series of
Securities.
In the event that a Sub-Servicer is servicing one or more Residential Loans
in a Trust Fund, the Sub-Servicer will establish and maintain a separate account
or accounts (a "Sub-Servicing Account"), which may be interest bearing or
non-interest bearing and which shall comply with the standards for Trust
Accounts set forth above, and which is otherwise acceptable to the Master
Servicer. The Sub-Servicer is required to credit to the related Sub-Servicing
Account on a daily basis the amount of all proceeds of Residential Loans
received by the Sub-Servicer, less its servicing compensation, its Retained
Interest, if any, and unreimbursed expenses and advances to which it is entitled
pursuant to the related Sub-Servicing Agreement. As specified in the related
Prospectus Supplement, the Sub-Servicer shall remit to the Master Servicer all
funds held in the Sub-Servicing Account with respect to each Residential Loan
and any amount required to be advanced pursuant to the related Sub-Servicing
Agreement on a monthly basis.
Pre-Funding Account
If so provided in the related Prospectus Supplement, the Master Servicer
will establish and maintain a Pre-Funding Account, in the name of the related
Trustee on behalf of the related Securityholders, into which the Depositor will
deposit the Pre-Funded Amount on the related Closing Date. The Pre-Funded Amount
will be used by the related Trustee to purchase Subsequent Loans from the
Depositor from time to time during the Funding Period. The Funding Period, if
any, for a Trust Fund will begin on the related Closing Date and will end on the
date specified in the related Prospectus Supplement, which in no event will be
later than the date that is three months after the Closing Date. Any amounts
remaining in the Pre-Funding Account at the end of the Funding Period will be
distributed to the related Securityholders in the manner and priority specified
in the related Prospectus Supplement, as a prepayment of principal of the
related Securities.
Payments on Residential Loans
The Master Servicer will deposit or cause to be deposited in the Trust
Account for each Trust Fund including Residential Loans as and when received
(or, in the case of Advances on or before the applicable Distribution Date),
unless otherwise provided in the related Agreement, the following payments and
collections received or made by or on behalf of the Master Servicer subsequent
to the Cut-off Date (unless otherwise specified in the related Prospectus
Supplement, 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 Residential Loans;
(ii) all payments on account of interest on the Residential Loans,
exclusive of any portion thereof representing interest in excess of the Net
Interest Rate (unless such excess amount is required to be deposited pursuant to
the related Agreement) and, if provided in the related Prospectus Supplement,
prepayment penalties;
(iii) all proceeds of any Primary Hazard Insurance Policies and any special
hazard insurance policy (to the extent such proceeds are not applied to the
restoration of the property or released to the borrower in accordance with the
Master Servicer's normal servicing procedures), any Primary Credit Insurance
Policy, any FHA Insurance, VA Guarantee, any Bankruptcy Bond and any Pool
Insurance Policy (as hereinafter defined) (collectively, "Insurance Proceeds"),
other than proceeds that represent reimbursement of the Master Servicer's costs
and expenses incurred in connection with presenting claims under the related
insurance policies, and all other cash amounts received, by foreclosure, eminent
domain, condemnation or otherwise, in connection with the liquidation of
defaulted Residential Loans included in the related Trust Fund ("Liquidation
Proceeds"), together with the net proceeds on a monthly basis with respect to
any properties acquired for the benefit of Securityholders by deed in lieu of
foreclosure or repossession;
(iv) any Advances made as described below under "Advances";
(v) all amounts required to be transferred to the Trust Account from a
Reserve Fund, if any, as described below under "Subordination";
(vi) all proceeds of any Residential Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any Sub-Servicer or any
Unaffiliated Seller as described under "Residential Loan
Program--Representations by Unaffiliated Sellers; Repurchases" and "Description
of the Certificates--Assignment of Trust Fund Assets" above, exclusive of the
Retained Interest, if any, in respect of such Residential Loan, and all proceeds
of any Residential Loan repurchased as described under "Termination" below;
(vii) all payments required to be deposited in the Trust Account with
respect to any deductible clause in any blanket insurance policy described under
"Description of Primary Insurance Coverage--Primary Hazard Insurance Policies";
(viii) any amount required to be deposited by the Trustee or the Master
Servicer in connection with losses realized on investments of funds held in the
Trust Account;
(ix) any amounts required to be transferred to the Trust Account pursuant
to any guaranteed investment contract;
(x) any distributions received on any Mortgage Securities included in the
related Trust Fund; and
(xi) any other amount required to be deposited in the Trust Account
pursuant to the Agreement.
Payments on Agency Securities
The Agency Securities included in a Trust Fund will be registered in the
name of the Trustee so that all distributions thereon will be made directly to
the Trustee. The Trustee will deposit or cause to be deposited into the Trust
Account for each Trust Fund including Agency Securities as and when received,
unless otherwise provided in the related Trust Agreement, all distributions
received by the Trustee with respect to the related Agency Securities (other
than payments due on or before the Cut-off Date and exclusive of any trust
administration fee and amounts representing the Retained Interest, if any).
Distributions
Distributions of principal and interest on the Securities of each Series
will be made by or on behalf of the Trustee or the Master Servicer on the dates
(each, a "Distribution Date") and at the intervals (which may be monthly,
quarterly, semi-annual or other intervals) specified in the related Prospectus
Supplement, to the persons in whose names the Securities are registered at the
close of business on the record date ("Record Date") specified in the Prospectus
Supplement. The amount of each distribution will be determined as of the close
of business on each Determination Date specified in the related Prospectus
Supplement. Distributions 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 the Master Servicer and holds Securities in any requisite amount
specified in the related Prospectus Supplement, 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
will be made only upon presentation and surrender of the Securities at the
office or agency of the Security Registrar specified in the notice to
Securityholders of such final distribution. Unless otherwise specified in the
Prospectus Supplement, all distributions made to the holders of Securities of
any Series on each Distribution Date will be made on a pro rata basis among the
Securityholders of record on the next preceding Record Date (other than in
respect of the final distribution), based on the aggregate Percentage Interest
represented by their respective Securities.
Final Distribution Date
With respect to any Series consisting of classes having sequential
priorities for distributions of principal, the "Final Distribution Date" for
each such class of Securities is the latest Distribution Date on which the
Security Principal Balance thereof is expected to be reduced to zero, based on
certain assumptions, including the assumption that no prepayments or defaults
occur with respect to the related Trust Fund Assets, as further or as otherwise
specified in the related Prospectus Supplement. Since the rate of distribution
of principal of any such class of Securities will depend upon, among other
things, the rate of payment (including prepayments) of the principal of the
Trust Fund Assets, the actual last Distribution Date for any class of Securities
could occur significantly earlier than its Final Distribution Date. The rate of
payments on the Trust Fund Assets for any Series of Securities will depend upon
their particular characteristics, as well as on the prevailing level of interest
rates from time to time and other economic factors, and no assurance can be
given as to the actual prepayment experience of the Trust Fund Assets. See
"Maturity and Prepayment Considerations." In addition, substantial losses on the
Trust Fund Assets in a given period, even though within the limits of the
protection afforded by the instruments described under "Description of Credit
Support", or by the Subordinate Securities in the case of a Senior/Subordinate
Series, may cause the actual last Distribution Date of certain classes of
Securities to occur after their Final Distribution Date.
Special Distributions
With respect to any Series of Securities with Distribution Dates occurring
at intervals less frequently than monthly, the Securities may be subject to
special distributions under the circumstances and in the manner described below
if and to the extent provided in the related Prospectus Supplement. If
applicable, the Master Servicer will be required to make or cause to be made
special distributions allocable to principal and interest on Securities of a
Series out of, and to the extent of, the amount available therefor in the
related Trust Account, on the day specified in the related Prospectus
Supplement, in the amount described below if, as a result of substantial
payments of principal on the Trust Fund Assets, low rates then available for
reinvestment of payments on such Trust Fund Assets, substantial Realized Losses
or some combination thereof, and based on the assumptions specified in the
related Agreement, it is determined that the amount anticipated to be on deposit
in the Trust Account on the next Distribution Date or on some intervening date
as provided in the related Prospectus Supplement, together with, if applicable,
the amount available to be withdrawn from any related Reserve Fund, may be
insufficient to make required distributions on the Securities of such Series on
such Distribution Date or such intervening date as may be provided in the
related Prospectus Supplement. The amount of any special distribution that is
allocable to principal will not exceed the amount that would otherwise be
distributed as principal on the next Distribution Date from amounts then on
deposit in the Trust Account. All special distributions will include interest at
the applicable Trust Interest Rate on the amount of the special distribution
allocable to principal to the date specified in the related Prospectus
Supplement.
All special distributions of principal will be made in the same priority
and manner as distributions in respect of principal on the Securities on a
Distribution Date. Special distributions of principal with respect to Securities
of the same class will be made on a pro rata basis. Notice of any special
distributions will be given by the Master Servicer or Trustee prior to the
special distribution date.
Principal and Interest on the Securities
Each class of Securities (other than certain classes of Strip Securities)
may have a different Certificate Interest Rate, which may be a fixed, variable
or adjustable Security Interest Rate. The related Prospectus Supplement will
specify the Security Interest Rate for each class, or in the case of a variable
or adjustable Security Interest Rate, the method for determining the Security
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.
As to each Series of Securities, with respect to each Distribution Date,
interest accruing with respect to each Security (the "Accrued Security
Interest"), other than a Strip Security, will be equal to interest on the
outstanding Security Principal Balance thereof immediately prior to the
Distribution Date, at the applicable Security Interest Rate, for a period of
time corresponding to the intervals between the Distribution Dates for such
Series. As to each Strip Security, the Stripped Interest with respect to any
Distribution Date will equal the amount described in the related Prospectus
Supplement for the related period. Unless otherwise specified in the related
Prospectus Supplement, the Accrued Security Interest on each Security of a
Series will be reduced, in the event of shortfalls in collections of interest
resulting from prepayments of Residential Loans that are not covered by payments
by the Master Servicer out of its servicing fees or by application of prepayment
penalties, with such shortfall allocated among all of the Securities of that
Series in proportion to the respective amounts of Accrued Security Interest that
would have been payable thereon absent such reductions and absent any
delinquencies or losses. See "Yield Considerations" and "Maturity and Prepayment
Considerations." Unless otherwise provided in the related Prospectus Supplement,
neither the Trustee, the Master Servicer nor the Depositor will be obligated to
fund shortfalls in interest collections resulting from prepayments. Unless
otherwise specified in the related Prospectus Supplement, distributions of
Accrued Certificate Interest that would otherwise be payable on any class of
Accrual Securities of a Series will be added to the Security Principal Balance
thereof on each Distribution Date until the Security Principal Balance of the
Securities of all other classes of such Series having a Final Distribution Date
prior to the Final Distribution Date of such class of Accrual Securities has
been reduced to zero, and actual payments of interest on the Accrual Securities
will be made thereafter. See "Final Distribution Date."
Unless the related Prospectus Supplement provides otherwise, each Security
will have a "Security Principal Balance" that, at any time, will equal the
maximum amount that the holder will be entitled to receive in respect of
principal out of the future cash flow on the Trust Fund Assets and other assets
included in the related Trust Fund. With respect to each such Security,
distributions generally will be applied to accrued and currently payable
interest thereon, and thereafter to principal. The outstanding Security
Principal Balance of a Security will be reduced to the extent of distributions
in respect of principal thereon, and in the case of Securities evidencing
interests in a Trust Fund that includes Residential Loans, by the amount of any
Realized Losses, as defined below, allocated thereto.
Unless the related Prospectus Supplement provides otherwise, the initial
aggregate Security Principal Balance of all classes of Securities of a Series
will equal the aggregate outstanding principal balance of the related Trust Fund
Assets as of the applicable Cut-off Date. The initial aggregate Security
Principal Balance of a Series and each class thereof will be specified in the
related Prospectus Supplement. Alternatively, the initial Security Principal
Balance for a Series of Securities may equal the initial aggregate "Cash Flow
Value" of the related Trust Fund Assets as the applicable Cut-off Date. The
aggregate Cash Flow Value of the Trust Fund Assets will be the Security
Principal Balance of the Certificates of such Series which, based on certain
assumptions (including the assumption that no defaults occur on the Trust Fund
Assets), can be supported by either the future scheduled payments on the Trust
Fund Assets (with the interest thereon adjusted to the Net Interest Rate), or
the proceeds of the prepayment of such Trust Fund Assets, together with
reinvestment earnings thereon, if any, at the applicable Assumed Reinvestment
Rate, and amounts available to be withdrawn from any Reserve Fund for such
Series, as further or as otherwise specified in the Prospectus Supplement
relating to a Series of Securities. The "Assumed Reinvestment Rate" for a Series
of Securities will be the highest rate permitted by the Rating Agency or
Agencies, or a rate insured pursuant to a guaranteed investment contract or
similar arrangement satisfactory to such Rating Agency or Agencies. If the
Assumed Reinvestment Rate is so insured, the Prospectus Supplement relating to a
Series of Securities will set forth the terms of such arrangement. The aggregate
of the initial Cash Flow Values of the Trust Fund Assets included in the Trust
Fund for a Series of Certificates will be at least equal to the aggregate
Security Principal Balance of the Securities of such Series at the date of
initial issuance thereof.
With respect to any Series as to which the initial Security Principal
Balance is calculated on the basis of Cash Flow Values of the Trust Fund Assets,
the amount of principal distributed for such Series on each Distribution Date
will generally be calculated on the basis of (i) the decline in the aggregate
Cash Flow Values of the Trust Fund Assets during the related Due Period,
calculated in the manner prescribed in the related Agreement, minus (ii) with
respect to any Realized Loss incurred during the related Due Period and not
covered by any of the instruments described under "Description of Credit
Support", the portion of the Cash Flow Value of the Trust Fund Assets
corresponding to such Realized Loss; or as otherwise provided in the related
Prospectus Supplement as to any such Series which is a Senior/Subordinate
Series. Unless the related Prospectus Supplement provides otherwise, the "Due
Period" applicable to any Distribution Date will commence on the second day of
the month in which the immediately preceding Distribution Date occurs, or on 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.
Unless otherwise provided in the related Prospectus Supplement,
distributions in respect of principal will be made on each Distribution Date to
the class or classes of Security entitled thereto until the Security Principal
Balance of such class has been reduced to zero. In the case of a Series of
Securities that include two or more classes of Securities, the timing,
sequential order and amount of distributions (including distributions among
multiple classes of Senior Securities or Subordinate Securities) in respect of
principal on each such class shall be as provided in the related Prospectus
Supplement. Distributions in respect of principal of any class of Securities
will be made on a pro rata basis among all of the Securities of such class.
Available Distribution Amount
Unless otherwise specified in the related Prospectus Supplement, all
distributions on the Certificates of each Series on each Distribution Date will
be made from the following amounts (collectively, the "Available Distribution
Amount"):
(i) the total amount of all cash on deposit in the related Trust Account as
of the corresponding Determination Date exclusive of:
(a) all monthly payments collected but due during a Due Period
subsequent to the applicable Due Period;
(b) all prepayments and any related prepayment penalties, and
other unscheduled recoveries of principal and related payments of
interest thereon, received subsequent to the related Prepayment Period;
and
(c) all other amounts in the Trust Account which are payable or
reimbursable to the Depositor, the Master Servicer or the Trustee with
respect to such Distribution Date;
(ii) if so provided in the related Prospectus Supplement, any Advances made
with respect to such Distribution Date;
(iii) if so provided in the related Prospectus Supplement, any payments in
respect of interest shortfalls resulting from principal prepayments;
(iv) if so provided in the related Prospectus Supplement, all net income
received in connection with the operation of any Residential Property acquired
on behalf of the Securityholders through deed in lieu of foreclosure or
repossession; and
(v) if the related Prospectus Supplement so provides, interest or
reinvestment income on amounts on deposit in the Trust Account (which may
include income provided under a guaranteed investment contract).
On each Distribution Date for a Series of Securities, the Trustee or the
Master Servicer will withdraw or cause to be withdrawn from the Trust Account
the entire Available Distribution Amount and distribute the same or cause the
same to be distributed to the related Securityholders in the manner set forth
herein and in the Prospectus Supplement.
Subordination
A Senior/Subordinate Series will consist of one or more classes of Senior
Securities and one or more classes of Subordinate Securities, as specified in
the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, only the Senior Securities will be offered hereby.
Subordination of the Subordinate Securities of any Series will be effected by
either of the two following methods, or by any other alternative method as may
be described in the related Prospectus Supplement.
Shifting Interest Subordination
With respect to any Series of Certificates as to which credit support is
provided by shifting interest subordination, in the event of any Realized Losses
on Residential Loans not in excess of the limitations described below, the
rights of the Subordinate Certificateholders to receive distributions with
respect to the Residential Loans will be subordinate to the rights of the Senior
Certificateholders. With respect to any defaulted Residential Loan that is
finally liquidated, through foreclosure sale, disposition of the related
Residential Property if acquired on behalf of the Certificateholders by deed in
lieu of foreclosure, repossession, or otherwise, the amount of loss realized, if
any (a "Realized Loss"), will equal the portion of the unpaid principal balance
remaining after application of all principal amounts recovered (net of amounts
reimbursable to the Master Servicer for related expenses). With respect to
certain Residential Loans the principal balances of which have been reduced in
connection with bankruptcy proceedings, the amount of such reduction will be
treated as a Realized Loss.
All Realized Losses will be allocated to the Subordinate Certificates of
the related Series, until the Security Principal Balance of the Subordinate
Certificates thereof has been reduced to zero. Any additional Realized Losses
will be allocated to the Senior Certificates (or, if such Series includes more
than one class of Senior Certificates, either on a pro rata basis among all of
the Senior Certificates in proportion to their respective outstanding
Certificate Principal Balances or as otherwise provided in the related
Prospectus Supplement). With respect to certain Realized Losses resulting from
physical damage to Residential Properties which are generally of the same type
as are covered under a special hazard insurance policy ("Special Hazard
Losses"), the amount thereof that may be allocated to the Subordinate
Certificates of the related Series may be limited to an amount (the "Special
Hazard Subordination Amount") specified in the related Prospectus Supplement.
See "Description of Credit Support--Special Hazard Insurance Policies." If so,
any Special Hazard Losses in excess of the Special Hazard Subordination Amount
will be allocated among all outstanding classes of Certificates of the related
Series, either on a pro rata basis in proportion to their outstanding
Certificate Principal Balances, regardless of whether any Subordinate
Certificates remain outstanding, or as otherwise provided in the related
Prospectus Supplement.
Any allocation of a Realized Loss to a Certificate will be made by reducing
the Security Principal Balance thereof as of the Distribution Date following the
Prepayment Period in which such Realized Loss was incurred. If so provided in
the related Prospectus Supplement, in the event of a Realized Loss, the Senior
Certificateholders may be entitled to receive a distribution in respect of
principal, to be paid from and to the extent of funds otherwise distributable to
the Subordinate Certificateholders, equal to the amount, if any, by which (i)
the then applicable Senior Percentage (as defined below) times the Scheduled
Principal Balance (as defined below) of the related Residential Loan exceeds
(ii) the total amount of the related unscheduled recovery which is allocable to
principal (the "Unrecovered Senior Portion"). Payments to the Senior
Certificateholders in respect of any Unrecovered Senior Portion on any
Distribution Date will only be made with respect to Realized Losses incurred in
connection with Residential Loans that were finally liquidated during the
preceding Prepayment Period and will not be made as to any Special Hazard Losses
in excess of the Special Hazard Subordination Amount, if applicable. As with any
other distribution in respect of principal, any payment to the holders of Senior
Certificates attributable to an Unrecovered Senior Portion will be applied to
reduce the Security Principal Balance thereof. At any given time, the percentage
corresponding to the ratio of the Security Principal Balance of the Senior
Certificates to the Security Principal Balances of all of the Certificates is
the "Senior Percentage", determined in the manner set forth in the related
Prospectus Supplement. As specified in the related Prospectus Supplement, the
"Scheduled Principal Balance" of any Residential Loan as of any date of
determination is equal to the unpaid principal balance thereof as of the date of
determination, reduced by the principal portion of all monthly payments due but
unpaid as of the date of determination.
As set forth above, the rights of holders of the various classes of
Certificates of any Series to receive distributions of principal and interest is
determined by the aggregate Security Principal Balance of each such class. The
Security Principal Balance of any Certificate will be reduced by all amounts
previously distributed on such Certificate in respect of principal, and by any
Realized Losses allocated thereto. However, to the extent so provided in the
related Prospectus Supplement, holders of Senior Certificates may be entitled to
receive a disproportionately larger amount of prepayments received in certain
circumstances, which will have the effect (in the absence of offsetting losses)
of accelerating the amortization of the Senior Certificates and increasing the
respective percentage ownership interest evidenced by the Subordinate
Certificates in the related Trust Fund (with a corresponding decrease in the
Senior Percentage), as well as preserving the availability of the subordination
provided by the Subordinate Certificates. In addition, as set forth above,
Realized Losses will be first allocated to Subordinate Certificates by reduction
of the Security Principal Balance thereof, which will have the effect of
increasing the respective ownership interest evidenced by the Senior
Certificates in the related Trust Fund. If there were no Realized Losses or
prepayments of principal on any of the Residential Loans, the respective rights
of the holders of Certificates of any Series to future distributions would not
change.
Cash Flow Subordination
With respect to any Series of Securities as to which credit support is
provided by cash flow subordination, in the event of losses on the Residential
Loans not in excess of the Available Subordination Amount, the rights of the
Subordinate Securityholders to receive distributions of principal and interest
with respect to the Residential Loans will be subordinate to the rights of the
Senior Securityholders. The Available Subordination Amount at any time is equal
to the difference between the then applicable Maximum Subordination Amount and
the "Cumulative Subordination Payments" at such time. At the time of any
determination, Cumulative Subordination Payments equal the aggregate of amounts
paid to the Senior Securityholders that, but for the subordination provisions,
would otherwise have been payable to the Subordinate Securityholders. The
Available Subordination Amount will decrease whenever amounts otherwise payable
to the Subordinate Securityholders are paid to the Senior Securityholders
(including amounts withdrawn from the Reserve Fund and paid to the Senior
Securityholders), and will increase whenever there is distributed to the
Subordinate Securityholders amounts in respect of which subordination payments
have previously been paid to the Senior Securityholders (which will occur only
when subordination payments in respect of delinquencies and certain other
deficiencies have been recovered). The "Maximum Subordination Amount" initially
will equal a fixed percentage amount specified in the related Prospectus
Supplement of the aggregate initial principal balance of the Residential Loans
in the related Trust Fund, and will periodically be adjusted in accordance with
a formula specified in the Prospectus Supplement.
The protection afforded to the Senior Securityholders from the
subordination provisions described herein will be effected both by the
preferential right of the Senior Securityholders to receive current
distributions from the Trust Fund (subject to the limitations described herein)
and by the establishment and maintenance of a cash reserve fund (the "Reserve
Fund"). The Reserve Fund may be funded by an initial cash deposit on the date of
the initial issuance of the related Series of Securities (the "Initial Deposit")
and by deposits of amounts otherwise due on the Subordinate Securities to the
extent set forth in the related Prospectus Supplement.
Amounts in the Reserve Fund (other than earnings thereon) will be withdrawn
for distribution to Senior Securityholders as may be necessary to make full
distributions to such holders on a particular Distribution Date, as described
above. If on any Distribution Date, after giving effect to the distributions to
the Senior Securityholders on such date, the amount of the Reserve Fund exceeds
the amount required to be held therein (the "Specified Reserve Fund Balance"),
such excess will be withdrawn and distributed in the manner specified in the
related Prospectus Supplement.
In the event the Reserve Fund is depleted before the Available
Subordination Amount is reduced to zero, the Senior Securityholders will
nevertheless have a preferential right to receive current distributions from the
Trust Fund to the extent of the then Available Subordination Amount. However,
under these circumstances, should current distributions be insufficient, the
Senior Securityholders could suffer shortfalls of amounts due to them. The
Senior Securityholders will bear their proportionate share of any losses
realized on the Trust Fund in excess of the Available Subordination Amount.
Amounts remaining in the Reserve Fund after the Available Subordination
Amount is reduced to zero will no longer be subject to any claims or rights of
the Senior Securityholders of such Series.
Funds in the Reserve Fund may be invested as provided in the related
Agreement in Permitted Instruments that mature according to a schedule set forth
in the related Agreement. The earnings or losses on such investments will be
applied in the manner described in the related Prospectus Supplement.
The time necessary for the Reserve Fund to reach the Specified Reserve Fund
Balance will be affected by the prepayment, foreclosure, and delinquency
experience of the Residential Loans and therefore cannot accurately be
predicted.
Subordination and Cash Flow Values
In the event that the Security Principal Balances of the various classes of
Securities comprising a Senior/Subordinate Series are based upon the Cash Flow
Value of the Residential Loans, a shortfall in amounts distributable to Senior
Securityholders on any Distribution Date will occur to the extent that the
Senior Percentage of the decline in the Cash Flow Value of the Residential Loans
during the related Deposit Period exceeds all collections and, if so provided in
the related Prospectus Supplement, Advances in respect of the Residential Loans,
minus Accrued Security Interest on the Security Principal Balances of the Senior
Securities for such Distribution Date. The loss attributable to any liquidated
Residential Loan shall be equal to the excess, if any, of the Cash Flow Value of
such Residential Loan over all net proceeds recovered and allocable to
principal. The "Deposit Period" with respect to any Distribution Date is the
period commencing on the day following the Determination Date immediately
preceding the related Determination Date and ending on the related Determination
Date.
Because the Cash Flow Value of a Residential Loan will never exceed the
outstanding principal balance thereof, prepayments in full and liquidations of
the Residential Loans may result in proceeds attributable to principal in excess
of the corresponding Cash Flow Value decline. Any excess will be applied to
offset losses realized during the related Deposit Period (as such losses are
described in the immediately preceding paragraph) in respect of other liquidated
Residential Loans without affecting the remaining subordination, and such excess
may, if so provided in the related Prospectus Supplement, be deposited in a
Reserve Fund for future distributions.
Advances
With respect to any Series of Securities evidencing interests in a Trust
Fund that includes Residential Loans, other than a Senior/Subordinate Series,
unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will be obligated to advance on or before each Distribution Date, from
its own funds, or from amounts held for future distribution in the Trust Account
that are not included in the Available Distribution Amount for such Distribution
Date (any such advance, an "Advance"), in an amount equal to the aggregate of
payments of principal and interest (adjusted to the applicable Net Interest
Rate) that were due during the related Due Period and that were delinquent (and
not advanced by any Sub-Servicer) on the Determination Date. Any amounts held
for future distribution and so used shall be replaced by the Master Servicer on
or before any future Distribution Date to the extent that funds in the Trust
Account on such Distribution Date shall be less than payments to Securityholders
required to be made on such date. Unless otherwise specified in a Prospectus
Supplement relating to a Series of Securities, the obligation of the Master
Servicer to make Advances will be subject to the good faith determination of the
Master Servicer that such advances will be reimbursable from related late
collections, Insurance Proceeds or Liquidation Proceeds. See "Description of
Credit Support." As specified in the related Prospectus Supplement with respect
to any Series of Securities as to which the Trust Fund includes Mortgage
Securities, the Master Servicer's advancing obligations, if any, will be
pursuant to the terms of such Mortgage Securities, as may be supplemented by the
terms of the applicable Pooling and Servicing Agreement.
With respect to a Senior/Subordinate Series in which subordination is
effected through the "shifting interest" method, previously described herein,
unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will make an Advance on each Distribution Date from its own funds or
from funds held in the Trust Account that are not included in the Available
Distribution Amount for such Distribution Date, in an aggregate amount equal to
the lesser of (a) the total of all amounts required to be distributed on each
class of Senior Securities on such Distribution Date that remain after applying
towards such payment the entire Available Distribution Amount, including funds
otherwise payable to the Subordinate Securityholders, and (b) the aggregate of
payments of principal and interest (adjusted to the applicable Net Interest
Rate) that were due during the related Due Period but were delinquent on the
related Determination Date and were not advanced by any Sub-Servicer. With
respect to a Senior/Subordinated Series in which subordination is effected
through the "cash flow" method previously described herein, unless otherwise
provided in the related Prospectus Supplement, the Master Servicer may be
obligated to make Advances in the manner provided in the preceding paragraph. In
either case, so long as the Security Principal Balance of the Subordinate
Securities in the case of subordination effected through the "shifting interest"
method, or the Available Subordination Amount in the case of subordination
effected through the "cash flow" method, has not been reduced to zero, the
Master Servicer will be obligated to make such Advances regardless of
recoverability from the related Residential Loans. Thereafter, such Advances are
required to be made only to the extent they are deemed by the Master Servicer to
be recoverable from related late collections, Insurance Proceeds, Liquidation
Proceeds, or otherwise, unless otherwise specified in the related Prospectus
Supplement. See "Description of Primary Insurance Coverage" and "Description of
Credit Support."
If Distribution Dates for any Series of Securities occur less frequently
than each month, Advances shall be made on the intervening dates specified in
the related Prospectus Supplement.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to Securityholders, rather than to guarantee or insure
against losses. Unless otherwise specified in a Prospectus Supplement relating
to a Series of Securities, Advances will be reimbursable to the Master Servicer,
without interest, out of related recoveries on the Residential Loans respecting
which such amounts were advanced, or, to the extent that the Master Servicer
shall determine that any such Advance previously made will not be ultimately
recoverable from Insurance Proceeds or Liquidation Proceeds (a "Nonrecoverable
Advance"), from any cash available in the Trust Account. If so specified in the
related Prospectus Supplement, the obligations of the Master Servicer to make
Advances may be secured by a cash advance reserve fund or a surety bond.
Information regarding the characteristics of, and the identity of any obligor
of, any such surety bond, will be set forth in the related Prospectus
Supplement.
Statements to Securityholders
Unless otherwise provided in the related Prospectus Supplement, on each
Distribution Date, the Master Servicer or the Trustee will forward or cause to
be forwarded to each Securityholder of the related Series and to the Depositor a
statement including the following information (in the case of information
furnished pursuant to (i), (ii) and (iii) below, the amounts shall be expressed
as a dollar amount per minimum denomination Security):
(i) the amount of such distribution, if any, allocable to principal,
separately identifying the aggregate amount of principal prepayments and, if
applicable, related prepayment penalties received during the related Prepayment
Period;
(ii) the amount of such distribution, if any, allocable to interest;
(iii) the amount of administration and servicing compensation received by
or on behalf of the Trustee, Master Servicer and any Sub-Servicer with respect
to such Distribution Date and such other customary information as the Master
Servicer or the Trustee deems necessary or desirable to enable Securityholders
to prepare their tax returns or which a Securityholder reasonably requests for
such purpose;
(iv) if applicable, the aggregate amount of any Advances included in such
distribution and the aggregate amount of any unreimbursed Advances as of the
close of business on such Distribution Date;
(v) the Security Principal Balance of a minimum denomination Security, and
the aggregate Security Principal Balance of all of the Securities of that
Series, after giving effect to the amounts distributed on such Distribution
Date;
(vi) the number and aggregate principal balance of any Residential Loans in
the related Trust Fund (a) delinquent one month, (b) delinquent two or more
months and (c) as to which repossession or foreclosure proceedings have been
commenced;
(vii) with respect to any Residential Property acquired through
foreclosure, deed in lieu of foreclosure or repossession during the preceding
calendar month, the loan number and principal balance of the related Residential
Loan as of the close of business on the Distribution Date in such month and the
date of acquisition thereof;
(viii) the book value of any Residential Property acquired through
foreclosure, deed in lieu of foreclosure or repossession as of the close of
business on the last business day of the calendar month preceding the
Distribution Date;
(ix) the aggregate Scheduled Principal Balance and Stated Principal Balance
of the Mortgage Loans at the close of business on such Distribution Date;
(x) in the case of Securities with a variable Security Interest Rate, the
Security Interest Rate applicable to such Distribution Date, as calculated in
accordance with the method specified in the Prospectus Supplement relating to
such Series;
(xi) in the case of Securities with an adjustable Security Interest Rate,
for statements to be distributed in any month in which an adjustment date
occurs, the adjusted Certificate Interest Rate applicable to the next succeeding
Distribution Date;
(xii) as to any Series including one or more classes of Accrual Securities,
the interest accrued on each such class with respect to such Distribution Date
and added to the Security Principal Balance thereof;
(xiii) the amount deposited in the Reserve Fund, if any, on such
Distribution Date;
(xiv) the amount remaining in the Reserve Fund, if any, as of the close of
business on such Distribution Date, after giving effect to distributions made on
such Distribution Date;
(xv) as to any Series that includes credit support, the amount of remaining
coverage of each Insurance Instrument (as defined under "Collection and Other
Servicing Procedures") included therein as of the close of business on such
Distribution Date, or, in the case of a Senior/Subordinate Series, information
as to the remaining amount of protection against losses afforded to the Senior
Securityholders by the subordination provisions and information regarding any
shortfalls in payments to the Senior Certificateholder which remain outstanding;
and
(xvi) with respect to any Series of Securities as to which the Trust Fund
includes Mortgage Securities, certain additional information as required under
the related Pooling and Servicing Agreement or Trust Agreement, as applicable.
Within a reasonable period of time after the end of each calendar year, the
Master Servicer or the Trustee will furnish or cause to be furnished a report to
every person who was a holder of record of a Security at any time during such
calendar year setting forth the aggregate of amounts reported pursuant to (i),
(ii) and (iii) above for such calendar year or in the event such person was a
holder of record during a portion of such calendar year, for the applicable
portion of such year.
The related Prospectus Supplement may provide that additional information
with respect to a Series of Securities will be included in such statements. In
addition, the Master Servicer or the Trustee shall file with the Internal
Revenue Service and furnish to holders of Securities such statements or
information as may be required by the Code or applicable procedures of the
Internal Revenue Service.
Book-Entry Registration of Securities
As described in the Prospectus Supplement, if not issued in fully
registered form, each class of Certificates will be registered as book-entry
certificates (the "Book-Entry Securities"). Persons acquiring beneficial
ownership interests in the Securities ("Security Owners") will hold their
Securities through the Depository Trust Company ("DTC") in the United States, or
CEDEL or Euroclear (in Europe) if they are participants ("Participants") of such
systems, or indirectly through organizations which are Participants in such
systems. The Book-Entry Securities will be issued in one or more certificates
which equal the aggregate principal balance of the Securities and will initially
be registered in the name of Cede & Co., the nominee of DTC. CEDEL and Euroclear
will hold omnibus positions on behalf of their Participants through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank,
N.A. will act as depositary for CEDEL and the Brussels, Belgium branch of Morgan
Guarantee Trust Company of New York ("Morgan") will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Except as described below, no
Security Owner will be entitled to receive a physical certificate representing
such Security (a "Definitive Security"). Unless and until Definitive Securities
are issued, it is anticipated that the only "Securityholders" of the Securities
will be Cede & Co., as nominee of DTC. Security Owners are only permitted to
exercise their rights indirectly through Participants and DTC.
The Security Owner's ownership of a Book-Entry Security will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the Security
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Security will be recorded on the records of DTC (or
of a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the Security Owner's
Financial Intermediary is not a Participant and on the records of CEDEL or
Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and Participants. While
the Securities are outstanding (except under the circumstances described below),
under the rules, regulations and procedures creating and affecting DTC and its
operations (the "Rules"), DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of, and interest on,
the Securities. Participants and indirect participants with whom Security Owners
have accounts with respect to securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Security Owners. Accordingly, although Security Owners will not
possess certificates, the Rules provide a mechanism by which Security Owners
will receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Certificates will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Security
Owners.
Because of time zone differences, credits of Securities received in CEDEL
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 Certificates
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of Certificates by or through a CEDEL Participant (as defined
herein) or Euroclear Participant (as defined herein) to a DTC 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.
Transfers between Participants will occur in accordance with the Rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons 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
the Rules on behalf of the relevant European international clearing system by
the Relevant Depositary; however, such cross market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to the Relevant Depositary to take action to
effect final settlement on its behalf by delivering or receiving Securities to
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 European Depositaries.
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. 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.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of
Morgan, under contract with Euroclear Clearance Systems S.C., a Belgium
cooperative corporation (the "Euroclear Cooperative"). All operations are
conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Euroclear Cooperative. The Euroclear Cooperative establishes policy for
Euroclear on behalf of Euroclear Participants. Euroclear Participants include
banks (including central banks), securities brokers and dealers and other
professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial relationship
with a Euroclear Participant, either directly or indirectly.
Morgan 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 Morgan are governed by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law (collectively, the
"Terms and Conditions"). The Terms and Conditions govern transfers of securities
and cash within Euroclear, withdrawals of securities and cash from Euroclear,
and receipts of payments with respect to securities in Euroclear. All securities
in Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Under a book-entry format, beneficial owners of the Book-Entry Securities
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede & Co. Distributions with respect to
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 the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with the relevant United States tax laws and regulations. See "Certain Federal
Income Tax Consequences" herein. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Securities to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Securities, may
by limited due to the lack of physical certificates for such Book-Entry
Securities. In addition, issuance of the Book-Entry Securities in book-entry
form may reduce the liquidity of such Securities in the secondary market since
certain potential investors may be unwilling to purchase Securities for which
they cannot obtain physical certificates.
Unless otherwise specified in the related Prospectus Supplement, monthly
and annual reports on the Trust Fund will be provided to Cede & Co., as nominee
of DTC, and may be made available by Cede & Co. to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Securities of such beneficial owners are credited.
It is the Depositor's understanding that, unless and until Definitive
Securities are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Securities under the applicable Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Securities. CEDEL or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Securityholder under the applicable
Agreement on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect such actions on its behalf through DTC. DTC
may take actions, at the direction of the related Participants, with respect to
some Securities which conflict with actions taken with respect to other
Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
reregistration, the Trustee will issue Definitive Securities, and thereafter the
Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
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.
None of the Master Servicer, the Depositor or the Trustee will have any
responsibility for any aspect of the records relating, to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Collection and Other Servicing Procedures
Residential Loans
The Master Servicer, directly or through Sub-Servicers, will make
reasonable efforts to collect all required payments under the Residential Loans
and will follow or cause to be followed such collection procedures as it would
follow with respect to the servicing of residential loans that are comparable to
the Residential Loans and held for its own account, provided such procedures are
consistent with the related Agreement and any insurance policy, bond or other
instrument described under "Description of Primary Insurance Coverage" or
"Description of Credit Support" (any such instrument providing, or insofar as it
provides, coverage as to losses resulting from physical damage, a "Hazard
Insurance Instrument", any such instrument providing, or insofar as it provides,
coverage as to credit or other risks, a "Credit Insurance Instrument", and
collectively, an "Insurance Instrument"). With respect to any Series of
Securities as to which the Trust Fund includes Mortgage Securities, the Master
Servicer's servicing and administration obligations, if any, will be pursuant to
the terms of such Mortgage Securities.
In any case in which a Residential Property has been, or is about to be,
conveyed, or in the case of a multifamily Residential Property, encumbered, by
the borrower, the Master Servicer will, to the extent it has knowledge of such
conveyance, encumbrance, or proposed conveyance or encumbrance, exercise or
cause to be exercised its rights to accelerate the maturity of such Residential
Loan under any due-on-sale or due-on-encumbrance clause applicable thereto, but
only if the exercise of such rights is permitted by applicable law and will not
impair or threaten to impair any recovery under any related Insurance
Instrument. If these conditions are not met or if the Master Servicer or
Sub-Servicer reasonably believes it is unable under applicable law to enforce
such due-on-sale or due-on-encumbrance clause, the Master Servicer or
Sub-Servicer will enter into or cause to be entered into an assumption and
modification agreement with the person to whom such property has been conveyed,
encumbered or is proposed to be conveyed or encumbered, pursuant to which such
person becomes liable under the Mortgage Note, Cooperative Note, Home
Improvement Contract or Manufactured Housing Contract and, to the extent
permitted by applicable law, the borrower remains liable thereon and provided
that coverage under any Insurance Instrument with respect to such Residential
Loan is not adversely affected. The Master Servicer is also authorized to enter
into a substitution of liability agreement with such person, pursuant to which
the original borrower is released from liability and such person is substituted
as the borrower and becomes liable under the Mortgage Note, Cooperative Note or
Contract. In connection with any such assumption, the Interest Rate, the amount
of the monthly payment or any other term affecting the amount or timing of
payment on the Residential Loan may not be changed. Any fee collected by or on
behalf of the Master Servicer for entering into an assumption agreement will be
retained by or on behalf of the Master Servicer as additional compensation for
administering of the Trust Fund Assets. See "Certain Legal Aspects of
Residential Loans--Enforceability of Certain Provisions" and "--Prepayment
Charges and Prepayments." The Master Servicer shall notify the Trustee and any
custodian that any such assumption or substitution agreement has been completed.
Agency Securities
The Trust Agreement will require the Trustee, if it has not received a
distribution with respect to any Agency Security by the fifth business day after
the date on which such distribution was due and payable pursuant to the terms of
such Agency Security, to request the issuer or guarantor, if any, of such Agency
Security to make such payment as promptly as possible and legally permitted and
to take such legal action against such issuer or guarantor as the Trustee deems
appropriate under the circumstances, including the prosecution of any claims in
connection therewith. The reasonable legal fees and expenses incurred by the
Trustee in connection with the prosecution of any such legal action will be
reimbursable to the Trustee out of the proceeds of any such action and will be
retained by the Trustee prior to the deposit of any remaining proceeds in the
Trust Account pending distribution thereof to Securityholders of the related
Series. In the event that the proceeds of any such legal action may be
insufficient to reimburse the Trustee for its legal fees and expenses, the
Trustee will be entitled to withdraw from the Trust Account an amount equal to
such expenses incurred by it, in which event the Trust Fund may realize a loss
up to the amount so charged.
Realization Upon Defaulted Residential Loans
As servicer of the Residential Loans, the Master Servicer, on behalf of
itself, the Trustee and the Securityholders, will present claims to the insurer
under each Insurance Instrument, to the extent specified in the related
Prospectus Supplement, and will take such reasonable steps as are necessary to
receive payment or to permit recovery thereunder with respect to defaulted
Residential Loans. As set forth above, all collections by or on behalf of the
Master Servicer under any Insurance Instrument, other than amounts to be applied
to the restoration of a Residential Property or released to the borrower, are to
be deposited in the Trust Account for the related Trust Fund, subject to
withdrawal as heretofore described. Unless otherwise provided in the Prospectus
Supplement relating to a Series of Securities, the Master Servicer will not
receive payment under any letter of credit included as an Insurance Instrument
with respect to a defaulted Residential Loan unless all Liquidation Proceeds and
Insurance Proceeds which it deems to be finally recoverable have been realized;
however, the Master Servicer will be entitled to reimbursement for any
unreimbursed advances and reimbursable expenses thereunder.
If any property securing a defaulted Residential Loan is damaged and
proceeds, if any, from the related Hazard Insurance Instrument are insufficient
to restore the damaged property to a condition sufficient to permit recovery
under the related Credit Insurance Instrument, if any, 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 Residential 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.
If recovery on a defaulted Residential Loan under any related Credit
Insurance Instrument is not available for the reasons set forth in the preceding
paragraph, or for any other reason, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and procedures
as it deems necessary, and appropriate for the type of defaulted Residential
Loan, or advisable to realize upon the defaulted Residential Loan. If the
proceeds of any liquidation of the property securing the defaulted Residential
Loan are less than the outstanding principal balance of the defaulted
Residential Loan (or the Cash Flow Value of such Mortgage Loan in the event that
Security Principal Balances are based upon Cash Flow Values), the amount of any
liens senior thereto plus interest accrued thereon at the Net Interest Rate
plus, the aggregate amount of expenses incurred by the Master Servicer in
connection with such proceedings and which are reimbursable under the related
Agreement, the Trust Fund will realize a loss in the amount of such difference.
If the Master Servicer recovers Insurance Proceeds which, when added to any
related Liquidation Proceeds and after deduction of certain expenses
reimbursable to the Master Servicer, exceed the outstanding principal balance of
the defaulted Residential Loan together with accrued interest at the Net
Interest Rate, the Master Servicer will be entitled to withdraw or cause to be
withdrawn from the Trust Account amounts representing its normal administration
compensation on such Residential Loan. In the event that the Master Servicer has
expended its own funds to restore damaged property and such funds have not been
reimbursed under any Insurance Instrument, it will be entitled to withdraw from
the Trust Account out of related Liquidation Proceeds or Insurance Proceeds an
amount equal to such expenses incurred by it, in which event the Trust Fund may
realize a loss up to the amount so charged. Because Insurance Proceeds cannot
exceed deficiency claims and certain expenses incurred by the Master Servicer,
no such payment or recovery will result in a recovery to the Trust Fund which
exceeds the principal balance of the defaulted Residential Loan together with
accrued interest thereon at the Net Interest Rate. In addition, when property
securing a defaulted Residential Loan can be resold for an amount exceeding the
outstanding principal balance of the related Residential Loan together with
accrued interest and expenses, it may be expected that, if retention of any such
amount is legally permissible, the insurer will exercise its right under any
related pool insurance policy to purchase such property and realize for itself
any excess proceeds. See "Description of Primary Insurance Coverage" and
"Description of Credit Support."
With respect to collateral securing a Cooperative Loan, any prospective
purchaser will generally have to obtain the approval of the board of directors
of the relevant Cooperative before purchasing the shares and acquiring rights
under the proprietary lease or occupancy agreement securing that Cooperative
Loan. See "Certain Legal Aspects of Residential Loans--Foreclosure on
Cooperatives." This approval is usually based on the purchaser's income and net
worth and numerous other factors. The necessity of acquiring such approval could
limit the number of potential purchasers for those shares and otherwise limit
the Master Servicer's ability to sell, and realize the value of, those shares.
Retained Interest, Administration Compensation and Payment of Expenses
The Prospectus Supplement for a Series of Securities will specify whether
there will be any Retained Interest in any of the Trust Fund Assets. If so, the
Retained Interest will be established on a loan-by-loan or security-by-security
basis and will be specified in the related Agreement or in an exhibit to the
related Agreement. A Retained Interest in a Trust Fund Asset represents a
specified portion of the interest payable thereon. The Retained Interest will be
deducted from related payments as received and will not be part of the related
Trust Fund. Unless otherwise provided in the related Prospectus Supplement, any
partial recovery of interest on a Residential Loan, after deduction of all
applicable administration fees, will be allocated between Retained Interest, if
any, and interest at the Net Interest Rate on a pro rata basis.
Unless otherwise specified in the related Prospectus Supplement, the
primary administration compensation of the Master Servicer (or in the case of a
Trust Fund consisting of Agency Securities, the Trustee) with respect to a
Series of Securities will come from the monthly payment to it, with respect to
each interest payment on a Trust Fund Asset, at a rate equal to one-twelfth of
the difference between the Interest Rate and the sum of the Net Interest Rate
and the Retained Interest Rate, if any (the "Administration Fee Rate"), times
the scheduled principal balance of such Trust Fund Asset. Notwithstanding the
foregoing, with respect to a Series of Securities as to which the Trust Fund
includes Mortgage Securities, the compensation payable to the Master Servicer or
Manager for servicing and administering such Mortgage Securities on behalf of
the holders of such Securities may be based on a percentage per annum described
in the related Prospectus Supplement of the outstanding balance of such Mortgage
Securities and may be retained from distributions thereon, if so specified in
the related Prospectus Supplement. Any Sub-Servicer will receive a portion of
the Master Servicer's primary compensation as its sub-servicing compensation.
Since any Retained Interest and the primary compensation of the Master Servicer
(or the Trustee) are percentages of the outstanding principal balance of each
Trust Fund Asset, such amounts will decrease as the Trust Fund Assets amortize.
As additional compensation in connection with a Series of Securities
relating to Residential Loans, the Master Servicer or the Sub-Servicers, if any,
will retain all assumption fees and late payment charges, if any, to the extent
collected from borrowers, and, if so provided in the related Prospectus
Supplement, any prepayment fees collected from the borrowers and any excess
recoveries realized upon liquidation of a defaulted Residential Loan. Unless
otherwise provided in the related Prospectus Supplement, any interest or other
income that may be earned on funds held in the Trust Account pending monthly,
quarterly, semiannual or other periodic distributions, as applicable, or any
Sub-Servicing Account may be paid as additional compensation to the Trustee, the
Master Servicer or the Sub-Servicers, as the case may be.
With respect to a Series of Securities relating to Residential Loans, the
Master Servicer will pay from its administration compensation certain expenses
incurred in connection with its servicing of the Residential Loans, including,
without limitation, amounts payable to any Sub-Servicer, payment of the premiums
and fees associated with any Pool Insurance Policy, special hazard insurance
policy, Bankruptcy Bond or, to the extent specified in the related Prospectus
Supplement, other insurance policy or credit support, payment of the fees and
disbursements of the Trustee and independent accountants, and payment of
expenses incurred in connection with distributions and reports to
Securityholders, and payment of any other expenses as described in the related
Prospectus Supplement.
It is anticipated that the administration compensation will in all cases
exceed such expenses. The Master Servicer is entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Residential Loans, including under certain circumstances reimbursement of
expenditures incurred by it in connection with the restoration of Residential
Properties, such right of reimbursement being prior to the rights of
Securityholders to receive any related Liquidation Proceeds. The Master Servicer
is also entitled to reimbursement from the Trust Account for Advances, if
applicable. With respect to a Series of Securities relating to Agency
Securities, the Trustee shall pay all expenses incurred in administration
thereof, subject to the limitations described in the related Prospectus
Supplement.
Evidence as to Compliance
Each Agreement will generally provide that on or before a specified date in
each year, beginning with the first such date that occurs at least six months
after the Cut-off Date, the Master Servicer, in the case of a Pooling and
Servicing Agreement, or the Trustee, in the case of a Trust Agreement, at its
expense shall cause a firm of independent public accountants (who may also
render other services to the Master Servicer, the Depositor, the Trustee or any
affiliate thereof) which is a member of the American Institute of Certified
Public Accountants to furnish a statement to the Depositor and, in the case of a
Pooling and Servicing Agreement, to the Trustee, to the effect that such firm as
part of their examination of the financial statements of the Master Servicer or
the Trustee, as the case may be, has performed tests in accordance with
generally accepted accounting principles regarding the records and documents
relating to residential loans or agency securities serviced and that their
examination disclosed no exceptions that, in their opinion, were material. In
rendering such statement, such firm may rely, as to matters relating to direct
servicing of Residential Loans by Sub-Servicers, upon comparable statements for
examinations conducted substantially in compliance with generally accepted
accounting principles in the residential loan servicing industry (rendered
within one year of such statement) of independent public accountants with
respect to the related Sub-Servicer.
Each Agreement will also provide for delivery to the Depositor and, in the
case of a Servicing Agreement, to the Trustee, on or before a specified date in
each year, of an annual statement signed by two officers of the Master Servicer,
in the case of a Pooling and Servicing Agreement, or of the Trustee, in the case
of a Trust Agreement, to the effect that, to the best of such officers'
knowledge, the Master Servicer or the Trustee, as the case may be, has fulfilled
its obligations under such Agreement throughout the preceding year.
Certain Matters Regarding the Master Servicer, the Depositor and the Trustee
The Master Servicer
The Master Servicer under each Servicing Agreement will be identified in
the related Prospectus Supplement. Each such Servicing Agreement will provide
that the Master Servicer may resign from its obligations and duties under the
Servicing Agreement with the prior written approval of the Depositor and the
Trustee and shall resign upon a determination that its duties thereunder are no
longer permissible under applicable law. No such resignation will become
effective until a successor master servicer meeting the eligibility requirements
set forth in the Servicing Agreement has assumed, in writing, the Master
Servicer's obligations and responsibilities under the Pooling and Servicing
Agreement.
Each Servicing Agreement will further provide that neither the Master
Servicer nor any director, officer, employee, or agent of the Master Servicer
shall be under any liability to the related Trust Fund or Securityholders for
any action taken or for refraining from the taking of any action in good faith
pursuant to the Servicing Agreement, or for errors in judgment; provided,
however, that neither the Master Servicer nor any such person shall be protected
against any liability for any breach of warranties or representations made in
the Servicing Agreement or against any specific liability imposed on the Master
Servicer by the terms of the Servicing Agreement or by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. The Master Servicer and any director, officer, employee or agent of
the Master Servicer may rely in good faith on any document of any kind prima
facie properly executed and submitted by any person respecting any matters
arising under the related Servicing Agreement. Each Servicing Agreement will
further provide that the Master Servicer and any director, officer, employee or
agent of the Master Servicer will be entitled to indemnification by the Trust
Fund and will be held harmless against any loss, liability, or expense incurred
in connection with any legal action relating to the Servicing Agreement or the
Securities, the Pool Insurance Policy, the special hazard insurance policy and
the Bankruptcy Bond, if any, other than any loss, liability, or expense related
to any specific Residential Loan or Residential Loans (except any such loss,
liability, or expense otherwise reimbursable pursuant to the Servicing
Agreement) and any loss, liability, or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each Servicing Agreement will provide that the Master
Servicer will be under no obligation to appear in, prosecute, or defend any
legal action which is not incidental to its duties under the Servicing Agreement
and which in its opinion may involve it in any expense or liability. The Master
Servicer may, however, in its discretion undertake any such action which it may
deem necessary or desirable with respect to the Servicing 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 Trust Fund and the Master Servicer will be entitled to be
reimbursed therefor out of the Trust Account, such right of reimbursement being
prior to the rights of Securityholders to receive any amount in the Trust
Account.
Any entity into which the Master Servicer may be merged, consolidated or
converted, or any entity resulting from any merger, consolidation or conversion
to which the Master Servicer is a party, or any entity succeeding to the
business of the Master Servicer, will be the successor of the Master Servicer
under each Servicing Agreement, provided that the successor or surviving entity
meets the qualifications specified in the related Prospectus Supplement.
If the Prospectus Supplement so provides, the Master Servicer's duties may
be terminated upon payment of a termination fee as specified therein, and the
Master Servicer may be replaced with a successor meeting the qualifications
specified in the Prospectus Supplement.
The Depositor
Each Servicing Agreement, Owner Trust Agreement and Trust Agreement will
provide that neither the Depositor nor any director, officer, employee, or agent
of the Depositor shall be under any liability to the related Trust Fund or
Securityholders for any action taken or for refraining from the taking of any
action in good faith pursuant to such Agreement, or for errors in judgment;
provided, however, that neither the Depositor nor any such person shall be
protected against any liability for any breach of warranties or representations
made in the Agreement or against any specific liability imposed on the Depositor
by the terms of the Agreement or by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. The Depositor and any
director, officer, employee or agent of the Depositor may rely in good faith on
any document of any kind prima facie properly executed and submitted by any
person respecting any matters arising under the related Agreement. Each
Agreement will further provide that the Depositor and any director, officer,
employee or agent of the Depositor will be entitled to indemnification by the
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, the Pool Insurance Policy, the special hazard insurance policy and
the Bankruptcy Bond, if any, or the Agency Securities, if any, other than any
loss, liability, or expense related to any specific Residential Loan or
Residential Loans (except any such loss, liability, or expense otherwise
reimbursable pursuant to the Agreement) and any loss, liability, or expense
incurred by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, each Agreement will provide that
the Depositor will be under no any obligation to appear in, prosecute, or defend
any legal action which is not incidental to its duties under such Agreement and
which in its opinion may involve it in any expense or liability. The Depositor
may, however, in its discretion undertake any such action which it may deem
necessary or desirable with respect to the related 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
Trust Fund, and the Depositor will be entitled to be reimbursed therefor out of
the Trust Account, such right of reimbursement being prior to the rights of
Securityholders to receive any amount in the Trust Account.
Any entity into which the Depositor may be merged, consolidated or
converted, or any entity resulting from any merger, consolidation or conversion
to which the Depositor is a party, or any entity succeeding to the business of
the Depositor will be the successor of the Depositor under each Agreement.
The Trustees
The Trustee for any Series of Securities (or, Trustees, in the case of an
issuance of Notes) will be a corporation possessing corporate trust powers
having a combined capital and surplus of at least $50,000,000 and subject to
supervision or examination by federal or state authority and identified in the
related Prospectus Supplement. The commercial bank or trust company serving as
Trustee may have normal banking relationships with the Depositor and its
affiliates and the Master Servicer, if any, and its affiliates. For the purpose
of meeting the legal requirements of certain local jurisdictions, the Depositor
and the Trustee acting jointly shall have the power to appoint co-trustees or
separate trustees of all or any part of the Trust Fund. In the event of such
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee by the Agreement relating to such Series shall be conferred or
imposed upon the Trustee and such separate trustee or co-trustee jointly, or, in
any jurisdiction in which the Trustee shall be incompetent or unqualified to
perform certain acts, singly upon such separate trustee or co-trustee who shall
exercise and perform such rights, powers, duties and obligations solely at the
direction of the Trustee.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee. The Depositor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent, incapable of acting or a receiver
or similar person shall be appointed to take control of its affairs. In such
circumstances, the Depositor will be obligated to appoint a successor Trustee.
The holders of Securities evidencing not less than 51% of the Percentage
Interests of any Series of Securities may at any time remove the Trustee and
appoint a successor Trustee by written instrument in accordance with additional
procedures set forth in the related Agreement. Any resignation or removal of the
Trustee and appointment of a successor Trustee does not become effective until
acceptance of the appointment by a successor Trustee.
Duties of the Trustees
The Trustee will make no representations as to the validity or sufficiency
of any Agreement, the Securities, any Trust Fund Asset or related document other
than the certificate of authentication, and does not assume any responsibility
for their correctness. The Trustee under any Agreement is not accountable for
the use or application by or on behalf of the Master Servicer of any funds paid
to the Master Servicer in respect of the Securities, the Trust Fund Assets, or
deposited into or withdrawn from the Trust Account or any other account by or on
behalf of the Depositor or the Master Servicer. If no Event of Default (as
hereinafter defined) has occurred and is continuing, the Trustee is required to
perform only those duties specifically required under the related Agreement.
However, upon receipt of the various certificates, reports or other instruments
required to be furnished to it under an Agreement, the Trustee is required to
examine such documents and to determine whether they conform to the requirements
of the Agreement.
Each Agreement will further provide that neither the Trustee nor any
director, officer, employee, or agent of the Trustee shall be under any
liability to the related Trust Fund or Securityholders for any action taken or
for refraining from the taking of any action in good faith pursuant to the
Agreement, or for errors in judgment; provided, however, that neither the
Trustee nor any such person shall be protected against specific liability
imposed on the Trustee by the terms of the Agreement or by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. The Trustee and any director, officer, employee or agent of the
Trustee may rely in good faith on any document of any kind prima facie properly
executed and submitted by any person respecting any matters arising under the
related Agreement. Each Agreement will further provide that the Trustee and any
director, officer, employee or agent of the Trustee will be entitled to
indemnification by the Trust Fund and will be held harmless against any loss,
liability, or expense incurred in connection with any legal action relating to
the Agreement, the Securities or the Agency Securities, if any other than any
loss, liability, or expense incurred by reason of willful misfeasance, bad faith
or gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder.
Deficiency Events
With respect to each Series of Securities with Distribution Dates occurring
at intervals less frequently than monthly, and with respect to each Series of
Securities including two or more classes with sequential priorities for
distribution of principal, the following provisions will apply unless otherwise
specified in the related Prospectus Supplement.
A deficiency event (a "Deficiency Event") with respect to the Securities of
any such Series is the inability to distribute to holders of one or more classes
of Securities of such Series, in accordance with the terms thereof and the
related Agreement, any distribution of principal or interest thereon when and as
distributable, in each case because of the insufficiency for such purpose of the
funds then held in the related Trust Fund.
Upon the occurrence of a Deficiency Event, the Trustee or Master Servicer,
as set forth in the related Prospectus Supplement, will be required to determine
whether or not the application on a monthly basis (regardless of frequency of
regular Distribution Dates) of all future scheduled payments on the Residential
Loans included in the related Trust Fund and other amounts receivable with
respect to such Trust Fund towards payments on such Securities in accordance
with the priorities as to distributions of principal and interest set forth in
such Securities will be sufficient to make distributions of interest at the
applicable Security Interest Rates and to distribute in full the principal
balance of each such Security on or before the latest Final Distribution Date of
any outstanding Securities of such Series.
The Trustee or Master Servicer will obtain and rely upon an opinion or
report of a firm of independent accountants of recognized national reputation as
to the sufficiency of the amounts receivable with respect to such Trust Fund to
make such distributions on the Securities, which opinion or report will be
conclusive evidence as to such sufficiency. Prior to making any such
determination, distributions on the Securities shall continue to be made in
accordance with their terms.
In the event that the Trustee or Master Servicer makes a positive
determination, the Trustee or Master Servicer will apply all amounts received in
respect of the related Trust Fund (after payment of expenses of the Trust Fund)
to distributions on the Securities of such Series in accordance with their
terms, except that such distributions shall be made monthly and without regard
to the amount of principal that would otherwise be distributable on any
Distribution Date. Under certain circumstances following such positive
determination, the Trustee or Master Servicer may resume making distributions on
such Securities expressly in accordance with their terms.
If the Trustee or Master Servicer is unable to make the positive
determination described above, the Trustee or Master Servicer will apply all
amounts received in respect of the related Trust Fund (after payment of
expenses) to monthly distributions on the Certificates of such Series pro rata,
without regard to the priorities as to distribution of principal set forth in
such Securities, and such Securities will, to the extent permitted by applicable
law, accrue interest at the highest Security Interest Rate borne by any Security
of such Series, or in the event any class of such Series shall have an
adjustable or variable Security Interest Rate, at the weighted average Security
Interest Rate, calculated on the basis of the maximum Security Interest Rate
applicable to the class having the initial Security Principal Balance of the
Securities of that class. In such event, the holders of Securities evidencing a
majority of the Voting Rights may direct the Trustee to sell the related Trust
Fund, any such direction being irrevocable and binding upon the holders of all
Securities of such Series and upon the owners of any residual interests in such
Trust Fund. In the absence of such a direction, the Trustee may not sell all or
any portion of the Trust Fund.
Events of Default
Pooling and Servicing Agreements
Events of default ("Events of Default") under each Pooling and Servicing
Agreement will generally consist of (i) any failure by the Master Servicer to
distribute or cause to be distributed to Certificateholders any required payment
which continues unremedied for five days after the giving of written notice of
such failure 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 Percentage Interests in the related Trust
Fund; (ii) any failure by the Master Servicer duly to observe or perform in any
material respect any of its other covenants or agreements in the Agreement which
continues unremedied for sixty days after the giving of written notice of such
failure 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 Percentage Interests in the related Trust
Fund; and (iii) 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. A default pursuant to the terms of any Mortgage Securities included
in any Trust Fund will not constitute an Event of Default under the related
Pooling and Servicing Agreement.
So long as an Event of Default under a Pooling and Servicing Agreement
remains unremedied, the Depositor or the Trustee may, and at the direction of
holders of Certificates evidencing not less than 25% of the Percentage Interests
shall, by notice in writing to the Master Servicer terminate all of the rights
and obligations of the Master Servicer under the Pooling and Servicing Agreement
and in and to the Residential Loans and the proceeds thereof. Upon receipt by
the Master Servicer of such written notice, all authority and power of the
Master Servicer under this Pooling and Servicing Agreement shall pass to and be
vested in the Trustee, and the Trustee shall be authorized and empowered to
execute and deliver, on behalf of the Master Servicer, as attorney-in-fact, or
otherwise, any and all documents and other instruments, and to do or accomplish
all other acts or things necessary or appropriate to effect the purposes of such
termination. Upon receipt by the Master Servicer of notice of termination, the
Trustee will succeed to all the responsibilities, duties and liabilities of the
Master Servicer under the Pooling and Servicing Agreement (except that if the
Trustee is prohibited by law from obligating itself to make advances regarding
delinquent Residential Loans, then the Trustee will not be so obligated) and
will be entitled to similar compensation arrangements. In the event that the
Trustee is unwilling, it may, or if it is unable or if the holders of
Certificates evidencing not less than 25% of the Percentage Interests request in
writing, it shall appoint, or petition a court of competent jurisdiction for the
appointment of, a residential loan servicing institution with a net worth of at
least $10,000,000 to act as successor to the Master Servicer under the Pooling
and Servicing Agreement. Pending such appointment, the Trustee is obligated to
act in such capacity. The Trustee and such successor may agree upon the
administration compensation to be paid, which in no event may be greater than
the compensation to the Master Servicer under the Pooling and Servicing
Agreement.
No Certificateholder will have the right under any Pooling and Servicing
Agreement to institute any proceeding with respect thereto unless: (i) such
holder previously has given to the Trustee written notice of an Event of Default
or of a default by the Depositor or the Trustee in the performance of any
obligation under the Pooling and Servicing Agreement, and of the continuance
thereof; (ii) the holders of Certificates evidencing not less than 25% of the
Percentage Interests 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 as it may require against the costs, expenses and
liabilities to be incurred thereby; and (iii) the Trustee for sixty days after
receipt of such notice, request and offer of indemnity 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 Pooling and
Servicing 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 Certificates
covered by such Pooling and Servicing Agreement, unless such Certificateholders
have offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
Servicing Agreement
Unless otherwise provided in the related Prospectus Supplement for a Series
of Notes, a "Servicing Default" under the related Servicing Agreement generally
will include: (i) any failure by the Master Servicer to make a required deposit
to the Security Account or, if the Master Servicer is so required, to distribute
to the holders of any class of Notes or Equity Certificates of such Series any
required payment which continues unremedied for five business days (or other
period of time described in the related Prospectus Supplement) after the giving
of written notice of such failure to the Master Servicer by the Trustee or the
Issuer; (ii) any failure by the Master Servicer duly to observe or perform in
any material respect any other of its covenants or agreements in the Servicing
Agreement with respect to such Series of Securities which continues unremedied
for 45 days after the giving of written notice of such failure to the Master
Servicer by the Trustee or the Issuer; (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings regarding the Master Servicer and certain actions by the Master
Servicer indicating its insolvency or inability to pay its obligations and (iv)
any other Servicing Default as set forth in the Servicing Agreement.
So long as a Servicing Default remains unremedied, either the Depositor or
the Trustee may, by written notification to the Master Servicer and to the
Issuer or the Trustee or Trust Fund, as applicable, terminate all of the rights
and obligations of the Master Servicer under the Servicing Agreement (other than
any right of the Master Servicer as Noteholder or as holder of the Equity
Certificates and other than the right to receive servicing compensation and
expenses for servicing the Mortgage Loans during any period prior to the date of
such termination), whereupon the Trustee will succeed to all responsibilities,
duties and liabilities of the Master Servicer under such Servicing Agreement
(other than the obligation to purchase Mortgage Loans under certain
circumstances) and will be entitled to similar compensation arrangements. In the
event that the Trustee would be obligated to succeed the Master Servicer but is
unwilling so to act, it may appoint (or if it is unable so to act, it shall
appoint) or petition a court of competent jurisdiction for the appointment of an
approved mortgage servicing institution with a net worth of at least $10,000,000
to act as successor to the Master Servicer under the Servicing Agreement (unless
otherwise set forth in the Servicing Agreement). Pending such appointment, the
Trustee is obligated to act in such capacity. The Trustee and such successor may
agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation to the initial Master Servicer under the Servicing
Agreement.
Indenture
Unless otherwise provided in the related Prospectus Supplement for a Series
of Notes, an Event of Default under the Indenture generally will include: (i) a
default for five days or more (or other period of time described in the related
Prospectus Supplement) in the payment of any principal of or interest on any
Note of such Series; (ii) failure to perform any other covenant of the Issuer or
the Trust Fund in the Indenture which continues for a period of thirty days
after notice thereof is given in accordance with the procedures described in the
related Prospectus Supplement; (iii) any representation or warranty made by the
Issuer 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 thirty days after notice thereof is
given in accordance with the procedures described in the related Indenture; (iv)
certain events of bankruptcy, insolvency, receivership or liquidation of the
Issuer 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, the 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 related Notes.
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 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 payments 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
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default, unless (a) the holders of 100% 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 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 Trustee obtains the consent of the holders of
66 2/3% of the then aggregate outstanding amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default, the Indenture provides that the 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 payments to the Noteholders would be less than would otherwise be the case.
However, the 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.
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 that is unamortized.
No Noteholder or holder of an Equity Certificate generally will have any
right under an Owner Trust Agreement or Indenture to institute any proceeding
with respect to such Agreement unless (a) such holder previously has given to
the Trustee written notice of default and the continuance thereof, (b) the
holders of Notes or Equity Certificates of any class evidencing not less than
25% of the aggregate Percentage Interests constituting such class (i) have made
written request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and (ii) have offered to the Trustee reasonable indemnity,
(c) the Trustee has neglected or refused to institute any such proceeding for 60
days after receipt of such request and indemnity and (d) no direction
inconsistent with such written request has been given to the Trustee during such
60 day period by the Holders of a majority of the Note Balances of such class.
However, the Trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the applicable Agreement 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 Notes or Equity Certificates covered by such
Agreement, unless such holders 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 Depositor, the Trustee and, in the
case of a Pooling and Servicing Agreement, the Master Servicer, (i) to cure any
ambiguity, (ii) to correct or supplement any provision therein which may be
inconsistent with any other provision therein, (iii) to make any other
provisions with respect to matters or questions arising under the Agreement and
(iv) if such amendment, as evidenced by an opinion of counsel, is reasonably
necessary to comply with any requirements imposed by the Code (or any successor
or mandatory statutes) or any temporary or final regulation, revenue ruling,
revenue procedure or other written official announcement or interpretation
relating to federal income tax law or any proposed such action which, if made
effective, would apply retroactively to the Trust Fund at least from the
effective date of such amendment, each without the consent of any of the
Certificateholders of the related Series, provided that such action (other than
an amendment described in (iv) above) will not adversely affect in any material
respect the interests of any holder of the Certificates covered by the
Agreement. Each Agreement may also be amended, subject to certain restrictions
to continue favorable tax treatment of the entity by the Depositor, the Trustee
and, in the case of a Pooling and Servicing Agreement the Master Servicer, with
the consent of the holders of Certificates evidencing not less than 51% of the
Percentage Interests of the related Series for any purpose; provided, however,
that no such amendment may (a) reduce in any manner the amount of, or delay the
timing of, payments received on Trust Fund Assets which are required to be
distributed on any Certificate without the consent of the holder of such
Certificate, or (b) reduce the aforesaid percentage of Percentage Interests
required for the consent to any such amendment without the consent of the
holders of all Certificates of the related Series then outstanding.
With respect to each Series of Notes, each related Servicing Agreement or
Indenture may be amended by the parties thereto without the consent of any of
the holders of the Notes covered by such Agreement, to cure any ambiguity, to
correct, modify or supplement any provision therein, or to make any other
provisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions thereof, provided that such
action will not adversely affect in any material respect the interests of any
holder of Notes covered by the Agreement. Each Agreement may also be amended by
the parties thereto with the consent of the holders of Notes evidencing not less
than 66 2/3% of the voting rights, for any purpose; provided, however, that no
such amendment may (i) reduce in any manner the amount of or delay the timing
of, payments received on Trust Fund Assets which are required to be distributed
on any Note without the consent of the holder of such Note, (ii) adversely
affect in any material respect the interests of the holders of any class of
Notes in a manner other than as described in (i), without the consent of the
holders of Notes of such class evidencing not less than 66 2/3% of the aggregate
voting rights of such class or (iii) reduce the aforesaid percentage of voting
rights required for the consent to any such amendment without the consent of the
holders of all Notes covered by such Agreement then outstanding. The voting
rights evidenced by any Note will be the portion of the voting rights of all of
the Notes in the related Series allocated in the manner described in the related
Prospectus Supplement.
Termination
The obligations created by the Agreement for each Series of Securities will
terminate upon payment to the Securityholders of that Series of all amounts held
in the Trust Account and required to be paid to the Securityholders pursuant to
such Agreement, following the final payment or other liquidation, including the
disposition of all property acquired upon foreclosure or repossession, of the
last Trust Fund Asset remaining in the related Trust Fund or, 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, whichever occurs first. In no event, however, will the
trust created by the Agreement continue beyond the period specified in the
related Prospectus Supplement. Written notice of termination of the Agreement
will be given to each Securityholder, and the final distribution will be made
only upon surrender and cancellation of the Securities at an office or agency
appointed by the Trustee which will be specified in the notice of termination.
Any such purchase of assets of the Trust Fund shall be made at a price
equal to (a) in the case of a Series of Securities evidencing interests in a
Trust Fund that includes Residential Loans, the sum of (i) 100% of the unpaid
principal balance of each outstanding Residential Loan (net of any unreimbursed
Advances attributable to principal) as of the date of such purchase plus accrued
interest thereon at the Net Interest Rate to the first day of the month of such
purchase, plus (ii) the appraised value of any property acquired in respect of
any defaulted Residential Loan (but not more than the unpaid principal balance
of that Residential Loan) together with accrued interest at the applicable Net
Interest Rate to the first day of the month of such purchase less the good faith
estimate of the Master Servicer of liquidation expenses to be incurred in
connection with its disposal thereof, and (b) in the case of a Series of
Securities evidencing interests in a Trust Fund that includes Agency Securities
or Mortgage Securities, the sum of 100% of the unpaid principal balance of each
outstanding Trust Fund Asset as of the day of such purchase plus accrued
interest thereon at the Net Interest Rate to the first day of the month of such
purchase, or at such other price as may be specified in the related Prospectus
Supplement. The exercise of the right to purchase the assets of the Trust Fund
as set forth in the preceding paragraph will effect early retirement of the
Securities of that Series.
Voting Rights
If so provided in the related Agreement, a provider of credit support may
be entitled to direct certain actions of the Master Servicer and the Trustee or
to exercise certain rights of the Master Servicer, the Trustee or the holders of
Securities.
DESCRIPTION OF PRIMARY INSURANCE COVERAGE
If provided in the related Prospectus Supplement, each Residential Loan
will be covered by a Primary Hazard Insurance Policy (as defined herein) and, if
required as described in the related Prospectus Supplement, a Primary Credit
Insurance Policy. In addition, if provided in the related Prospectus Supplement,
a Trust Fund may include any combination of a Pool Insurance Policy, a special
hazard insurance policy, a Bankruptcy Bond or another form of credit support, as
described under "Description of Credit Support."
The following is only a brief description of certain insurance policies and
does not purport to summarize or describe all of the provisions of these
policies. Such insurance is subject to underwriting and approval of individual
Residential Loans by the respective insurers.
Primary Credit Insurance Policies
If provided in the related Prospectus Supplement and as set forth under
"Description of the Certificates--Realization Upon Defaulted Residential Loans",
the Master Servicer will maintain or cause to be maintained in accordance with
the underwriting standards adopted by the Depositor a Primary Credit Insurance
Policy with respect to each Residential Loan (other than Multifamily Loans, FHA
Loans, and VA Loans) for which such insurance is required. While the terms and
conditions of Primary Credit Insurance Policies differ, each Primary Credit
Insurance Policy generally will cover losses up to an amount equal to the excess
of the outstanding principal balance of a defaulted Residential Loan (plus
accrued and unpaid interest thereon and certain approved expenses) over a
specified percentage of the Collateral Value of the related Residential
Property.
The Master Servicer will cause to be paid the premium for each Primary
Credit Insurance Policy on a timely basis. The Master Servicer, or the related
Sub-Servicer, if any, will exercise its best reasonable efforts to be named the
insured or a loss payee under any Primary Credit Insurance Policy. The ability
to assure that insurance proceeds are appropriately applied may be dependent
upon its being so named, or upon the extent to which information in this regard
is furnished by borrowers. All amounts collected by the Master Servicer under
any such policy will be deposited in the Trust Account. The Master Servicer will
not cancel or refuse to renew any such Primary Credit Insurance Policy in effect
at the time of the initial issuance of the Securities that is required to be
kept in force under the related Agreement unless the Master Servicer uses its
best efforts to obtain a replacement Primary Credit Insurance Policy for such
canceled or nonrenewed policy maintained with an insurer the claims-paying
ability of which is acceptable to the Rating Agency or Agencies for pass-through
certificates having the same rating as the Securities on their date of issuance.
As conditions precedent to the filing or payment of a claim under a Primary
Credit Insurance Policy, the insured typically will be required, in the event of
default by the borrower, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
insurer, real estate taxes (if applicable), protection and preservation expenses
and foreclosure and related costs; (ii) in the event of any physical loss or
damage to the Residential Property, have the Residential Property restored to at
least its condition at the effective date of the Primary Credit Insurance Policy
(ordinary wear and tear excepted); and (iii) tender to the insurer good and
merchantable title to, and possession of, the Residential Property.
FHA Insurance and VA Guarantees
Residential Loans designated in the related Prospectus Supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1934, as amended. Certain Residential Loans will be
insured under various FHA programs including the standard FHA 203(b) program to
finance the acquisition of one- to four-family housing units, the FHA 245
graduated payment mortgage program and the FHA Title I Program. These programs
generally limit the principal amount and interest rates of the mortgage loans
insured. The Prospectus Supplement for Securities of each Series evidencing
interests in a Trust Fund including FHA Loans will set forth additional
information regarding the regulations governing the applicable FHA insurance
programs. Except as otherwise specified in the related Prospectus Supplement,
the following describes FHA insurance programs and regulations as generally in
effect with respect to FHA Loans.
The insurance premiums for FHA Loans are collected by lenders approved by
the Department of Housing and Urban Development ("HUD") or by the Master
Servicer or any Sub-Servicer and are paid to the FHA. The regulations governing
FHA single-family mortgage insurance programs provide that insurance benefits
are payable either upon foreclosure (or other acquisition of possession) and
conveyance of the mortgaged premises to the United States of America or upon
assignment of the defaulted Loan to the United States of America. With respect
to a defaulted FHA-insured Residential Loan, the Master Servicer or any
Sub-Servicer is limited in its ability to initiate foreclosure proceedings. When
it is determined, either by the Master Servicer or any Sub-Servicer or HUD, that
default was caused by circumstances beyond the mortgagor's control, the Master
Servicer or any Sub- Servicer is expected to make an effort to avoid foreclosure
by entering, if feasible, into one of a number of available forms of forbearance
plans with the mortgagor. Such plans may involve the reduction or suspension of
regular mortgage payments for a specified period, with such payments to be made
upon or before the maturity date of the mortgage, or the recasting of payments
due under the mortgage up to or, other than Residential Loans originated under
the Title I Program of the FHA, beyond the maturity date. In addition, when a
default caused by such circumstances is accompanied by certain other criteria,
HUD may provide relief by making payments to the Master Servicer or any
Sub-Servicer in partial or full satisfaction of amounts due under the
Residential Loan (which payments are to be repaid by the mortgagor to HUD) or by
accepting assignment of the loan from the Master Servicer or any Sub-Servicer.
With certain exceptions, at least three full monthly installments must be due
and unpaid under the FHA Loan, and HUD must have rejected any request for relief
from the mortgagor before the Master Servicer or any Sub-Servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer or any Sub-Servicer of each FHA-insured single
family Loan will be obligated to purchase any such debenture issued in
satisfaction of such Residential Loan upon default for an amount equal to the
principal amount of any such debenture.
Other than in relation to the Title I Program of the FHA, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted Residential Loan adjusted to reimburse the
Master Servicer or Sub-Servicer for certain costs and expenses and to deduct
certain amounts received or retained by the Master Servicer or Sub-Servicer
after default. When entitlement to insurance benefits results from foreclosure
(or other acquisition of possession) and conveyance to HUD, the Master Servicer
or Sub-Servicer is compensated for no more than two-thirds of its foreclosure
costs, and is compensated for interest accrued and unpaid prior to such date but
in general only to the extent it was allowed pursuant to a forbearance plan
approved by HUD. When entitlement to insurance benefits results from assignment
of the Residential Loan to HUD, the insurance payment includes full compensation
for interest accrued and unpaid to the assignment date. The insurance payment
itself, upon foreclosure of an FHA-insured Residential Loan, bears interest from
a date 30 days after the borrower's first uncorrected failure to perform any
obligation to make any payment due under the mortgage and, upon assignment, from
the date of assignment to the date of payment of the claim, in each case at the
same interest rate as the applicable HUD debenture interest rate as described
above.
Residential Loans designated in the related Prospectus Supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended (a "VA Guaranty Policy"). The
Serviceman's Readjustment Act of 1944, as amended, permits a veteran (or in
certain instances the spouse of a veteran) to obtain a mortgage loan guarantee
by the VA covering mortgage financing of the purchase of a one- to four-family
dwelling unit at interest rates permitted by the VA. The program has no mortgage
loan limits, requires no down payment from the purchaser and permits the
guarantee of mortgage loans of up to 30 years' duration. However, no Residential
Loan guaranteed by the VA will have an original principal amount greater than
five times the partial VA guarantee for such Residential Loan. The Prospectus
Supplement for Securities of each Series evidencing interests in a Trust Fund
including VA Loans will set forth additional information regarding the
regulations governing the applicable VA insurance programs.
With respect to a defaulted VA guaranteed Residential Loan, the Master
Servicer or Sub-Servicer is, absent exceptional circumstances, authorized to
announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guarantee is submitted after
liquidation of the Residential Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Residential Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guarantee will be equal to the unpaid principal
amount of the Residential Loan, interest accrued on the unpaid balance of the
Residential Loan to the appropriate date of computation and limited expenses of
the mortgagee, but in each case only to the extent that such amounts have not
been recovered through liquidation of the Residential Property. The amount
payable under the guarantee may in no event exceed the amount of the original
guarantee.
Primary Hazard Insurance Policies
Unless otherwise provided in the Prospectus Supplement in respect of a
Series, the related Servicing Agreement will require the Master Servicer to
cause the borrower on each Residential Loan to maintain a hazard insurance
policy (a "Primary Hazard Insurance Policy") providing for coverage of the
standard form of fire insurance policy with extended coverage customary in the
state in which the Residential Property is located. Unless otherwise specified
in the related Prospectus Supplement, such coverage in general will equal the
lesser of the principal balance owing on such Residential Loan and the amount
necessary to fully compensate for any damage or loss to the improvements on the
Residential 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 policy. The Master Servicer, or the related Sub-Servicer, if
any, will exercise its best reasonable efforts to be named as an additional
insured under any Primary Hazard Insurance Policy and under any flood insurance
policy referred to below. The ability to assure that hazard insurance proceeds
are appropriately applied may be dependent upon its being so named, or upon the
extent to which information in this regard is furnished by borrowers. All
amounts collected by the Master Servicer under any such policy (except for
amounts to be applied to the restoration or repair of the Residential Property
or released to the borrower 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 Trust Account. Each
Servicing Agreement provides that the Master Servicer may satisfy its obligation
to cause each borrower to maintain such a hazard insurance policy by the Master
Servicer's maintaining a blanket policy insuring against hazard losses on the
Residential Loans. If such blanket policy contains a deductible clause, the
Master Servicer will deposit in the Trust Account all sums which would have been
deposited therein but for such clause. The Master Servicer also is required to
maintain a fidelity bond and errors and omissions policy with respect to its
officers and employees that provides coverage against losses that may be
sustained as a result of an officer's or employee's misappropriation of funds or
errors and omissions in failing to maintain insurance, subject to certain
limitations as to amount of coverage, deductible amounts, conditions, exclusions
and exceptions.
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 Residential 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 the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft,
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. When a
Residential Property is located at origination in a federally designated flood
area, each Servicing Agreement requires the Master Servicer to cause the
borrower to acquire and maintain flood insurance in an amount equal in general
to the lesser of (i) the amount necessary to fully compensate for any damage or
loss to the improvements which are part of the Residential Property on a
replacement cost basis and (ii) the maximum amount of insurance available under
the federal flood insurance program, whether or not the area is participating in
the program.
The hazard insurance policies covering the Residential Properties 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 greater 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.
The Master Servicer will not require that a hazard or flood insurance
policy be maintained for any Cooperative Loan. Generally, the Cooperative is
responsible for maintenance of hazard insurance for the property owned by the
Cooperative, and the tenant-stockholders of that Cooperative do not maintain
individual hazard insurance policies. To the extent, however, that a Cooperative
and the related borrower on a Cooperative Note do not maintain such insurance or
do not maintain adequate coverage or any insurance proceeds are not applied to
the restoration of the damaged property, damage to such borrower's Cooperative
apartment or such Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Note.
Since the amount of hazard insurance the Master Servicer will cause to be
maintained on the improvements securing the Residential Loans will decline as
the principal balances owing thereon decrease, and since residential properties
have historically appreciated in value over time, the effect of co-insurance in
the event of partial loss may be that hazard insurance proceeds may be
insufficient to restore fully the damaged property. Under the terms of the
Residential Loans, borrowers are required to present claims to insurers under
hazard insurance policies maintained on the Residential 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 Residential Properties. 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 borrowers. However, if provided in the related Prospectus
Supplement, to the extent of the amount available to cover hazard losses under
the special hazard insurance policy for a Series, Certificateholders will not
suffer loss by reason of delinquencies or foreclosures following hazard losses,
whether or not subject to co-insurance claims.
DESCRIPTION OF CREDIT SUPPORT
If so provided in the related Prospectus Supplement, the Trust Fund that
includes Residential Loans for a Series of Securities may include credit support
for such Series or for one or more classes of Securities comprising such Series,
which credit support may consist of any combination of the following separate
components, any of which may be limited to a specified percentage of the
aggregate principal balance of the Residential Loans covered thereby or a
specified dollar amount: a Pool Insurance Policy, a special hazard insurance
policy, a Bankruptcy Bond, a reserve fund, or a similar credit support
instrument. Alternatively, if so specified in the Prospectus Supplement for a
Series of Securities, credit support may be provided by subordination of one or
more classes of Securities, in combination with or in lieu of any one or more of
the instruments set forth above. See "Description of the
Securities--Subordination." The amount and type of credit support with respect
to a Series of Securities or with respect to one or more classes of Securities
comprising such Series, and the obligors on such credit support, will be set
forth in the related Prospectus Supplement.
To the extent provided in the related Prospectus Supplement and the
Agreement, credit support may be periodically reduced based on the aggregate
outstanding principal balance of the Residential Loans covered thereby.
Pool Insurance Policies
If so specified in the Prospectus Supplement relating to a Series of
Securities, the Master Servicer will exercise its best reasonable efforts to
maintain or cause to be maintained a Pool Insurance Policy in full force and
effect, unless coverage thereunder has been exhausted through payment of claims.
The Pool Insurance Policy for any Series of Securities will be issued by the
Pool Insurer named in the related Prospectus Supplement. Each Pool Insurance
Policy will, subject to the limitations described below, provide coverage in an
amount equal to a percentage (specified in the related Prospectus Supplement) of
the aggregate principal balance of the Residential Loans on the Cut-off Date.
The Master Servicer will pay the premiums for each Pool Insurance Policy on a
timely basis unless, as described in the related Prospectus Supplement, the
payment of such fees is otherwise provided. The Master Servicer will present or
cause to be presented claims under each Pool Insurance Policy to the Pool
Insurer on behalf of itself, the Trustee and the Securityholders. Pool Insurance
Policies, however, are not blanket policies against loss, since claims
thereunder may be made only upon satisfaction of certain conditions, as
described below and, if applicable, in the related Prospectus Supplement.
Pool Insurance Policies do not cover losses arising out of the matters
excluded from coverage under Primary Credit Insurance Policies, FHA Insurance or
VA Guarantees or losses due to a failure to pay or denial of a claim under a
Primary Credit Insurance Policy, FHA Insurance or VA Guarantee, irrespective of
the reason therefor.
Pool Insurance Policies in general provide that no claim may be validly
presented thereunder with respect to a residential loan unless (i) an acceptable
Primary Credit Insurance Policy, in the event that the initial Collateral Value
of the Residential Loan exceeded 80%, has been kept in force until such
Collateral Value is reduced to 80%; (ii) premiums on the Primary Hazard
Insurance Policy have been paid by the insured and real estate taxes (if
applicable) and foreclosure, protection and preservation expenses have been
advanced by or on behalf of the insured, as approved by the Pool Insurer; (iii)
if there has been physical loss or damage to the Residential Property, it has
been restored to its physical condition at the time the Residential Loan became
insured under the Pool Insurance Policy, subject to reasonable wear and tear;
and (iv) the insured has acquired good and merchantable title to the Residential
Property, free and clear of all liens and encumbrances, except permitted
encumbrances, including any right of redemption by or on behalf of the borrower,
and if required by the Pool Insurer, has sold the property with the approval of
the Pool Insurer.
Assuming the satisfaction of these conditions, the Pool Insurer typically
has the option to either (i) acquire the property securing the defaulted
Residential Loan for a payment equal to the principal balance thereof plus
accrued and unpaid interest at the Interest Rate to the date of acquisition and
certain expenses described above advanced by or on behalf of the insured, on
condition that the Pool Insurer must be provided with good and merchantable
title to the Residential Property (unless the property has been conveyed
pursuant to the terms of the applicable Primary Credit Insurance Policy) or (ii)
pay the amount by which the sum of the principal balance of the defaulted
Residential Loan and accrued and unpaid interest at the Interest Rate to the
date of the payment of the claim and such expenses exceeds the proceeds received
from a sale of the Residential Property that the Pool Insurer has approved. In
both (i) and (ii), the amount of payment under a Pool Insurance Policy will be
reduced by the amount of such loss paid under any Primary Credit Insurance
Policy.
Unless earlier directed by the Pool Insurer, a claim under a Pool Insurance
Policy generally must be filed (i) in the case when a Primary Credit Insurance
Policy is in force, within a specified number of days (typically, 60 days) after
the claim for loss has been settled or paid thereunder, or after acquisition by
the insured or a sale of the property approved by the Pool Insurer, whichever is
later, or (ii) in the case when a Primary Credit Insurance Policy is not in
force, within a specified number of days (typically, 60 days) after acquisition
by the insured or a sale of the property approved by the Pool Insurer. A claim
must be paid within a specified period (typically, 30 days) after the claim is
made by the insured.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Securities, the amount of coverage under each Pool Insurance Policy
will be reduced over the life of the Securities of such Series by the aggregate
dollar amount of claims paid less the aggregate of the net amounts realized by
the Pool Insurer upon disposition of all acquired properties. The amount of
claims paid includes certain expenses incurred by the Master Servicer as well as
accrued interest on delinquent Residential Loans to the date of payment of the
claim. However, Securityholders may experience a shortfall in the amount of
interest distributed in connection with the payment of claims under a Pool
Insurance Policy, because the Pool Insurer is required to remit only unpaid
interest through the date a claim is paid, rather than unpaid interest through
the end of the month in which such claim is paid. In addition, Securityholders
may experience losses in connection with payments made under a Pool Insurance
Policy to the extent that the Master Servicer expends funds for the purpose of
enabling it to make a claim under such Pool Insurance Policy. Such expenditures
could include amounts necessary to cover real estate taxes and to repair the
related Residential Property. The Master Servicer will be reimbursed for such
expenditures from amounts that otherwise would be distributed to
Securityholders, and such expenditures will not be covered by payments made
under the related Pool Insurance Policy. See "Certain Legal Aspects of
Residential Loans--Foreclosure on Mortgages" and "--Repossession with respect to
Manufactured Housing Contracts." Accordingly, if aggregate net claims paid under
a Pool Insurance Policy reach the applicable policy limit, coverage under that
Pool Insurance Policy will be exhausted and any further losses will be borne by
Securityholders of the related Series.
In the event that a Pool Insurer ceases to be a Qualified Insurer (such
term being defined to mean a private mortgage guaranty insurance company duly
qualified as such under applicable laws and approved as an insurer by FHLMC,
FNMA, or any successor entity, and having a claims-paying ability acceptable to
the Rating Agency or Agencies), the Master Servicer will use its best reasonable
efforts to obtain or cause to be obtained from another Qualified Insurer a
replacement insurance policy comparable to the Pool Insurance Policy with a
total coverage equal to the then outstanding coverage of such Pool Insurance
Policy; provided, however, that, unless otherwise provided in the related
Prospectus Supplement, if the cost of the replacement policy is greater than the
cost of such Pool Insurance Policy, the coverage of the replacement policy may
be reduced to a level such that its premium rate does not exceed the premium
rate on such Pool Insurance Policy. However, in the event that the Pool Insurer
ceases to be a Qualified Insurer solely because it ceases to be approved as an
insurer by FHLMC, FNMA, or any successor entity, the Master Servicer will
review, or cause to be reviewed, the financial condition of the Pool Insurer
with a view towards determining whether recoveries under the Pool Insurance
Policy are jeopardized for reasons related to the financial condition of the
Pool Insurer. If the Master Servicer determines that recoveries are so
jeopardized, it will exercise its best reasonable efforts to obtain from another
Qualified Insurer a replacement policy as described above, subject to the same
cost limitation.
Because each Pool Insurance Policy will require that the property subject
to a defaulted Residential Loan be restored to its original condition prior to
claiming against the Pool Insurer, such policy will not provide coverage against
hazard losses. As set forth above, the Primary Hazard Insurance Policies
covering the Residential Loans typically exclude from coverage physical damage
resulting from a number of causes and, even when the damage is covered, may
afford recoveries that are significantly less than full replacement cost of such
losses. Further, a special hazard insurance policy will not cover all risks, and
the coverage thereunder will be limited in amount. Certain hazard risks will, as
a result, be uninsured and will therefore be borne by the Securityholders.
Special Hazard Insurance Policies
If so specified in the Prospectus Supplement with respect to a Series of
Securities, the Master Servicer will obtain a special hazard insurance policy
for such Series, issued by the insurer specified in such Prospectus Supplement
(the "Special Hazard Insurer") covering any Special Hazard Amount (as defined
below). The Master Servicer will be obligated to exercise its best reasonable
efforts to keep or cause to be kept a special hazard insurance policy in full
force and effect, unless coverage thereunder has been exhausted through payment
of claims; provided, however, that the Master Servicer will be under no
obligation to maintain such policy in the event that a Pool Insurance Policy
covering such Series is no longer in effect or if otherwise provided in the
related Prospectus Supplement. The Master Servicer will be obligated to pay the
premiums on each special hazard insurance policy on a timely basis unless, as
described in the related Prospectus Supplement, payment of such premiums is
otherwise provided for. Claims under each special hazard insurance policy will
generally be limited to (i) a percentage set forth in the Prospectus Supplement
(expected to be not greater than 1%) of the aggregate principal balance as of
the Cut-off Date of the Residential Loans comprising the related Trust Fund,
(ii) twice the unpaid principal balance as of the Cut-off Date of the largest
Residential Loan in the Trust Fund, or (iii) the greatest aggregate principal
balance of Residential Loans secured by Residential Properties located in any
one California postal zip code area, whichever is the greatest (the "Special
Hazard Amount").
As more specifically provided in the related Prospectus Supplement, each
special hazard insurance policy will, subject to limitations of the kind
described below, typically protect holders of Securities of the related Series
from (i) loss by reason of damage to Residential Properties caused by certain
hazards (including earthquakes and mudflows) not insured against under the
Primary Hazard Insurance Policies or a flood insurance policy if the property is
in a federally designated flood area and (ii) loss from partial damage caused by
reason of the application of the co-insurance clause contained in the Primary
Hazard Insurance Policies. Special hazard insurance policies will typically not
cover losses such as those occasioned by normal wear and tear, war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear or chemical reaction
or contamination, flood (if the property is located in a federally designated
flood area) and certain other risks.
Subject to the foregoing limitations, each special hazard insurance policy
will typically provide that, when there has been damage to property securing a
defaulted Residential Loan acquired by the insured and to the extent the damage
is not covered by the related Primary Hazard Insurance Policy or flood insurance
policy, the insurer will pay the lesser of (i) the cost of repair to the
property and (ii) upon transfer of the property to the insurer, the unpaid
principal balance of such Residential Loan at the time of acquisition of the
property by foreclosure, deed in lieu of foreclosure or repossession, plus
accrued interest at the Interest Rate to the date of claim settlement and
certain expenses incurred by or on behalf of the Master Servicer with respect to
the property. The amount of coverage under the special hazard insurance policy
will be reduced by the sum of (a) the unpaid principal balance plus accrued
interest and certain expenses paid by the insurer, less any net proceeds
realized by the insurer from the sale of the property, plus (b) any amount paid
as the cost of repair of the property.
Typically, restoration of the property with the proceeds described under
clause (i) of the immediately preceding paragraph will satisfy the condition
under a Pool Insurance Policy that the property be restored before a claim
thereunder may be validly presented with respect to the defaulted Residential
Loan secured by such property. The payment described under clause (ii) of the
immediately preceding paragraph will render unnecessary presentation of a claim
in respect of such Residential Loan under a Pool Insurance Policy. Therefore, so
long as the Pool Insurance Policy remains in effect, the payment by the insurer
of either of the above alternative amounts will not affect the total insurance
proceeds paid to Securityholders, but will affect the relative amounts of
coverage remaining under any special hazard insurance policy and any Pool
Insurance Policy.
The sale of a Residential Property must typically be approved by the
Special Hazard Insurer under any special hazard insurance policy and funds
received by the insured in excess of the unpaid principal balance of the
Residential Loan plus interest thereon to the date of sale plus certain expenses
incurred by or on behalf of the Master Servicer with respect to the property
(not to exceed the amount actually paid by the Special Hazard Insurer) must be
refunded to such Special Hazard Insurer and, to that extent, coverage under the
special hazard insurance policy will be restored. If aggregate claim payments
under a special hazard insurance policy reach the policy limit, coverage
thereunder will be exhausted and any further losses will be borne by the
Securityholders.
A claim under a special hazard insurance policy generally must be filed
within a specified number of days (typically, 60 days) after the insured has
acquired good and merchantable title to the property, and a claim payment is
generally payable within a specified number of days (typically, 30 days) after a
claim is accepted by the Special Hazard Insurer. Special hazard insurance
policies generally provide that no claim may be paid unless Primary Hazard
Insurance Policy premiums, flood insurance premiums (if the property is located
in a federally designated flood area) and, as approved by the Special Hazard
Insurer, real estate property taxes (if applicable), property protection and
preservation expenses and foreclosure costs have been paid by or on behalf of
the insured, and unless the insured has maintained the Primary Hazard Insurance
Policy and, if the property is located in a federally designated flood area,
flood insurance, as required by the special hazard insurance policy.
If a special hazard insurance policy is canceled or terminated for any
reason (other than the exhaustion of total policy coverage), the Master Servicer
will be obligated to use its best reasonable efforts to obtain or cause to be
obtained from another insurer a replacement policy comparable to such special
hazard insurance policy with a total coverage that is equal to the then existing
coverage of such special hazard insurance policy; provided, however, that,
unless otherwise provided in the related Prospectus Supplement, if the cost of
the replacement policy is greater than the cost of such special hazard insurance
policy, the coverage of the replacement policy may be reduced to a level such
that its premium rate does not exceed the premium rate on such special hazard
insurance policy.
Since each special hazard insurance policy is designed to permit full
recoveries under a Pool Insurance Policy in circumstances in which such
recoveries would otherwise be unavailable because property has been damaged by a
cause not insured against by a Primary Hazard Insurance Policy and thus would
not be restored, each Pooling and Servicing Agreement will provide that, if the
related Pool Insurance Policy shall have lapsed or terminated or been exhausted
through payment of claims, the Master Servicer will be under no further
obligation to maintain the special hazard insurance policy.
Bankruptcy Bonds
If so specified in the Prospectus Supplement with respect to a Series of
Securities, the Master Servicer will obtain a Bankruptcy Bond for such Series.
The obligor on, and the amount of coverage of, any such Bankruptcy Bond will be
set forth in the related Prospectus Supplement. The Master Servicer will
exercise its best reasonable efforts to maintain or cause to be maintained the
Bankruptcy Bond in full force and effect, unless coverage thereunder has been
exhausted through payment of claims. The Master Servicer will pay or cause to be
paid the premiums for each Bankruptcy Bond on a timely basis, unless, as
described in the Prospectus Supplement, payment of such premiums is otherwise
provided for. Subject to the limit of the dollar amount of coverage provided,
each Bankruptcy Bond will cover certain losses resulting from an extension of
the maturity of a Residential Loan, or a reduction by the bankruptcy court of
the principal balance of or the Interest Rate on a Residential Loan, and the
unpaid interest on the amount of a principal reduction during the pendency of a
proceeding under the United States Bankruptcy Code, 11 U.S.C. Sections 101 et
seq. (the "Bankruptcy Code") See "Certain Legal Aspects of Residential
Loans--Foreclosure on Mortgages" and "--Repossession with respect to
Manufactured Housing Contracts."
Reserve Funds
If so provided in the related Prospectus Supplement, the Depositor will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash, one or more irrevocable letters of credit or one or more
Permitted Instruments in specified amounts, or any other instrument satisfactory
to the Rating Agency or Agencies, which will be applied and maintained in the
manner and under the conditions specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, to the extent described in the
related Prospectus Supplement, a Reserve Fund may be funded through application
of a portion of the interest payment on each Mortgage Loan or of all or a
portion of amounts otherwise payable on the Subordinate Securities. Amounts in a
Reserve Fund may be distributed to Securityholders, or applied to reimburse the
Master Servicer for outstanding Advances, or may be used for other purposes, in
the manner and to the extent specified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, any such Reserve
Fund will not be deemed to be part of the related Trust Fund.
Amounts deposited in any Reserve Fund for a Series will be invested in
Permitted Instruments by, or at the direction of, the Master Servicer or any
other person named in the related Prospectus Supplement.
Cross-Support Provisions
If so provided in the related Prospectus Supplement, the Residential Loans
for a Series of Securities may be divided into separate groups, each supporting
a separate class or classes of Securities of a Series, and credit support may be
provided by cross-support provisions requiring that distributions be made on
Securities evidencing interests in one group of Mortgage Loans prior to
distributions on Securities evidencing interests in a different group of
Mortgage Loans 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.
The coverage provided by one or more forms of credit support may apply
concurrently to two or more related Trust Funds. If applicable, the related
Prospectus Supplement will identify the Trust Funds to which such credit support
relates and the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the identified Trust Funds.
Letter of Credit
If so provided in the Prospectus Supplement for a Series of Securities, the
Residential Loans in the related Trust Fund 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, equal to the percentage specified in
the related Prospectus Supplement of the aggregate principal balance of the
Residential Loans on the related Cut-off Date or 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. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder.
Insurance Policies and Surety Bonds
If so provided in the Prospectus Supplement for a Series of Certificates,
one or more classes of Securities of such Series 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.
Excess Spread
If so provided in the Prospectus Supplement for a Series of Securities, a
portion of the interest payment on each Mortgage Loan may be applied to reduce
the principal balance of one or more classes of Securities to provide or
maintain a cushion against losses on the related Residential Loans.
CERTAIN LEGAL ASPECTS OF RESIDENTIAL LOANS
The following discussion contains general summaries of certain legal
aspects of loans secured by residential properties. Because such legal aspects
are governed by applicable state law (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 Residential Loans is situated. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Residential Loans. In this regard, the following discussion does not fully
reflect federal regulations with respect to FHA Loans and VA Loans. See "The
Trust Funds--Residential Loans" and "Description of Primary Insurance
Coverage--FHA Insurance and VA Guarantees."
General
All of the Residential Loans, except as described below, are loans to
homeowners and all of the Mortgage Loans and Multifamily Loans are evidenced by
notes or bonds and secured by instruments which may be mortgages, deeds of
trust, security deeds or deeds to secure debt, depending upon the type of
security instrument customary to grant a security interest in real property in
the state in which the Residential Property is located. If specified in the
Prospectus Supplement relating to a Series of Securities, a Trust Fund may also
contain (i) Home Improvement Contracts evidenced by promissory notes, which may
be secured by an interest in the related Mortgaged Property (ii) Cooperative
Loans evidenced by promissory notes secured by security interests in shares
issued by private, cooperative housing corporations and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in the related buildings or (iii) Manufactured Housing
Contracts evidencing both (a) the obligation of the obligor to repay the loan
evidenced thereby and (b) the grant of a security interest in the related
Manufactured Home or with respect to Land Contracts, a lien on the real estate
(the "Mortgaged Property") to which the related Manufactured Homes are deemed to
be affixed, and including in some cases a security interest in the related
Manufactured Home, to secure repayment of such loan. Unless otherwise specified
in the Prospectus Supplement, any of the foregoing types of encumbrance 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, the knowledge of the parties to such instruments, as well as the
order of recordation or filing of the instrument in the appropriate public
office. Such a lien is generally not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers.
Mortgage Loans
The Mortgage Loans and Multifamily Loans will be secured by either
mortgages, deeds of trust, security deeds or deeds to secure debt depending upon
the type of security instrument customary to grant a security interest according
to the prevailing practice in the state in which the property subject to a
Mortgage Loan or Multifamily Loan is located. Any of the foregoing types of
encumbrance creates a lien upon or conveys title to the real property encumbered
by such instrument and represents the security for the repayment of an
obligation that is customarily evidenced by a promissory note. Such a lien is
generally not prior to the lien for real estate taxes and assessments and other
charges imposed under governmental police powers. Priority with respect to these
security instruments depends on their terms and generally on the order of
recording with the applicable state, county or municipal office. There are two
parties to a mortgage, the mortgagor, who is the borrower and usually the owner
of the subject property or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. (In the case of a
land trust, title to the property is held by a land trustee under a land trust
agreement, while the owner is the beneficiary of the land trust; at origination
of a mortgage loan, the borrower executes a separate undertaking to make
payments on the mortgage note.) Although a deed of trust is similar to a
mortgage, a deed of trust normally has three parties, the trustor (similar to a
mortgagor), who is the owner of the subject property and may or may not be the
borrower, the beneficiary (similar to a mortgagee), who is the lender, and the
trustee, a third-party grantee. Under a deed of trust, the trustor grants the
property, irrevocably until the debt is paid, in trust, generally with a power
of sale, to the trustee to secure payment of the obligation. A security deed and
a deed to secure debt are special types of deeds which indicate on their face
that they are granted to secure an underlying debt. By executing a security deed
or 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. The mortgagee's authority under a mortgage and the
trustee's authority under a deed of trust, security deed or deed to secure debt
are governed by the law of the state in which the real property is located, the
express provisions of the mortgage, deed of trust, security deed or deed to
secure debt and, in some cases, with respect to deeds of trust, the directions
of the beneficiary.
Cooperative Loans
The Cooperative owns all the real property or some interest therein
sufficient to permit it to own 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 on the
cooperative apartment building and/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 mortgagor, or lessee, as the case may be, is also responsible
for meeting these blanket 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 the
obtaining of capital by the Cooperative. The interests of the occupants under
proprietary leases or occupancy agreements as to which the Cooperative is the
landlord are generally subordinate to the interests of the holder of the 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 its blanket
mortgage, the mortgagee holding the 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 final
maturity. The inability of the Cooperative to refinance such 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 Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. In either event,
foreclosure by the holder of the 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 Trust Fund, the
collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases 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 is 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 on Cooperative
Shares" below.
Tax Aspects of Cooperative Ownership
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of the
Code) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation representing
his proportionate share of certain interest expenses and certain real estate
taxes allowable as a deduction under Section 216(a) of the Code to the
corporation under Sections 163 and 164 of the Code. In order for a corporation
to qualify under Section 216(b)(1) of the Code for its taxable year in which
such items are allowable as a deduction to the corporation, such section
requires, among other things, that at least 80% of the gross income of the
corporation be derived from its tenant-stockholders. By virtue of this
requirement, the status of a corporation for purposes of Section 216(b)(1) of
the Code must be determined on a year-to-year basis. Consequently, there can be
no assurance that cooperatives relating to the Cooperative Loans will qualify
under such section for any particular year. In the event that such a cooperative
fails to qualify for one or more years, the value of the collateral securing any
related Cooperative Loans could be significantly impaired because no deduction
would be allowable to tenant-stockholders under Section 216(a) of the Code with
respect to those years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that such a failure would be permitted to continue over
a period of years appears remote.
Manufactured Housing Contracts Other Than Land Contracts
Under the laws of most states, manufactured housing constitutes personal
property and is subject to the motor vehicle registration laws of the state or
other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for the perfection of security interests
in manufactured homes, security interests are perfected by the filing of a
financing statement under Article 9 of the UCC, which has been adopted by all
states. Such financing statements are effective for five years and must be
renewed at the end of each five years. The certificate of title laws adopted by
the majority of states provide that ownership of motor vehicles and manufactured
housing shall be evidenced by a certificate of title issued by the motor
vehicles department (or a similar entity) of such state. In the states which
have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law.
The Master Servicer will be required under the related Servicing Agreement
to effect such notation or delivery of the required documents and fees, and to
obtain possession of the certificate of title, as appropriate under the laws of
the state in which any Manufactured Home is registered. In the event the Master
Servicer fails, due to clerical errors or otherwise, to effect such notation or
delivery, or takes action under the wrong law (for example, under a motor
vehicle title statute rather than under the UCC), the Trustee likely will not
have a perfected security interest in the Manufactured Home securing a
Manufactured Housing Contract.
As manufactured homes have become larger and often have been attached to
their sites without any apparent intention to move them, courts in many states
have held that manufactured homes may, under certain circumstances, become
subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties, including a trustee in bankruptcy, claiming an interest in the
home under applicable state real estate law, notwithstanding compliance with the
requirements described above. In order to perfect a security interest in a
manufactured home under real estate laws, the holder of the security interest
must file either a "fixture filing" under the provisions of the UCC or a real
estate mortgage under the real estate laws of the state where the home is
located. These filings must be made in the real estate records office of the
county where the home is located. Generally, Manufactured Housing Contracts will
contain provisions prohibiting the obligor from permanently attaching the
Manufactured Home to its site. So long as the obligor does not violate this
agreement, a security interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to perfect the security interest in the Manufactured Home. If,
however, a Manufactured Home is permanently attached to its site, other parties,
including a trustee in bankruptcy, could obtain an interest in the Manufactured
Home which is prior to the security interest originally retained by the seller
and transferred to the Depositor.
The Depositor will assign or cause to be assigned a security interest in
the Manufactured Homes to the Trustee, on behalf of the Securityholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Depositor,
the Master Servicer nor the Trustee will amend the certificates of title to
identify the Trustee, on behalf of the Securityholders, as the new secured party
and, accordingly, the Depositor or the Unaffiliated Seller will continue to be
named as the secured party on the certificates of title relating to the
Manufactured Homes. In most states, such assignment is an effective conveyance
of such security interest without amendment of any lien noted on the related
certificate of title and the new secured party, therefore, succeeds to the
Depositor's rights as the secured party. However, in some states there exists a
risk that, in the absence of an amendment to the certificate of title, such
assignment of the security interest might not be held effective against
creditors of the Depositor or Unaffiliated Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Depositor on
the certificate of title or delivery of the required documents and fees or, in
states where a security interest in manufactured homes is perfected pursuant to
Article 9 of the UCC, the filing of a financing statement (and continuation
statements before the end of each five year period) will be sufficient to
protect the Trustee against the rights of subsequent purchasers of a
Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the Depositor
has failed to perfect or cause to be perfected the security interest assigned to
the Trust Fund, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes, holders of perfected
security interests, and a trustee in bankruptcy. There also exists a risk in not
identifying the Trustee, on behalf of the Securityholders as the new secured
party on the certificate of title that, through fraud or negligence, the
security interest of the Trustee could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and re-register
the Manufactured Home in such state, and if the Depositor did not take steps to
re-perfect its security interest in such state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a Manufactured Home;
accordingly, if the Depositor holds the certificate of title to such
Manufactured Home, it must surrender possession of such certificate. In the case
of Manufactured Homes registered in states which provide for notation of lien,
the Depositor would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the
Depositor could re-perfect its security interest in the Manufactured Home in the
state of relocation. In states which do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. Under the Servicing Agreement, the Master Servicer will be obligated to
take such steps, at the Master Servicer's expense, as are necessary to maintain
perfection of security interests in the Manufactured Homes.
Under the laws of most states, statutory liens, such as liens for repairs
performed on a Manufactured Home and liens for personal property taxes, take
priority even over a perfected security interest. In addition, certain liens
arising as a matter of federal law, such as federal tax liens, also take
priority over a perfected security interest. The Depositor will obtain the
representation of the Unaffiliated Seller that it has no knowledge of any such
liens with respect to any Manufactured Home securing a Contract. However, such
liens could arise at any time during the term of a Contract. No notice will be
given to the Trustee or Securityholders in the event such a lien arises.
Foreclosure on Mortgages
Foreclosure of a mortgage is generally accomplished by judicial action.
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
necessary parties defendant. When the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be time
consuming. After the completion of a judicial foreclosure, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage in and to the mortgaged
property. It is regulated by statutes and rules and subject throughout to the
court's equitable powers. Generally, a mortgagor is bound by the terms of the
mortgage note and the mortgage as made and cannot be relieved from its own
default. However, since a foreclosure action is equitable in nature and is
addressed to a court of equity, the court may relieve a mortgagor of a default
and deny the mortgagee foreclosure on proof that the mortgagor's default was
neither willful nor in bad faith and that the mortgagee's action was such as to
establish a waiver, or fraud, bad faith, oppressive or unconscionable conduct as
to warrant a court of equity to refuse affirmative relief to the mortgagee.
Under certain circumstances a court of equity may relieve the mortgagor from an
entirely technical default where such default was not willful.
A foreclosure action or sale pursuant to a power of sale is subject to most
of the delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring up to several years to complete. Moreover, a
non-collusive, regularly conducted foreclosure sale or sale pursuant to a power
of sale may be challenged as a fraudulent conveyance, regardless of the parties'
intent, if a court determines that the sale was for less than fair consideration
and such sale occurred while the mortgagor was insolvent and within one year (or
within the state statute of limitations if the trustee in bankruptcy elects to
proceed under state fraudulent conveyance law) of the filing of bankruptcy.
Similarly, a suit against the debtor on the mortgage note may take several years
and, generally, is a remedy alternative to foreclosure, the mortgagee being
precluded from pursuing both at the same time. In some states, mortgages may
also be foreclosed by advertisement pursuant to a power of sale provided in the
mortgage. Foreclosure of a mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon default by the borrower under the terms of
the note or deed of trust. In some states, prior to such sale, the trustee must
record a notice of default and send a copy to the borrower-trustor and to any
person 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 individual having an interest in the real property, including any junior
lienholder. In some states, the trustor, borrower, or any person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation to the extent allowed by applicable law.
Generally, state law controls the amount of foreclosure expenses and costs,
including attorneys' fees, which may be recovered by a lender. Certain states
require that a notice of sale must be posted in a public place and, in most
states, published for a specific period of time in a specified manner prior to
the date of the trustee's sale. In addition, some state laws require that a copy
of the notice of sale be posted on the property, recorded and sent to all
parties having an interest in the real property. In certain states, foreclosure
under a deed of trust may also be accomplished by judicial action in the manner
provided for foreclosure of mortgages.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is generally a
public sale. However, because of the difficulty potential third party purchasers
at the sale might have in determining the exact status of title and because the
physical condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at the
foreclosure sale. In some states, potential buyers may be further unwilling to
purchase a property at a foreclosure sale as a result of the 1980 decision of
the United States Court of Appeals for the Fifth Circuit in Durrett v.
Washington National Insurance Company. The court in Durrett held that even a
non-collusive, regularly conducted foreclosure sale was a fraudulent transfer
under section 67 of the former Bankruptcy Act (section 548 of the current
Bankruptcy Code) and, therefore, could be rescinded in favor of the bankrupt's
estate, if (i) the foreclosure sale was held while the debtor was insolvent and
not more than one year prior to the filing of the bankruptcy petition, and (ii)
the price paid for the foreclosed property did not represent "fair
consideration" ("reasonably equivalent value" under the Bankruptcy Code).
However, on May 23, 1994, Durrett was effectively overruled by the United States
Supreme Court in BFP v. Resolution Trust Corporation, as Receiver for Imperial
Federal Savings and Loan Association, et al., in which the Court held that
"'reasonably equivalent value', for foreclosed property, is the price in face
received at the foreclosure sale, so long as all the requirements of the State's
foreclosure law have been complied with." The Supreme Court decision, however,
may not be controlling as to whether a non-collusive, regularly conducted
foreclosure can be avoided as a fraudulent conveyance under applicable state
law, if a court determines that the sale was for less than "fair consideration"
under applicable state law. For these reasons, it is common for the lender to
purchase the property from the trustee or referee for an amount equal to the
principal amount of the mortgage or deed of trust plus accrued and unpaid
interest and the expenses of foreclosure. Generally, state law controls the
amount of foreclosure costs and expenses, including attorneys' and trustee's
fees, which may be recovered by a lender. In some states there is a statutory
minimum purchase price which the lender may offer for the property. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume ownership of the mortgaged
property and, therefore, the burdens of ownership, including obtaining casualty
insurance, paying taxes and making such repairs at its own expense as are
necessary to render the property suitable for sale. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss may be reduced by the receipt of
any mortgage insurance proceeds, if any.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees. Accordingly, with respect to those Mortgage Loans which are
junior mortgage loans, if the lender purchases the property, the lender's title
will be subject to all senior liens and claims 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 or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds are
generally payable to the mortgagor or trustor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceedings.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
a lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower's failure to adequately maintain the property or
the borrower's execution of a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily-prescribed minimums. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
In addition, 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 may 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 possibly under state law in a number of states, a
secured party that takes a deed in lieu of foreclosure or acquires a mortgaged
property at a foreclosure sale 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 secured lender on residential properties. In
the event that title to a Residential Property was acquired on behalf of
Securityholders and cleanup costs were incurred in respect of the Residential
Property, such Securityholders might realize a loss if such costs were required
to be paid by the related Trust Fund.
Foreclosure on Cooperative Shares
The Cooperative shares and proprietary lease or occupancy agreement 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 in the proprietary lease or
occupancy agreement, and may be canceled by the Cooperative, even while pledged,
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. Commonly,
rent and other obligations and charges arising under a proprietary lease or
occupancy agreement which are owed to the cooperative are made liens upon the
shares to which the proprietary lease or occupancy agreement relates. In
addition, the proprietary lease or occupancy agreement generally permits the
Cooperative to terminate such lease or agreement in the event the
tenant-stockholder 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, together with any lender protection
provisions contained in the proprietary lease, establishes the rights and
obligations of both parties in the event of a default by the tenant-stockholder
on its obligations under the proprietary lease or occupancy agreement. 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 notice of and 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 a sale of the Cooperative
apartment, subject, however, to the Cooperative's right to sums due under such
proprietary lease or occupancy agreement or which have become liens on the
shares relating to the proprietary lease or occupancy agreement. The total
amount owed to the Cooperative by the tenant-stockholder, which the lender
generally cannot restrict and does not monitor, could reduce the value of the
collateral below the outstanding principal balance of the Cooperative Loan and
accrued and unpaid interest 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.
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 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 sale.
Generally, a sale conducted according to the usual practice of similar parties
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 Cooperative corporation 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. See "Anti- Deficiency Legislation and
Other Limitations on Lenders" below.
Repossession with respect to Manufactured Housing Contracts that are not
Land Contracts
Repossession of manufactured housing is governed by state law. So long as a
manufactured home has not become so attached to real estate that it would be
treated as a part of the real estate under the law of the state where it is
located, repossession of such home in the event of a default by the obligor will
generally be governed by the UCC. Article 9 of the UCC provides the statutory
framework for the repossession of manufactured housing. While the UCC as adopted
by the various states may vary in certain small particulars, the general
repossession procedure established by the UCC is as follows:
(i) Except in those few states where the debtor must receive notice of his
right to cure his default (typically 30 days to bring the account current),
repossession can commence immediately upon default without prior notice.
Repossession may be effected either through self-help (peaceable retaking
without court order), voluntary repossession or through judicial process
(repossession pursuant to court-issued writ of replevin). The self-help and/or
voluntary repossession methods are more commonly employed, and are accomplished
simply by retaking possession of the manufactured home. In cases where the
debtor objects or raises a defense to repossession, a court order must be
obtained from the appropriate state court, and the manufactured home must then
be repossessed in accordance with that order. Whether the method employed is
self-help, voluntary repossession or judicial repossession, the repossession can
be accomplished either by an actual physical removal of the manufactured home to
a secure location for refurbishment and resale or by removing the occupants and
their belongings from the manufactured home and maintaining possession of the
manufactured home on the location where the occupants were residing. Various
factors may affect whether the manufactured home is physically removed or left
on location, such as the nature and term of the lease of the site on which it is
located and the condition of the unit. In many cases, leaving the manufactured
home on location is preferable, in the event that the home is already set up,
because the expenses of retaking and redelivery will be saved. However, in those
cases where the home is left on location, expenses for site rentals will usually
be incurred.
(ii) Once repossession has been achieved, preparation for the subsequent
disposition of the manufactured home can commence. The disposition may be by
public or private sale, upon notice to the debtor, and the method, manner, time,
place and terms of the sale must be commercially reasonable. The UCC and
consumer protection laws in most states place restrictions on repossession
sales, including requiring prior notice to the debtor.
(iii) Sale proceeds are to be applied first to repossession expenses
(expenses incurred in retaking, storage, preparing for sale to include
refurbishing costs and selling) and then to satisfaction of the indebtedness.
While some states impose prohibitions or limitations on deficiency judgments if
the net proceeds from resale do not cover the full amount of the indebtedness,
the deficiency may be sought from the debtor in the form of a deficiency
judgment in those states which do not prohibit or limit such judgments. The
deficiency judgment is a personal judgment against the debtor for the shortfall.
Occasionally, after resale of a manufactured home and payment of all expenses
and indebtedness, there is a surplus of funds. In that case, the UCC requires
the party suing for the deficiency judgment to remit the surplus to the debtor.
Because the defaulting owner of a manufactured home generally has very little
capital or income available following repossession, a deficiency judgment may
not be sought in many cases or, if obtained, will be settled at a significant
discount in light of the defaulting owner's strained financial condition.
Rights of Redemption with respect to Residential Properties
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 foreclosing mortgagee, from
exercising 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, parties
having an interest which is subordinate to that of the foreclosing mortgagee 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. Parties having an equity of redemption
must generally be made parties and duly summoned to the foreclosure action in
order for their equity of redemption to be barred.
Equity of redemption, which is a non-statutory right that must be exercised
prior to foreclosure sale, should be distinguished from statutory rights of
redemption. In some states, after sale pursuant to a deed of trust or
foreclosure of a mortgage, the trustor or mortgagor and certain foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, redemption may occur only upon payment of
the foreclosure sales price, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower 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 subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
a right of redemption is to force the lender to retain the property and pay the
expenses of ownership and maintenance of the property until the redemption
period has expired. In some states, there is no right to redeem property after a
trustee's sale under a deed of trust.
Notice of Sale; Redemption Rights with respect to Manufactured Homes
While state laws do not usually require notice to be given debtors prior to
repossession, many states do require delivery of a notice of default and of the
debtor's right to cure defaults before repossession. The law in most states also
requires that the debtor be given notice of sale prior to the resale of the home
so that the owner may redeem at or before resale. In addition, the sale must
comply with the requirements, including the notice requirements, of the UCC.
Anti-Deficiency Legislation, Bankruptcy Laws and Other Limitations on Lenders
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower 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. 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 borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower 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
beneficiary or a mortgagee from obtaining a large deficiency judgment against
the former borrower as a result of low or no bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the Bankruptcy Code and state
laws affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to obtain payment of a mortgage loan, to realize upon
collateral and/or enforce a deficiency judgment. For example, under the
Bankruptcy Code, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and, usually, no interest or principal payments are made
during the course of the bankruptcy case. Foreclosure of an interest in real
property of a debtor in a case under the Bankruptcy Code can typically occur
only if the bankruptcy court vacates the stay; an action the bankruptcy court
may be reluctant to take, particularly if the debtor has the prospect of
restructuring his or her debts and the mortgage collateral is not deteriorating
in value. The delay and the consequences thereof caused by such automatic stay
can be significant. Also, under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a junior lienor (a subordinate lender secured by a
mortgage on the property) may stay the senior lender from taking action to
foreclose out such junior lien.
A homeowner may file for relief under the Bankruptcy Code under any of
three different chapters of the Bankruptcy Code. Under Chapter 7, the assets of
the debtor are liquidated and a lender secured by a lien may "bid in" (i.e., bid
up to the amount of the debt) at the sale of the asset. (See "--Foreclosure on
Mortgages.") A homeowner may also file for relief under Chapter 11 of the
Bankruptcy Code and reorganize his or her debts through his or her
reorganization plan. Alternatively, a homeowner may file for relief under
Chapter 13 of the Bankruptcy Code and address his or her debts in a
rehabilitation plan. (Chapter 13 is often referred to as the "wage earner
chapter" or "consumer chapter" because most individuals seeking to restructure
their debts file for relief under Chapter 13 rather than under Chapter 11.)
A reorganization plan under Chapter 11 and a rehabilitation plan under
Chapter 13 of the Bankruptcy Code may each allow a debtor to cure a default with
respect to a mortgage loan on such debtor's residence by paying arrearages
within a reasonable time period and to deaccelerate and reinstate the original
mortgage loan payment schedule, even though the lender accelerated the loan and
a final judgment of foreclosure had been entered in state court (provided no
sale of the property had yet occurred) prior to the filing of the debtor's
petition under the Bankruptcy Code. Courts have approved Chapter 11 plans that
have allowed curing of defaults over a number of years. In certain
circumstances, defaults may be cured over a number of years even if the full
amount due under the original loan is never repaid, notwithstanding objection by
the mortgagee. Under a Chapter 13 plan, curing of defaults must be accomplished
within the five year maximum term permitted for repayment plans.
Generally, a repayment plan filed in a case under Chapter 13 may not modify
the claim of a mortgage lender if the borrower elects to retain the property,
the property is the borrower's principal residence and the property is the
lender's only collateral. Notwithstanding the foregoing restrictions, if the
last payment on the original payment schedule of a mortgage loan secured only by
the debtor's principal residence is due before the final date for payment under
such debtor's Chapter 13 plan (which date could be up to five years after the
debtor emerges from bankruptcy), under a case recently decided by an
intermediate appellate court, the debtor's rehabilitation plan could modify the
terms of the loan by bifurcating an undersecured lender's claim into a secured
and an unsecured component in the same manner as if the debtor were a debtor in
a case under Chapter 11 (see the following paragraph). While this decision is
contrary to a prior decision of a more senior appellate court in another
jurisdiction, it is possible that the intermediate court's decision will become
the accepted interpretation in view of the language of the applicable statutory
provision. If this interpretation is adopted by a court considering the
treatment in a Chapter 13 repayment plan of a home equity loan, it is likely
that the home equity loan could be restructured as if the bankruptcy case were
under Chapter 11 due to the short term of most home equity loans if the final
payment is due within five years of the debtor's emergence from bankruptcy.
In a case under Chapter 11, provided certain substantive and procedural
safeguards are met, the amount and terms of a mortgage loan secured by property
of the debtor, including the debtor's principal residence, may be modified.
Under the Bankruptcy Code, the outstanding amount of a loan secured by the real
property may be reduced to the then-current value of the property as determined
by the court (with a corresponding partial reduction of the amount of the
lender's security interest) if the value is less than the amount due on the
loan, leaving the lender a general unsecured creditor for the difference between
such value of the collateral and the outstanding balance of the loan. A
borrower's unsecured indebtedness will typically be discharged in full upon
payment of a substantially reduced amount. Other modifications may include a
reduction in the amount of each scheduled payment, which reduction may result
from a reduction in the rate of interest and/or the alteration of the repayment
schedule (with or without affecting the unpaid principal balance of the loan),
and/or an extension (or reduction) of the final maturity date. State statutes
and general principles of equity may also provide a mortgagor with means to halt
a foreclosure proceeding or sale and to force a restructuring of a mortgage loan
on terms a lender would not otherwise accept. Because many of the Mortgage Loans
had loan-to-value ratios in excess of 100% at origination (or such loan-to-value
ratios otherwise may exceed 100% in cases where the market value declined
subsequent to origination), a potentially significant portion of the unpaid
principal amount of the related Mortgage Loan would likely be treated as
unsecured indebtedness in a case under Chapter 11.
In a bankruptcy or similar proceeding of a mortgagor, action may be taken
seeking the recovery, as a preferential transfer or on other grounds, of any
payments made by the mortgagor under the related mortgage loan. Payments on
long-term debt may be protected from recovery as preferences if they are
payments in the ordinary course of business made on debts incurred in the
ordinary course of business or if the value of the collateral exceeds the debt
at the time of payment. Whether any particular payment would be protected
depends upon the facts specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. In certain circumstances, subject to the court's
approval, a debtor in a case under Chapter 11 of the Bankruptcy Code may have
the power to grant liens senior to the lien of a mortgage. Moreover, the laws of
certain states also give priority to certain tax and mechanics liens over the
lien of a mortgage. Under the Bankruptcy Code, if the court finds that actions
of the mortgagee have been unreasonable and inequitable, the lien of the related
mortgage may be subordinated to the claims of unsecured creditors.
Various proposals to amend the Bankruptcy Code in ways that could adversely
affect the value of the Mortgage Loans have been considered by Congress, and
more such proposed legislation may be considered in the future. No assurance can
be given that any particular proposal will or will not be enacted into law, or
that any provision so enacted will not differ materially from the proposals
described above.
The Code provides priority to certain tax liens over the lien of the
mortgage. This may have the effect of delaying or interfering with the
enforcement of rights in respect of a defaulted Mortgage Loan. 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. The laws include the federal Truth-in-Lending
Act (and Regulation Z), Real Estate Settlement Procedures Act (and Regulation
X), Equal Credit Opportunity Act (and Regulation B), Fair Credit Billing Act,
Fair Credit Reporting Act, Fair Housing Act, Housing and Community Development
Act, Home Mortgage Disclosure Act, Federal Trade Commission Act, Fair Debt
Collection Practices Act, Uniform Consumer Credit Code, Consumer Credit
Protection Act, Riegle Act, and related statutes and regulations. 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.
For Cooperative 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.
Junior Mortgages
Some of the Mortgage Loans, Multifamily Loans and Home Improvement
Contracts may be secured by junior mortgages or deeds of trust, which are junior
to senior mortgages or deeds of trust which are not part of the Trust Fund. The
rights of the Certificateholders as the holders of a junior deed of trust or a
junior mortgage are subordinate in lien priority and in payment priority 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, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will govern generally. 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 senior mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
Consumer Protection Laws with respect to Home Improvement and Manufactured
Housing Contracts
Numerous Federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
federal Truth-in-Lending Act (and Regulation Z), Real Estate Settlement
Procedures Act (and Regulation X), Equal Credit Opportunity Act (and Regulation
B), Fair Credit Billing Act, Fair Credit Reporting Act, Fair Housing Act,
Housing and Community Development Act, Home Mortgage Disclosure Act, Federal
Trade Commission Act, Fair Debt Collection Practices Act, Uniform Consumer
Credit Code, Consumer Credit Protection Act, Riegle Act, and related statutes
and regulations. These laws can impose specific statutory liabilities upon
creditors who fail to comply with their provisions and may affect the
enforceability of the contract.
Contracts often contain provisions obligating the obligor to pay late
charges if payments are not timely made. In certain cases, Federal and state law
may specifically limit the amount of late charges that may be collected. Unless
otherwise provided in the related Prospectus Supplement, under an Agreement,
late charges will be retained by the Master Servicer as additional servicing
compensation, and any inability to collect these amounts will not affect
payments to Certificateholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect (subject to any applicable limitations imposed
by the Riegle Act) of subjecting a seller (and certain related creditors and
their assignees (to the extent the liability of such parties is not limited by
the provisions of the Riegle Act)) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses which the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due
thereunder.
Most of the Manufactured Housing Contracts and certain of the Home
Improvement Contracts in the Trust Fund will be subject to the requirements of
the FTC Rule. Accordingly, the Trustee, as holder of Manufactured Housing
Contracts, will be subject to any claims or defenses that the purchaser of the
related manufactured home may assert against the seller of the manufactured
home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract. If an obligor is successful in asserting any such claim or
defense, and if the Unaffiliated Seller had or should have had knowledge of such
claim or defense, the Master Servicer will have the right to require the
Unaffiliated Seller to repurchase the Contract because of a breach of its
Unaffiliated Seller's representation and warranty that no claims or defenses
exist which would affect the obligor's obligation to make the required payments
under the Contract. The Unaffiliated Seller would then have the right to require
the originating dealer to repurchase the Contract from it and might also have
the right to recover from the dealer for any losses suffered by the Unaffiliated
Seller with respect to which the dealer would have been primarily liable to the
obligor.
Other Limitations
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including Federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a lender to
realize upon collateral and/or enforce a deficiency judgment. For example, in a
proceeding under the Federal bankruptcy law, a court may prevent a lender from
repossessing a home. In the case of an individual eligible for relief in a
proceeding under Chapter 11 of the Federal bankruptcy law, as part of the
rehabilitation plan under Chapter 11, a court may reduce the amount of the
secured indebtedness to the market value of the home at the time of bankruptcy
(as determined by the court), leaving the party providing financing as a general
unsecured creditor for the remainder of the indebtedness. A bankruptcy court may
also reduce the payments due under a contract or change the rate of interest and
time of repayment of the indebtedness pursuant to a Chapter 11 plan of
reorganization. Generally, any plan filed in a proceeding under Chapter 13 of
the Federal bankruptcy law must provide for the full payment of the claim of the
lender without changing the terms of payment if the borrower elects to retain
the property, the property is the borrower's principal residence and the
property is the lender's only collateral.
Enforceability of Certain Provisions
Unless the Prospectus Supplement indicates otherwise, all the related
Residential Loans, except for FHA Loans and VA Loans, contain due-on-sale
clauses. These clauses permit the lender to accelerate the maturity of the loan
if the borrower sells, transfers, or conveys the property without the prior
consent of the mortgagee. The enforceability of these clauses has been impaired
in various ways in certain states by statute or decisional law. The ability of
mortgage lenders and their assignees and transferees to enforce due-on-sale
clauses was addressed by the Garn-St. Germain Depository Institutions Act of
1982 (the "Garn-St. Germain Act") which was enacted on October 15, 1982. This
legislation, subject to certain exceptions, preempts state constitutional,
statutory and case law that prohibits the enforcement of due-on-sale clauses.
The Garn-St. Germain Act does "encourage" lenders to permit assumptions of loans
at the original rate of interest or at some other rate less than the average of
the original rate and the market rate.
Mortgage Loans
Exempted from this preemption pursuant to the Garn-St. Germain Act are
mortgage loans (originated other than by federal savings and loan associations
and federal savings banks) that were made or assumed during the period beginning
on the date a state, by statute or final appellate court decision having
statewide effect, prohibited the exercise of due-on-sale clauses and ending on
October 15, 1982 ("Window Period Loans"). However, this exception applies only
to transfers of property underlying Window Period Loans occurring between
October 15, 1982 and October 15, 1985 and does not restrict enforcement of a
due-on-sale clause in connection with current transfers or property underlying
Window Period Loans unless the property underlying such Window Period Loan is
located in one of the three "window period states" identified below. Due-on-sale
clauses contained in Mortgage Loans originated by federal savings and loan
associations or federal savings banks are fully enforceable pursuant to
regulations of the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision, which preempt state law restrictions on the enforcement of
due-on-sale clauses. Mortgage Loans originated by such institutions are
therefore not deemed to be Window Period Loans.
With the expiration of the exemption for Window Period Loans on October 15,
1985, due-on-sale clauses have become generally enforceable except in those
states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period", which ended in all cases not
later than October 15, 1982, and (ii) originated by lenders other than national
banks, federal savings institutions and federal credit unions. FHLMC has taken
the position in its published mortgage servicing standards that, out of a total
of eleven "window period states", three states (Michigan, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of Window Period Loans. The Garn-St. Germain Act also sets forth nine
instances in which a mortgage lender covered by the Garn-St. Germain 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, the creation of
a junior encumbrance, and other instances where regulations promulgated by the
Director of the Office of Thrift Supervision (as successor to the Federal Home
Loan Bank Board) prohibit such enforcement. To date no such regulations have
been issued. Regulations promulgated under the Garn-St. Germain Act 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 Loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the Mortgage Loans related to a Series and the number of such Mortgage
Loans which may be outstanding until maturity.
Transfer of Manufactured Homes
Generally, manufactured housing contracts contain provisions prohibiting
the sale or transfer of the related manufactured homes without the consent of
the obligee on the contract and permitting the acceleration of the maturity of
such contracts by the obligee on the contract upon any such sale or transfer
that is not consented to. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will, to the extent it has knowledge of such
conveyance or proposed conveyance, exercise or cause to be exercised its rights
to accelerate the maturity of the related Contracts through enforcement of
"due-on-sale" clauses, subject to applicable state law. In certain cases, the
transfer may be made by a delinquent obligor in order to avoid a repossession
proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the "due-on-sale" clause. The Garn-St. Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes. Consequently, in some cases the
Master Servicer may be prohibited from enforcing a "due-on-sale" clause in
respect of certain Manufactured Homes.
Prepayment Charges and Prepayments
Generally, conventional mortgage loans, Cooperative Loans, Home Improvement
and Manufactured Housing Contracts, residential owner occupied FHA loans and VA
loans may be prepaid in full or in part without penalty. Generally, multifamily
residential loans, including multifamily FHA Loans, may contain provisions
limiting prepayments on such loans, including prohibiting prepayment for a
specified period after origination, prohibiting partial prepayments entirely or
requiring the payment of a prepayment penalty upon prepayment in full or in
part.
The laws of certain states may render prepayment fees unenforceable after a
Mortgage Loan has been outstanding for a certain number of years, or may limit
the amount of any prepayment fee to a specified percentage of the original
principal amount of the Mortgage Loan, to a specified percentage of the
outstanding principal balance of a Mortgage Loan, or to a fixed number of
months' interest on the prepaid amount. In certain states, prepayment fees
payable on default or other involuntary acceleration of a Residential Loan may
not be enforceable against the related mortgagor or obligor. Some state
statutory provisions may also treat certain prepayment fees as usurious if in
excess of statutory limits.
Subordinate Financing
When the 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 an 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 statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision which
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 has been advised by counsel that a court interpreting Title V
would hold that mortgage loans related to a Series 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
Loans originated after the date of such state action will be eligible for
inclusion in a Trust Fund if such Mortgage Loans bear interest or provide for
discount points or charges in excess of permitted levels. No Mortgage Loan
originated prior to January 1, 1980 will bear interest or provide for discount
points or charges in excess of permitted levels.
Alternative Mortgage Instruments
ARM 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 complied
with applicable law. These difficulties were simplified 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,
(i) state-chartered banks may originate "alternative mortgage instruments"
(including ARM Loans) in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks, (ii) 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 (iii) all other
non-federally chartered housing creditors, including without limitation
state-chartered savings and loan associations, 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 further 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.
Environmental Legislation
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "Conservation Act") amended, among other things, the provisions of CERCLA
with respect to lender liability and the secured creditor exemption. The
Conservation Act offers protection to lenders by defining certain activities in
which a lender can engage and still have the benefit of the secured creditor
exemption. A lender will be deemed to have participated in the management of a
mortgaged property, and will lose the secured creditor exemption, if it actually
participates in the operational affairs of the property of the borrower. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of all operational functions of the mortgaged property.
The Conservation Act also provides that a lender may continue to have the
benefit of the secured creditor exemption even if it forecloses on a mortgaged
property, purchases it at a foreclosure sale or accepts a deed-in-lieu of
foreclosure provided that the lender seeks to sell the mortgaged property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
Other federal and state laws in certain circumstances may impose liability
on a secured party which takes a deed-in-lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, or operates a mortgaged property on
which contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and
lead-based paint. Such cleanup costs may be substantial. It is possible that
such cleanup costs could become a liability of a Trust Fund and reduce the
amounts otherwise distributable to the holders of the related Series of
Certificates. Moreover, certain federal statutes and certain states by statute
impose a lien for any cleanup costs incurred by such state on the property that
is the subject of such cleanup costs (an "Environmental Lien"). All subsequent
liens on such property generally are subordinated to such an Environmental Lien
and, in some states, even prior recorded liens are subordinated to Environmental
Liens. In the latter states, the security interest of the Trustee in a related
parcel of real property that is subject to such an Environmental Lien could be
adversely affected.
Unless otherwise provided in the related Prospectus Supplement, the
Mortgage Loan Seller with respect to any Mortgage Loan included in a Trust Fund
for a particular Series of Securities will represent as to the material
compliance of the related Residential Property with applicable environmental
laws and regulations as of the date of transfer and assignment of such Mortgage
Loan to the Trustee. In addition, unless otherwise provided in the related
Prospectus Supplement, the related Agreement will provide that the Master
Servicer and any Special Servicer acting on behalf of the Trustee, may not
acquire title to a Residential Property or take over its operation unless the
Master Servicer (or Special Servicer) has previously determined, based on a
report prepared by a person who regularly conducts environmental audits, that
(a) there are no circumstances present at the Residential Property relating to
substances for which some action relating to their investigation or clean-up
could be required or that it would be in the best economic interest of the Trust
Fund to take such actions with respect to the affected Residential Property and
(b) that the Residential Property is in compliance with applicable environmental
laws or that it would be in the best economic interest of the Trust Fund to take
the actions necessary to comply with such laws. See "Description of the
Certificates--Realization Upon Defaulted Mortgage Loans."
Soldiers' and Sailors' Civil Relief Act of 1940
Generally, 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 or Contract (including a
mortgagor who was in reserve status and is called to active duty after
origination of the Mortgage Loan), may not be charged interest (including fees
and charges) above an annual rate of 6% during the period of such mortgagor's
active duty status, unless a court orders otherwise upon application of the
lender. The Relief Act applies to mortgagors who are members of the Army, Navy,
Air Force, Marines, National Guard, Reserves, Coast Guard, and officers of the
U.S. Public Health Service assigned to duty with the military. Because the
Relief Act applies to mortgagors who enter military service (including
reservists who are called to active duty) after origination of the related
Mortgage Loan, no information can be provided as to the number of loans that may
be affected by the Relief Act. Application of the Relief Act would adversely
affect, for an indeterminate period of time, the ability of the Master 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 Securities, 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 Securities. In addition, the
Relief Act imposes limitations that would impair the ability of the Master
Servicer to foreclose on an affected Mortgage Loan or enforce rights under a
Contract 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 or Contract goes into default, there may be
delays and losses occasioned thereby.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
Securities offered hereunder. This discussion is directed solely to
Securityholders that hold the Securities as capital assets within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"), and
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
Further, the authorities on which this discussion, and the opinion referred to
below, are based are subject to change or differing interpretations, which could
apply retroactively. In addition to the federal income tax consequences
described herein, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the
Securities. See "State and Other Tax Consequences." Securityholders are advised
to consult their own tax advisors concerning the federal, state, local or other
tax consequences to them of the purchase, ownership and disposition of the
Securities offered hereunder.
The following discussion addresses securities of four general types: (i)
securities ("REMIC Securities") representing interests in a Trust Fund, or a
portion thereof, that the Trustee will elect to have treated as a real estate
mortgage investment conduit ("REMIC") under Sections 860A through 860G (the
"REMIC Provisions") of the Code, (ii) securities ("Grantor Trust Securities")
representing interests in a Trust Fund ("Grantor Trust Fund") as to which no
such election will be made, (iii) securities ("Partnership Securities")
representing interests in a Trust Fund ("Partnership Trust Fund") which is
treated as a partnership or, if owned by a single beneficial owner, ignored for
federal income tax purposes, and (iv) securities ("Debt Securities")
representing indebtedness of a Partnership Trust Fund for federal income tax
purposes. The Prospectus Supplement for each Series of Securities will indicate
which of the foregoing treatments will apply to such Series and, if a REMIC
election (or elections) will be made for the related Trust Fund, will identify
all "regular interests" and "residual interests" in the REMIC. For purposes of
this tax discussion, (i) references to a "Securityholder" or a "holder" are to
the beneficial owner of a Security, (ii) references to "REMIC Pool" are to an
entity or portion thereof as to which a REMIC election will be made and (iii)
unless indicated otherwise in the applicable Prospectus Supplement, references
to "Mortgage Loans" include Agency Securities and Private Mortgage-Backed
Securities.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code and
in the Treasury regulations issued thereunder (the "OID Regulations"), and in
part upon the REMIC Provisions and the Treasury regulations issued thereunder
(the "REMIC Regulations"). The OID Regulations do not adequately address certain
issues relevant to, and in some instances provide that they are not applicable
to, securities such as the Securities.
REMICS
Classification of REMICS
Upon the issuance of each Series of REMIC Securities, Cadwalader,
Wickersham & Taft, special counsel to the Depositor, will deliver its opinion
generally to the effect that, assuming compliance with all provisions of the
related Pooling and Servicing Agreement, the related Trust Fund (or each
applicable portion thereof) will qualify as a REMIC and the REMIC Securities
offered with respect thereto will be considered to evidence ownership of
"regular interests" ("Regular Securities") or "residual interests" ("Residual
Securities") in that REMIC within the meaning of the REMIC Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Securities) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant to
which the de minimis requirement will be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than 1% of the aggregate
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a de minimis
amount of nonqualified assets. A REMIC Pool also must provide "reasonable
arrangements" to prevent its residual interests from being held by "disqualified
organizations" or agents thereof and must furnish applicable tax information to
transferors or agents that violate this requirement. The Pooling and Servicing
Agreement with respect to each Series of REMIC Securities will contain
provisions meeting these requirements. See "Taxation of Owners of Residual
Securities--Tax-Related Restrictions on Transfer of Residual
Securities--Disqualified Organizations."
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contact in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
and, generally, certificates of beneficial interest in a grantor trust that
holds mortgage loans and regular interests in another REMIC, such as lower-tier
regular interests in a tiered REMIC. The REMIC Regulations specify that loans
secured by timeshare interests and shares held by a tenant stockholder in a
cooperative housing corporation can be qualified mortgages. A qualified mortgage
includes a qualified replacement mortgage, which is any property that would have
been treated as a qualified mortgage if it were transferred to the REMIC Pool on
the Startup Day and that is received either (i) in exchange for any qualified
mortgage within a three-month period thereafter or (ii) in exchange for a
"defective obligation" within a two-year period thereafter. A "defective
obligation" includes (i) a mortgage in default or as to which default is
reasonably foreseeable, (ii) a mortgage as to which a customary representation
or warranty made at the time of transfer to the REMIC Pool has been breached,
(iii) a mortgage that was fraudulently procured by the mortgagor, and (iv) a
mortgage that was not in fact principally secured by real property (but only if
such mortgage is disposed of within 90 days of discovery). A Mortgage Loan that
is "defective" as described in clause (iv) that is not sold or, if within two
years of the Startup Day, exchanged, within 90 days of discovery, ceases to be a
qualified mortgage after such 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and certain other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in such fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced "promptly and appropriately" as payments on the Mortgage Loans
are received. Foreclosure property is real property acquired by the REMIC Pool
in connection with the default or imminent default of a qualified mortgage and
generally not held beyond the close of the third calendar year following the
year of acquisition, with one extension available from the Internal Revenue
Service.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more classes of regular interests or
(ii) a single class of residual interests on which distributions, if any, are
made pro rata. A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount (or
other similar amount), and provides that interests payments (or other similar
amounts), if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate, or consist of a specified, nonvarying portion of
the interest payments on qualified mortgages. Such a specified portion may
consist of a fixed number of basis points, a fixed percentage of the total
interest, or a qualified variable rate, inverse variable rate or difference
between two fixed or qualified variable rates on some or all of the qualified
mortgages. The specified principal amount of a regular interest that provides
for interest payments consisting of a specified, nonvarying portion of interest
payments on qualified mortgages may be zero. A residual interest is an interest
in a REMIC Pool other than a regular interest that is issued on the Startup Day
and that is designated as a residual interest. An interest in a REMIC Pool may
be treated as a regular interest even if payments of principal with respect to
such interest are subordinated to payments on other regular interests or the
residual interest in the REMIC Pool, and are dependent on the absence of
defaults or delinquencies on qualified mortgages or permitted investments, lower
than reasonably expected returns on permitted investments, unanticipated
expenses incurred by the REMIC Pool or prepayment interests shortfalls.
Accordingly, the Regular Securities of a Series will constitute one or more
classes of regular interests, and the Residual Securities with respect to that
Series will constitute a single class of residual interests with respect to each
REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Securities may not be accorded
the status or given the tax treatment described below. Although the Code
authorizes the Treasury Department to issue regulations providing relief in the
event of an inadvertent termination of REMIC status, 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 Trust Fund's income
for the period in which the requirements for such status are not satisfied. The
Pooling and Servicing Agreement with respect to each REMIC Pool will include
provisions designed to maintain the Trust Fund's status as a REMIC under the
REMIC Provisions. It is not anticipated that the status of any Trust Fund as a
REMIC will be terminated.
Characterization of Investments in REMIC Securities
In general, the REMIC Securities will be treated as "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code in the same proportion that the assets of the
REMIC Pool underlying such Securities would be so treated. Moreover, if 95% or
more of the assets of the REMIC Pool qualify for either of the foregoing
treatments at all times during a calendar year, the REMIC Securities will
qualify for the corresponding status in their entirety for that calendar year.
If the assets of the REMIC Pool include Buydown Loans, it is possible that the
percentage of such assets constituting "loans...secured by an interest in real
property which is...residential real property" for purposes of Code Section
7701(a)(19)(C)(v) may be required to be reduced by the amount of the related
funds paid thereon (the "Buydown Funds"). Interest (including original issue
discount) on the Regular Securities and income allocated to the class of
Residual Securities will be interest described in Section 856(c)(3)(B) of the
Code to the extent that such Securities are treated as "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code. In addition, the Regular
Securities will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code if transferred to another REMIC on its Startup Day in
exchange for regular or residual interests therein, and will be "permitted
assets" within the meaning of Section 860L(c) for a financial asset
securitization investment trust. The determination as to the percentage of the
REMIC Pool's assets that constitute assets described in the foregoing sections
of the Code will be made with respect to each calendar quarter based on the
average adjusted basis of each category of the assets held by the REMIC Pool
during such calendar quarter. The REMIC will report those determinations to
Securityholders in the manner and at the times required by applicable Treasury
regulations. The Small Business Job Protection Act of 1996 (the "SBJPA of 1996")
repealed the reserve method of bad debts of domestic building and loan
associations and mutual savings banks, and thus has eliminated the asset
category of "qualifying real property loans" in former Code Section 593(d) for
taxable years beginning after December 31, 1995. The requirements in the SBJPA
of 1996 that such institutions must "recapture" a portion of their existing bad
debt reserves is suspended if a certain portion of their assets are maintained
in "residential loans" under Code Section 7701(a)(19)(C)(v), but only if such
loans were made to acquire, construct or improve the related real property and
not for the purpose of refinancing. However, no effort will be made to identify
the portion of the Mortgage Loans of any Series meeting this requirement, and no
representation is made in this regard.
The assets of the REMIC Pool will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Securities and
property acquired by foreclosure held pending sale, and may include amounts in
reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. The REMIC
Regulations do provide, however, that payments on Mortgage Loans held pending
distribution are considered part of the Mortgage Loans for purposes of Section
856(c)(4)(A) of the Code. Furthermore, foreclosure property will qualify as
"real estate assets" under Section 856(c)(5)(A) of the Code.
Tiered REMIC Structures
For certain Series of REMIC Securities, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
Series of REMIC Securities, Cadwalader, Wickersham & Taft will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related Pooling and Servicing Agreement, the Tiered REMICs will each qualify
as a REMIC and the REMIC Securities issued by the Tiered REMICs, respectively,
will be considered to evidence ownership of Regular Securities or Residual
Securities in the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Securities is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of Regular Securities
General
In general, interest, original issue discount, and market discount on a
Regular Security will be treated as ordinary income to a holder of the Regular
Security (the "Regular Securityholder"), and principal payments on a Regular
Security will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to Regular
Securities, regardless of the method of accounting otherwise used by such
Regular Securityholder.
Original Issue Discount
Regular Securities may be issued with "original issue discount" within the
meaning of Code Section 1273(a). Holders of any Class or Subclass of Regular
Securities having original issue discount generally must include original issue
discount in ordinary income for federal income tax purpose as it accrues, in
accordance with a constant yield method that takes into account the compounding
of interest, in advance of the receipt of the cash attributable to such income.
The following discussion is based in part on temporary and final Treasury
regulations issued on February 2, 1994, as amended on June 14, 1996, (the "OID
Regulations") under Code Section 1271 through 1273 and 1275 and in part on the
provisions of the 1986 Act. Regular Securityholders should be aware, however,
that the OID Regulations do not adequately address certain issues relevant to
prepayable securities, such as the Regular Securities. To the extent such issues
are not addressed in such regulations, it is anticipated that the Trustee will
apply the methodology described in the Conference Committee Report to the 1986
Act. No assurance can be provided that the Internal Revenue Service will not
take a different position as to those matters not currently addressed by the OID
Regulations. Moreover, the OID Regulations include an anti-abuse rule allowing
the Internal Revenue Service to apply or depart from the OID Regulations where
necessary or appropriate to ensure a reasonable tax result in light of the
applicable statutory provisions. A tax result will not be considered
unreasonable under the anti-abuse rule in the absence of a substantial effect on
the present value of a taxpayer's tax liability. Investors are advised to
consult their own tax advisors as to the discussion therein and the appropriate
method for reporting interest and original issue discount with respect to the
Regular Securities.
Each Regular Security (except to the extent described below with respect to
a Regular Security on which principal is distributed in a single installment or
by lots of specified principal amounts upon the request of a Securityholder or
by random lot (a "Non-Pro Rata Security")) will be treated as a single
installment obligation for purposes of determining the original issue discount
includible in a Regular Securityholder's income. The total amount of original
issue discount on a Regular Security is the excess of the "stated redemption
price at maturity" of the Regular Security over its "issue price." The issue
price of a Class of Regular Securities offered pursuant to this Prospectus
generally is the first price at which a substantial amount of such Class is sold
to the public (excluding bond houses, brokers and underwriters). Although
unclear under the OID Regulations, it is anticipated that the Trustee will treat
the issue price of a Class as to which there is no substantial sale as of the
issue date or that is retained by the Depositor as the fair market value of the
Class as of the issue date. The issue price of a Regular Security also includes
any amount paid by an initial Regular Securityholder for accrued interest that
relates to a period prior to the issue date of the Regular Security, unless the
Regular Securityholder elects on its federal income tax return to exclude such
amount from the issue price and to recover it on the first Distribution Date.
The stated redemption price at maturity of a Regular Security always includes
the original principal amount of the Regular Security, but generally will not
include distributions of interest if such distributions constitute "qualified
stated interest." Under the OID Regulations, qualified stated interest generally
means interest payable at a single fixed rate or a 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 Regular
Security. Because there is no penalty or default remedy in the case of
nonpayment of interest with respect to a Regular Security, it is possible that
no interest on any Class of Regular Securities will be treated as qualified
stated interest. However, except as provided in the following three sentences or
in the applicable Prospectus Supplement, because the underlying Mortgage Loans
provide for remedies in the event of default, it is anticipated that the Trustee
will treat interest with respect to the Regular Securities as qualified stated
interest. Distributions of interest on Regular Securities with respect to which
deferred interest will accrue, will not constitute qualified stated interest, in
which case the stated redemption price at maturity of such Regular Securities
includes all distributions of interest as well as principal thereon. Likewise,
it is anticipated that the Trustee will treat an interest-only Class or a Class
on which interest is substantially disproportionate to its principal amount (a
so-called "super-premium" Class) as having no qualified stated interest. Where
the interval between the issue date and the first Distribution Date on a Regular
Security is shorter than the interval between subsequent Distribution Dates, the
interest attributable to the additional days will be included in the stated
redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Security will
be considered to be zero if such original issue discount is less than 0.25% of
the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted average maturity of the Regular Security 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 Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security. The
Conference Committee Report to the 1986 Act provides that the schedule of such
distributions should be determined in accordance with the assumed rate of
prepayment of the Mortgage Loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Securities. The
Prepayment Assumption with respect to a Series of Regular Securities will be set
forth in the applicable Prospectus Supplement. Holders generally must report de
minimis original issue discount pro rata as principal payments are received, and
such income will be capital gain if the Regular Security is held as a capital
asset. Under the OID Regulations, however, Regular Securityholders may elect to
accrue all de minimis original issue discount as well as market discount and
market premium, under the constant yield method. See "Election to Treat All
Interest Under the Constant Yield Method."
A Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions", as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for each
day on which it holds the Regular Security, including the date of purchase but
excluding the date of disposition. The Trustee will treat the monthly period
ending on the day before each Distribution Date as the accrual period. With
respect to each Regular Security, a calculation will be made of the original
issue discount that accrues during each successive full accrual period (or
shorter period from the date of original issue) that ends on the day before the
related Distribution Date on the Regular Security. The Conference Committee
Report to the 1986 Act states that the rate of accrual of original issue
discount is intended to be based on the Prepayment Assumption. The original
issue discount accruing in a full accrual period would be the excess, if any, of
(i) the sum of (a) the present value of all of the remaining distributions to be
made on the Regular Security as of the end of that accrual period, and (b) the
distributions made on the Regular Security during the accrual period that are
included in the Regular Security's stated redemption price at maturity, over
(ii) the adjusted issue price of the Regular Security at the beginning of the
accrual period. The present value of the remaining distributions referred to in
the preceding sentence is calculated based on (i) the yield to maturity of the
Regular Security at the issue date, (ii) events (including actual prepayments)
that have occurred prior to the end of the accrual period, and (iii) the
Prepayment Assumption. For these purposes, the adjusted issue price of a Regular
Security at the beginning of any accrual period equals the issue price of the
Regular Security, increased by the aggregate amount of original issue discount
with respect to the Regular Security that accrued in all prior accrual periods
and reduced by the amount of distributions included in the Regular Security's
stated redemption price at maturity that were made on the Regular Security in
such prior periods. The original issue discount accruing during any accrual
period (as determined in this paragraph) will then be divided by the number of
days in the period to determine the daily portion of original issue discount for
each day in the period. With respect to an initial accrual period shorter than a
full accrual period, the daily portions of original issue discount must be
determined according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the Mortgage Loans that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. As increase in
prepayments on the Mortgage Loans with respect to a Series of Regular Securities
can result in both a change in the priority of principal payments with respect
to certain Classes of Regular Securities and either an increase or decrease in
the daily portions of original issue discount with respect to such Regular
Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the Trustee
will determine the yield to maturity of such Security based upon the anticipated
payment characteristics of the Class as a whole under the Prepayment Assumption.
In general, the original issue discount accruing on each Non-Pro Rata Security
in a full accrual period would be its allocable share of the original issue
discount with respect to the entire Class, as determined in accordance with the
preceding paragraph. However, in the case of a distribution in retirement of the
entire unpaid principal balance of any Non-Pro Rata Security (or portion of such
unpaid principal balance), (a) the remaining unaccrued original issue discount
allocable to such Security (or to such portion) will accrue at the time of such
distribution, and (b) the accrual of original issue discount allocable to each
remaining Security of such Class (or the received) will be adjusted by reducing
the present value of the remaining payments on such Class and the adjusted issue
price of such Class to the extent attributable to the portion of the unpaid
principal balance thereof that was distributed. The Depositor believes that the
foregoing treatment is consistent with the "pro rata prepayment" rules of the
OID Regulations, but with the rate of accrual of original issue discount
determined based on the Prepayment Assumption for the Class as a whole.
Investors are advised to consult their tax advisors as to this treatment.
Acquisition Premium
A purchaser of a Regular Security at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Security reduced pro rata by a fraction, the numerator
of which is the excess of its purchase price over such adjusted issue price and
the denominator of which is the excess of the remaining stated redemption price
at maturity over the adjusted issue price. Alternatively, such a subsequent
purchaser may elect to treat all such acquisition premium under the constant
yield method, as described below under the heading "Election to Treat All
Interest Under the Constant Yield Method."
Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate. Under
the OID Regulations, interest is treated as payable at a variable rate if,
generally, (i) the issue price does not exceed the original principal balance by
more than a specified amount and (ii) the interest compounds or is payable at
least annually at current values of (a) one or more "qualified floating rates",
(b) a single fixed rate and one or more qualified floating rates, (c) a single
"objective rate", or (d) a single fixed rate and a single objective rate that is
a "qualified inverse floating rate." A floating rate is a qualified floating
rate if variations can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds, where such rate is subject to a
fixed multiple that is greater that 0.65 but not more than 1.35. Such rate may
also be increased or decreased by a fixed spread or subject to a fixed cap or
floor, or a cap or floor that is not reasonably expected as of the issue date to
affect the yield of the instrument significantly. An objective rate is any rate
(other than a qualified floating rate) that is determined using a single fixed
formula and that is based on objective financial or economic information,
provided that such information is not (i) within the control of the issuer or a
related party or (ii) unique to the circumstances of the issuer or a related
party. A qualified inverse floating rate is a rate equal to a fixed rate minus a
qualified floating rate that inversely reflects contemporaneous variations in
the cost of newly borrowed funds; an inverse floating rate that is not a
qualified inverse floating rate may nevertheless be an objective rate. A Class
of Regular Securities may be issued under this Prospectus that does not have a
variable rate under the foregoing rules, for example, a Class that bears
different rates at different times during the period it is outstanding such that
it is considered significantly "front-loaded" or "back-loaded" within the
meaning of the OID Regulations. It is possible that such a Class may be
considered to bear "contingent interest" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to Regular Securities. However, if
final regulations dealing with contingent interest with respect to Regular
Securities apply the same principles as the OID Regulations, such regulations
may lead to different timing of income inclusion that would be the case under
the OID Regulations. Furthermore, application of such principles could lead to
the characterization of gain on the sale of contingent interest Regular
Securities as ordinary income. Investors should consult their tax advisors
regarding the appropriate treatment of any Regular Security that does not pay
interest at a fixed rate or variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Security (i) bearing a rate that
qualifies as a variable rate under the OID Regulations that is tied to current
values of a variable rate (or the highest, lowest or average of two or more
variable rates, including a rate based on the average cost of funds of one or
more financial institutions), or a positive or negative multiple of such a rate
(plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such a
rate that is subject to one or more caps or floors, or (ii) bearing one or more
such variable rates for one or more periods, or one or more fixed rates for one
or more periods, and a different variable rate or fixed rate for other periods,
qualifies as a regular interest in a REMIC. Accordingly, unless otherwise
indicated in the applicable Prospectus Supplement, it is anticipated that the
Trustee will treat Regular Securities that qualify as regular interests under
this rule in the same manner as obligations bearing a variable rate for original
issue discount reporting purposes.
The amount of original issue discount with respect to a Regular Security
bearing a variable rate of interest will accrue in the manner described above
under "Original Issue Discount", with the yield to maturity and future payments
on such Regular Security generally to be determined by assuming that interest
will be payable for the life of the Regular Security based on the initial rate
(or, if different, the value of the applicable variable rate as of the pricing
date) for the relevant Class. Unless required otherwise by applicable final
regulations, it is anticipated that the Trustee will treat such variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium Class, which will be treated as non-qualified
stated interest includible in the stated redemption price at maturity. Ordinary
income reportable for any period will be adjusted based on subsequent changes in
the applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, it is anticipated that the Trustee will treat
Regular Securities bearing an interest rate that is a weighted average of the
net interest rates on Mortgage Loans as having qualified stated interest, except
to the extent that initial "teaser" rates cause sufficiently "back-loaded"
interest to create more than de minimis original issue discount. The yield on
such Regular Securities for purposes of accruing original issue discount will be
a hypothetical fixed rate based on the fixed rates, in the case of fixed rate
Mortgage Loans, and initial "teaser rates" followed by fully indexed rates, in
the case of adjustable rate Mortgage Loans. In the case of adjustable rate
Mortgage Loans, the applicable index used to compute interest on the Mortgage
Loans in effect on the pricing date (or possibly the issue date) will be deemed
to be in effect beginning with the period in which the first weighted average
adjustment date occurring after the issue date occurs. Adjustments will be made
in each accrual period either increasing or decreasing the amount of ordinary
income reportable to reflect the actual Pass-Through Rate on the Regular
Securities.
Market Discount
A purchaser of a Regular Security also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these sections and the
principles applied by the OID Regulations in the context of original issue
discount, "market discount" is the amount by which the purchaser's original
basis in the Regular Security (i) is exceeded by the then-current principal
amount of the Regular Security, or (ii) in the case of a Regular Security having
original issue discount, is exceeded by the adjusted issue price of such Regular
Security at the time of purchase. Such purchaser generally will be required to
recognize ordinary income to the extent of accrued market discount on such
Regular Security as distributions includible in the stated redemption price at
maturity thereof are received, in an amount not exceeding any such distribution.
Such market discount would accrue in a manner to be provided in Treasury
regulations and should take into account the Prepayment Assumption. The
Conference Committee Report to the 1986 Act provides that until such regulations
are issued, such market discount would accrue either (i) on the basis of a
constant interest rate, or (ii) in the ratio of stated interest allocable to the
relevant period to the sum of the interest for such period plus the remaining
interest as of the end of such period, or in the case of a Regular Security
issued with original issue discount, in the ratio of original issue discount
accrued for the relevant period to the sum of the original issue discount
accrued for such period plus the remaining original issue as of the end of such
period. Such purchaser also generally will be required to treat a portion of any
gain on a sale or exchange of the Regular Security as ordinary income to the
extent of the market discount accrued to the date of disposition under one of
the foregoing methods, less any accrued market discount previously reported as
ordinary income as partial distributions in reduction of the stated redemption
price at maturity were received. Such purchaser will be required to defer
deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Security over the interest
distributable thereon. The deferred portion of such interest expense in any
taxable year generally will not exceed the accrued market discount on the
Regular Security for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Security is disposed of. As
an alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Securityholder may elect to include market discount in income
currently as it accrues on all market discount instruments acquired by such
Regular Securityholder in that taxable year or thereafter, in which case the
interest deferral rule will not apply. See "Election to Treat All Interest Under
the Constant Yield Method" below regarding an alternative manner in which such
election may be deemed to be made.
By analogy to the OID Regulations, market discount with respect to a
Regular Security will be considered to be zero if such market discount is less
than 0.25% of the remaining stated redemption price at maturity of such Regular
Security multiplied by the weighted average maturity of the Regular Security
(determined as described above in the third paragraph under "Original Issue
Discount") remaining after the date of purchase. It appears that de minimis
market discount would be reported in a manner similar to de minimis original
issue discount. See "Original Issue Discount" above. Treasury regulations
implementing the market discount rules have not yet been issued, and therefore
investors should consult their own tax advisors regarding the application of
these rules. Investors should also consult Revenue Procedure 92-67 concerning
the elections to include market discount in income currently and to accrue
market discount on the basis of the constant yield method.
Premium
A Regular Security purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds such Regular Security as a "capital
asset" within the meaning of Code Section 1221, the Regular Securityholder may
elect under Code Section 171 to amortize such premium under the constant yield
method. Such election will apply to all debt obligations acquired by the Regular
Securityholder at a premium held in that taxable year or thereafter, unless
revoked with the permission of the Internal Revenue Service. Final Treasury
regulations with respect to amortization of bond premium do not by their terms
apply to obligations, such as the Regular Securities, which are prepayable as
described in Code Section 1272(a)(6). However, the Conference Committee Report
to the 1986 Act indicates a Congressional intent that the same rules that apply
to the accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations such
as the Regular Securities, although it is unclear whether the alternatives to
the constant interest method described above under "Market Discount" are
available. Amortizable bond premium will be treated as an offset to interest
income on a Regular Security, rather than as a separate deductible item. See
"Election to Treat All Interest Under the Constant Yield Method" below regarding
an alternative manner in which the Code Section 171 election may be deemed to be
made.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to treat
all interest that accrues on the instrument using the constant yield method,
with none of the interest being treated as qualified stated interest. For
purposes of applying the constant yield method to a debt instrument subject to
such an election, (i) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make such an election on an instrument by instrument basis or for
a class or group of debt instruments. However, if the holder makes such an
election with respect to a debt instrument with amortizable bond premium or with
market discount, the holder is deemed to have made elections to amortize bond
premium or to report market discount income currently as it accrues under the
constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the Internal Revenue Service. Investors should consult their own tax
advisors regarding the advisability of making such an election.
Treatment of Losses
Regular Securityholders will be required to report income with respect to
Regular Securities on the accrual method of accounting, without giving effect to
delays or reductions in distributions attributable to defaults or delinquencies
on the Mortgage Loans, except to the extent it can be established that such
losses are uncollectible. Accordingly, the holder of a Regular Security,
particularly a Subordinate Security, may have income, or may incur a diminution
in cash flow as a result of a default or delinquency, but may not be able to
take a deduction (subject to the discussion below) for the corresponding loss
until a subsequent taxable year. In this regard, investors are cautioned that
while they may generally cease to accrue interest income if it reasonably
appears that the interest will be uncollectible, the Internal Revenue Service
may take the position that original issue discount must continue to be accrued
in spite of its uncollectibility until the debt instrument is disposed of in a
taxable transaction or becomes worthless in accordance with the rules of Code
Section 166. To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that Regular Securityholders that are corporations or
that otherwise hold the Regular Securities in connection with a trade or
business should in general be allowed to deduct as an ordinary loss such loss
with respect to principal sustained during the taxable year on account of any
such Regular Securities becoming wholly or partially worthless, and that, in
general, Regular Securityholders that are not corporations and do not hold the
Regular Securities in connection with a trade or business should be allowed to
deduct as a short-term capital loss any loss sustained during the taxable year
on account of a portion of any such Regular Securities becoming wholly
worthless. Although the matter is not free from doubt, such non-corporate
Regular Securityholders should be allowed a bad debt deduction at such time as
the principal balance of such Regular Securities is reduced to reflect losses
resulting from any liquidated Mortgage Loans. The Internal Revenue Service,
however, could take the position that non-corporate holders will be allowed a
bad debt deduction to reflect such losses only after all the Mortgage Loans
remaining in the Trust Estate have been liquidated or the applicable Class of
Regular Securities has been otherwise retired. The Internal Revenue Service
could also assert that losses on the Regular Securities are deductible based on
some other method that may defer such deductions for all holders, such as
reducing future cashflow for purposes of computing original issue discount. This
may have the effect of creating "negative" original issue discount which would
be deductible only against future positive original issue discount or otherwise
upon termination of the Class. Regular Securityholders are urged to consult
their own tax advisors regarding the appropriate timing, amount and character of
any loss sustained with respect to such Regular Securities. While losses
attributable to interest previously reported as income should be deductible as
ordinary losses by both corporate and non-corporate holders, the Internal
Revenue Service may take the position that losses attributable to accrued
original issue discount may only be deducted as capital losses in the case of
non-corporate holders who do not hold the Regular Securities in connection with
a trade or business. 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
Regular Securities.
Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular Security.
The adjusted basis of a Regular Security generally will equal the cost of the
Regular Security to the seller, increased by any original issue discount or
market discount previously included in the seller's gross income with respect to
the Regular Security and reduced by amounts included in the stated redemption
price at maturity of the Regular Security that were previously received by the
seller, by any amortized premium and by any recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the applicable
holding period (described below). Such gain will be treated as ordinary income
(i) if a Regular Security is held as part of a "conversion transaction" as
defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the Regular Securityholder's net investment in the conversion
transaction at 120% of the appropriate applicable Federal rate under Code
Section 1274(d) in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any prior
disposition of property that was held as part of such transaction, (ii) in the
case of a non-corporate taxpayer, to the extent such taxpayer has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates, or (iii) to the extent that such
gain does not exceed the excess, if any, of (a) the amount that would have been
includible in the gross income of the holder if its yield on such Regular
Security were 110% of the applicable Federal rate as of the date of purchase,
over (b) the amount of income actually includible in the gross income of such
holder with respect to such Regular Security. In addition, gain or loss
recognized from the sale of a Regular Security by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code Section
582(c). Capital gains of non-corporate taxpayers generally are subject to a
lower maximum tax rate (20%) than ordinary income of such taxpayers (39.6%) for
capital assets held for more than one year. The maximum tax rate for
corporations is the same with respect to both ordinary income and capital gains.
Taxation of Owners of Residual Securities
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Securities ("Residual Holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarter ratably to each day in such quarter
and by allocating such daily portion among the Residual Holders in proportion to
their respective holdings of Residual Securities in the REMIC Pool on such day.
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 Pool'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 from amortization of issue premium, if any, on
the Regular Securities, plus income on reinvestment of cash flows and reserve
assets, plus any cancellation of indebtedness income upon allocation of realized
losses to the Regular Securities. The REMIC Pool's deductions include interest
and original issue discount expense on the Regular Securities, servicing fees on
the Mortgage Loans, other administrative expenses of the REMIC Pool and realized
losses on the Mortgage Loans. The requirement that Residual Holders report their
pro rata share of taxable income or net loss of the REMIC Pool will continue
until there are no Securities of any class of the related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium with respect to the Mortgage Loans, on the one hand, and
the timing of deductions for interest (including original issue discount) or
income from amortization of issue premium on the Regular Securities, on the
other hand. In the event that an interest in the Mortgage Loans is acquired by
the REMIC Pool at a discount, and one or more of such Mortgage Loans is prepaid,
the prepayment may be used in whole or in part to make distributions in
reduction of principal on the Regular Securities, and (ii) the discount on the
Mortgage Loans which is includible in income may exceed the deduction allowed
upon such distributions on those Regular Securities on account of any unaccrued
original issue discount relating to those Regular Securities. When there is more
than one Class of Regular Securities that distribute principal sequentially,
this mismatching of income and deductions is particularly likely to occur in the
early years following issuance of the Regular Securities when distributions in
reduction of principal are being made in respect of earlier Classes of Regular
Securities to the extent that such Classes are not issued with substantial
discount or are issued at a premium. If taxable income attributable to such a
mismatching is realized, in general, losses would be allowed in later years as
distributions on the later maturing Classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later years as a
result of the fact that interest expense deductions, expressed as a percentage
of the outstanding principal amount of such a Series of Regular Securities, may
increase over time as distributions in reduction of principal are made on the
lower yielding Classes of Regular Securities, whereas, to the extent the REMIC
Pool consists of fixed rate Mortgage Loans, interest income with respect to any
given Mortgage Loan will remain constant over time as a percentage of the
outstanding principal amount of that loan. Consequently, Residual Holders must
have sufficient other sources of cash to pay any federal, state, or local income
taxes due as a result of such mismatching or unrelated deductions against which
to offset such income, subject to the discussion of "excess inclusions" below
under "--Limitations on Offset or Exemption of REMIC Income." The timing of such
mismatching of income and deductions described in this paragraph, if present
with respect to a Series of Securities, may have a significant adverse effect
upon a Residual Holder's after-tax rate of return. In addition, a Residual
Holder's taxable income during certain periods may exceed the income reflected
by such Residual Holders for such periods in accordance with generally accepted
accounting principles. Investors should consult their own accountants concerning
the accounting treatment of their investment in Residual Securities.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Holder is limited to the adjusted basis of the Residual Security
as of the close of the quarter (or time of disposition of the Residual Security
if earlier), determined without taking into account the net loss for the
quarter. The initial adjusted basis of a purchaser of a Residual Security is the
amount paid for such Residual Security. Such adjusted basis will be increased by
the amount of taxable income of the REMIC Pool reportable by the Residual Holder
and will be decreased (but not below zero), first, by a cash distribution from
the REMIC Pool and, second, by the amount of loss of the REMIC Pool reportable
by the Residual Holder. Any loss that is disallowed on account of this
limitation may be carried over indefinitely with respect to the Residual Holder
as to whom such loss was disallowed and may be used by such Residual Holder only
to offset and income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of
its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, the taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Such recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Securities over their life.
However, in view of the possible acceleration of the income of Residual Holders
described above under "Taxation of REMIC Income", the period of time over which
such issue price is effectively amortized may be longer than the economic life
of the Residual Securities.
A Residual Security may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash flows.
The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the Internal Revenue Service may provide future guidance on the
proper tax treatment of payments made by a transferor of such a residual
interest to induce the transferee to acquire the interest, and Residual Holders
should consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Security is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations currently in effect do not so provide. See "--Treatment of Certain
Items of REMIC Income and Expense--Market Discount" below regarding the basis of
Mortgage Loans to the REMIC Pool and "Sale or Exchange of a Residual Security"
below regarding possible treatment of a loss upon termination of the REMIC Pool
as a capital loss.
Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the Trustee will compute REMIC income and
expense in accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. The Depositor makes no representation as to the
specific method that will be used for reporting income with respect to the
Mortgage Loans and expenses with respect to the Regular Securities, and
different methods could result in different timing or reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's deductions
for original issue discount and income from amortization of issue premium will
be determined in the same manner as original issue discount income on Regular
Securities as described above under "Taxation of Owners of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities",
without regard to the de minimis rule described therein, and "--Premium."
Market Discount. The REMIC Pool will have market discount income in respect
of Mortgage Loans if, in general, the basis of the REMIC Pool in such Mortgage
Loans is exceeded by their unpaid principal balances. The REMIC Pool's basis in
such Mortgage Loans is generally the fair market value of the Mortgage Loans
immediately after the transfer thereof to the REMIC Pool. The REMIC Regulations
provide that such basis is equal in the aggregate to the issue prices of all
regular and residual interests in the REMIC Pool. The accrued portion of such
market discount would be recognized currently as an item of ordinary income in a
manner similar to original issue discount. Market discount income generally
should accrue in the manner described above under "Taxation of Owners of Regular
Securities--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Loans at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the fair
market value of the Mortgage Loans, based on the aggregate of the issue prices
of the regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "Taxation of Owners of Regular Securities--Premium", a person that
holds a Mortgage Loan as a capital asset under Code Section 1221 may elect under
Code Section 171 to amortize premium on Mortgage Loans originated after
September 27, 1985 under the constant yield method. Amortizable bond premium
will be treated as an offset to interest income on the Mortgage Loans, rather
than as a separate deduction item. Because substantially all of the mortgagors
on the Mortgage Loans are expected to be individuals, Code Section 171 will not
be available for premium on Mortgage Loans originated on or prior to September
27, 1985. Premium with respect to such Mortgage Loans may be deductible in
accordance with a reasonable method regularly employed by the holder thereof.
The allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the Internal Revenue Service may argue
that such premium should be allocated in a different manner, such as allocating
such premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in determining
the federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion", is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Security over the daily accruals for such quarterly period of (i) 120% of the
long-term applicable Federal rate that would have applied to the Residual
Security (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (ii) the adjusted issue price of such Residual Security
at the beginning of such quarterly period. For this purpose, the adjusted issue
price of a Residual Security at the beginning of a quarter is the issue price of
the Residual Security, plus the amount of such daily accruals of REMIC income
described in this paragraph for all prior quarters, decreased by any
distributions made with respect to such Residual Security prior to the beginning
of such quarterly period. Accordingly, the portion of the REMIC Pool's taxable
income that will be treated as excess inclusions will be a larger portion of
such income as the adjusted issue price of the Residual Securities diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including net
operating loss carryforwards, on such Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of such
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax with respect to certain persons who are
not U.S. Persons (as defined below under "Tax-Related Restrictions on Transfer
of Residual Securities--Foreign Investors"), and the portion thereof
attributable to excess inclusions is not eligible for any reduction in the rate
of withholding tax (by treaty or otherwise). See "Taxation of Certain Foreign
Investors--Residual Securities" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Security, a portion
(allocated under Treasury regulations yet to be issued) of dividends paid by the
real estate investment trust or regulated investment company could not be offset
by net operating losses of its shareholders, would constitute unrelated business
taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to certain persons who are not U.S. Persons. The SBJPA
of 1996 has eliminated the special rule permitting Section 593 institutions
("thrift institutions") to use net operating losses and other allowable
deductions to offset their excess inclusion income from Residual Securities that
have "significant value" within the meaning of the REMIC Regulations, effective
for taxable years beginning after December 31, 1995, except with respect to
Residual Securities continuously held by a thrift institution since November 1,
1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual Holder
is determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a Residual Holder's
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deduction must be computed without regard to any excess
inclusions. These rules are effective for taxable years beginning after December
31, 1986, unless a Residual Holder elects to have such rules apply only to
taxable years beginning after August 20, 1996.
Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The REMIC Regulations
provide that the anticipated excess inclusions are based on actual prepayment
experience to the date of the transfer and projected payments based on the
Prepayment Assumption. The present value rate equals the applicable Federal rate
under Code Section 1274(d) as of the date of the transfer for a term ending with
the last calendar quarter in which excess inclusions are expected to accrue.
Such rate is applied to the anticipated excess inclusions from the end of the
remaining calendar quarters in which they arise to the date of the transfer.
Such a tax generally would be imposed on the transferor of the Residual
Security, except that where such transfer is through an agent (including a
broker, nominee, or other middleman) for a Disqualified Organization, the tax
would instead be imposed on such agent. However, a transferor of a Residual
Security would in no event be liable for such tax with respect to a transfer if
the transferee furnished to the transferor an affidavit stating that the
transferee is not a Disqualified Organization and, as of the time of the
transfer, the transferor does not have actual knowledge that such affidavit is
false. The tax also may be waived by the Internal Revenue Service if the
Disqualified Organization promptly disposes of the Residual Security and the
transferor pays income tax at the highest corporate rate on the excess inclusion
for the period the Residual Security is actually held by the Disqualified
Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on such entity equal to the product of (i) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that it is not
a Disqualified Organization or stating such holder's taxpayer identification
number and, during the period such person is the record holder of the Residual
Security, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Security, all interests in the electing
large partnership are treated as held by Disqualified Organizations for purposes
of the tax imposed upon a Pass-Through Entity by Section 860E(c) of the Code. An
exception to this tax, otherwise available to a Pass-Through Entity that is
furnished certain affidavits by record holders of interests in the entity and
that does not know such affidavits are false, is not available to an electing
large partnership.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service or persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 531) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations, 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, and (iii) an "electing large partnership" means any
partnership having more than 100 members during the preceding tax year (other
than certain service partnerships and commodity pools), which elects to apply
certain simplified reporting provisions under the Code.
The Pooling and Servicing Agreement with respect to a Series will provide
that no legal or beneficial interest in a Residual Security may be transferred
or registered unless (i) the proposed transferee furnished to the transferor and
the Trustee an affidavit providing its taxpayer identification number and
stating that such transferee is the beneficial owner of the Residual Security
and is not a Disqualified Organization and is not purchasing such Residual
Security on behalf of a Disqualified Organization (i.e., as a broker, nominee or
middleman thereof) and (ii) the transferor provides a statement in writing to
the Trustee that it has no actual knowledge that such affidavit is false.
Moreover, the Pooling and Servicing Agreement will provide that any attempted or
purported transfer in violation of these transfer restrictions will be null and
void and will vest no rights in any purported transferee. Each Residual Security
with respect to a Series will bear a legend referring to such restrictions on
transfer, and each Residual Holder will be deemed to have agreed, as a condition
of ownership thereof, to any amendments to the related Pooling and Servicing
Agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Seller or the
Trustee may charge a fee for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person as defined below under "Foreign Investors") is
disregarded to all federal income tax purposes if a significant purpose of the
transferor is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest 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 on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "Disqualified Organizations." The REMIC Regulations explain
that 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 safe harbor is provided if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of the non-economic residual
interest, the transferee may incur liabilities in excess of any cash flows
generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The Pooling
and Servicing Agreement with respect to each Series of Certificates will require
the transferee of a Residual Security to certify to the matters in the preceding
sentence as part of the affidavit described above under the heading
"Disqualified Organizations."
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, (i) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (ii) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and prior to the end of the next
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to the Certificates of a Series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership (except as provided in Treasury regulations that may be issued) or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, an estate that is subject to U.S. federal
income tax regardless of the source of its income, or, generally, a trust if a
court within the United States is able to exercise primary supervision over the
administration of such trust, and one or more U.S. Persons have the authority to
control all substantial decisions of such trust (or, to the extent provided in
applicable Treasury regulations, certain trusts in existence on August 20, 1996
which are eligible to elect to be treated as U.S. Persons).
Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder will
recognize gain or loss equal to the excess, if any, of the amount realized over
the adjusted basis (as described above under "Taxation of Owners of Residual
Securities--Basis and Losses") of such Residual Holder in such Residual Security
at the time of the sale or exchange. In addition to reporting the taxable income
of the REMIC Pool, a Residual Holder will have taxable income to the extent that
any cash distribution to it from the REMIC Pool exceeds such adjusted basis on
that Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Holder's Residual Security, in which case, if the
Residual Holder has an adjusted basis in its Residual Security remaining when
its interest in the REMIC Pool terminates, and if it holds such Residual
Security as a capital asset under Code Section 1221, then it will recognize a
capital loss at that time in the amount of such remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (i) if a Residual Security is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the Residual Holder's net investment in the conversion transaction at
120% of the appropriate applicable Federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was held
as a part of such transaction or (ii) in the case of a non-corporate taxpayer,
to the extent such taxpayer has made an election under Code Section 163(d)(4) to
have net capital gains taxed as investment income at ordinary income rates. In
addition, gain or loss recognized from the sale of a Residual Security by
certain banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Securities where the seller
of the Residual Security, during the period beginning six months before the sale
or disposition of the Residual Security and ending six months after such sale or
disposition, acquires (or enters into any other transaction that results in the
application of Code Section 1091) any residual interest in any REMIC or any
interest in a "taxable mortgage pool" (such as a non-REMIC owner trust) that is
economically comparable to a Residual Security.
Mark to Market Regulations
On December 24, 1996, the Internal Revenue Service issued final regulations
(the "Mark to Market Regulations") under Code Section 475 relating to the
requirement that a securities dealer mark to market securities held for sale to
customers. This mark to market requirement applies to all securities of a
dealer, except to the extent that the dealer has specifically identified a
security as held for investment. The Mark to Market Regulations provide that,
for purposes of this mark to market requirement, a Residual Security is not
treated as a security and thus may not be marked to market. The Mark to Market
Regulations apply to all Residual Securities acquired on or after January 4,
1995.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include (i) the disposition of a qualified mortgages other than for (a)
substitution within two years of the Startup Day for a defective (including a
defaulted) obligation (or repurchase in lieu of substitution of a defective
(including a defaulted) obligation at any time) or for any qualified mortgage
within three months of the Startup Day, (b) foreclosure, default, or imminent
default of a qualified mortgage, (c) bankruptcy or insolvency of the REMIC Pool,
or (d) a qualified (complete) liquidation, (ii) the receipt of income from
assets that are not the type of mortgages or investments that the REMIC Pool is
permitted to hold, (iii) the receipt of compensation for services, or (iv) the
receipt of gain from disposition of cash flow investments other than pursuant to
a qualified liquidation. Notwithstanding (i) and (iv), it is not a prohibited
transaction to sell REMIC Pool property to prevent a default on Regular
Securities as a result of a default on qualified mortgages or to facilitate a
clean-up call (generally, an optional termination to save administrative costs
when no more than a small percentage of the Securities is outstanding). The
REMIC Regulations indicate that the modification of a Mortgage Loan generally
will not be treated as a disposition if it is occasioned by a default or
reasonably foreseeable default, an assumption of the Mortgage Loan, the waiver
of a due-on-sale or due-on-encumbrance clause, or the conversion of an interest
rate by a mortgagor pursuant to the terms of a convertible adjustable rate
Mortgage Loan.
Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during the
three months following the Startup Day, (ii) made to a qualified reserve fund by
a Residual Holder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call, and (v) as otherwise permitted in
Treasury regulations yet to be issued. It is not anticipated that there will be
any contributions to the REMIC Pool after the Startup Day.
Net Income from Foreclosure Property
The REMIC Pool will be subject of 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. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" until the close of the third calendar year following the
year of acquisition, with a possible extension. Net income from foreclosure
property generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
It is not anticipated that the REMIC Pool will have any taxable net income from
foreclosure property.
Liquidation of the REMIC Pool
If a REMIC Pool 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 Pool'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 Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of Regular Securities
and Residual Holders (within the 90-day period).
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Holder for an entire
taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The Master Servicer will be obligated to act as "tax
matters person", as defined in applicable Treasury regulations, with respect to
the REMIC Pool, as agent of the Residual Holder holding the largest percentage
interest in the Residual Securities. If the Code or applicable Treasury
regulations do not permit the Master Servicer to act as tax matters person in
its capacity as agent of such Residual Holder, such Residual Holder or such
other person specified pursuant to Treasury regulations will be required to act
as tax matters person.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $124,500 for 1998 ($62,250 in the case of a
married individual filing a separate return) (as adjusted for inflation for
subsequent years), or (ii) 80% of the amount of itemized deductions otherwise
allowable for such year. In the case of a REMIC Pool, such deductions may
include deductions under Code Section 212 for the Servicing Fee and all
administrative and other expenses relating to the REMIC Pool, or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it holds
in another REMIC. Such investors who hold REMIC Securities either directly or
indirectly through certain pass-through entities may have their pro rata share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Temporary Treasury regulations provide that the additional gross income and
corresponding amount of expenses generally are to be allocated entirely to the
holders of Residual Securities in the case of a REMIC Pool that would not
qualify as a fixed investment trust in the absence of a REMIC election. However,
such additional gross income and limitation on deductions will apply to the
allocable portion of such expenses to holders of Regular Securities, as well as
holders of Residual Securities, where such Regular Securities are issued in a
manner that is similar to pass-through certificates in a fixed investment trust.
Unless indicated otherwise in the applicable Prospectus Supplement, all such
expenses will be allocable to the Residual Securities. In general, such
allocable portion will be determined based on the ratio that a REMIC
Securityholder's income, determined on a daily basis, bears to the income of all
holders of Regular Securities and Residual Securities with respect to a REMIC
Pool. As a result, individuals, estates or trusts holding REMIC Securities
(either directly or indirectly through a grantor trust, partnership, S
corporation, REMIC, or certain other pass-through entities described in the
foregoing temporary Treasury regulations) may have taxable income in excess of
the interest income at the pass-through rate on Regular Securities that are
issued in a single class or otherwise consistently with fixed investment trust
status or in excess of cash distributions for the related period on Residual
Securities.
Taxation of Certain Foreign Investors
Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
non-U.S. Persons (as defined below), will be considered "portfolio interest"
and, therefore, generally will not be subject to 30% United States withholding
tax, provided that such Non-U.S. Person (i) is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (ii) provides the
Trustee, or the person who would otherwise be required to withhold tax from such
distributions under Code Section 1441 or 1442, with an appropriate statement,
signed under penalties of perjury, identifying the beneficial owner and stating,
among other things, that the beneficial owner of the Regular Security is a
Non-U.S. Person. If such statement, or any other required statement, is not
provided, 30% withholding will apply unless reduced or eliminated pursuant to an
applicable tax treaty or unless the interest on the Regular Security is
effectively connected with the conduct of a trade or business within the United
States by such Non-U.S. Person. In the latter case, such Non-U.S. Person will be
subject to United States federal income tax at regular rates. Investors who are
Non-U.S. Persons should consult their own tax advisors regarding the specific
tax consequences to them of owning a Regular Security. The term "Non-U.S.
Person" means any person who is not a U.S. Person.
The IRS recently issued final regulations (the "New Regulations") which
would provide alternative methods of satisfying the beneficial ownership
certification requirement described above. The New Regulations are effective
January 1, 2000, although valid withholding certificates that are held on
December 31, 1999, remain valid until the earlier of December 31, 2000 or the
due date of expiration of the certificate under the rules as currently in
effect. The New Regulations would require, in the case of Regular Securities
held by a foreign partnership, that (x) the certification described above be
provided by the partners rather than by the foreign partnership and (y) the
partnership provide certain information, including a United States taxpayer
identification number. A look-through rule would apply in the case of tiered
partnerships. Non-U.S. Persons should consult their own tax advisors concerning
the application of the certification requirements in the New Regulations.
Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest", subject to the conditions
described in "Regular Securities" above, but only to the extent that (i) the
Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Estate or
segregated pool of assets therein (as to which a separate REMIC election will be
made), to which the Residual Security relates, consists of obligations issued in
"registered form" within the meaning of Code Section 163(f)(1). Generally,
Mortgage Loans will not be, but regular interests in another REMIC Pool will be,
considered obligations issued in registered form. Furthermore, Residual Holders
will not be entitled to any exemption from the 30% withholding tax (or lower
treaty rate) to the extent of that portion of REMIC taxable income that
constitutes an "excess inclusion." See "Taxation of Owners of Residual
Securities--Limitations on Offset or Exemption of REMIC Income." If the amounts
paid to Residual Holders who are Non-U.S. Persons are effectively connected with
the conduct of a trade or business within the United States by such Non-U.S.
Persons, 30% (or lower treaty rate) withholding will not apply. Instead, the
amounts paid to such Non-U.S. Persons will be subject to United States federal
income tax at regular rates. If 30% (or lower treaty rate) withholding is
applicable, such amounts generally will be taken into account for purposes of
withholding only when paid or otherwise distributed (or when the Residual
Security is disposed of) under rules similar to withholding upon disposition of
debt instruments that have original issue discount. See "Tax-Related
Restrictions on Transfer of Residual Securities--Foreign Investors" above
concerning the disregard of certain transfers having "tax avoidance potential."
Investors who are Non-U.S. Persons should consult their own tax advisors
regarding the specific tax consequences to them of owning Residual Securities.
Backup Withholding
Distributions made on the Regular Securities, and proceeds from the sale of
the Regular Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under certain
circumstances, principal distributions) unless the Regular Holder complies with
certain reporting and/or certification procedures, including the provision of
its taxpayer identification number to the Trustee, its agent or the broker who
effected the sale of the Regular Security, or such Holder is otherwise an exempt
recipient under applicable provisions of the Code. Any amounts to be withheld
from distribution on the Regular Securities would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Holder's federal
income tax liability. The New Regulations change certain of the rules relating
to certain presumptions currently available relating to information reporting
and backup withholding. Non-U.S. Persons are urged to contact their own tax
advisors regarding the application to them of backup withholding and information
reporting.
Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to the
Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
Regular Securities or beneficial owners who own Regular Securities through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Securities (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 with respect to a particular Series of Regular
Securities. Holders through nominees must request such information from the
nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence).
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual Holders,
furnished annually, if applicable, to holders of Regular Securities, and filed
annually with the Internal Revenue Service concerning Code Section 67 expenses
(see "Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Securities, and filed annually with the Internal Revenue Service concerning the
percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "Characterization of Investments in REMIC Securities."
Grantor Trust Funds
Classification of Grantor Trust Funds
With respect to each Series of Grantor Trust Securities, Cadwalader,
Wickersham & Taft will deliver its opinion to the effect that, assuming
compliance with all provisions of the related Pooling and Servicing Agreement,
the related Grantor Trust Fund will be classified as a grantor trust under
subpart E, part I of subchapter J of the Code and not as a partnership, an
association taxable as a corporation, or a "taxable mortgage pool" within the
meaning of Code Section 7701(i). Accordingly, each holder of a Grantor Trust
Security generally will be treated as the beneficial owner of an undivided
interest in the Mortgage Loans included in the Grantor Trust Fund.
Standard Securities
General
Where there is no Retained Interest with respect to the Mortgage Loans
underlying the Securities of a Series, and where such Securities are not
designated as "Stripped Securities", the holder of each such Security in such
Series (referred to herein as "Standard Securities") will be treated as the
owner of a pro rata undivided interest in the ordinary income and corpus
portions of the Grantor Trust Fund represented by its Standard Security and will
be considered the beneficial owner of a pro rata undivided interest in each of
the Mortgage Loans, subject to the discussion below under "Recharacterization of
Servicing Fees." Accordingly, the holder of a Standard Security of a particular
Series will be required to report on its federal income tax return its pro rata
share of the entire income from the Mortgage Loans represented by its Standard
Security, including interest at the coupon rate on such Mortgage Loans, original
issue discount (if any), prepayment fees, assumption fees, and late payment
charges received by the Servicer, in accordance with such Securityholder's
method of accounting. A Securityholder generally will be able to deduct its
share of the Servicing Fee and all administrative and other expenses of the
Trust Estate in accordance with its method of accounting, provided that such
amounts are reasonable compensation for services rendered to that Grantor Trust
Fund. However, investors who are individuals, estates or trusts who own
Securities, either directly or indirectly through certain pass-through entities,
will be subject to limitation with respect to certain itemized deductions
described in Code Section 67, including deductions under Code Section 212 for
the Servicing Fee and all such administrative and other expenses of the Grantor
Trust Fund, to the extent that such deductions, in the aggregate, do not exceed
two percent of an investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $124,500 for 1998 ($62,250 in the case of a
married individual filing a separate return) (in each case, as adjusted for
inflation in subsequent years), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. As a result, such investors holding Standard
Securities, directly or indirectly through a pass-through entity, may have
aggregate taxable income in excess of the aggregate amount of cash received on
such Standard Securities with respect to interest at the pass-through rate or as
discount income on such Standard Securities. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Moreover, where there is Retained Interest with respect to the Mortgage Loans
underlying a Series of Securities or where the servicing fees are in excess of
reasonable servicing compensation, the transaction will be subject to the
application of the "stripped bond" and "stripped coupon" rules of the Code, as
described below under "Stripped Securities" and "Recharacterization of Servicing
Fees", respectively.
Tax Status
Cadwalader, Wickersham & Taft has advised the Depositor that:
1. A Standard Security owned by a "domestic building and loan association"
within the meaning of Code Section 7701(a)(19) will be considered to represent
"loans...secured by an interest in real property which is... residential real
property" within the meaning of Code Section 7701(a)(19)(C)(v), provided that
the real property securing the Mortgage Loans represented by that Standard
Security is of the type described in such section of the Code.
2. A Standard Security owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code Section
856(c)(4)(A) to the extent that the assets of the related Grantor Trust Fund
consist of qualified assets, and interest income on such assets will be
considered "interest on obligations secured by mortgages on real property" to
such extent within the meaning of Code Section 856(c)(3)(B).
3. A Standard Security owned by a REMIC will be considered to represent an
"obligation (including any participation or certificate of beneficial ownership
therein) which is principally secured by an interest in real property" within
the meaning of Code Section 860G(a)(3)(A) to the extent that the assets of the
related Grantor Trust Fund consist of "qualified mortgages" within the meaning
of Code Section 860G(a)(3).
4. A Standard Security owned by a "financial asset securitization
investment trust" within the meaning of Code Section 860L(c) will be considered
to represent "permitted assets" within the meaning of Code Section 860L(c) to
the extent that the assets of related Grantor Trust Fund consist of "debt
instruments" or other permitted assets within the meaning of Code Section
860L(c).
An issue arises as to whether Buydown Loans may be characterized in their
entirety under the Code provisions cited in clauses 1 and 2 of the immediately
preceding paragraph or whether the amount qualifying for such treatment must be
reduced by the amount of the Buydown Funds. There is indirect authority
supporting treatment of an investment in a Buydown Loan as entirely secured by
real property if the fair market value of the real property securing the loan
exceeds the principal amount of the loan at the time of issuance or acquisition,
as the case may be. There is no assurance that the treatment described above is
proper. Accordingly, Securityholders are urged to consult their own tax advisors
concerning the effects of such arrangements on the characterization of such
Securityholder's investment for federal income tax purposes.
Premium and Discount
Securityholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon initial
acquisition of Standard Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Standard
Security will be determined generally as described above under "REMICs--Taxation
of Owners of Residual Securities--Premium."
Original Issue Discount. The original issue discount rules of Code Section
1271 through 1275 will be applicable to a Securityholder's interest in those
Mortgage Loans as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount 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 original issue discount could arise by the charging of
points by the originator of the mortgages 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 Loans. See
"Stripped Securities" below regarding original issue discount on Stripped
Securities.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
Unless indicated otherwise in the applicable Prospectus Supplement, no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includible in the income of a holder of an obligation that acquires the
obligation after its initial issuance at a price greater than the sum of the
original issue price and the previously accrued original issue discount, less
prior payments of principal. Accordingly, if such Mortgage Loans acquired by a
Securityholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Loans (i.e., points) will be includible by such holder.
Market Discount. Securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under "REMICs--Taxation of Owners of Regular Securities--Market Discount",
except that the ratable accrual methods described therein will not apply.
Rather, the holder will accrue market discount pro rata over the life of the
Mortgage Loans, unless the constant yield method is elected. Unless indicated
otherwise in the applicable Prospectus Supplement, no prepayment assumption will
be assumed for purposes of such accrual.
Recharacterization of Servicing Fees
If the servicing fees paid to a Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would represent neither income
nor a deduction to Securityholders. In this regard, there are no authoritative
guidelines for federal income tax purposes as to either the maximum amount of
servicing compensation that may be considered reasonable in the context of this
or similar transactions or whether, in the case of Standard Securities, the
reasonableness of servicing compensation should be determined on a weighted
average or loan-by-loan basis. If a loan-by-loan basis is appropriate, the
likelihood that such amount would exceed reasonable servicing compensation as to
some of the Mortgage Loans would be increased. Internal Revenue Service guidance
indicates that a servicing fee in excess of reasonable compensation ("excess
servicing") will cause the Mortgage Loans to be treated under the "stripped
bond" rules. Such guidance provides safe harbors for servicing deemed to be
reasonable and requires taxpayers to demonstrate that the value of servicing
fees in excess of such amounts is not greater than the value of the services
provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
Servicer who receives a servicing fee in excess of such amounts would be viewed
as retaining an ownership interest in a portion of the interest payments on the
Mortgage Loans. Under the rules of Code Section 1286, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from the right to receive some or all of the principal payments on
the obligation would result in treatment of such Mortgage Loans as "stripped
coupons" and "stripped bonds." Subject to the de minimis rule discussed below
under "Stripped Securities", each stripped bond or stripped coupon could be
considered for this purpose as a non-interest bearing obligation issued on the
date of issue of the Standard Securities, and the original issue discount rules
of the Code would apply to the holder thereof. While Securityholders would still
be treated as owners of beneficial interests in a grantor trust for federal
income tax purposes, the corpus of such trust could be viewed as excluding the
portion of the Mortgage Loans the ownership of which is attributed to the
Servicer, or as including such portion as a second class of equitable interest.
Applicable Treasury regulations treat such an arrangement as a fixed investment
trust, since the multiple classes of trust interests should be treated as merely
facilitating direct investments in the trust assets and the existence of
multiple classes of ownership interests is incidental to that purpose. In
general, such a recharacterization should not have any significant effect upon
the timing or amount of income reported by a Securityholder, except that the
income reported by a cash method holder may be slightly accelerated. See
"Stripped Securities" below for a further description of the federal income tax
treatment of stripped bonds and stripped coupons.
Sale or Exchange of Standard Securities
Upon sale or exchange of a Standard Security, a Securityholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its aggregate adjusted basis in the Mortgage Loans and other assets
represented by the Security. In general, the aggregate adjusted basis will equal
the Securityholder's cost for the Standard Security, exclusive of accrued
interest, increased by the amount of any income previously reported with respect
to the Standard Security and decreased by the amount of any losses previously
reported with respect to the Standard Security and the amount of any
distributions (other than accrued interest) received thereon. Except as provided
above with respect to market discount on any Mortgage Loans, and except for
certain financial institutions subject to the provisions of Code Section 582(c),
any such gain or loss generally would be capital gain or loss if the Standard
Security was held as a capital asset. However, gain on the sale of a Standard
Security will be treated as ordinary income (i) if a Standard Security is held
as part of a "conversion transaction" as defined in Code Section 1258(c), up to
the amount of interest that would have accrued on the Securityholder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any prior
disposition of property that was held as part of such transaction or (ii) in the
case of a non-corporate taxpayer, to the extent such taxpayer has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. Capital gains of noncorporate
taxpayers generally are subject to a lower maximum tax rate (20%) than ordinary
income of such taxpayers (39.6%) for capital assets held for more than one year.
The maximum tax rate for corporations is the same with respect to both ordinary
income and capital gains.
Stripped Securities
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership of
the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Securities that are subject to those rules will be referred to as "Stripped
Securities." The Securities will be subject to those rules if (i) the Depositor
or any of its affiliates retains (for its own account or for purposes of
resale), in the form of Retained Interest or otherwise, an ownership interest in
a portion of the payments on the Mortgage Loans, (ii) the Depositor or any of
its affiliates is treated as having an ownership interest in the Mortgage Loans
to the extent it is paid (or retains) servicing compensation in an amount
greater than reasonable consideration for servicing the Mortgage Loans (see
"Standard Securities--Recharacterization of Servicing Fees" above), and (iii) a
Class of Securities are issued in two or more Classes or Subclasses representing
the right to non-pro-rata percentages of the interest and principal payments on
the Mortgage Loans.
In general, a holder of a Stripped Security will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Security's allocable share of the
servicing fees paid to a Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"Standard Securities--Recharacterization of Servicing Fees." Although not free
from doubt, for purposes of reporting to Stripped Securityholders, the servicing
fees will be allocated to the classes of Stripped Securities in proportion to
the distributions to such Classes for the related period or periods. The holder
of a Stripped Security generally will be entitled to a deduction each year in
respect of the servicing fees, as described above under "Standard
Securities--General", subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued on the date that such stripped interest is purchased.
Although the treatment of Stripped Securities for federal income tax purposes is
not clear in certain respects, particularly where such Stripped Securities are
issued with respect to a Mortgage Pool containing variable-rate Mortgage Loans,
the Depositor has been advised by counsel that (i) the Grantor Trust Fund will
be treated as a grantor trust under subpart E, Part I of subchapter J of the
Code and not as an association taxable as a corporation or a "taxable mortgage
pool" within the meaning of Code Section 7701(i), and (ii) each Stripped
Security should be treated as a single installment obligation for purposes of
calculating original issue discount and gain or loss on disposition. This
treatment is based on the interrelationship of Code Section 1286, Code Sections
1272 through 1275, and the OID Regulations. Although it is possible that
computations with respect to Stripped Securities could be made in one of the
ways described below under "Possible Alternative Characterizations", the OID
Regulations state, in general, that two or more debt instruments issued by a
single issuer to a single investor in a single transaction should be treated as
a single debt instrument. Accordingly, for original issue discount purposes, all
payments on any Stripped Securities should be aggregated and treated as though
they were made on a single debt instrument. The Pooling and Servicing Agreement
will require that the Trustee make and report all computations described below
using this aggregate approach, unless substantial legal authority requires
otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped
Security as a single debt instrument issued on the date it is purchased for
purposes of calculating any original issue discount. In addition, under such
regulations, a Stripped Security that represents a right to payments of both
interest and principal may be viewed either as issued with original issue
discount or market discount (as described below), at a de minimis original issue
discount, or, presumably, at a premium. This treatment indicates that the
interest component of such a Stripped Security would be treated as qualified
stated interest under the OID Regulations, assuming it is not an interest-only
or super-premium Stripped Security. Further, these regulations provide that the
purchaser of such a Stripped Security will be required to account for any
discount as market discount rather than original issue discount if either (i)
the initial discount with respect to the Stripped Security was treated as zero
under the de minimis rule, or (ii) no more than 100 basis points in excess of
reasonable servicing is stripped off the related Mortgage Loans. Any such market
discount would be reportable as described above under "REMICs--Taxation of
Owners of Regular Securities--Market Discount", without regard to the de minimis
rule therein, assuming that a prepayment assumption is employed in such
computation.
Status of Stripped Securities
No specific legal authority exists as to whether the character of the
Stripped Securities, for federal income tax purposes, will be the same as that
of the Mortgage Loans. Although the issue is not free from doubt, counsel has
advised the Depositor that Stripped Securities owned by applicable holders
should be considered to represent "real estate assets" within the meaning of
Code Section 856(c)(4)(A), "obligation[s] . ... . principally secured by an
interest in real property" within the meaning of Code Section 860G(a)(3)(A), and
"loans . . . secured by an interest in real property" within the meaning of Code
Section 7701(a)(19)(C)(v), and interest (including original issue discount)
income attributable to Stripped Securities 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 Mortgage
Loans and interest on such Mortgage Loans qualify for such treatment. The
application of such Code provisions to Buydown Loans is uncertain. See "Standard
Securities--Tax Status" above.
Taxation of Stripped Securities
Original Issue Discount. Except as described above under "General", each
Stripped Security will be considered to have been issued at an original issue
discount for federal income tax purposes. Original issue discount with respect
to a Stripped Security must be included in ordinary income as it accrues, in
accordance with a constant yield method that takes into account the compounding
of interest, which may be prior to the receipt of the cash attributable to such
income. Based in part on the issue discount required to be included in the
income of a holder of a Stripped Security (referred to in this discussion as a
"Stripped Securityholder") in any taxable year likely will be computed generally
as described above under "REMICs--Taxation of Owner of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities."
However, with the apparent exception of a Stripped Security qualifying as a
market discount obligation as described above under "--General", the issue price
of a Stripped Security will be the purchase price paid by each holder thereof,
and the stated redemption price at maturity will include the aggregate amount of
the payments to be made on the Stripped Security to such Securityholder,
presumably under the Prepayment Assumption, other than qualified stated
interest.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Securityholder's recognition of original
issue discount will be either accelerated or decelerated and the amount of such
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each Mortgage Loan represented
by such Securityholder's Stripped Security. While the matter is not free from
doubt, the holder of a Stripped Security should be entitled in the year that it
becomes certain (assuming no further prepayments) that the holder will not
recover a portion of its adjusted basis in such Stripped Security to recognize a
loss (which may be a capital loss) equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Securities will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as the
Stripped Securities. However, if final regulations dealing with contingent
interest with respect to the Stripped Securities apply the same principles as
the OID Regulations, such regulations may lead to different timing of income
inclusion that would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on the
sale of contingent interest Stripped Securities as ordinary income. Investors
should consult their tax advisors regarding the appropriate tax treatment of
Stripped Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Securityholder's
adjusted basis in such Stripped Security, as described above under
"REMICs--Taxation of Owners of Regular Securities--Sale or Exchange of Regular
Securities." To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Securities, such subsequent
purchaser will be required for federal income tax purposes to accrue and report
such excess as if it were original issue discount in the manner described above.
It is not clear for this purpose whether the assumed prepayment rate that is to
be used in the case of a Securityholder other than an original Securityholder
should be the Prepayment Assumption or a new rate based on the circumstances at
the date of subsequent purchase.
Purchase of More Than One Class of Stripped Securities. When an investor
purchases more than one Class of Stripped Securities, it is currently unclear
whether for federal income tax purposes such Classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
Possible Alternative Characterization. The characterizations of the
Stripped Securities discussed above are not the only possible interpretations of
the applicable Code provisions. For example, the Securityholder may be treated
as the owner of (i) one installment obligation consisting of such Stripped
Security's pro rata share of the payments attributable to principal on each
Mortgage Loan and a second installment obligation consisting of such Stripped
Security's pro rata share of the payments attributable to interest on each
Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there are
scheduled payments of principal and/or interest on each Mortgage Loan, or (iii)
a separate installment obligation for each Mortgage Loan, representing the
Stripped Security's pro rata share of payments of principal and/or interest to
be made with respect thereto. Alternatively, the holder of one or more Classes
of Stripped Securities may be treated as the owner of a pro rata fractional
undivided interest in each Mortgage Loan to the extent that such Stripped
Security, or Classes of Stripped Securities in the aggregate, represent the same
pro rata portion of principal and interest on each such Mortgage Loan, and a
stripped bond or stripped coupon (as the case may be), treated as an installment
obligation or contingent payment obligation, as to the remainder. Treasury
regulations regarding original issue discount on stripped obligations make the
foregoing interpretations less likely to be applicable. The preamble to such
regulations states that they are premised on the assumption that an aggregation
approach is appropriate for determining whether original issue discount on a
stripped bond or stripped coupon is de minimis, and solicits comments on
appropriate rules for aggregating stripped bonds and stripped coupons under Code
Section 1286.
Because of these possible varying characterizations of Stripped Securities
and the resultant differing treatment of income recognition, Securityholders are
urged to consult their own tax advisors regarding the proper treatment of
Stripped Securities for federal income tax purposes.
Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Securityholder at any time during such year, such
information (prepared on the basis described above) as is necessary to enable
such Securityholder to prepare its federal income tax returns. Such information
will include the amount of original issue discount accrued on Securities held by
persons other than Securityholders exempted from the reporting requirements.
However, the amount required to be reported by the Trustee may not be equal to
the proper amount of original issue discount required to be reported as taxable
income by a Securityholder, other than an original Securityholder that purchased
at the issue price. In particular, in the case of Stripped Securities, unless
provided otherwise in the applicable Prospectus Supplement, such reporting will
be based upon a representative initial offering price of each Class of Stripped
Securities. The Trustee will also file such original issue discount information
with the Internal Revenue Service. If a Securityholder fails to supply an
accurate taxpayer identification number or if the Secretary of the Treasury
determines that a Securityholder has not reported all interest and dividend
income required to be shown on his federal income tax return, 31% backup
withholding may be required in respect of any reportable payments, as described
above under "REMICs--Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Security evidences ownership in Mortgage Loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. persons generally
will be subject to 30% United States withholding tax, or such lower rate as may
be provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the Securityholder on the sale or exchange of such a
Security also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements, described above under
"REMICs--Taxation of Certain Foreign Investors--Regular Securities."
Partnership Trust Funds
Classification of Partnership Trust Funds
With respect to each Series of Partnership Securities or Debt Securities,
Cadwalader, Wickersham & Taft will deliver its opinion that the Trust Fund will
not be a taxable mortgage pool or 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 related Pooling
and Servicing Agreement and related documents will be complied with, and on
counsel's conclusion that the nature of the income of the Trust Fund will exempt
it from the rule that certain publicly traded partnerships are taxable as
corporations.
Characterization of Investments in Partnership Securities and
Debt Securities
For federal income tax purposes, (i) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute "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 (ii) interest on Debt Securities held by a real
estate investment trust will not be treated as "interest on obligations secured
by mortgages on real property or on interests in real property" within the
meaning of Code Section 856(c)(3)(B), and Debt Securities held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code Section 856(c)(4)(A), but Partnership Securities held by a real estate
investment trust will qualify under those sections based on the real estate
investments trust's proportionate interest in the assets of the Partnership
Trust Fund based on capital accounts.
Taxation of Debt Securityholders
Treatment of the Debt Securities as Indebtedness
The Depositor will agree, and the Securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
with respect to each Series of Debt Securities, Cadwalader, Wickersham & Taft
will deliver its opinion that the Debt Securities will be classified as
indebtedness for federal income tax purposes. The discussion below assumes this
characterization of the Debt Securities is correct.
If, contrary to the opinion of counsel, the IRS successfully asserted that
the Debt Securities were not debt for federal income tax purposes, the Debt
Securities might be treated as equity interests in the Partnership Trust, and
the timing and amount of income allocable to holders of such Debt Securities may
be different than as described in the following paragraph.
Debt Securities generally will be subject to the same rules of taxation as
Regular Securities issued by a REMIC, as described above, except that (i) income
reportable on Debt Securities is not required to be reported under the accrual
method unless the holder otherwise uses the accrual method and (ii) the special
rule treating a portion of the gain on sale or exchange of a Regular Security as
ordinary income is inapplicable to Debt Securities. See "REMICs -- Taxation of
Owners of Regular Securities" and "--Sale or Exchange of Regular Securities."
Taxation of Owners of Partnership Securities
Treatment of the Partnership Trust Fund as a Partnership
If so specified in the applicable Prospectus Supplement, the Depositor will
agree, and the Securityholders will agree by their purchase of Securities, to
treat the Partnership Trust Fund (i) 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
Partnership Trust Fund, the partners of the partnership being the
Securityholders (including the Depositor), and the Debt Securities (if any)
being debt of the partnership or (ii) if a single beneficial owner owns all of
the Partnership Securities in a Trust Fund, the Trust Fund will be ignored for
federal income tax purposes and the assets and Debt Securities of the Trust Fund
will be treated as assets and indebtedness of such owner.
A variety of alternative characterizations are possible. For example,
because one or more of the classes of Partnership Securities have certain
features characteristic of debt, the Partnership Securities might be considered
debt of the Depositor or the Partnership Trust Fund. Any such characterization
would not result in materially adverse tax consequences to Securityholders as
compared to the consequences from treatment of the Partnership Securities as
equity in a partnership, described below. The following discussion assumes that
the Partnership Securities represent equity interests in a partnership.
Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to federal
income tax. Rather, each Securityholder will be required to separately take into
account such holder's allocated share of income, gains, losses, deductions and
credits of the Partnership Trust Fund. It is anticipated that the Partnership
Trust Fund's income will consist primarily of interest earned on the Mortgage
Loans (including appropriate adjustments for market discount, original issue
discount and bond premium) as described above under "--Grantor Trust Funds
- --Standard Securities--General", and "--Premium and Discount") and any gain upon
collection or disposition of Mortgage Loans. The Partnership Trust Fund's
deductions will consist primarily of interest accruing with respect to the Debt
Securities, servicing and other fees, and losses or deductions upon collection
or disposition of Debt Securities.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Pooling and Servicing Agreement and related documents). The Pooling and
Servicing Agreement will provide, in general, that the Securityholders will be
allocated taxable income of the Partnership Trust Fund for each Due Period equal
to the sum of (i) the interest that accrues on the Partnership Securities in
accordance with their terms for such Due Period, including interest accruing at
the applicable pass-through rate for such Due Period and interest on amounts
previously due on the Partnership Securities but not yet distributed; (ii) any
Partnership Trust Fund income attributable to discount on the Mortgage Loans
that corresponds to any excess of the principal amount of the Partnership
Securities over their initial issue price; and (iii) any other amounts of income
payable to the Securityholders for such Due Period. Such allocation will be
reduced by any amortization by the Partnership Trust Fund of premium on Mortgage
Loans that corresponds to any excess of the issue price of Partnership
Securities over their principal amount. All remaining taxable income or net loss
of the Partnership Trust Fund will be allocated to the Depositor. Based on the
economic arrangement of the parties, this approach for allocating Partnership
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 Securityholders. Moreover, even under the
foregoing method of allocation, Securityholders 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 Partnership Securities on the accrual basis and Securityholders
may become liable for taxes on Partnership Trust Fund income even if they have
not received cash from the Partnership Trust Fund to pay such taxes.
All of the taxable income allocated to a Securityholder 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.
A share of expenses of the Partnership Trust Fund (including fees of the
Master Servicer but not interest expense) allocable to an individual, estate or
trust Securityholder would be miscellaneous itemized deductions subject to the
limitations described above under "--Grantor Trust Funds--Standard
Securities--General." Accordingly, 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 Partnership Trust Fund.
Discount income or premium amortization with respect to each Mortgage Loan
would be calculated in a manner similar to the description above under
"--Grantor Trust Funds--Standard Securities--General" and "--Premium and
Discount." Notwithstanding such description, it is intended that the Partnership
Trust Fund will make all tax calculations relating to income and allocations to
Securityholders on an aggregate basis with respect to all Mortgage Loans held by
the Partnership Trust Fund rather than on a Mortgage Loan-by-Mortgage Loan
basis. If the IRS were to require that such calculations be made separately for
each Mortgage Loan, the Partnership Trust Fund might be required to incur
additional expense, but it is believed that there would not be a material
adverse effect on Securityholders.
Discount and Premium
Unless indicated otherwise in the applicable Prospectus Supplement, it is
not anticipated that the Mortgage Loans will have been issued with original
issue discount and, therefore, the Partnership Trust Fund should not have
original issue discount income. However, the purchase price paid by the
Partnership Trust Fund for the Mortgage Loans may be greater or less than the
remaining principal balance of the Mortgage Loans at the time of purchase. If
so, the Mortgage Loans will have been acquired at a premium or discount, as the
case may be. See "Grantor Trust Funds--Standard Securities--Premium and
Discount." (As indicated above, the Partnership 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 Partnership Trust Fund acquires the Mortgage Loans at a market
discount or premium, the Partnership 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 Securityholders.
Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be deemed to
terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. Such a termination would cause a deemed contribution of the
assets of a Partnership Trust Fund (the "old partnership") to a new Partnership
Trust Fund (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. The Partnership Trust Fund will not comply with certain technical
requirements that might apply when such a constructive termination occurs. As a
result, the Partnership Trust Fund may be subject to certain tax penalties and
may incur additional expenses if it is required to comply with those
requirements. Furthermore, the Partnership Trust Fund might not be able to
comply due to lack of data.
Disposition of Securities
Generally, capital gain or loss will be recognized on a sale of Partnership
Securities in an amount equal to the difference between the amount realized and
the seller's tax basis in the Partnership Securities sold. A Securityholder's
tax basis in a Partnership Security will generally equal the holder's cost
increased by the holder's share of Partnership Trust Fund income (includible in
income) and decreased by any distributions received with respect to such
Partnership Security. In addition, both the tax basis in the Partnership
Securities and the amount realized on a sale of a Partnership Security would
include the holder's share of the Debt Securities and other liabilities of the
Partnership Trust Fund. A holder acquiring Partnership Securities at different
prices may be required to maintain a single aggregate adjusted tax basis in such
Partnership Securities, and, upon sale or other disposition of some of the
Partnership Securities, allocate a portion of such aggregate tax basis to the
Partnership Securities sold (rather than maintaining a separate tax basis in
each Partnership Security for purposes of computing gain or loss on a sale of
that Partnership Security).
Any gain on the sale of a Partnership Security 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 Partnership Trust Fund does not expect
to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a Securityholder is required to recognize an aggregate amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Partnership Securities that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Partnership Securities.
Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will be
apportioned among the Securityholders in proportion to the principal amount of
Partnership Securities owned by them as of the close of the last day of such Due
Period. As a result, a holder purchasing Partnership Securities 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 Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Partnership Trust Fund might be reallocated among the Securityholders.
The Depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
Section 731 Distributions
In the case of any distribution to a Securityholder, no gain will be
recognized to that Securityholder to the extent that the amount of any money
distributed with respect to such Security exceeds the adjusted basis of such
Securityholder's interest in the Security. To the extent that the amount of
money distributed exceeds such Securityholder's adjusted basis, gain will be
currently recognized. In the case of any distribution to a Securityholder, no
loss will be recognized except upon a distribution in liquidation of a
Securityholder's interest. Any gain or loss recognized by a Securityholder will
be capital gain or loss.
Section 754 Election
In the event that a Securityholder sells its Partnership Securities at a
profit (loss), the purchasing Securityholder will have a higher (lower) basis in
the Partnership Securities than the selling Securityholder had. The tax basis of
the Partnership Trust Fund's assets would not be adjusted to reflect that higher
(or lower) basis unless the Partnership 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 Partnership Trust
Fund will not make such election. As a result, Securityholders might be
allocated a greater or lesser amount of Partnership Trust Fund income than would
be appropriate based on their own purchase price for Partnership Securities.
Administrative Matters
The Trustee is required to keep or have kept complete and accurate books of
the Partnership Trust Fund. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund 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 Partnership Trust Fund and will report each Securityholder's
allocable share of items of Partnership Trust Fund income and expense to holders
and the IRS on Schedule K-1. The Trustee will provide the Schedule K-1
information to nominees that fail to provide the Partnership Trust Fund with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Partnership Securities.
Generally, holders must file tax returns that are consistent with the
information return filed by the Partnership 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 Partnership
Securities as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership Securities
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 Partnership Securities
that were held, bought or sold on behalf of such person throughout the year. In
addition, brokers and financial institutions that hold Partnership Securities
through a nominee are required to furnish directly to the Trustee information as
to themselves and their ownership of Partnership Securities. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Partnership Trust Fund. The information
referred to above for any calendar year must be furnished to the Partnership
Trust Fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Partnership Trust Fund with the
information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the Pooling
and Servicing Agreement and, as such, will be responsible for representing the
Securityholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the Securityholders,
and, under certain circumstances, a Securityholder may be precluded from
separately litigating a proposed adjustment to the items of the Partnership
Trust Fund. An adjustment could also result in an audit of a Securityholder's
returns and adjustments of items not related to the income and losses of the
Partnership Trust Fund.
Tax Consequences to Foreign Securityholders
It is not clear whether the Partnership 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. However, for taxable years of a Partnership Trust Fund
commencing on or after January 1, 1998, securityholders who are Non-U.S. Persons
would in any event not be treated as engaged in a trade or business in the
United States if holding such Security (or other investing or trading in stock
or securities for the Holder's own account) is the only activity of the
securityholder within the United States and the securityholder is not a dealer
in securities. Accordingly, such securityholders will not be subject to
withholding tax pursuant to Section 1446 of the Code at a rate of 35% for
Non-U.S. Persons that are taxable as corporations and 39.6% for all other
foreign holders. The Prospectus Supplement for an applicable Series will
describe whether an exception to the 30% United States withholding tax on
interest may apply to securityholders who are Non-U.S. Persons.
Backup Withholding
Distributions made on the Partnership Securities and proceeds from the sale
of the Partnership Securities will be subject to a "backup" withholding tax of
31% if, in general, the Securityholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A SECURITYHOLDER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF REMIC SECURITIES, GRANTOR TRUST SECURITIES, PARTNERSHIP
SECURITIES AND DEBT SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER TAX LAWS.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences", potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Securities offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Securities offered
hereunder.
ERISA CONSIDERATIONS
Title I of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Code impose certain requirements on
retirement plans and on certain other employee benefit plans and arrangements
(including for this purpose individual retirement accounts and annuities and
Keogh plans) which are subject thereto and on bank collective investment funds
and insurance company general and separate accounts in which such plans,
accounts or arrangements are invested (all of which are hereinafter referred to
as "Plans") and on persons who are fiduciaries with respect to such Plans.
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA), are not
subject to the ERISA requirements discussed herein. Accordingly, assets of such
plans may be invested in Securities without regard to the ERISA considerations
described below, subject to the provisions of applicable federal, state and
local law. Any such plan which is qualified and exempt from taxation under
Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
In addition to the imposition of general fiduciary requirements, including
those of investment prudence and diversification and the requirement that a
Plan's investment be made in accordance with the documents governing the Plan,
Section 406(a) of ERISA and Section 4975(c)(1)(A), (B), (C) and (D) of the Code
prohibit a broad range of transactions involving assets of a Plan and persons
("Parties in Interest" within the meaning of Section 3(14) of ERISA and
"Disqualified Persons" within the meaning of Section 4975(e)(2) of the Code,
collectively referred to as "Parties in Interest") who have certain specified
relationships to the Plan. In addition, Section 406(b) of ERISA and Section
4975(c)(1)(E) and (F) of the Code impose certain prohibitions on Parties in
Interest who are fiduciaries with respect to the Plan. Certain Parties in
Interest that participate in a prohibited transaction may be subject to a
penalty imposed under Section 502(i) of ERISA or an excise tax pursuant to
Sections 4975(a) and (b) of the Code, unless a statutory or administrative
exemption is available.
Certain transactions involving a Trust Fund might be deemed to constitute
prohibited transactions under ERISA and Section 4975 of the Code with respect to
a Plan that purchases Securities if the Residential Loans, Agency Securities,
Mortgage Securities and other assets included in such Trust Fund are deemed to
be assets of the Plan. The U.S. Department of Labor (the "DOL") has promulgated
regulations at 29 C.F.R. ss.2510.3-101 (the "DOL Regulations") defining the term
"plan assets" for purposes of applying the general fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of ERISA and the
Code. Under the DOL Regulations, generally, when a Plan acquires an equity
interest in an entity (such as a Trust Fund), the Plan's assets include the
investment in the entity and an undivided interest in each of the underlying
assets of the entity, unless certain exceptions not applicable here apply, or
unless the equity participation in the entity by "Benefit Plan Investors" is not
significant. For this purpose, in general, equity participation is considered
"significant" on any date if 25% or more of the value of any class of equity
interests is held by "Benefit Plan Investors", which include Plans, as well as
any "employee benefit plan" (as defined in Section 3(3) of ERISA) which is not
subject to Title I of ERISA, such as governmental plans (as defined in Section
3(32) of ERISA) and church plans (as defined in Section 3(33) of ERISA) which
have not made an election under Section 410(d) of the Code, and any entity whose
underlying assets include plan assets by reason of a Plan's investment in the
entity. Because of the factual nature of certain of the rules set forth therein,
neither Plans nor persons investing plan assets should acquire or hold
Securities in reliance upon the availability of any exception under the DOL
Regulations.
In addition, the DOL Regulations provide that the term "equity interest"
means any interest in an entity other than an instrument which is treated as
indebtedness under applicable local law and which has no "substantial equity
features." If Notes of a particular Series are deemed to be indebtedness under
applicable local law without any substantial equity features, an investing
Plan's assets would include such Notes, but would not, by reason of such
purchase, include the underlying assets of the related Trust Fund. However,
without regard to whether such Notes are treated as an equity interest for such
purposes, the purchase or holding of Notes by or on behalf of a Plan could be
considered to result in a prohibited transaction if the Issuer, the holder of an
Equity Certificate or any of their respective affiliates is or becomes a Party
in Interest with respect to such Plan, or if the Depositor, the Master Servicer,
the Indenture Trustee or the Owner Trustee has investment authority with respect
to the assets of such Plan.
Any person who has discretionary authority or control respecting the
management or disposition of plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Residential Loans, Agency Securities, Mortgage Securities and other
assets included in a Trust Fund constitute plan assets, then any party
exercising management or discretionary control regarding those assets, such as
the Master Servicer or any Sub-Servicer, may be deemed to be a Plan "fiduciary"
subject to the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and the Code with respect to the investing Plan. In
addition, if the assets included in a Trust Fund constitute plan assets, the
purchase or holding of Securities by a Plan, as well as the operation of the
related Trust Fund, may constitute or involve a prohibited transaction under
ERISA and the Code.
Some of the transactions involving the Securities that might otherwise
constitute prohibited transactions under ERISA or the Code might qualify for
relief from the prohibited transaction rules under certain administrative
exemptions, which may be individual or class exemptions. The DOL issued an
individual exemption, Prohibited Transaction Exemption 90-36 (the "Exemption"),
on June 25, 1990 to PaineWebber Incorporated, 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 Section 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 or asset pools and the purchase, sale and holding of pass-through
certificates, such as a senior class of Certificates, underwritten by an
Underwriter (as hereinafter defined), provided that certain conditions set forth
in the Exemption are satisfied. For purposes of this Section "ERISA
Considerations", the term "Underwriter" shall include (a) PaineWebber
Incorporated, (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
PaineWebber Incorporated and (c) any member of the underwriting syndicate or
selling group of which a person described in (a) or (b) is a manager or
co-manager with respect to a class of Certificates.
The Exemption sets forth six general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of Certificates
by 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
Exemption only applies to Certificates evidencing rights and interests not
subordinated to the rights and interests evidenced by the other Certificates of
the same Series. Third, the Certificates at the time of acquisition by the Plan
must be rated in one of the three highest generic rating categories by Standard
& Poor's Ratings Services, Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co. or Fitch Investors Service, L.P. (collectively, the "Exemption Rating
Agencies"). Fourth, the Trustee cannot be an affiliate of any other member of
the "Restricted Group" which consists of any Underwriter, the Depositor, the
Trustee, the Master Servicer, any Sub-Servicer, the obligor on credit support
and any obligor with respect to Trust Fund Assets constituting more than 5% of
the aggregate unamortized principal balance of the Trust Fund Assets in the
related Trust Fund as of the date of initial issuance of the Certificates.
Fifth, the sum of all payments made to and retained by the Underwriter(s) must
represent not more than reasonable compensation for underwriting the
Certificates; the sum of all payments made to and retained by the Depositor
pursuant to the assignment of the Trust Fund Assets to the related Trust Fund
must represent not more than the fair market value of such obligations; and the
sum of all payments made to and retained by the Master Servicer and any
Sub-Servicer must represent not more than reasonable compensation for such
person's services under the related Pooling and Servicing 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.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
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 categories of one of the Exemption Rating Agencies for at least
one year prior to the acquisition of Certificates by or on behalf of a Plan or
with plan assets; 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 any acquisition of Certificates by or on behalf of a
Plan or with plan assets.
A fiduciary of a Plan contemplating purchasing a Certificate must make its
own determination that the general conditions set forth above will be satisfied
with respect to such Certificate. However, to the extent that Certificates are
subordinate, the Exemption will not apply to an investment by a Plan. In
addition, the Exemption will not apply to an investment by a Plan during a
Funding Period unless certain additional conditions specified in the related
Prospectus Supplement are satisfied. Furthermore, any Certificates representing
a beneficial ownership in unsecured obligations will not satisfy the general
conditions of the Exemption.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Section 4975(c) of the Code) in connection with the direct or
indirect sale, exchange, transfer, holding or the direct or indirect acquisition
or disposition in the secondary market of Certificates by Plans. However, no
exemption is provided from the restrictions of Sections 406(a)(1)(E), 406(a)(2)
and 407 of ERISA for the acquisition or holding of a Certificate on behalf of an
"Excluded Plan" by any person who has discretionary authority or renders
investment advice with respect to the assets of such Excluded Plan. For purposes
of the Certificates, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code in connection with (1) the direct or indirect sale, exchange or
transfer of Certificates in the initial issuance of Certificates between the
Depositor or an Underwriter and a Plan when the person who has discretionary
authority or renders investment advice with respect to the investment of Plan
assets in the Certificates is (a) an obligor with respect to 5% or less of the
fair market value of the Trust Fund Assets or (b) an affiliate of such a person,
(2) the direct or indirect acquisition or disposition in the secondary market of
Certificates by a Plan and (3) the holding of Certificates by a Plan.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the related Trust
Fund. The Depositor expects that the specific conditions of the Exemption
required for this purpose will be satisfied with respect to the Certificates so
that the Exemption would provide an exemption from the restrictions imposed by
Sections 406(a) and (b) of ERISA (as well as the excise taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code)
for transactions in connection with the servicing, management and operation of
the related Trust Fund, provided that the general conditions of the Exemption
are satisfied.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code if such
restrictions are deemed to otherwise apply merely because a person is deemed to
be a Party in Interest with respect to an investing Plan by virtue of providing
services to the Plan (or by virtue of having certain specified relationships to
such a person) solely as a result of the Plan's ownership of Certificates.
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 and other applicable
requirements set forth in the Exemption would be satisfied. In addition to
making its own determination as to the availability of the exemptive relief
provided in the Exemption, the Plan fiduciary should consider its general
fiduciary obligations under ERISA in determining whether to purchase any
Certificates on behalf of a Plan.
In addition to the Exemption, a Plan fiduciary or other investor using plan
assets should consider the availability of certain class exemptions granted by
the DOL ("Class Exemptions"), which may provide relief from certain of the
prohibited transaction provisions of ERISA and the related excise tax provisions
of the Code, including Prohibited Transaction Class Exemption ("PTCE") 83-1,
regarding transactions involving mortgage pool investment trusts; PTCE 84-14,
regarding transactions effected by a "qualified professional asset manager";
PTCE 90-1, regarding transactions by insurance company pooled separate accounts;
PTCE 91-38, regarding investments by bank collective investment funds; PTCE
95-60, regarding transactions by insurance company general accounts; and PTCE
96-23, regarding transactions effected by an "in-house asset manager."
In addition to any exemption that may be available under PTCE 95-60 for the
purchase, sale and holding of the Securities by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA, including the prohibited transaction provisions
thereof, and Section 4975 of the Code for transactions involving an insurance
company general account. Pursuant to Section 401(c) of ERISA, the DOL is
required to issue final regulations ("401(c) Regulations") no later than
December 31, 1997 which are to provide guidance for the purpose of determining,
in cases where insurance policies supported by an insurer's general account are
issued to or for the benefit of a Plan on or before December 31, 1998, which
general account assets constitute plan assets. Section 401(c) of ERISA generally
provides that, until the date which is 18 months after the 401(c) Regulations
become final, no person shall be subject to liability under Part 4 of Title I of
ERISA and Section 4975 of the Code on the basis of a claim that the assets of an
insurance company general account constitute plan assets, unless (i) as
otherwise provided by the Secretary of Labor in the 401(c) Regulations to
prevent avoidance of the regulations or (ii) an action is brought by the
Secretary of Labor for certain breaches of fiduciary duty which would also
constitute a violation of federal or state criminal law. Any assets of an
insurance company general account which support insurance policies issued to a
Plan after December 31, 1998 or issued to Plans on or before December 31, 1998
for which the insurance company does not comply with the 401(c) Regulations may
be treated as plan assets. In addition, because Section 401(c) does not relate
to insurance company separate accounts, separate account assets are still
treated as plan assets of any Plan invested in such separate account. Insurance
companies contemplating the investment of general account assets in the
Securities should consult with their legal counsel with respect to the
applicability of Section 401(c) of ERISA, including the general account's
ability to continue to hold the Securities after the date which is 18 months
after the date the 401(c) Regulations become final. The DOL proposed such
regulations on December 22, 1997, but they have not yet been finalized.
Any plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with its counsel with respect to the potential applicability of
ERISA and Section 4975 of the Code to such investment and the availability of
the Exemption or any Class Exemption in connection therewith. There can be no
assurance that the Exemption or any other individual or Class Exemption will
apply with respect to any particular Plan that acquires or holds Securities or,
even if all of the conditions specified therein were satisfied, that such
exemption would apply to all transactions involving the Trust Fund. The
Prospectus Supplement with respect to a Series of Securities may contain
additional information regarding the application of the Exemption or any other
exemption with respect to the Securities offered thereby.
LEGAL INVESTMENT
The Prospectus Supplement for each Series of Securities will specify which,
if any, of the classes of Securities offered thereby constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended ("SMMEA"). Any class of Securities offered hereby and by
the related Prospectus Supplement that is not initially rated in one of the two
highest rating categories by at least one Rating Agency or that represents an
interest in a Trust Fund that includes junior Residential Loans will not
constitute "mortgage related securities" for purposes of SMMEA. The appropriate
characterization of those Securities not qualifying as "mortgage related
securities"("Non-SMMEA Securities") under various legal investment restrictions,
and thus the ability of investors subject to these restrictions to purchase such
Securities, may be subject to significant interpretive uncertainties.
Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Non-SMMEA Securities constitute legal investments for them.
Classes of Securities qualifying as "mortgage related securities" will
constitute legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including, but not limited
to, state-chartered savings banks, commercial banks, savings and loan
associations and insurance companies, as well as trustees and state government
employee retirement systems) created pursuant to or existing under the laws of
the United States or of any state (including the District of Columbia and Puerto
Rico) whose authorized investments are subject to state regulation to the same
extent that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Pursuant to SMMEA, a
number of states enacted legislation, on or before the October 3, 1991 cutoff
for such enactments, limiting to varying extents the ability of certain entities
(in particular, insurance companies) to invest in "mortgage related securities"
secured by liens on residential, or mixed residential and commercial properties,
in most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Accordingly, the investors affected by such
legislation will be authorized to invest in Securities qualifying as "mortgage
related securities" only to the extent provided in 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 in "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.
ss. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe. In this connection, the Office of
the Comptroller of the Currency (the "OCC") amended 12 C.F.R. Part 1 to
authorize national banks to purchase and sell for their own account, without
limitation as to a percentage of the bank's capital and surplus (but subject to
compliance with certain general standards concerning "safety and soundness" and
retention of credit information in 12 C.F.R. ss. 1.5), certain "Type IV
securities," defined in 12 C.F.R. ss. 1.2(l) to include certain "residential
mortgage-related securities." As so defined, "residential mortgage-related
security" means, in relevant part, "mortgage related security" within the
meaning of SMMEA. The National Credit Union Administration ("NCUA") has adopted
rules, codified at 12 C.F.R. Part 703, which permit federal credit unions to
invest in "mortgage related securities" under certain limited circumstances,
other than stripped mortgage related securities and residual interests in
mortgage related securities, unless the credit union has obtained written
approval from the NCUA to participate in the "investment pilot program"
described in 12 C.F.R. ss. 703.140.
All depository institutions considering an investment in the Securities
should review the "Supervisory Policy Statement on Investment Securities and
End-User Derivatives Activities" (the "1998 Policy Statement") of the Federal
Financial Institutions Examination Council ("FFIEC"), which has been adopted by
the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the OCC and the Office of Thrift Supervision, effective
May 26, 1998, and by the NCUA, effective October 1, 1998. The 1998 Policy
Statement sets forth general guidelines which depository institutions must
follow in managing risks (including market, credit, liquidity, operational
(transaction), and legal risks) applicable to all securities (including mortgage
pass-through securities and mortgage-derivative products) used for investment
purposes. Until October 1, 1998, federal credit unions will still be subject to
the FFIEC's now-superseded "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992, as adopted by NCUA with certain
modifications, which prohibited depository institutions from investing in
certain "high-risk mortgage securities," except under limited circumstances, and
set forth certain investment practices deemed to be unsuitable for regulated
institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any Securities,
as certain Series or classes may be deemed unsuitable investments, or may
otherwise be restricted, under such rules, policies or guidelines (in certain
instances irrespective of SMMEA).
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, provisions which
may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," and, with regard to any Securities issued in
book-entry form, provisions which may restrict or prohibit investments in
securities which are issued in book-entry form.
Except as to the status of certain classes of Securities as "mortgage
related securities," no representation is made as to the proper characterization
of the Securities for legal investment purposes, financial institution
regulatory purposes, or other purposes, or as to the ability of particular
investors to purchase Securities under applicable legal investment restrictions.
The uncertainties described above (and any unfavorable future determinations
concerning legal investment or financial institution regulatory characteristics
of the Securities) may adversely affect the liquidity of the Securities.
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 legal advisors in determining
whether and to what extent the Securities constitute legal investments or are
subject to investment, capital or other restrictions and, if applicable, whether
SMMEA has been overridden in any jurisdiction relevant to such investor.
PLANS OF DISTRIBUTION
The 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 Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by PaineWebber Incorporated
("PaineWebber") acting as underwriter with other underwriters, if any, named
therein. In such event, the Prospectus Supplement may also specify that the
underwriters will not be obligated to pay for any Securities agreed to be
purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of the Securities, underwriters may
receive compensation from the Depositor or from purchasers of the 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 the Securities
will be distributed by PaineWebber acting as agent or in some cases as principal
with respect to Securities which it has previously purchased or agreed to
purchase. If PaineWebber acts as agent in the sale of Securities, PaineWebber
will receive a selling commission with respect to each Series of Securities,
depending on market conditions, expressed as a percentage of the aggregate
principal balance of the related Residential Loans 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 PaineWebber elects to purchase
Securities as principal, PaineWebber 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 Securities
of such Series.
The Depositor will indemnify PaineWebber and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments PaineWebber and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, PaineWebber and the Depositor, or their
affiliates, may engage in various securities and financing transactions,
including repurchase agreements to provide interim financing of the Depositor's
residential loans pending the sale of such residential loans or interests
therein, including the Securities.
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Securityholders should consult
with their legal advisors in this regard prior to any such reoffer or sale.
As to each Series of Securities, only those classes rated in one of the
four highest rating categories by any Rating Agency will be offered hereby. Any
unrated class may be initially retained by the Depositor, and may be sold by the
Depositor at any time to one or more institutional investors.
LEGAL MATTERS
Certain legal matters in connection with the Securities will be passed upon
for the Depositor by Cadwalader, Wickersham & Taft, New York, New York.
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.
RATING
Unless otherwise specified in the related Prospectus Supplement, it is a
condition to the issuance of the Securities of each Series offered hereby and by
the Prospectus Supplement that they shall have been rated in one of the four
highest rating categories by the nationally recognized statistical rating agency
or agencies (each, a "Rating Agency") specified in the related Prospectus
Supplement.
Any such rating would be based on, among other things, the adequacy of the
value of the Trust Fund Assets and any credit enhancement with respect to such
class and will reflect such Rating Agency's assessment solely of the likelihood
that holders of a class of Securities of such class will receive payments to
which such Securityholders are entitled under the related Agreement. Such rating
will not constitute an assessment of the likelihood that principal prepayments
on the related Residential Loans will be made, the degree to which the rate of
such prepayments might differ from that originally anticipated or the likelihood
of early optional termination of the Series of Securities. Such rating should
not be deemed a recommendation to purchase, hold or sell Securities, inasmuch as
it does not address market price or suitability for a particular investor. Such
rating will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a Series, such rating might also be lowered or withdrawn among other
reasons, because of an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a Series of Securities will be determined on the basis of criteria
established by each Rating Agency rating classes of such Series. Such criteria
are sometimes based upon an actuarial analysis of the behavior of mortgage loans
in a larger group. Such analysis is often the basis upon which each Rating
Agency determines the amount of credit enhancement required with respect to each
such class. There can be no assurance that the historical data supporting any
such actuarial analysis will accurately reflect future experience nor any
assurance that the data derived from a large pool of mortgage loans accurately
predicts the delinquency, foreclosure or loss experience of any particular pool
of Residential Loans. No assurance can be given that values of any Residential
Properties have remained or will remain at their levels on the respective dates
of origination of the related Residential Loans. If the residential real estate
markets should experience an overall decline in property values such that the
outstanding principal balances of the Residential Loans in a particular Trust
Fund and any secondary financing on the related Residential Properties become
equal to or greater than the value of the Residential Properties, the rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry. In addition, adverse economic
conditions (which may or may not affect real property values) may affect the
timely payment by mortgagors of scheduled payments of principal and interest on
the Residential Loans and, accordingly, the rates of delinquencies, foreclosures
and losses with respect to any Trust Fund. To the extent that such losses are
not covered by credit enhancement, such losses will be borne, at least in part,
by the holders of one or more classes of the Security of the related Series.
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
--1--
1998 Policy Statement...........................................................
--4--
401(c) Regulations..............................................................
--A--
Accrual Securities..............................................................
Accrued Security Interest.......................................................
Administration Fee Rate.........................................................
Advance.........................................................................
Agency Securities...............................................................
Agreement.......................................................................
ARM Loans.......................................................................
Available Distribution Amount...................................................
--B--
Bankruptcy Code.................................................................
Bankruptcy Commission...........................................................
BIF.............................................................................
Book-Entry Securities...........................................................
Buydown Funds...................................................................
Buydown Loans...................................................................
Buydown Period..................................................................
--C--
CEDEL Participants..............................................................
CERCLA..........................................................................
Certificates....................................................................
Charter Act.....................................................................
Class Exemptions................................................................
Code............................................................................
Commission......................................................................
Conservation Act................................................................
Cooperative.....................................................................
Cooperative Loans...............................................................
Cooperative Notes...............................................................
Cooperative Unit................................................................
Corporate Trust Office..........................................................
Credit Insurance Instrument.....................................................
Cut-off Date....................................................................
--D--
Debt Securities.................................................................
defective obligation............................................................
Deficiency Event................................................................
Definitive Security.............................................................
Deposit Period..................................................................
Depositor.......................................................................
Disqualified Organization.......................................................
Distribution Date...............................................................
DOL.............................................................................
DOL Regulations.................................................................
DTC.............................................................................
Due Period......................................................................
--E--
EDGAR...........................................................................
Environmental Lien..............................................................
Equity Certificates.............................................................
equity interest.................................................................
ERISA...........................................................................
Euroclear Cooperative...........................................................
Euroclear Participants..........................................................
European Depositaries...........................................................
Events of Default...............................................................
excess servicing................................................................
Exemption.......................................................................
Exemption Rating Agencies.......................................................
--F--
FDIC............................................................................
FFIEC...........................................................................
FHA.............................................................................
FHA Loans.......................................................................
FHLMC...........................................................................
FHLMC Act.......................................................................
FHLMC Certificate Group.........................................................
FHLMC Certificates..............................................................
Final Distribution Date.........................................................
Financial Intermediary..........................................................
FNMA............................................................................
FNMA Certificates...............................................................
FTC Rule........................................................................
Funding Period..................................................................
--G--
Garn-St. Germain Act............................................................
GNMA............................................................................
GNMA Certificates...............................................................
Grantor Trust Certificates......................................................
Grantor Trust Fund..............................................................
Grantor Trust Securities........................................................
--H--
Hazard Insurance Instrument.....................................................
holder..........................................................................
Holder in Due Course Rules......................................................
Home Equity Loans...............................................................
Home Improvement Contracts......................................................
Housing Act.....................................................................
HUD.............................................................................
--I--
Indenture.......................................................................
Initial Deposit.................................................................
insurability representation.....................................................
Insurance Instrument............................................................
Insurance Proceeds..............................................................
Interest Rate...................................................................
Issuer..........................................................................
--L--
L/C Bank........................................................................
Land Contracts..................................................................
Liquidation Proceeds............................................................
Loan-to-Value Ratio.............................................................
Lockout Period..................................................................
--M--
Manager.........................................................................
manufactured home...............................................................
Manufactured Housing Contracts..................................................
Manufacturer's Invoice Price....................................................
Mark to Market Regulations......................................................
Master Servicer.................................................................
Maximum Subordination Amount....................................................
Morgan..........................................................................
Mortgage Loans..................................................................
Mortgage Notes..................................................................
Mortgage Securities.............................................................
Mortgaged Properties............................................................
Mortgaged Property..............................................................
Mortgages.......................................................................
Multifamily Loans...............................................................
--N--
NCUA............................................................................
new partnership................................................................
New Regulations.................................................................
non-conforming credit...........................................................
Non-Pro Rata Security...........................................................
Nonrecoverable Advance..........................................................
Non-SMMEA Securities............................................................
Non-U.S. Person.................................................................
Notes...........................................................................
--O--
Obligor.........................................................................
OCC.............................................................................
OID Regulations.................................................................
old partnership.................................................................
Optional Termination............................................................
Owner Trust Agreement...........................................................
Owner Trustee...................................................................
--P--
PaineWebber.....................................................................
Participants....................................................................
Parties in Interest.............................................................
Partnership Securities..........................................................
Partnership Trust Fund..........................................................
Pass-Through Entity.............................................................
Percentage Interest.............................................................
Permitted Instruments...........................................................
Plans...........................................................................
Pooling and Servicing Agreement.................................................
Pre-Funded Amount...............................................................
Pre-Funding Account.............................................................
Prepayment Assumption...........................................................
Prepayment Period...............................................................
Primary Hazard Insurance Policy.................................................
PTCE............................................................................
--R--
Rating Agency...................................................................
real estate mortgage investment conduit.........................................
Realized Loss...................................................................
Record Date.....................................................................
regular interests...............................................................
Regular Securities..............................................................
Regular Securityholder..........................................................
Relevant Depositary.............................................................
Relief Act......................................................................
REMIC...........................................................................
REMIC Pool......................................................................
REMIC Provisions................................................................
REMIC Regular Certificates......................................................
REMIC Regulations...............................................................
REMIC Residual Certificates.....................................................
REMIC Securities................................................................
Reserve Fund....................................................................
Residential Loans...............................................................
Residential Properties..........................................................
Residual Holders................................................................
residual interests..............................................................
Residual Securities.............................................................
Restricted Group................................................................
Retained Interest...............................................................
Retained Interest Rate..........................................................
Riegle Act......................................................................
Rules...........................................................................
--S--
SAIF............................................................................
SBJPA of 1996...................................................................
Securities......................................................................
Security Interest Rate..........................................................
Security Owners.................................................................
Security Principal Balance......................................................
Securityholder..................................................................
Securityholders.................................................................
Senior Liens....................................................................
Senior Percentage...............................................................
Senior Securities...............................................................
Senior/Subordinate Series.......................................................
Series..........................................................................
Servicemen's Readjustment Act...................................................
Servicing Agreement.............................................................
Servicing Default...............................................................
SMMEA...........................................................................
Special Hazard Amount...........................................................
Special Hazard Insurer..........................................................
Special Hazard Losses...........................................................
Special Hazard Subordination Amount.............................................
Specified Reserve Fund Balance..................................................
Standard Securities.............................................................
Startup Day.....................................................................
Stated Principal Balance........................................................
Strip Securities................................................................
Stripped Agency Securities......................................................
Stripped Interest...............................................................
Stripped Securities.............................................................
Subordinate Securities..........................................................
Subordination...................................................................
Subsequent Loans................................................................
Sub-Servicer....................................................................
Sub-Servicing Account...........................................................
Sub-Servicing Agreement.........................................................
--T--
Terms and Conditions............................................................
thrift institutions.............................................................
Tiered REMICs...................................................................
TILA Amendment..................................................................
Title V.........................................................................
Title VIII......................................................................
Trust Account...................................................................
Trust Agreement.................................................................
Trust Fund......................................................................
Trust Fund Asset................................................................
Trustee.........................................................................
--U--
U.S. Person.....................................................................
Unaffiliated Sellers............................................................
Underwriter.....................................................................
Unrecovered Senior Portion......................................................
--V--
VA
VA Guaranty Policy..............................................................
VA Loans........................................................................
--W--
Window Period Loans.............................................................
<PAGE>
SUBJECT TO COMPLETION, DATED ------, 199-
PROSPECTUS SUPPLEMENT [Version 1]
(To Prospectus dated ------------, 199--)
$------------------- (Approximate)
Asset-Backed Certificates, Series 199---------
----% Pass-Through Rate
PAINEWEBBER MORTGAGE ACCEPTANCE CORPORATION IV
Depositor
----------------------------
Master Servicer
The Series 199------- Certificates offered hereby will consist of a single
class of Certificates and will represent in the aggregate the entire beneficial
ownership interest in a trust fund (the "Trust Fund") consisting primarily of a
segregated pool of conventional one- to four-family [30-year, fixed interest
rate] first mortgage loans (the "Mortgage Loans") having an aggregate principal
balance as of ----------, 199-- of approximately $---------- (subject to a
permitted variance as described herein under "Additional Information") to be
sold by PaineWebber Mortgage Acceptance Corporation IV (the "Depositor").
Principal and interest are payable on the 25th day of each month or, if such day
is not a business day, then on the next succeeding business day, beginning in
- ------------- (each, a "Distribution Date"). There is currently no secondary
market for the Certificates offered hereby and there can be no assurance that a
secondary market for the Certificates will develop. PaineWebber Incorporated
expects to establish a market in the Certificates offered hereby, but is not
obligated to do so. There is no assurance that any such market, if established,
will continue.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORM UNDER "RISK
FACTORS" ON PAGE S---- OF THIS PROSPECTUS SUPPLEMENT AND PAGE --- OF THE
ACCOMPANYING PROSPECTUS.
THESE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES EXCEPT AS
SET FORTH HEREIN. NEITHER THESE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS
WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
Aggregate
Initial Proceeds to
Certificate Underwriting the
Principal Price to Discounts and Depositor
Balance Public (1) Commissions (1) (2)
------- ---------- ----------- -------
Series 199------ $ % % %
Certificates....
- ------------
(1) Plus accrued interest from --------------, 199--.
(2) Before deducting expenses payable by the Depositor estimated to be
$-------------.]
[The Series 199------ Certificates offered hereby will be purchased by
PaineWebber Incorporated (the "Underwriter") from the Depositor and will be
offered by the Underwriter from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the Depositor, before deducting expenses payable by the
Depositor, estimated to be $-----------, will be ----% of the aggregate of the
initial Certificate Principal Balance of the Certificates, plus accrued interest
at the Pass-Through Rate from --------------, 199--.]
The Series 199----- Certificates offered hereby [are] [will be purchased by
PaineWebber Incorporated (the "Underwriter") from the Depositor and will be]
offered subject to receipt and acceptance by the Underwriter, to prior sale and
to the Underwriter's right to reject any order in whole or in part and to
withdraw, cancel or modify the offer without notice. It is expected that
delivery of the Series 199----- Certificates offered hereby will be made at the
office of PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New
York 10019 [or through the facilities of The Depository Trust Company] on or
about -------------------, 199--.
PaineWebber Incorporated
------------, 199--
<PAGE>
The Certificates offered by this Prospectus Supplement will be part of a
separate series of Certificates being offered by the Depositor pursuant to its
Prospectus dated -----------, 199--, of which this Prospectus Supplement is a
part and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
TABLE OF CONTENTS
Page
SUMMARY OF PROSPECTUS SUPPLEMENT................................................
RISK FACTORS....................................................................
THE MORTGAGE POOL..... .........................................................
ADDITIONAL INFORMATION..........................................................
DESCRIPTION OF THE CERTIFICATES.................................................
Distributions..............................................................
Advances...................................................................
Example of Distributions...................................................
DESCRIPTION OF CREDIT SUPPORT...................................................
Pool Insurance Policy......................................................
Special Hazard Insurance Policy............................................
Bankruptcy Bond............................................................
YIELD ON THE CERTIFICATES AND PREPAYMENTS OF THE MORTGAGE LOANS.................
Delay in Payment of Interest...............................................
Prepayment Considerations and Risks........................................
POOLING AND SERVICING AGREEMENT.................................................
General....................................................................
The Master Servicer........................................................
The Trustee................................................................
Servicing and Other Compensation and Payment of Expenses...................
Voting Rights..............................................................
Termination................................................................
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.........................................
SPECIAL TAX CONSIDERATIONS APPLICABLE TO REMIC RESIDUAL CERTIFICATES............
PLAN OF DISTRIBUTION............................................................
LEGAL MATTERS...................................................................
RATING..........................................................................
<PAGE>
Until ------------------, all dealers effecting transactions in the
Certificates, whether or not participating in this distribution, may be required
to deliver a Prospectus Supplement and the Prospectus to which it relates. This
is in addition to the obligation of dealers to deliver a Prospectus Supplement
and Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used but not defined herein shall have the meanings assigned
thereto in the Prospectus. An Index of Significant Definitions is included at
the end of the Prospectus.
Title of Series.........................Asset-Backed Certificates, Series
199----- ----% Pass-Through Rate (the
"Certificates").
Description of Certificates.............$----------- initial Certificate
Principal Balance (approximate)
evidencing 100% of the aggregate
principal balance of the Mortgage Loans.
The aggregate principal balance of the
Mortgage Loans as of ---------- 1, 199--
(the "Cut-off Date") will be
$------------ [(approximate, subject to
a permitted variance of plus or minus
----%)].
Depositor...............................PaineWebber Mortgage Acceptance
Corporation IV, a wholly-owned limited
purpose finance subsidiary of
PaineWebber Group Inc., and an affiliate
of the Underwriter. See "The Depositor"
in the Prospectus.
Trustee.................................-------------------------------------.
See "Pooling and Servicing
Agreement--The Trustee" herein.
Master Servicer.........................-------------------------------------.
See "Pooling and Servicing
Agreement--The Master Servicer" herein.
Principal (including
prepayments)..........................All principal payments (including
principal prepayments) with respect to
the Mortgage Loans will be passed
through on each Distribution Date,
commencing ----------------, 199--.
Principal prepayments will not be passed
through until the month following the
month of receipt. Holders of
Certificates will be entitled to receive
such principal payments and prepayments
on each Distribution Date on a pro rata
basis in accordance with the Percentage
Interest evidenced by their respective
Certificates. The Percentage Interest
evidenced by any Certificate is equal to
the initial Certificate Principal
Balance thereof divided by the aggregate
initial Certificate Principal Balance of
all of the Certificates. See
"Description of the
Certificates--Distributions" herein and
in the Prospectus.
Interest................................Holders of Certificates will be entitled
to distributions of interest payments on
the Mortgage Loans on each Distribution
Date based on the Pass-Through Rate and
the then outstanding Certificate
Principal Balance thereof.
Shortfalls in collections of interest
resulting from principal prepayments in
full on Mortgage Loans[, to the extent
not covered by the application of
concurrent servicing compensation of the
Master Servicer] will be allocated pro
rata among all Certificates then
outstanding. See "Description of the
Certificates--Distributions" herein and
in the Prospectus [and "Yield on the
Certificates and Prepayments of the
Mortgage Loans" herein].
The Mortgage Pool.......................The Mortgage Pool will consist of
30-year, fixed interest rate, level
monthly payment, fully amortizing
Mortgage Loans with an aggregate
principal balance as of the Cut-off Date
of approximately $------------- (subject
to a permitted variance of plus or minus
---%). [Include appropriate information,
with corresponding changes, for
different types of loans.] See "The
Mortgage Pool" herein.
Denominations...........................The Certificates offered hereby will be
offered in registered form, in
denominations evidencing initial
Certificate Principal Balances of
$----------- and multiples of $-------
in excess thereof, with one Certificate
evidencing the remainder of the
aggregate initial Certificate Principal
Balance.
Record Date.............................All distributions will be made by or on
behalf of the Trustee to the persons in
whose names the Certificates are
registered at the close of business on
the last business day of the month
preceding the month in which the related
Distribution Date occurs. See
"Description of the
Certificates--Distributions" herein.
Credit Support:
A. Pool Insurance Policy..........The Master Servicer will obtain and
exercise its best reasonable efforts to
cause to be kept in full force and
effect a Pool Insurance Policy issued by
-------------------, in an initial
amount equal to ------% of the aggregate
principal balance of the Mortgage Loans
as of the Cut-off Date. See "Description
of Credit Support--Pool Insurance
Policy" herein and "Description of
Credit Support--Pool Insurance Policies"
in the Prospectus.
B. Special Hazard
Insurance Policy.............The Master Servicer will obtain and
exercise its best reasonable efforts to
cause to be kept in full force and
effect a Special Hazard Insurance Policy
issued by --------------------------, in
an initial amount equal to -------% of
the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date.
See "Description of Credit
Support--Special Hazard Insurance
Policy" herein and "Description of
Credit Support--Special Hazard Insurance
Policies" in the Prospectus.
C. Bankruptcy Bond................The Master Servicer will obtain and
exercise its best reasonable efforts to
cause to be kept in full force and
effect a Bankruptcy Bond issued by
----------------------------------, in
an initial amount equal to -------% of
the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date.
See "Description of Credit
Support--Bankruptcy Bond" herein and
"Description of Credit
Support--Bankruptcy Bonds" in the
Prospectus.
Advances................................The Master Servicer will be obligated to
make Advances to Certificateholders with
respect to delinquent payments of
principal and interest on the Mortgage
Loans, to the extent described herein.
See "Description of the
Certificates--Advances" herein and in
the Prospectus.
Optional Termination....................At its option, the [Depositor] [Master
Servicer] may repurchase all of the
Mortgage Loans in the Trust Fund and
thereby effect early retirement of the
Certificates on any Distribution Date on
which the aggregate principal balance of
the Mortgage Loans remaining in the
Trust Fund is less than --% of the
aggregate principal balance of the
Mortgage Loans as of the Cut-off Date.
See "Pooling and Servicing
Agreement--Termination" herein and
"Description of the
Certificates--Termination" in the
Prospectus.
Special Prepayment
Considerations........................The rate of principal payments on the
Certificates collectively will depend on
the rate and timing of principal
payments (including prepayments,
defaults and liquidations ) on the
Mortgage Loans. As is the case with
mortgage-backed securities generally,
the Certificates are subject to
substantial inherent cash-flow
uncertainties because the Mortgage Loans
may be prepaid at any time. Generally,
when prevailing interest rates are
increasing, prepayment rates on mortgage
loans tend to decrease, resulting in a
reduced return of principal to investors
at a time when reinvestment at such
higher prevailing rates would be
desirable. Conversely, when prevailing
interest rates are declining, prepayment
rates on mortgage loans tend to
increase, resulting in a greater return
of principal to investors at a time when
reinvestment at comparable yields may
not be possible. See "Yield on the
Certificates and Prepayments of the
Mortgage Loans" herein, and "Maturity
and Prepayment Considerations" in the
Prospectus.
Special Yield
Considerations........................The yield to maturity on the
Certificates will depend on the rate and
timing of principal payments (including
prepayments, defaults, liquidations) on
the Mortgage Loans, as well as other
factors as described herein. The yield
to investors on the Certificates will be
adversely affected by any allocation
thereto of prepayment interest
shortfalls on the Mortgage Loans, which
are expected to result from the
distribution of interest only to the
date of prepayment (rather than a full
month's interest) in connection with
prepayments in full, and the lack of any
distribution of interest on the amount
of any partial prepayments. See "Yield
on the Certificates and Prepayments of
the Mortgage Loans" herein, and
"Maturity and Prepayment Considerations"
in the Prospectus.
Certain Federal Income Tax
Consequences..........................Upon the issuance of the Offered
Certificates Cadwalader, Wickersham &
Taft, counsel to the Depositor, will
deliver the following opinion: [Assuming
compliance with the provisions of the
Pooling and Servicing Agreement, for
federal income tax purposes, the Trust
Fund will qualify as a "real estate
mortgage investment conduit" (a "REMIC")
within the meaning of Sections 860A
through 860G (the "REMIC Provisions") of
the Internal Revenue Code of 1986 (the
"Code"), and (i) the Class A, Class B
and Class C Certificates will evidence
"regular interests" in such REMIC and
(ii) the Class R Certificates will be
the sole class of "residual interests"
in such REMIC, each within the meaning
of the REMIC Provisions in effect on the
date hereof.] [Assuming compliance with
the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust
Fund will be classified as a grantor
trust under Subpart E, part I of
subchapter J of the Code, and not as an
association taxable as a corporation or
as a partnership.]
Under the REMIC Regulations, the Class R
Certificates will not be regarded as
having "significant value" for purposes
of applying the rules relating to
"excess inclusions." In addition, the
Class R Certificates may constitute
"noneconomic" residual interests for
purposes of the REMIC Regulations.
Transfers of the Class R Certificates
will be restricted under the Pooling and
Servicing Agreement to United States
Persons in a manner designed to prevent
a transfer of a noneconomic residual
interest from being disregarded under
the REMIC Regulations. See "Certain
Federal Income Tax Consequences--Special
Tax Considerations Applicable to REMIC
Residual Certificates" herein and
"Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners
of REMIC Residual Certificates--Excess
Inclusions" and "--Noneconomic REMIC
Residual Certificates" in the
Prospectus.
The Class R Certificateholders may be
required to report an amount of taxable
income with respect to the early years
of the Trust Fund's term that
significantly exceeds distributions on
the Class R Certificates during such
years, with corresponding tax deductions
or losses deferred until the later years
of the Trust Fund's term. Accordingly,
on a present value basis, the tax
detriments occurring in the earlier
years may substantially exceed the sum
of any tax benefits in the later years.
As a result, the Class R
Certificateholders' after-tax rate of
return may be zero or negative, even if
their pre-tax rate of return is
positive.
See "Yield and Maturity Considerations,"
especially "--Additional Yield
Considerations Applicable Solely to the
Class R Certificates", and "Certain
Federal Income Tax Consequences--Special
Tax Considerations Applicable to REMIC
Residual Certificates" herein.
For further information regarding the
Federal income tax consequences of
investing in the Offered Certificates,
see "Certain Federal Income Tax
Consequences" herein and in the
Prospectus.
Rating..................................It is a condition to the issuance of the
Certificates offered hereby that the
Certificates be rated ----------------
by --------------- -------------------.
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. A security rating does not
address the frequency of prepayments of
Mortgage Loans, nor the corresponding
effect on yield to investors. See "Yield
on the Certificates" and "Rating"
herein.
Legal Investment........................The Certificates will constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA")
so long as they are rated as described
herein, and, as such, are legal
investments for certain entities to the
extent provided in SMMEA. See "Legal
Investment" in the Prospectus and
"Rating" herein.
RISK FACTORS
[To Be Provided]
THE MORTGAGE POOL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date, after deducting payments
of principal due on such date, of [approximately] $----------------- [(subject
to a permitted variance of plus or minus --%)]. The Mortgage Loans to be
included in the Mortgage Pool will be acquired by the Depositor from
- ------------------------, in its capacity as Unaffiliated Seller. In addition,
the [Unaffiliated Seller] will be the Master Servicer for the Certificates.
[All of the Mortgage Loans have monthly payments due on the first day of
each month. None of the Mortgage Loans are Buydown Mortgage Loans. At
origination each Mortgage Loan had a term to maturity of up to 30 years. The
mortgagor with respect to each Mortgage Loan represented in its loan application
that the Mortgaged Property initially would be owner-occupied as its primary
residence.]
[All Mortgage Loans will have Net Mortgage Rates of ----%.] [As to any
Mortgage Loan, the "Net Mortgage Rate" is equal to the Mortgage Rate minus the
Servicing Fee Rate.] The Mortgage Loans will have Mortgage Rates ranging from
- ---% to ---%, with a weighted average Mortgage Rate as of the Cut-off Date of
- ---%. The Mortgage Loans will have Servicing Fee Rates ranging from ---% to
- ---%, with a weighted average Servicing Fee Rate as of the Cut-off Date of ---%.
The weighted average maturity of the Mortgage Loans as of the Cut-off Date will
be approximately --- years and --- months. None of the Mortgage Loans will have
been originated prior to ------------- or will have an unexpired term at the
Cut-off Date of less than approximately --- years and --- months or more than
approximately --- years and -- months. The Mortgage Loans will each have a
principal balance at origination of not less than $----------- or more than
$--------.
The Mortgage Loans will also have the following characteristics as of the
Cut-off Date (expressed as a percentage of the aggregate principal balance of
the Mortgage Loans having such characteristics relative to the aggregate
principal balance of all Mortgage Loans):
No more than ----% of the Mortgage Loans will have Loan-to-Value
Ratios at origination exceeding 80%. Mortgage Loans with Loan-to-Value
Ratios at origination exceeding 80% will be covered by policies of
primary mortgage guaranty insurance (each, a "Primary Credit Insurance
Policy") insuring against default as to the principal amount of the
Mortgage Loans exceeding 75% (or a lesser percentage) of the
Collateral Values of the Mortgaged Properties at origination and such
insurance will be maintained until the Loan-to-Value Ratios are
reduced to 80% or less. [insert information as to FHA insurance or VA
guarantee if applicable.]
At least ---% of the Mortgage Loans will be secured by detached
one-family dwelling units.
No more than ---% of the Mortgage Loans will be secured by
Mortgaged Properties located in ----------- and no more than ------%
of the Mortgage Loans will be secured by Mortgaged Properties located
in -------. [Except as indicated in the preceding sentence, no more
than ---% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one state.]
No more than ---% of the Mortgage Loans will be secured by
Mortgaged Properties located in any one zip code area or housing
development, and no more than ---% will be secured by Mortgaged
Properties located in any one zip code area or housing development in
California.
No more than -----% of the Mortgage Loans will be secured by
vacation or second homes. No more than ---% of the Mortgage Loans will
be secured by condominium units.
[The foregoing type of description will be used if precise information on
the Mortgage Loans is not available on the date of the Prospectus Supplement; a
description similar to the following description will be used if precise
information is available.]
[Set forth below is a description of certain additional characteristics of
the Mortgage Loans as of the Cut-off Date:
MORTGAGE RATES
Aggregate
Unpaid Percentage of
Number of Principal Aggregate Unpaid
Mortgage Rates Loans Balance Principal Balance
-------------- ----- ------- -----------------
$--------- ----------%
Total.................... $ 100%
========== ===========
As of the Cut-off Date, the weighted average Mortgage Rate was ------% per
annum.
REMAINING TERMS TO STATED MATURITY
Aggregate
Remaining Terms to Unpaid Percentage of
Stated Maturity Number of Principal Aggregate Unpaid
(in Months) Loans Balance Principal Balance
----------- ----- ------- -----------------
$ %
---------- -----------
Total.................... $ 100%
========== ===========
As of the Cut-off Date, the weighted average remaining term to stated
maturity was approximately ------- months.
ORIGINAL LOAN-TO-VALUE RATIOS
Aggregate
Unpaid Percentage of
Number of Principal Aggregate Unpaid
Original Loan-To-Value Ratios Loans Balance Principal Balance
- ----------------------------- ----- ------- -----------------
Up to 70.00%................... $ %
70.01%--80.00%.................
80.01%--90.00%................. --------- ---------- -----------
More than 90.00%............... --------- ---------- -----------
Total.................... $ 100%
========= ========== ===========
As of the Cut-off Date, the weighted average loan-to-value
ratio at origination of the Mortgage Loans was -----% per annum.
ORIGINAL LOAN AMOUNTS
Aggregate
Unpaid Percentage of
Number of Principal Aggregate Unpaid
Original Loan Amounts Loans Balance Principal Balance
--------------------- ----- ------- -----------------
Up to $50,000.00............... $ %
$ 50,000 -$99,999.99...........
$100,000 -$149,999.99..........
$150,000 -$199,999.99..........
$200,000 -$249,999.99..........
$250,000 -$299,999.99..........
$300,000 -$349,999.99..........
$350,000 -$399,999.99..........
$400,000 -$449,999.99..........
$450,000 -$500,000............. --------- ---------- -----------
Total.................... $ 100%
========= ========== ===========
As of the Cut-off Date, the average unpaid balance of the Mortgage Loans
was $-------------- and the unpaid principal balances of the largest and
smallest Mortgage Loans were $----------- and $----------------, respectively.
TYPES OF LOANS
Aggregate
Unpaid Percentage of
Number of Principal Aggregate Unpaid
Types Loans Balance Principal Balance
----- ----- ------- -----------------
Conventional Loans secured by: $ %
One-family detached
Low-rise condominiums/
2 family.................
High-rise condominiums/
3-4 family............... --------- ---------- -----------
Total.................... $ 100%
========= ========== ===========
YEARS OF ORIGINATION OF MORTGAGE LOANS
Aggregate
Unpaid Percentage of
Number of Principal Aggregate Unpaid
Years of Origination Loans Balance Principal Balance
-------------------- ----- ------- -----------------
199- .......................... $ %
199- ..........................
199- ..........................
199- ..........................
199- .......................... --------- ---------- -----------
Total.................... $ 100%
========= ========== ===========
OCCUPANTS OF MORTGAGED PROPERTIES
Aggregate
Unpaid Percentage of
Number of Principal Aggregate Unpaid
Loans Balance Principal Balance
----- ------- -----------------
Owner.......................... $ %
Primary residence...........
Vacation/second home........
Non-owner occupied
investment property....... --------- ---------- -----------
Total.................... $ 100%
========= ========== ===========
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
Aggregate
Unpaid Percentage of
Number of Principal Aggregate Unpaid
States Loans Balance Principal Balance
------ ----- ------- -----------------
$
--------- ---------- -----------%
Total $ 100%
--------- ========== ============
[The foregoing information will be modified to the extent necessary to
describe different types of mortgage loans.]
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Certificates,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise, if the Depositor deems such removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the Mortgage Pool prior to the issuance of the
Certificates unless including such mortgage loans would materially alter the
characteristics of the Mortgage Pool as described herein. The Depositor believes
that the information set forth herein will be representative of the
characteristics of the Mortgage Pool as it will be constituted at the time the
Certificates are issued, although the range of Mortgage Rates and maturities and
certain other characteristics of the Mortgage Loans in the Mortgage Pool may
vary.
A report on Form 8-K containing a detailed description of the Mortgage
Loans will be available to purchasers of the Certificates at or before initial
issuance and will be filed with the Securities and Exchange Commission within
fifteen days after such initial issuance. The report on Form 8-K will specify
the precise aggregate principal balance of the Mortgage Loans outstanding as of
the Cut-off Date and will set forth on a precise basis the other information
presented in this Prospectus Supplement on an approximate basis.
DESCRIPTION OF THE CERTIFICATES
The Series 199----- Certificates will consist of a single class of
Certificates. The Certificates have an initial Certificate Principal Balance of
$------------, evidencing 100% of the aggregate principal balance of the
Mortgage Loans in the Trust Fund as of the Cut-off Date.
Distributions
On each Distribution Date, the Available Distribution Amount will be
distributed to the holders of the Certificates, in each case to the extent of
available funds:
(i) the Accrued Certificate Interest thereon for such
Distribution Date (plus any Accrued Certificate Interest remaining
unpaid from a previous Distribution Date); and
(ii) an amount equal to the sum of the following, to be applied
to reduce the Certificate Principal Balance thereof:
(A) the principal portion of all scheduled monthly
payments on the related Mortgage Loans due during the
related Due Period, whether or not received;
(B) the sum of the following amounts: (a) all full
and partial principal prepayments made by the respective
mortgagors during the related Prepayment Period, (b) all
other unscheduled collections, including Insurance Proceeds
and Liquidation Proceeds, representing or allocable to
recoveries of principal on the Mortgage Loans received
during the related Prepayment Period, and (c) all proceeds
of the repurchase [(or, in the case of a substitution,
certain amounts representing a principal adjustment)] of any
Mortgage Loan as required by the Agreement since the
preceding Distribution Date; and
(C) any amounts described in this clause (ii) for
any previous Distribution Date which remain unpaid.
For any Distribution Date, the Accrued Certificate Interest on the
Certificates will be an amount equal to one month's interest at the Pass-Through
Rate on the outstanding Certificate Principal Balance of such Certificates
immediately prior to such Distribution Date, based on a year of twelve 30-day
months, subject to reduction as follows.
[The Master Servicer will be obligated to apply amounts otherwise payable
to it as servicing compensation to cover any shortfalls in collections of a full
month's interest resulting from principal prepayments in full of Mortgage Loans,
to the extent of an aggregate amount equal to its total servicing compensation
for the concurrent period.] For any Distribution Date, Accrued Certificate
Interest on each Certificate will be reduced in the event of shortfalls in
collections of interest resulting from principal prepayments in full of Mortgage
Loans during the Prepayment Period [, to the extent not covered by the
application of servicing compensation of the Master Servicer, as described
above]. The aggregate amount of any such shortfalls will be allocated among all
of the outstanding Certificates, in proportion to the respective amounts of
Accrued Certificate Interest that would otherwise have been payable thereon
absent such reductions and absent any delinquencies or losses.
With respect to any Distribution Date, the Available Distribution Amount
will equal the total amount of all cash on deposit in the Certificate Account as
of the corresponding Determination Date, together with Advances made by the
Master Servicer in respect of such Distribution Date, exclusive of:
(a) all monthly payments collected but due on a date
subsequent to the related Due Period,
(b) all prepayments and other unscheduled recoveries of
principal, and related payments of interest thereon, received
subsequent to the related Prepayment Period, and
(c) any amounts in the Certificate Account which are payable
or reimbursable to the Master Servicer.
All distributions will be made by the [Trustee] [Master Servicer] to the
persons in whose names the Certificates are registered at the close of business
on each Record Date, which will be the last business day of the month preceding
the month in which the related Distribution Date occurs. Such distributions
shall be made [either (i) by check mailed to the address of each
Certificateholder as it appears in the Certificate Register or (ii) at the
request to the [Trustee] [Master Servicer] in writing by the Record Date
immediately prior to such Distribution Date of any holder of Certificates having
an initial Certificate Principal Balance in excess of $---------------, by wire
transfer in immediately available funds to the account of such Certificateholder
specified in the request]. Distributions to holders of Certificates will be
allocated among such holders in proportion to their respective Percentage
Interests.
Advances
Subject to the following limitations, the Master Servicer will be obligated
to advance on or before each Distribution Date its own funds, or funds in the
Certificate Account which are in excess of those included in the Available
Distribution Amount for such Distribution Date, in an aggregate amount
sufficient to assure payment to the holders of the Certificates of the total of
all amounts required to be distributed thereon on such Distribution Date as
described above under "Distributions" (after first applying towards such payment
the entire Available Distribution Amount), but not more than the aggregate of
payments of principal and interest (adjusted to the Net Mortgage Rate) which
were due during the related Due Period and delinquent on the related
Determination Date, plus certain amounts representing interest not covered by
any current net income on Mortgaged Properties acquired on behalf of
Certificateholders by foreclosure or deed in lieu of foreclosure. The obligation
of the Master Servicer to make any such Advance is subject to the good faith
determination by the Master Servicer that the Advance will be recoverable from
late collections, Insurance Proceeds or Liquidation Proceeds. By operation of
the foregoing provision, to the extent of remaining coverage under the Credit
Support described below, the Master Servicer will generally be obligated to make
Advances without regard to recoverability from the related mortgagor or
Mortgaged Property. All Advances will be reimbursable to the Master Servicer
from related late collections, Insurance Proceeds, Liquidation Proceeds from the
Mortgage Loan or, if the Master Servicer determines that an Advance is not so
recoverable, from cash otherwise distributable to the Certificateholders.
Example of Distributions
The following chart sets forth an example of distributions on the
Certificates, based upon the assumption that the Certificates were issued in
- --------- 199-- and that distributions are made on the 25th of each month.
- -------- 1..............................Cut-off Date. The initial principal
balance of the Mortgage Loans will be
the aggregate principal balance of the
Mortgage Loans as of --------- 1, 199--,
after deducting any principal payments
due on or before such date. Any
principal and interest payments due on
or before --------- 1, as well as any
Retained Interest, will not be part of
the Trust Fund, and the Depositor will
retain such amounts when they are
received.
- --------- 2 through
--------- 30.......................Prepayment Period. Principal payments,
and interest thereon to the date of
prepayment in the case of principal
prepayments in full, received at any
time during this period will be
deposited into the Certificate Account
for distribution to Certificateholders
on ----------- 25.
- --------- 30............................Record Date. Distributions on
----------- 25 will be made to
Certificateholders of record at the
close of business on the last business
day of the month immediately preceding
the month of distribution.
- --------- 2 to
----------- 20.....................Collection Period. Payments due during
the related Due Period (---------
2------------- 1) from mortgagors will
be deposited in the Certificate Account
or Sub-Servicing account as received,
and will include scheduled principal
payments plus interest on the ---------
balances, less interest from the date of
prepayment of any Mortgage Loan prepaid
in full in ---------.
- ----------- 20..........................Determination Date. The amounts of
principal and interest that will be
distributed on ----------- 25 will be
determined by or on behalf of the Master
Servicer.
- ----------- 25..........................Distribution Date. On ----------- 25,
the Master Servicer will distribute or
cause to be distributed to the
Certificateholders the amounts
determined on ----------- 20. If a
monthly payment due during the related
Due Period is received from a mortgagor
after ----------- 20 and funds have been
distributed with respect to such payment
from the Certificate Account, such
payment will be deposited into the
Certificate Account as reimbursement
therefor. If an Advance has been made,
the Master Servicer will reimburse
itself to the extent permitted by the
Agreement by withdrawing the amount of
such payment from the Certificate
Account. If no such Advance has been
made, such late payment will be
distributed to the Certificateholders in
October.
Succeeding months follow the above
pattern, except for the Cut-off Date.
DESCRIPTION OF CREDIT SUPPORT
[Pool Insurance Policy
Subject to the limitations described under "Description of Credit
Support--Pool Insurance Policies" in the Prospectus, the Master Servicer will
obtain and exercise its best reasonable efforts to keep in full force and effect
a Pool Insurance Policy. The initial amount available under the Pool Insurance
Policy will be [equal to --%] [in a range from --% to --%] of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date. [The precise
amount of coverage will be determined by the exact Mortgage Pool
characteristics, and will be included in the report on Form 8-K referred to in
"The Mortgage Pool" herein.]
The Pool Insurance Policy will be issued by ---------------------------
(the "Pool Insurer"). [Include information regarding the Pool Insurer.] The
information set forth above concerning the Pool Insurer has been obtained by the
Depositor from the financial statements of the Pool Insurer.]
[Special Hazard Insurance Policy
Subject to the limitations described under "Description of Credit
Support--Special Hazard Insurance Policies" in the Prospectus, the Master
Servicer will obtain and exercise its best reasonable efforts to obtain and keep
in full force and effect a Special Hazard Insurance Policy. The initial amount
available under the Special Hazard Insurance Policy will equal [not less than]
- ---------% of the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date.
The Special Hazard Insurance Policy will be issued by -----------------
(the "Special Hazard Insurer"). [Include information regarding the Special
Hazard Insurer.] The information set forth above concerning the Special Hazard
Insurer has been obtained by the Depositor from the financial statements of the
Special Hazard Insurer.]
[Bankruptcy Bond
Subject to the limitations described under "Description of Credit
Support--Bankruptcy Bonds" in the Prospectus, the Master Servicer will obtain
and exercise its best reasonable efforts to keep in full force and effect a
Bankruptcy Bond. The initial amount available under the Bankruptcy Bond will be
$------------.
The Bankruptcy Bond will be issued by --------------------- (the
"Bankruptcy Bond Issuer"). [Include information regarding the Bankruptcy Bond
Issuer.] The information set forth above concerning the Bankruptcy Bond Issuer
has been obtained by the Depositor from the financial statements of the
Bankruptcy Bond Issuer.]
YIELD ON THE CERTIFICATES AND PREPAYMENTS
OF THE MORTGAGE LOANS
Delay in Payment of Interest
The effective yield to the holders of the Certificates will be lower than
the yield otherwise produced by the applicable Pass-Through Rate and purchase
price because monthly interest will not be payable to such holders until the
25th day (or if such day is not a business day, then on the next succeeding
business day) of the month following the month of accrual (without any
additional distribution of interest or earnings thereon in respect of such
delay). See "Yield Considerations" and "Description of the
Certificates--Retained Interest, Servicing Compensation and Payment of Expenses"
in the Prospectus.
Prepayment Considerations and Risks
The rate of principal payments on the Certificates, the aggregate amount of
distributions on the Certificates and the yield to maturity of the Certificates
will be directly related to the rate of payments of principal on the Mortgage
Loans. The rate of principal payments on the Mortgage Loans will in turn be
affected by the amortization schedules of the Mortgage Loans and by the rate of
principal prepayments thereon (including for this purpose payments resulting
from refinancings, liquidations of the Mortgage Loans due to defaults,
casualties, condemnations and repurchases by the Unaffiliated Seller, the Master
Servicer and Depositor). The Mortgage Loans may be prepaid by the mortgagors at
any time without payment of any prepayment fee or penalty. Prepayments,
liquidations and purchases of the Mortgage Loans will result in distributions to
Certificateholders of amounts which would otherwise be distributed over the
remaining terms of the Mortgage Loans. See "Maturity and Prepayment
Considerations" in the Prospectus. Since the rate of payment of principal on the
Mortgage Loans will depend on future events and a variety of factors (as
described more fully herein and in the Prospectus under "Yield Considerations"
and "Maturity and Prepayment Considerations"), no assurance can be given as to
such rate or the rate of principal prepayments.
In general, if prevailing mortgage rates fell significantly below the
Mortgage Rates on the Mortgage Loans, the rate of prepayment (and refinancing)
would be expected to increase. Conversely, if prevailing mortgage rates rose
significantly above the Mortgage Rates on the Mortgage Loans, the rate of
prepayment on the Mortgage Loans would be expected to decrease. The rate of
payments (including prepayments) on pools of mortgage loans is also influenced
by a variety of economic, geographic, social and other factors, including
changes in mortgagors' housing needs, job transfers, unemployment, mortgagors'
net equity in the mortgaged properties and servicing decisions. Accordingly,
there can be no certainty as to the rate of prepayments on the Mortgage Loans
during any period or over the life of the Certificates. See "Yield
Considerations" and "Maturity and Prepayment Considerations" in the Prospectus.
The Mortgage Loans are subject to assumption under circumstances described
under "Description of the Certificates--Collection and other Servicing
Procedures" and "Certain Legal Aspects of Residential Loans--Enforceability of
Certain Provisions; Prepayment Charges and Prepayments" in the Prospectus. The
extent to which the Mortgage Loans are assumed by purchasers of the Mortgaged
Properties rather than prepaid by the related mortgagors in connection with the
sales of the Mortgaged Properties will affect the weighted average life of the
Certificates. See "Maturity and Prepayment Considerations" in the Prospectus.
Since the rate of principal payments (including prepayments) on the
Mortgage Loans will significantly affect the yield to maturity on the
Certificates, prospective investors are urged to consult their investment
advisors as to both the rate of future principal payments (including
prepayments) on the Mortgage Loans and the suitability of the Certificates to
their investment objectives.
POOLING AND SERVICING AGREEMENT
General
The Certificates offered hereby will be issued pursuant to a Pooling and
Servicing Agreement (the "Agreement") to be dated as of ------------- 1, 199--,
among the Depositor, the Master Servicer and the Trustee, a form of which is
filed as an exhibit to the Registration Statement. Reference is made to the
Prospectus for important information additional to that set forth herein
regarding the terms and conditions of the Agreement and the Certificates. [The
Trustee will appoint ------------------------ (the "Custodian"), to serve as
Custodian in connection with the Certificates.] The Certificates will be
transferable and exchangeable at the corporate trust office of
- ------------------------------------------------------, located in
- --------------------------------, which will serve as Certificate Registrar.
- -------------------- [---------- will act as paying agent and authenticating
agent.] No service charge will be made for any transfer or exchange of
Certificates but the [Trustee] [Certificate Registrar] may require payment of a
sum sufficient to cover any tax or governmental charge that may be imposed in
connection with the transfer or exchange of Certificates. The Depositor will
provide to a prospective or actual Certificateholder without charge, on written
request, a copy (without exhibits) of the Agreement. Requests should be
addressed to PaineWebber Mortgage Acceptance Corp. IV, 1285 Avenue of the
Americas, New York, New York 10019, Attention: ----------------.
The Master Servicer
-----------------------------, a --------------------- (the "Master
Servicer"), will act as Master Servicer for the 199------ Certificates pursuant
to the Agreement. The Master Servicer's principal executive offices are located
at --------- ---------------------------, and its telephone number is --------
- -----------. [Describe other locations and general operations of the Master
Servicer.]
The following table summarized the foreclosure experience on conventional
residential first trust deeds or mortgage loans serviced by the Master Servicer
during the periods indicated:
Year Ended December 31,
---------------------------------------------------
199-- 199-- 199-- 199--
---------------------------------------------------
(Dollar Amounts in Thousands)
Principal Balance
(end of period)......... $ $ $ $
Total Number of Loans......
Total Number of
Foreclosures............
Percent Foreclosed
by Number of Loans...... % % % %
The following table summarizes the delinquency experience on conventional
residential first trust deeds or mortgage loans serviced by the Master Servicer
during the periods indicated:
Year Ended December 31,
---------------------------------------------------
199-- 199-- 199-- 199--
---------------------------------------------------
(Dollar Amounts in Thousands)
Period of Delinquency:
30-59 days $ $ $ $
Principal Balance
Number of Loans
Percent of Delinquent by
Number of Loans % % % %
Period of Delinquency:
60-89 days $ $ $ $
Principal Balance
Number of Loans
Percent of Delinquent by
Number of Loans % % % %
Period of Delinquency:
90 days or more $ $ $ $
Principal Balance
Number of Loans
Percent of Delinquent by
Number of Loans % % % %
In foreclosure
Principal Balance $ $ $ $
Number of Loans
Percent of Delinquent by
Number of Loans % % % %
Total Delinquent and in
Foreclosure $ $ $ $
Principal Balance
Number of Loans
Percent of Delinquent by
Number of Loans % % % %
While the above foreclosure and delinquency experience is typical of the
Master Servicer's recent experience, there can be no assurance that the future
experience on the Mortgage Loans will be the same. In addition, the foregoing is
based on all of the conventional loans in the Master Servicer's servicing
portfolio. The Mortgage Loans may be more recently originated than and may have
certain other characteristics unlike the majority of the loans in the Master
Servicer's conventional servicing portfolio.
The Trustee
----------------------------------------------------------------------, a
- ----------------------------------- (the "Trustee"), will act as Trustee for the
Series 199------- Certificates pursuant to the Agreement. The Trustee's
principal executive offices are located at -----------------, and its telephone
number is -------------.
Servicing and Other Compensation and Payment of Expenses
The principal compensation to be paid to the Master Servicer in respect of
its master servicing activities for the Certificates will be equal to the
product of the Servicing Fee Rate times the Scheduled Principal Balance of each
Mortgage Loan in the Mortgage Pool. As to any Mortgage Loan, the Servicing Fee
Rate is equal to ---% per annum. The Master Servicer is obligated to pay certain
ongoing expenses associated with the Mortgage Pool and incurred by the Master
Servicer in connection with its responsibilities under the Agreement, including
compensation of any Sub-Servicers. The Master Servicer is also obligated to
include in each distribution on the Certificates that portion of its servicing
compensation equal to interest at the Net Mortgage Rate on the principal balance
of any Mortgage Loan as to which a prepayment or liquidation occurs, such
interest commencing on the date of the prepayment or liquidation and ending on
the due date of the Mortgage Loan immediately following the date of the
prepayment or other liquidation. See "Description of the Certificates--Retained
Interest, Servicing Compensation and Payment of Expenses" in the Prospectus for
information regarding other possible compensation to the Master Servicer and for
information regarding expenses payable by the Master Servicer.
Voting Rights
At all times, the Voting Rights will be allocated among the holders of the
Certificates in proportion to the Percentage Interests evidenced thereby.
Termination
The circumstances under which the obligations created by the Agreement will
terminate in respect of the Certificates are described in "Description of the
Certificates--Termination" in the Prospectus. The [Depositor] [Master Servicer]
will have the right to repurchase all remaining Mortgage Loans in the Mortgage
Pool and thereby effect early retirement of the Certificates, subject to the
aggregate principal balance of the Mortgage Loans at the time of repurchase
being less than ---% of the aggregate principal balance of such Mortgage Loans
as of the Cut-off Date. In the event the [Depositor] [Master Servicer] exercises
such option, the repurchase price distributed with respect to each Certificate
will be 100% of its then outstanding Certificate Principal Balance plus interest
thereon at the Pass-Through Rate. In no event will the trust created by the
Agreement for a series of Certificates continue beyond the expiration of 21
years from the death of the survivor of the person or persons named in the
Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Cadwalader, Wickersham &
Taft, counsel to the Depositor, will deliver the following opinion: [Assuming
compliance with the provisions of the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund will qualify as a "real estate
mortgage investment conduit" (a "REMIC") within the meaning of Sections 860A
through 860G (the "REMIC Provisions") of the Internal Revenue Code of 1986 (the
"Code"), and (i) the Class A, Class B and Class C Certificates will evidence
"regular interests" in such REMIC and (ii) the Class R Certificates will be the
sole class of "residual interests" in such REMIC, each within the meaning of the
REMIC Provisions in effect on the date hereof.] [Assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, the Trust Fund
will be classified as a grantor trust under Subpart E, part I of subchapter J of
the Code, and not as an association taxable as a corporation or as a
partnership.]
The ---------- Certificates [may] [will] [will not] be treated as having
been issued with original issue discount for Federal income tax reporting
purposes. The prepayment assumption that will be used in determining the rate of
accrual of [original issue discount,] market discount and premium, if any, for
Federal income tax purposes will be based on the assumption that subsequent to
the date of any determination the Mortgage Loans will prepay at a rate equal to
[a CPR of --%]. No representation is made that the Mortgage Loans will prepay at
that rate or at any other rate. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the Prospectus.
The ------------------- Certificates may be treated for Federal income tax
purposes as having been issued at a premium. Whether any holder of [either] such
Class of Certificates will be treated as holding a Certificate with amortizable
bond premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of [each] such Class of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Premium"
in the Prospectus.
The Offered Certificates will be treated as "qualifying real property
loans" within the meaning of Section 593(d) of the Code, assets described in
Section 7701(a)(19)(C) of the Code and "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code, and interest (including original issue
discount, if any) on the Offered Certificates will be interest described in
Section 856(c)(3)(B) of the Code. Moreover, the Offered Certificates will be
"qualified mortgages" within the meaning of Section 860(A)(3) of the Code. See
"Certain Federal Income Tax Consequences--REMICs--Characterization of
Investments in REMIC Certificates" in the Prospectus.
------------------------, a ---------------, will act as REMIC
Administrator for the Trust Fund. [The Master Servicer will be responsible for
the fees and normal disbursements of the REMIC Administrator.] See "Certain
Federal Income Tax Consequences--REMICs--Reporting and Other Administrative
Matters" and "The Pooling and Servicing Agreements--Certain Matters Regarding
the Master Servicer, the Special Servicer, the REMIC Administrator and the
Depositor", "--Events of Default" and "--Rights Upon Event of Default" in the
Prospectus.
For further information regarding the Federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO REMIC RESIDUAL CERTIFICATES
The IRS has issued REMIC Regulations that significantly affect holders of
REMIC Residual Certificates. The REMIC Regulations impose restrictions on the
transfer or acquisition of certain residual interests, including the Class R
Certificates. In addition, the REMIC Regulations provide special rules
applicable to: (i) thrift institutions holding residual interests having
"significant value" and (ii) the transfer of "noneconomic" residual interests to
United States persons. Pursuant to the Pooling and Servicing Agreement, the
Class R Certificates may not be transferred to non-United States persons. See
"Certain Federal Income Tax Consequences--REMICS--Taxation of Owners of REMIC
Residual Certificates" in the Prospectus.
The REMIC Regulations provide for the determination of whether a residual
interest has "significant value" for purposes of applying the rules relating to
"excess inclusions" with respect to residual interests. Based on the REMIC
Regulations, the Class R Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess inclusions
with respect to the Class R Certificates, which will be in an amount equal to
all or virtually all of the taxable income includable by holders of the Class R
Certificates. See "Certain Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Residual Certificates--Excess Inclusions" in the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, if "a significant purpose of the transfer was
to impede the assessment or collection of tax." Based on the REMIC Regulations,
the Class R Certificates may constitute noneconomic residual interests during
some or all of their terms for purposes of the REMIC Regulations and,
accordingly, if a significant purpose of a transfer is to impede the assessment
or collection of tax, transfers of the Class R Certificates may be disregarded
and purported transferors may remain liable for any taxes due with respect to
the income on the Class R Certificates. All transfers of the Class R
Certificates will be subject to certain restrictions under the terms of the
Pooling and Servicing Agreement that are intended to reduce the possibility of
any such transfer being disregarded to the extent that the Class R Certificates
constitute noneconomic residual interests. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Noneconomic REMIC Residual Certificates" in the Prospectus.
The Class R Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the term of the
Trust Fund that significantly exceeds the amount of cash distributions received
by such Certificateholders from the Trust Fund with respect to such periods.
Furthermore, the tax on such income may exceed the cash distributions with
respect to such periods. Consequently, Class R Certificateholders should have
other sources of funds sufficient to pay any federal income taxes due in the
earlier years of the Trust Fund's term as a result of their ownership of the
Class R Certificates. In addition, the required inclusion of this amount of
taxable income during the Trust Fund's earlier accrual periods and the deferral
of corresponding tax losses or deductions until later accrual periods or until
the ultimate sale or disposition of a Class R Certificate (or possibly later
under the "wash sale" rules of Section 1091 of the Code) may cause the Class R
Certificateholders' after-tax rate of return to be zero or negative even if the
Class R Certificateholders' pre-tax rate of return is positive. That is, on a
present value basis, the Class R Certificateholders' resulting tax liabilities
could substantially exceed the sum of any tax benefits and the amount of any
cash distributions on the Class R Certificates over their life.
Potential investors in Class R Certificates should be aware that under the
Pooling and Servicing Agreement, the holder of the largest Percentage Interest
in the Class R Certificates shall, by its acceptance of such Certificates, agree
to irrevocably appoint the Master Servicer as its agent to perform all of the
duties of the tax matters person for the REMIC.
Purchasers of the Class R Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in such
Certificates.
For further information regarding the federal income tax consequences of
investing in the Class R Certificates, see "Yield and Maturity
Considerations--Additional Yield Considerations Applicable Solely to the Class R
Certificates" herein and "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.
PLAN OF DISTRIBUTION
[Subject to the terms and conditions set forth in the Underwriting
Agreement dated ------------, 199-- (the "Underwriting Agreement"), the
Depositor has agreed to sell and PaineWebber Incorporated (the "Underwriter")
has agreed to purchase the Certificates. The Underwriter is obligated to
purchase all Certificates offered hereby if any are purchased.]
[The Depositor has been advised by the Underwriter that it proposes
initially to offer all of the Certificates to the public at the public offering
prices set forth on the cover page of this Prospectus Supplement and to certain
dealers at such prices less a concession not in excess of ---% of the initial
Certificate Principal Balance of the Certificates. The Underwriter may allow and
such dealers may reallow concessions not in excess of ---% of the initial
aggregate Certificate Principal Balance of the Certificates. After the initial
public offering, the public offering price and such concessions may be changed.]
[Distribution of the Certificates will be made [by ---------] from time to
time in negotiated transactions or otherwise at varying prices to be determined
at the time of sale. Proceeds to the Depositor from the sale of the Certificates
will be -----% of the aggregate of the Certificate Principal Balances initially
represented by the Certificates, plus accrued interest at the Pass-Through Rate
from the Cut-off Date but before deducting expenses payable by the Depositor. In
connection with the purchase and sale of the Certificates, the Underwriter may
be deemed to have received compensation from the Depositor in the form of
underwriting discounts.]
The Underwriting Agreement provides that the Depositor and its parent
corporation will indemnify the Underwriter against certain civil liabilities,
including liabilities under the Securities Act of 1933, or will contribute to
payments the Underwriter may be required to make in respect thereof.
There can be no assurance that a secondary market for the Certificates will
develop or, if it does develop, that it will continue. The primary source of
information available to investors concerning the Certificates will be the
monthly statements discussed in the Prospectus under "Description of the
Certificates--Statements to Certificateholders," which will include information
as to the outstanding principal balance of the Certificates and the status of
the applicable form of credit enhancement. There can be no assurance that any
additional information regarding the Certificates will be available through any
other source. In addition, the Depositor is not aware of any source through
which price information about the Certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the Certificates
may adversely affect the liquidity of the Certificates, even if a secondary
market for the Certificates become available.
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon for
the Depositor and for the Underwriter by Cadwalader, Wickersham & Taft, New
York, New York.
RATING
[It is a condition to issuance that the Certificates offered hereby be
rated in the second highest rating category by such nationally recognized
statistical rating organization as the Depositor may designate]. [rating agency
language] See "Yield on the Certificates and Prepayments of the Mortgage Loans"
herein.
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.
<PAGE>
SUBJECT TO COMPLETION, DATED -------, 199-
PROSPECTUS SUPPLEMENT [Version 2]
(To Prospectus dated ------------, 199--)
$------------------- initial Senior Certificate
Principal Balance (Approximate)
Senior Asset-Backed Certificates, Series 199---------
-------% Pass-Through Rate
PAINEWEBBER MORTGAGE ACCEPTANCE CORPORATION IV
Depositor
[----------------------------]
Master Servicer
The Series 199----- Certificates will consist of a single class of Senior
Certificates and [a single class] [two classes] of Subordinate Certificates. The
Senior Certificates are designated as the Class A Certificates and the
Subordinate Certificates are designated as the Class B[-1 and Class B-2]
Certificates. Only the Senior Certificates are offered hereby.
The Series 199----- Certificates will represent in the aggregate the entire
beneficial ownership in a trust fund (the "Trust Fund") consisting primarily of
a segregated pool of conventional [one- to four-family [30-year, fixed interest
rate] first mortgage loans (the "Mortgage Loans") having an aggregate principal
balance as of ----------, 199- of approximately $---------- (subject to a
permitted variance as described herein under "Additional Information") to be
sold by PaineWebber Mortgage Acceptance Corporation IV (the "Depositor").
Principal and interest are payable on the 25th day of each month or, if such day
is not a business day, then on the next succeeding business day, beginning in
- ------------- (each, a "Distribution Date").
Except under certain circumstances described herein, shortfalls in collections
on the Mortgage Loans will be allocated first to the Subordinate Certificates.
As further described herein, until the Distribution Date occurring in
- -------------------, or on any Distribution Date thereafter on which the Senior
Percentage (as described herein) is greater than the initial Senior Percentage,
all principal prepayments on the Mortgage Loans will be distributed solely to
holders of the Senior Certificates.
There is currently no secondary market for the Certificates offered hereby and
there can be no assurance that a secondary market for the Certificates will
develop. PaineWebber Incorporated expects to establish a market in the
Certificates offered hereby, but is not obligated to do so. There is no
assurance that any such market, if established, will continue.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE S----- OF THIS PROSPECTUS SUPPLEMENT AND PAGE ---- OF THE
ACCOMPANYING PROSPECTUS.
[An election will be made to treat the Trust Fund as a "real estate mortgage
investment conduit" ("REMIC") for federal income tax purposes. As described more
fully herein and in the Prospectus, the Class A Certificates will constitute
"regular interests" in the REMIC. See "Certain Federal Income Tax Consequences"
herein and in the Prospectus.]
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR,
THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT AS SET FORTH
HEREIN. NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS WILL BE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
Aggregate Initial Underwriting Proceeds to the
Certificate Price to Discounts and Depositor (1)(2)
Principal Balance Public(1) Commissions
<S> <C> <C> <C> <C>
Series 199----- Certificates....... $ % % %
</TABLE>
- ----------
(1) Plus accrued interest from --------------, 199--.
(2) Before deducting expenses payable by the Depositor estimated to be
$-------------.]
[The Senior Certificates offered hereby will be [purchased by PaineWebber
Incorporated (the "Underwriter") from the Depositor and will be] offered by [the
Underwriter] from time to time to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. Proceeds to
the Depositor from the sale of the Senior Certificates, before deducting
expenses payable by the Depositor estimated to be $-----------, will be ----% of
the aggregate of the initial Certificate Principal Balance of the Senior
Certificates, plus accrued interest at the Pass-Through Rate from
- --------------, 199--.]
The Senior Certificates offered hereby [are] [will be purchased by PaineWebber
Incorporated (the "Underwriter") from the Depositor and will be] offered subject
to receipt and acceptance by the Underwriter, to prior sale and to the
Underwriter's right to reject any order in whole or in part and to withdraw,
cancel or modify the offer without notice. It is expected that delivery of the
Senior Certificates offered hereby will be made at the office of PaineWebber
Incorporated, 1285 Avenue of the Americas, New York, New York, 10019 [or through
the facilities of The Depository Trust Company] on or about -------------------,
199--.
PaineWebber Incorporated
------------, 199--
<PAGE>
The Senior Certificates offered by this Prospectus Supplement will be part of a
separate series of Certificates being offered by the Depositor pursuant to its
Prospectus dated -----------, 199--, of which this Prospectus Supplement is a
part and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
TABLE OF CONTENTS
Page
SUMMARY OF PROSPECTUS SUPPLEMENT.............................................4
RISK FACTORS................................................................10
THE MORTGAGE POOL...........................................................10
ADDITIONAL INFORMATION......................................................13
DESCRIPTION OF THE CERTIFICATES.............................................13
Distributions..........................................................14
Advances...............................................................17
Allocation of Losses; Subordination....................................17
Reserve Fund...........................................................18
Example of Distributions...............................................18
YIELD ON THE CERTIFICATES AND PREPAYMENTS OF THE MORTGAGE LOANS............19
Delay in Payment of Interest...........................................19
Prepayment Considerations and Risks....................................19
POOLING AND SERVICING AGREEMENT.............................................20
General................................................................20
The Master Servicer....................................................20
The Trustee............................................................22
Servicing and Other Compensation and Payment of Expenses...............23
Voting Rights..........................................................23
Termination............................................................23
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....................................23
SPECIAL TAX CONSIDERATIONS APPLICABLE TO REMIC RESIDUAL CERTIFICATES.......24
PLAN OF DISTRIBUTION........................................................25
LEGAL MATTERS...............................................................26
RATING......................................................................26
<PAGE>
Until ---------------, all dealers effecting transactions in the Senior
Certificates, whether or not participating in this distribution, may be required
to deliver a Prospectus Supplement and the Prospectus to which it relates. This
is in addition to the obligation of dealers to deliver a Prospectus Supplement
and Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SENIOR
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used but not defined herein shall have the meanings assigned
thereto in the Prospectus. An Index of Significant Definitions is included at
the end of the Prospectus.
Title of Series................. Asset-Backed Certificates, Series 199-----
---% Pass- Through Rate (the "Certificates").
Senior Certificates............. $------------- initial Certificate Principal
Balance (approximate), ---% Pass-Through
Rate, evidencing approximately -----% (the
initial "Senior Percentage") of the aggregate
principal balance of the Mortgage Loans as of
------------ 1, 199-- (the "Cut-off Date").
Subordinate Certificates........ As to Class B[-1], $-------------- initial
Certificate Principal Balance (approximate),
----% Pass-Through Rate, evidencing
approximately ----% of the aggregate
principal balance of the Mortgage Loans as of
the Cut-off Date. [The Class B-2
Certificates, which have no Certificate
Principal Balance and no Pass-Through Rate,
represent the right to receive the amount, if
any, remaining in the Trust Fund after the
Senior Certificates and the Class B-1
Certificates have been retired.] See
"Description of the Certificates--
Distributions" herein.
The Subordinate Certificates are not being
offered hereby, and may be sold at any time
to one or more institutional investors in
accordance with the terms of the Pooling and
Servicing Agreement, dated as of -----------
1, 199--, pursuant to which the Series
199----- Certificates will be issued (the
"Agreement").
Depositor....................... PaineWebber Mortgage Acceptance Corporation
IV, a wholly-owned limited purpose finance
subsidiary of PaineWebber Group Inc., and an
affiliate of the Underwriter. See "The
Depositor" in the Prospectus.
Trustee......................... ------------------------------------. See
"Pooling and Servicing Agreement -- The
Trustee" herein.
Master Servicer................. -----------------------------. See "Pooling
and Servicing Agreement -- The Master
Servicer" herein.
Principal (including
prepayments).................. Principal on the Certificates is payable on
the 25th day of each month or, if such day is
not a business day, then on the next
succeeding business day, beginning in
------------ 199- (each, a "Distribution
Date") Holders of the Senior Certificates and
holders of the [Class B-1[Subordinate]
Certificates will be entitled to receive on
each Distribution Date principal payments on
the Mortgage Loans (including principal
prepayments) in the respective amounts and
order of priority as described herein and in
the Prospectus.
To the extent of available funds, holders of
the Senior Certificates will be entitled to
receive on each Distribution Date (i) the
then applicable Senior Percentage of all
scheduled principal payments due on the
Mortgage Loans during the period commencing
on the second day of the month prior to the
month of distribution and ending on the first
day of the month of distribution (the "Due
Period"), (ii) the then applicable Senior
[Prepayment] Percentage of all prepayments
and certain other unscheduled principal
recoveries received with respect to the
Mortgage Loans in the month prior to the
month of distribution (the "Prepayment
Period"), and (iii) as to any defaulted
Mortgage Loan which is finally liquidated in
the Prepayment Period, an amount representing
the net amount of principal recovered (plus
an additional amount representing the
Unrecovered Senior Portion as defined
herein), but not more than the then
applicable Senior Percentage of the Scheduled
Principal Balance thereof (as defined
herein).
The "Senior Percentage" initially will be
approximately ----%, and on each Distribution
Date will be adjusted to reflect the then
current ownership interest in the Trust Fund
evidenced by the Senior Certificates. [The
Senior Prepayment Percentage initially will
be 100%; starting on the Distribution Date
occurring in -----------------, it will
decline annually in accordance with a
schedule described herein until it equals the
then applicable Senior Percentage; however,
the Senior Prepayment Percentage will be 100%
for any Distribution Date on which the then
applicable Senior Percentage is greater than
the initial Senior Percentage. This will have
the effect of accelerating the amortization
of the Senior Certificates while increasing
the proportionate interest in the Trust Fund
evidenced by the Subordinate Certificates.
Increasing the proportionate interest of the
Subordinate Certificates relative to that of
the Senior Certificates is intended to
preserve the availability of the
subordination provided by the Subordinate
Certificates. See "Description of the
Certificates--Distributions" herein and in
the Prospectus.] Holders of the Senior
Certificates and [Class B-1] [Subordinate]
Certificates will be entitled to receive such
principal payments and prepayments allocated
to that class on each Distribution Date on a
pro rata basis in accordance with the
Percentage Interest evidenced by their
respective Certificates. The Percentage
Interest evidenced by any Certificate is
equal to the initial Certificate Principal
Balance thereof divided by the aggregate
initial Certificate Principal Balance of all
of the Certificates of the respective class.
Interest........................ To the extent of available funds, holders of
the Senior Certificates and the [Class B-1]
[Subordinate] Certificates will be entitled
to distributions of interest payments on the
Mortgage Loans on each Distribution Date
based on the applicable Pass-Through Rate and
the then outstanding Certificate Principal
Balance thereof.
Shortfalls in collections of interest
resulting from principal prepayments in full
on Mortgage Loans [, to the extent not
covered by the application of concurrent
servicing compensation of the Master
Servicer] will be allocated pro rata among
all classes of Certificates then outstanding.
Shortfalls in collections of interest
resulting from delinquencies will be borne by
the Subordinate Certificates so long as they
remain outstanding. See "Description of the
Certificates -- Distributions" herein and in
the Prospectus [and "Yield on the
Certificates and Prepayments of the Mortgage
Loans" herein].
Allocation of Losses........... Subject to the limitations described herein
[(including the limitation relating to
allocation of Special Hazard Realized
Losses)], losses of principal realized on the
Mortgage Loans will be allocated to the
Subordinate Certificates prior to allocation
to the Senior Certificates. See "Description
of the Certificates -- Allocation of Losses;
Subordination" herein.
[Reserve Fund................... In order to preserve the availability of the
subordination provisions described herein the
[Master Servicer] shall establish and
maintain a Reserve Fund. See "Description of
the Certificates -- Reserve Fund" herein and
"Description of Credit Support -- Reserve
Funds" in the Prospectus.]
The Mortgage Pool............... The Mortgage Pool will consist of 30-year,
fixed interest rate, level monthly payment,
fully amortizing Mortgage Loans, with an
aggregate principal balance as of the Cut-off
Date of approximately $----------- (subject
to a permitted variance of plus or minus
-----%). [Include appropriate information,
with corresponding changes, for different
types of loans.] See "The Mortgage Pool"
herein.
Denominations................... The Senior Certificates offered hereby will
be offered in registered form, in
denominations evidencing initial Certificate
Principal Balances of $----------- and
multiples of $------- in excess thereof, with
one Certificate evidencing an additional
amount equal to the remainder of the
aggregate initial Certificate Principal
Balance.
Record Date..................... All distributions will be made by or on
behalf of the Trustee to the persons in whose
names the Certificates are registered at the
close of business on the last business day of
the month preceding the month in which the
related Distribution Date occurs. See
"Description of the Certificates--
Distributions" herein.
Advances........................ The Master Servicer will be obligated to make
Advances to holders of the Senior
Certificates in respect of delinquent
payments of principal and interest on the
Mortgage Loans, to the extent described
herein. See "Description of the
Certificates--Advances" herein and in the
Prospectus.
Optional Termination............ At its option, the [Depositor] [Master
Servicer] may repurchase all of the Mortgage
Loans in the Trust Fund and thereby effect
early retirement of the Certificates on any
Distribution Date on which the aggregate
principal balance of the Mortgage Loans
remaining in the Trust Fund is less than --%
of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date. See
"Pooling and Servicing
Agreement--Termination" herein and
"Description of the
Certificates--Termination" in the Prospectus.
Special Prepayment
Considerations................ The rate of principal payments on the Senior
Certificates collectively will depend on the
rate and timing of principal payments
(including prepayments, defaults and
liquidations ) on the Mortgage Loans. As is
the case with mortgage-backed securities
generally, the Senior Certificates are
subject to substantial inherent cash-flow
uncertainties because the Mortgage Loans may
be prepaid at any time. Generally, when
prevailing interest rates are increasing,
prepayment rates on mortgage loans tend to
decrease, resulting in a reduced return of
principal to investors at a time when
reinvestment at such higher prevailing rates
would be desirable. Conversely, when
prevailing interest rates are declining,
prepayment rates on mortgage loans tend to
increase, resulting in a greater return of
principal to investors at a time when
reinvestment at comparable yields may not be
possible. See "Yield on the Certificates and
Prepayments of the Mortgage Loans" herein,
and "Maturity and Prepayment Considerations"
in the Prospectus.
Special Yield
Considerations................ The yield to maturity on the Senior
Certificates will depend on the rate and
timing of principal payments (including
prepayments, defaults, liquidations) on the
Mortgage Loans, as well as other factors as
described herein. The yield to investors on
the Certificates will be adversely affected
by any allocation thereto of prepayment
interest shortfalls on the Mortgage Loans,
which are expected to result from the
distribution of interest only to the date of
prepayment (rather than a full month's
interest) in connection with prepayments in
full, and the lack of any distribution of
interest on the amount of any partial
prepayments. See "Yield on the Certificates
and Prepayments of the Mortgage Loans"
herein, and "Maturity and Prepayment
Considerations" in the Prospectus.
[Certain Federal Income Tax
Consequences.................. Upon the issuance of the Offered
Certificates, Cadwalader, Wickersham & Taft,
counsel to the Depositor, will deliver the
following opinion: [Assuming compliance with
the provisions of the Pooling and Servicing
Agreement, for federal income tax purposes,
the Trust Fund will qualify as a "real estate
mortgage investment conduit" (a "REMIC")
within the meaning of Sections 860A through
860G (the "REMIC Provisions") of the Internal
Revenue Code of 1986 (the "Code"), and (i)
the Class A, Class B and Class C Certificates
will evidence "regular interests" in such
REMIC and (ii) the Class R Certificates will
be the sole class of "residual interests" in
such REMIC, each within the meaning of the
REMIC Provisions in effect on the date
hereof.] [Assuming compliance with the
Pooling and Servicing Agreement, for federal
income tax purposes, the Trust Fund will be
classified as a grantor trust under Subpart
E, part I of subchapter J of the Code, and
not as an association taxable as a
corporation or as a partnership.]
Under the REMIC Regulations, the Class R
Certificates will not be regarded as having
"significant value" for purposes of applying
the rules relating to "excess inclusions." In
addition, the Class R Certificates may
constitute "noneconomic" residual interests
for purposes of the REMIC Regulations.
Transfers of the Class R Certificates will be
restricted under the Pooling and Servicing
Agreement to United States Persons in a
manner designed to prevent a transfer of a
noneconomic residual interest from being
disregarded under the REMIC Regulations. See
"Certain Federal Income Tax Consequences --
Special Tax Considerations Applicable to
REMIC Residual Certificates" herein and
"Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of
REMIC Residual Certificates--Excess
Inclusions" and "--Noneconomic REMIC Residual
Certificates" in the Prospectus.
The Class R Certificateholders may be
required to report an amount of taxable
income with respect to the early years of the
Trust Fund's term that significantly exceeds
distributions on the Class R Certificates
during such years, with corresponding tax
deductions or losses deferred until the later
years of the Trust Fund's term. Accordingly,
on a present value basis, the tax detriments
occurring in the earlier years may
substantially exceed the sum of any tax
benefits in the later years. As a result, the
Class R Certificateholders' after-tax rate of
return may be zero or negative, even if their
pre-tax rate of return is positive.
See "Yield and Maturity Considerations,"
especially "--Additional Yield Considerations
Applicable Solely to the Class R
Certificates", and "Certain Federal Income
Tax Consequences -- Special Tax
Considerations Applicable to REMIC Residual
Certificates" herein.
For further information regarding the Federal
income tax consequences of investing in the
Offered Certificates, see "Certain Federal
Income Tax Consequences" herein and in the
Prospectus.
Rating.......................... It is a condition to the issuance of the
Certificates offered hereby that the Senior
Certificates be rated ---- by -----------. 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. A
security rating does not address the
frequency of prepayments of Mortgage Loans,
or the corresponding effect on yield to
investors. See "Yield on the Certificates"
and "Rating" herein.
Legal Investment................ The Senior Certificates will constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") so long as they are rated
as described herein, and, as such, are legal
investments for certain entities to the
extent provided in SMMEA. See "Legal
Investment" in the Prospectus and "Rating"
herein.
<PAGE>
RISK FACTORS
[To Be Provided]
THE MORTGAGE POOL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date, after deducting payments
of principal due on such date, of [approximately] $----------------- [(subject
to a permitted variance of plus or minus --%)]. The Mortgage Loans to be
included in the Mortgage Pool will be acquired by the Depositor from
- ------------------------, in its capacity as Unaffiliated Seller. In addition,
the [Unaffiliated Seller] will be the Master Servicer for the Certificates.
[All of the Mortgage Loans have monthly payments due on the first day of
each month. None of the Mortgage Loans are Buydown Mortgage Loans. At
origination each Mortgage Loan had a term to maturity of up to 30 years. The
mortgagor with respect to each Mortgage Loan represented in its loan application
that the Mortgaged Property initially would be owner-occupied as its primary
residence.]
All Mortgage Loans will have Net Mortgage Rates of ----%. As to any
Mortgage Loan, the "Net Mortgage Rate" is equal to the Mortgage Rate minus the
Servicing Fee Rate. The Mortgage Loans will have Mortgage Rates ranging from
- ---% to ---%, with a weighted average Mortgage Rate as of the Cut-off Date of
- ---%. The Mortgage Loans will have Retained Interest Rates ranging from ---% to
- ---%, with a weighted average Retained Interest Rate as of the Cut-off Date of
- ---%. The weighted average maturity of the Mortgage Loans as of the Cut-off Date
will be approximately --- years and --- months. None of the Mortgage Loans will
have been originated prior to ------------- or will have an unexpired term at
the Cut-off Date of less than approximately --- years and --- months or more
than approximately --- years and -- months. The Mortgage Loans will each have a
principal balance at origination of not less than $----------- or more than
$--------.
The Mortgage Loans will also have the following characteristics as of the
Cut-off Date (expressed as a percentage of the aggregate principal balance of
the Mortgage Loans having such characteristics relative to the aggregate
principal balance of all Mortgage Loans):
No more than ----% of the Mortgage Loans will have Loan-to-Value
Ratios at origination exceeding 80%. Mortgage Loans with Loan-to-Value
Ratios at origination exceeding 80% will be covered by policies of primary
mortgage guaranty insurance (each, a "Primary Credit Insurance Policy")
insuring against default as to the principal amount of the Mortgage Loans
exceeding 75% (or a lesser percentage) of the Collateral Values of the
Mortgaged Properties at origination and such insurance will be maintained
until the Loan-to-Value Ratios are reduced to 80% or less. [insert
information as to FHA insurance or VA guarantee if applicable.]
At least ---% of the Mortgage Loans will be secured by detached
one-family dwelling units.
No more than ---% of the Mortgage Loans will be secured by Mortgaged
Properties located in ----------- and no more than ------% of the Mortgage
Loans will be secured by Mortgaged Properties located in -------. Except as
indicated in the preceding sentence, no more than ---% of the Mortgage
Loans will be secured by Mortgaged Properties located in any one state.
No more than ---% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code area or housing development, and no
more than ---% will be secured by Mortgaged Properties located in any one
zip code area or housing development in California.
No more than -----% of the Mortgage Loans will be secured by vacation
or second homes. No more than ---% of the Mortgage Loans will be secured by
condominium units.
The foregoing type of description will be used if precise information on
the Mortgage Loans is not available on the date of the Prospectus Supplement; a
description similar to the following description will be used if precise
information is available.
Set forth below is a description of certain additional characteristics of
the Mortgage Loans as of the Cut-off Date:
<PAGE>
MORTGAGE RATES
Aggregate
Unpaid Percentage of
Number of Principal Aggregate Unpaid
Mortgage Rates Loans Balance Principal Balance
-------------- ----- ------- -----------------
--------- $--------- ----------%
Total.................... $ 100%
========= ========== ===========
As of the Cut-off Date, the weighted average Mortgage Rate was ------% per
annum.
REMAINING TERMS TO STATED MATURITY
Aggregate
Remaining Terms to Unpaid Percentage of
Stated Maturity Number of Principal Aggregate Unpaid
(in Months) Loans Balance Principal Balance
-------------- ----- ------- -----------------
$ %
--------- ---------- -----------
Total.................... $ 100%
========= ========== ===========
As of the Cut-off Date, the weighted average remaining term to stated maturity
was approximately ------- months.
ORIGINAL LOAN-TO-VALUE RATIOS
Aggregate
Unpaid Percentage of
Number of Principal Aggregate Unpaid
Original Loan-To-Value Ratios Loans Balance Principal Balance
- ----------------------------- ----- ------- -----------------
Up to 70.00%................... $ %
70.01%--80.00%.................
80.01%--90.00%................. --------- ---------- -----------
More than 90.00%............... --------- ---------- -----------
Total.................... $ 100%
========= ========== ===========
As of the Cut-off Date, the weighted average loan-to-value ratio at origination
of the Mortgage Loans was -----% per annum.
ORIGINAL LOAN AMOUNTS
Aggregate
Unpaid Percentage of
Number of Principal Aggregate Unpaid
Original Loan Amounts Loans Balance Principal Balance
--------------------- ----- ------- -----------------
Up to $50,000.00............... $ %
$ 50,000 -$99,999.99...........
$100,000 -$149,999.99..........
$150,000 -$199,999.99..........
$200,000 -$249,999.99..........
$250,000 -$299,999.99..........
$300,000 -$349,999.99..........
$350,000 -$399,999.99..........
$400,000 -$449,999.99..........
$450,000 -$500,000............. --------- ---------- -----------
Total.................... $ 100%
========= ========== ===========
As of the Cut-off Date, the average unpaid balance of the Mortgage Loans was
$-------------- and the unpaid principal balances of the largest and smallest
Mortgage Loans were $----------- and $----------------, respectively.
<PAGE>
TYPES OF LOANS
Aggregate
Unpaid Percentage of
Number of Principal Aggregate Unpaid
Types Loans Balance Principal Balance
----- ----- ------- -----------------
Conventional Loans secured by: $ %
One-family detached
Low-rise condominiums/
2 family.................
High-rise condominiums/
3-4 family............... --------- ---------- -----------
Total.................... $ 100%
========= ========== ===========
YEARS OF ORIGINATION OF MORTGAGE LOANS
Aggregate
Unpaid Percentage of
Number of Principal Aggregate Unpaid
Years of Origination Loans Balance Principal Balance
-------------------- ----- ------- -----------------
199- .......................... $ %
199- ..........................
199- ..........................
199- ..........................
199- .......................... --------- ---------- -----------
Total.................... $ 100%
========= ========== ===========
OCCUPANTS OF MORTGAGED PROPERTIES
Aggregate
Unpaid Percentage of
Number of Principal Aggregate Unpaid
Loans Balance Principal Balance
----- ------- -----------------
Owner
Primary residence........... $ %
Vacation/second home........
Non-owner occupied
investment property....... --------- ---------- -----------
Total.................... $ 100%
========= ========== ===========
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
Aggregate
Unpaid Percentage of
Number of Principal Aggregate Unpaid
States Loans Balance Principal Balance
------ ----- ------- -----------------
--------- $--------- -----------%
Total $ 100%
========= ========== ============
[The foregoing information will be modified to the extent necessary to
describe different types of mortgage loans.]
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Certificates,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise, if the Depositor deems such removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the Mortgage Pool prior to the issuance of the
Certificates unless including such mortgage loans would materially alter the
characteristics of the Mortgage Pool as described herein. The Depositor believes
that the information set forth herein will be representative of the
characteristics of the Mortgage Pool as it will be constituted at the time the
Certificates are issued, although the range of Mortgage Rates and maturities and
certain other characteristics of the Mortgage Loans in the Mortgage Pool may
vary.
A report on Form 8-K containing a detailed description of the Mortgage
Loans will be available to purchasers of the Certificates at or before initial
issuance and will be filed with the Securities and Exchange Commission within
fifteen days after such initial issuance. The report on Form 8-K will specify
the precise aggregate principal balance of the Mortgage Loans outstanding as of
the Cut-off Date and will set forth on a precise basis the other information
presented in this Prospectus Supplement on an approximate basis.
DESCRIPTION OF THE CERTIFICATES
The Series 199-- - -- Certificates will consist of a single class of Senior
Certificates and [a single class] [two classes] of Subordinate Certificates (the
"Class B[-1" and "Class B-2]" Certificates). The Senior Certificates have an
initial Certificate Principal Balance of $--------------- (approximate),
evidencing approximately ----% (the initial Senior Percentage) of the aggregate
principal balance of the Mortgage Loans in the Trust Fund as of the Cut-off
Date. The Class B[-1] Certificates have an initial Certificate Principal Balance
of $-------------- evidencing ---% (the initial Subordinate Percentage) of the
aggregate principal balance of the Mortgage Loans in the Trust Fund as of the
Cut-off Date. [The Class B-2 Certificates, which have no Certificate Principal
Balance and no Pass-Through Rate, represent the right to receive the balance of
the Trust Fund after retirement of the Senior Certificates and the Class B-1
Certificates, as described herein.] The Class B[-1 and Class B-2] Certificates
are not being offered hereby, and may be sold at any time to one or more
institutional investors in accordance with the terms of the Agreement.
Distributions
On each Distribution Date, the Available Distribution Amount will be
distributed in the following order of priority, in each case to the extent of
available funds:
(i) to the holders of the Senior Certificates, the Accrued Certificate
Interest thereon for such Distribution Date (plus any Accrued Certificate
Interest remaining unpaid from a previous Distribution Date);
(ii) to the holders of the Senior Certificates, an amount equal to the
sum of the following, to be applied to reduce the Certificate Principal
Balance thereof, but in no event greater than the outstanding Certificate
Principal Balance of such Senior Certificates:
(A) the then applicable Senior Percentage times the principal
portion of all scheduled monthly payments on the related Mortgage
Loans due during the related Due Period, whether or not received;
(B) the product of (1) the then applicable Senior [Prepayment]
Percentage times (2) the aggregate of the following amounts: (a) the
principal portion of all full and partial prepayments made by the
respective mortgagors during the related Prepayment Period, (b) all
other unscheduled collections, including Insurance Proceeds and
Liquidation Proceeds (other than with respect to any Mortgage Loan
which was finally liquidated during the related Prepayment Period),
representing or allocable to recoveries of principal of the Mortgage
Loans received during the related Prepayment Period, and (c) all
proceeds of the repurchase [(or, in the case of a substitution,
certain amounts representing a principal adjustment)] of any Mortgage
Loan as required by the Agreement since the preceding Distribution
Date;
(C) with respect to unscheduled recoveries allocable to principal
of any Mortgage Loan which was finally liquidated during the related
Prepayment Period, [other than Special Hazard Realized Losses in
excess of the Special Hazard Subordination Amount,] the lesser of (1)
the full amount of such recovery and (2) the then applicable Senior
Percentage times the Scheduled Principal Balance of the related
Mortgage Loan immediately prior to such Distribution Date;
[(D) with respect to any Special Hazard Realized Loss incurred
during the related Prepayment Period in excess of the Special Hazard
Subordination Amount, the then applicable Senior Percentage times the
amount of the related recovery allocable to principal;] and
(E) any amounts described in this clause (ii) for any previous
Distribution Date which remain unpaid;
(iii) to the Master Servicer, in reimbursement of any Advances which
have been outstanding for [three] months or more;
(iv) in the event of one or more Realized Losses incurred during the
related Prepayment Period, [other than Special Hazard Realized Losses in
excess of the Special Hazard Subordination Amount,] to the holders of the
Senior Certificates, the amount equal to the aggregate of the related
Unrecovered Senior Portions (as defined below), to be applied to reduce the
Certificate Principal Balance of the Senior Certificates, but in no event
greater than the outstanding Certificate Principal Balance of such Senior
Certificates;
[(v) to the Reserve Fund, up to an amount equal to the then applicable
Subordinate Percentage times the aggregate amount described in clause
(ii)(B)(2) above, but not more than the amount necessary to bring the
balance on deposit in the Reserve Fund up to the then applicable Specified
Reserve Fund Balance;]
[(vi)] to the holders of the Class B[-1] Certificates, the Accrued
Certificate Interest thereon for such Distribution Date (plus any Accrued
Certificate Interest remaining unpaid from a previous Distribution Date);
[(vii)] to the holders of the Class B[-1] Certificates, the balance,
if any, of the Available Distribution Amount, applied to reduce the
Certificate Principal Balance thereof, but in no event greater than the
outstanding Certificate Principal Balance of such Class B[-1] Certificates;
and
[(viii)] to the holders of the Senior Certificates, on any
Distribution Date after the Certificate Principal Balance of the Class
B[-1] Certificates has been reduced to zero, the balance, if any, of the
Available Distribution Amount, applied to reduce the Certificate Principal
Balance thereof, but in no event greater than the outstanding Certificate
Principal Balance of such Senior Certificates.
For any Distribution Date, the Accrued Certificate Interest on the Senior
Certificates and the [Subordinate] [Class B-1] Certificates will be an amount
equal to one month's interest at the applicable Pass-Through Rate on the
outstanding Certificate Principal Balance of such Certificates immediately prior
to such Distribution Date, based on a year of twelve 30-day months, subject to
reduction as described herein.
[The Master Servicer will be obligated to apply amounts otherwise payable
to it as servicing compensation to cover any shortfalls in collections of a full
month's interest resulting from principal prepayments in full of Mortgage Loans,
to the extent of an aggregate amount equal to its total servicing compensation
for the concurrent period.] For any Distribution Date, Accrued Certificate
Interest on each Certificate will be reduced in the event of shortfalls in
collections of interest resulting from principal prepayments in full of Mortgage
Loans during the Prepayment Period [, to the extent not covered by the
application of servicing compensation of the Master Servicer, as described
above]. The aggregate amount of any such shortfalls will be allocated among all
of the outstanding Certificates, in proportion to the respective amounts of
Accrued Certificate Interest that would otherwise have been payable thereon
absent such reductions and absent any delinquencies or losses.
With respect to any Distribution Date, the Available Distribution Amount
will equal the total amount of all cash on deposit in the Certificate Account as
of the corresponding Determination Date, together with Advances made by the
Master Servicer in respect of each Distribution Date, exclusive of:
(a) all monthly payments collected but due on a date subsequent to the
related Due Period,
(b) all prepayments and other unscheduled recoveries of principal, and
related payments of interest thereon, received subsequent to the related
Prepayment Period, and
(c) all amounts in the Certificate Account which are payable or
reimbursable to the Master Servicer.
All distributions will be made by the [Trustee] [Master Servicer] to the
persons in whose names the Certificates are registered at the close of business
on each Record Date, which will be the last business day of the month preceding
the month in which the related Distribution Date occurs. Such distributions
shall be made [either (i) by check mailed to the address of each
Certificateholder as it appears in the Certificate Register or (ii) at the
request to the Trustee in writing by the Record Date immediately prior to such
Distribution Date of any holder of Certificates having an initial Certificate
Principal Balance in excess of $-------------, by wire transfer in immediately
available funds to the account of such Certificateholder specified in the
request.] Distributions to holders of each respective class of Certificates will
be allocated among such holders in proportion to their respective Percentage
Interest in that class.
[The Senior Prepayment Percentage for each Distribution Date is the
percentage indicated below:
Distribution Date Senior Prepayment Percentage
----------------- ----------------------------
- ------ 199-- through ----------........ 100%
- ------------ through ----------........ Senior Percentage, plus 70% of the
difference between the Senior
Percentage and 100%
- ------------ through ----------........ Senior Percentage, plus 60% of the
difference between the Senior
Percentage and 100%
- ------------ through ----------........ Senior Percentage, plus 40% of the
difference between the Senior
Percentage and 100%
- ------------ through ----------........ Senior Percentage, plus 20% of the
difference between the Senior
Percentage and 100%
- ------------ through ----------........ Senior Percentage
provided, however, that if the Senior Percentage as of any Distribution Date is
greater than the initial Senior Percentage, the Senior Prepayment Percentage for
such Distribution Date shall be 100%.]
The "Senior Percentage" initially will be -----% and on each Distribution
Date will be adjusted to reflect the then current ownership interest in the
Trust Fund evidenced by the Senior Certificates, based on the aggregate
Certificate Principal Balance of the Senior Certificates and the aggregate
Scheduled Principal Balance of the Mortgage Loans in the Trust Fund.
The "Scheduled Principal Balance" of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by the principal portion of all
monthly payments due on or before the date of determination, whether or not
received, and by all amounts allocable to unscheduled principal that were
distributed to Certificateholders on or before the date of determination, and as
further reduced to the extent that any Realized Loss thereon has been allocated
to one or more classes of Certificates on or before the date of determination.
See "Allocation of Losses; Subordination" herein.
For purposes of the foregoing, the "Unrecovered Senior Portion" with
respect to a Realized Loss is the amount, if any, by which (i) the product of
the then applicable Senior Percentage and the Scheduled Principal Balance of the
related Mortgage Loan exceeds (ii) the total amount of the related unscheduled
recovery which is allocable to principal. Payments to the holders of the Senior
Certificates as described above on any Distribution Date in respect of any
Unrecovered Senior Portion will be made only with respect to Realized Losses
incurred in connection with Mortgage Loans that were finally liquidated during
the related Prepayment Period.
Advances
- --------
Subject to the following limitations, the Master Servicer will be obligated
to advance on or before each Distribution Date its own funds, or funds in the
Certificate Account which are in excess of the Available Distribution Amount for
such Distribution Date, in an aggregate amount sufficient to assure payment to
the holders of the Senior Certificates of the total of all amounts required to
be distributed thereon on such Distribution Date as described above in clauses
(i) and (ii) under "Distributions" (after first applying towards such payment
the entire Available Distribution Amount, including funds otherwise payable to
the Subordinate Certificateholders), but not more than the aggregate of payments
of principal and interest (adjusted to the Net Mortgage Rate) which were due
during the related Due Period and delinquent on the related Determination Date,
plus certain amounts representing interest not covered by any current net income
on Mortgaged Properties acquired on behalf of Certificateholders by foreclosure
or deed in lieu of foreclosure.
The Master Servicer will be obligated to make Advances regardless of
whether such Advances are deemed to be recoverable from the related Mortgage
Loans, to the extent that the Class B[-1] Certificates remain outstanding.
Thereafter, such Advances are required to be made only to the extent they are
deemed by the Master Servicer to be recoverable from related late collections,
Insurance Proceeds or Liquidation Proceeds.
All Advances will be reimbursable to the Master Servicer either (a) from
late collections, Insurance Proceeds and Liquidation Proceeds from the Mortgage
Loan as to which such unreimbursed Advance was made or (b) as to any Advance
which has been outstanding for [three] months or more, from any portion of the
Available Distribution Amount remaining on any Distribution Date after payment
to the Senior Certificateholders of the amounts described above in clauses (i)
and (ii) under "Distributions". For purposes of the foregoing, all Advances when
made shall be allocated to specific delinquent monthly payments, all
reimbursements of Advances in the manner described in (b) above shall be
allocated, to the extent practicable, to specific monthly payments which have
been delinquent for the longest period of time, which allocations shall be
conclusive for purposes of future reimbursements of Advances. In addition, if
the Class B[-1] Certificates are no longer outstanding, any Advances previously
made which are deemed by the Master Servicer to be nonrecoverable from related
late collections, Insurance Proceeds or Liquidation Proceeds may be reimbursed
to the Master Servicer out of any funds in the Certificate Account prior to
distributions on the Senior Certificates.
Allocation of Losses; Subordination
- -----------------------------------
Any Realized Loss on a Mortgage Loan [(including any Special Hazard
Realized Loss)] will be allocated first to the Class B[-1] Certificates, until
the Certificate Principal Balance of the Class B[-1] Certificates has been
reduced to zero; any additional Realized Losses will be allocated to the Senior
Certificates. [However, as to Special Hazard Realized Losses, the total amount
thereof that may be allocated in full to the Class B[-1] Certificates is limited
to the Special Hazard Subordination Amount, which will be approximately
$---------. Any Special Hazard Realized Losses in excess of the Special Hazard
Subordination Amount will be allocated among the Senior Certificates and Class
B[-1] Certificates in proportion to their outstanding Certificate Principal
Balances.] Any allocation of a Realized Loss to a Senior Certificate or a Class
B[-1] Certificate will be made by reducing the Certificate Principal Balance
thereof by the amount so allocated as of the Distribution Date following the
Prepayment Period in which the Realized Loss was incurred. In addition, the
Senior Percentage will be recalculated after each Distribution Date and will
equal the then aggregate Certificate Principal Balance of the Senior
Certificates divided by the then aggregate Scheduled Principal Balance of all of
the Mortgage Loans which remain outstanding (but not more than 100%); and the
corresponding percentage for the Class B[-1] Certificates (the "Subordinate
Percentage") will equal 100% minus the Senior Percentage. Any allocation of
Realized Losses to the Class B[-1] Certificates will have the effect of
increasing the Senior Percentage and, accordingly, the portion of future
distributions payable to the Senior Certificateholders relative to that payable
to the Class B[-1] Certificateholders. Conversely, payments to the Senior
Certificateholders of [(i) prepayments when the Senior Prepayment Percentage
exceeds the Senior Percentage and (ii)] payments with respect to Unrecovered
Senior Portions, as described above in clause[s (ii)(B) and] (iv)[,
respectively,] under "Distributions", will have the effect of accelerating the
amortization of the Senior Certificates and therefore decreasing the Senior
Percentage. In addition, [such payment to the Senior Certificateholders of
prepayments when the Senior Prepayment Percentage exceeds the Senior Percentage]
[deposits in the Reserve Fund as described herein] will have the effect of
preserving the availability of the subordination provided by the Subordinate
Certificates.
Reserve Fund
- ------------
[In order to further effect the subordination provisions described herein,
the [Master Servicer] shall establish and maintain for the benefit of the
holders of the Senior Certificates a separate account (the "Reserve Fund"). The
[Master Servicer] shall retain in the Reserve Fund the amounts described above
in clause (v) under "Distributions" until the amount in the Reserve Fund equals
$----- (the "Specified Reserve Fund Balance"). [Insert Specified Reserve Fund
Balance reduction formula.] Amounts held in the Reserve Fund on any Distribution
Date will be available for distributions to the Senior Certificateholders of
amounts described in clauses (i) and (ii) under "Distributions", for
reimbursement to the Master Servicer of any Advance which has been outstanding
for [--- month[s]] or more and for distribution to the holders of the Senior
Certificates on such Distribution Date to the extent of the aggregate amount of
any Unrecovered Senior Portions remaining after application of the Available
Distribution Amount thereto. On each Distribution Date, any reinvestment income
on amounts in the Reserve Fund, together with amounts in the Reserve Fund in
excess of the Specified Reserve Fund Balance, will be released and distributed
to the holders of the Class B Certificates. [Insert allocation provisions for
multiple Subordinate classes, and modify to the extent funds otherwise
distributable on Subordinate Certificates will be retained in Reserve Fund.]]
Example of Distributions
- ------------------------
The following chart sets forth an example of distributions on the
Certificates, based upon the assumption that the Certificates were issued in
- --------- 199-- and that distributions are made on the 25th of each month.
- --------- 1......................... Cut-off Date. The initial principal
balance of the Mortgage Loans will be
the aggregate principal balance of the
Mortgage Loans as of --------- 1, 199--,
after deducting any principal payments
due on or before such date. Any
principal and interest payments due on
or before --------- 1[, as well as any
Retained Interest,] will not be part of
the Trust Fund, and the Depositor will
retain such amounts when they are
received.
- --------- 2 through
--------- 31....................... Prepayment Period. Principal payments,
and interest thereon to the date of
prepayment in the case of principal
prepayments in full, received at any
time during this period will be
deposited into the Certificate Account
for distribution to Certificateholders
on ----------- 25.
- --------- 31........................ Record Date. Distributions on
----------- 25 will be made to
Certificateholders of record at the
close of business on the last business
day of the month immediately preceding
the month of distribution.
- --------- 2 to
----------- 20..................... Collection Period. Payments due during
the related Due Period (--------- 2 -
----------- 1) from mortgagors will be
deposited in the Certificate Account or
Sub-Servicing account as received, and
will include scheduled principal
payments plus interest on the ---------
balances, less interest from the date of
prepayment of any Mortgage Loan prepaid
in full in -------------.
- ----------- 20...................... Determination Date. The amounts of
principal and interest that will be
distributed on ----------- 25 will be
determined by or on behalf of the Master
Servicer.
- ----------- 25...................... Distribution Date. On ----------- 25,
the Master Servicer will distribute or
cause to be distributed to the
Certificateholders the amounts
determined on ----------- 20. If a
monthly payment due during the related
Due Period is received from a mortgagor
after ----------- 20 and funds have been
distributed with respect to such payment
from the Certificate Account, such
payment will be deposited into the
Certificate Account as reimbursement
therefor. If an Advance has been made,
the Master Servicer will reimburse
itself to the extent permitted by the
Agreement by withdrawing the amount of
such payment from the Certificate
Account. If no such Advance has been
made, such late payment will be
distributed to the Certificateholders in
October.
Succeeding months follow the above pattern, except for the Cut-off Date.
YIELD ON THE CERTIFICATES AND PREPAYMENTS
OF THE MORTGAGE LOANS
Delay in Payment of Interest
- ----------------------------
The effective yield to the holders of the Certificates will be lower than
the yield otherwise produced by the Pass-Through Rate and purchase price because
monthly interest will not be payable to such holders until the 25th day (or if
such day is not a business day, then on the next succeeding business day) of the
month following the month of accrual (without any additional distribution of
interest or earnings thereon in respect of such delay). See "Yield
Considerations" and "Description of the Certificates--Retained Interest,
Servicing Compensation and Payment of Expenses" in the Prospectus.
Prepayment Considerations and Risks
- -----------------------------------
The rate of principal payments on the Senior Certificates, the aggregate
amount of distributions on the Senior Certificates and the yield to maturity of
the Senior Certificates will be directly related to the rate of payments of
principal on the Mortgage Loans. The rate of principal payments on the Mortgage
Loans will in turn be affected by the amortization schedules of the Mortgage
Loans and by the rate of principal prepayments thereon (including for this
purpose payments resulting from refinancings, liquidations of the Mortgage Loans
due to defaults, casualties, condemnations and repurchases by the Unaffiliated
Seller, the Master Servicer and Depositor). The Mortgage Loans may be prepaid by
the mortgagors at any time without payment of any prepayment fee or penalty.
Prepayments, liquidations and purchases of the Mortgage Loans will result in
distributions to Certificateholders of amounts which would otherwise be
distributed over the remaining terms of the Mortgage Loans. See "Maturity and
Prepayment Considerations" in the Prospectus. [As described under "Description
of the Certificates Distributions" herein, all or a disproportionately large
percentage of principal prepayments on the Mortgage Loans will be distributed on
the Senior Certificates during the first --------- years after the Cut-off
Date.] Since the rate of payment of principal on the Mortgage Loans will depend
on future events and a variety of factors (as described more fully herein and in
the Prospectus under "Yield Considerations" and "Maturity and Prepayment
Considerations"), no assurance can be given as to such rate or the rate of
principal prepayments.
In general, if prevailing mortgage rates fell significantly below the
Mortgage Rates on the Mortgage Loans, the rate of prepayment (and refinancing)
would be expected to increase. Conversely, if prevailing mortgage rates rose
significantly above the Mortgage Rates on the Mortgage Loans, the rate of
prepayment on the Mortgage Loans would be expected to decrease. The rate of
payments (including prepayments) on pools of mortgage loans is also influenced
by a variety of economic, geographic, social and other factors, including
changes in mortgagors' housing needs, job transfers, unemployment, mortgagors'
net equity in the mortgaged properties and servicing decisions. Accordingly,
there can be no certainty as to the rate of prepayments on the Mortgage Loans
during any period or over the life of the Certificates. See "Yield
Considerations" and "Maturity and Prepayment Considerations" in the Prospectus.
The Mortgage Loans are subject to assumption under circumstances described
under "Description of the Certificates--Collection and Other Servicing
Procedures" and "Certain Legal Aspects of Residential Loans--Enforceability of
Certain Provisions; Prepayment Charges and Prepayments" in the Prospectus. The
extent to which the Mortgage Loans are assumed by purchasers of the Mortgaged
Properties rather than prepaid by the related mortgagors in connection with the
sales of the Mortgage Properties will affect the weighted average life of the
Senior Certificates. See "Maturity and Prepayment Considerations" in the
Prospectus.
Since the rate of principal payments (including prepayments) on the
Mortgage Loans will significantly affect the yield to maturity on the
Certificates, prospective investors are urged to consult their investment
advisors as to both the rate of future principal payments (including
prepayments) on the Mortgage Loans and the suitability of the Certificates to
their investment objectives.
<PAGE>
POOLING AND SERVICING AGREEMENT
General
- -------
The Certificates offered hereby will be issued pursuant to a Pooling and
Servicing Agreement (the "Agreement") to be dated as of ------------- 1, 199--,
among the Depositor, the Master Servicer and the Trustee, a form of which is
filed as an exhibit to the Registration Statement. Reference is made to the
Prospectus for important information additional to that set forth herein
regarding the terms and conditions of the Agreement and the Certificates. [The
Trustee will appoint ----------------------------------------- (the
"Custodian"), to serve as Custodian in connection with the Certificates.] The
Certificates will be transferable and exchangeable at the corporate trust office
of ------------------------------------------, located in
- -----------------------------------, which will serve as Certificate Registrar.
- -------------------- [---------- will act as paying agent and authenticating
agent.] No service charge will be made for any transfer or exchange of
Certificates but the [Trustee] [Certificate Registrar] may require payment of a
sum sufficient to cover any tax or governmental charge that may be imposed in
connection with the transfer or exchange of Certificates. The Depositor will
provide to a prospective or actual Certificateholder without charge, on written
request, a copy (without exhibits) of the Agreement. Requests should be
addressed to PaineWebber Mortgage Acceptance Corporation IV, 1285 Avenue of the
Americas, New York, New York 10019, Attention: ----------------.
The Master Servicer
- -------------------
-----------------------------, a --------------------- (the "Master
Servicer"), will act as Master Servicer for the 199------ Certificates pursuant
to the Agreement. The Master Servicer's principal executive offices are located
at --------- ---------------------------, and its telephone number is --------
- -----------. [Describe other locations and general operations of the Master
Servicer.]
The following table summarizes the foreclosure experience on conventional
residential first trust deeds or mortgage loans serviced by the Master Servicer
during the periods indicated:
Year Ended December 31,
---------------------------------------------------
199-- 199-- 199-- 199--
---------------------------------------------------
(Dollar Amounts in Thousands)
Principal Balance
(end of period)......... $--------- $--------- $--------- $---------
Total Number of Loans......
Total Number of
Foreclosures............
Percent Foreclosed
by Number of Loans...... ---------% ---------% ---------% ---------%
The following table summarizes the delinquency experience on
conventional residential first trust deeds or mortgage loans serviced by the
Master Servicer during the periods indicated:
Year Ended December 31,
---------------------------------------------------
199-- 199-- 199-- 199--
---------------------------------------------------
(Dollar Amounts in Thousands)
Period of Delinquency:
30-59 days $ $ $ $
Principal Balance
Number of Loans
Percent of Delinquent by
Number of Loans % % % %
Period of Delinquency:
60-89 days $ $ $ $
Principal Balance
Number of Loans
Percent of Delinquent by
Number of Loans % % % %
Period of Delinquency:
90 days or more $ $ $ $
Principal Balance
Number of Loans
Percent of Delinquent by
Number of Loans % % % %
In foreclosure
Principal Balance $ $ $ $
Number of Loans
Percent of Delinquent by
Number of Loans % % % %
Total Delinquent and in
Foreclosure $ $ $ $
Principal Balance
Number of Loans
Percent of Delinquent by
Number of Loans % % % %
While the above foreclosure and delinquency experience is typical of the
Master Servicer's recent experience, there can be no assurance that the future
experience on the Mortgage Loans will be the same. In addition, the foregoing is
based on all of the conventional loans in the Master Servicer's servicing
portfolio. The Mortgage Loans may be more recently originated than and may have
certain other characteristics unlike the majority of the loans in the Master
Servicer's conventional servicing portfolio.
The Trustee
- -----------
-----------------------, a ----------------------------------- (the
"Trustee"), will act as Trustee for the Series 199------- Certificates pursuant
to the Agreement. The Trustee's principal executive offices are located at
- -----------------, and its telephone number is -------------.
Servicing and Other Compensation and Payment of Expenses
- --------------------------------------------------------
The principal compensation to be paid to the Master Servicer in respect of
its master servicing activities for the Certificates will be equal to the
product of the Servicing Fee Rate times the Scheduled Principal Balance of each
Mortgage Loan in the Mortgage Pool. As to any Mortgage Loan, the Servicing Fee
Rate is equal to ---% per annum. The Master Servicer is obligated to pay certain
ongoing expenses associated with the Mortgage Pool and incurred by the Master
Servicer in connection with its responsibilities under the Agreement, including
compensation of any Sub-Servicers. The Master Servicer is also obligated to
include in each distribution on the Certificates that portion of its servicing
compensation equal to interest at the Net Mortgage Rate on the principal balance
of any Mortgage Loan as to which a prepayment or liquidation occurs, such
interest commencing on the date of the prepayment or liquidation and ending on
the due date of the Mortgage Loan immediately following the date of the
prepayment or other liquidation. See "Description of the Certificates--Retained
Interest, Servicing Compensation and Payment of Expenses" in the Prospectus for
information regarding other possible compensation to the Master Servicer and for
information regarding expenses payable by the Master Servicer.
Voting Rights
- -------------
At all times, [--]% of all Voting Rights will be allocated among all
holders of the [Senior] Certificates [and the Class B-1 Certificates] in
proportion to the then outstanding Certificate Principal Balances of their
respective Certificates [, and [--]% of all Voting Rights will be allocated
among holders of the Class B-2 Certificates in proportion to the percentage
interests evidenced by their respective Certificates].
Termination
- -----------
The circumstances under which the obligations created by the Agreement will
terminate in respect of a series of Certificates are described in "Description
of the Certificates--Termination" in the Prospectus. The [Depositor] [Master
Servicer] will have the right to repurchase all remaining Mortgage Loans in the
Mortgage Pool and thereby effect early retirement of the Certificates, subject
to the aggregate principal balance of the Mortgage Loans at the time of
repurchase being less than ---% of the aggregate principal balance of such
Mortgage Loans as of the Cut-off Date. In the event the [Depositor] [Master
Servicer] exercises such option, the purchase price distributed with respect to
each Senior Certificate will be 100% of its then outstanding Certificate
Principal Balance plus interest thereon at the Pass-Through Rate. In no event
will the trust created by the Agreement for a series of Certificates continue
beyond the expiration of 21 years from the death of the survivor of the person
or persons named in the Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Cadwalader, Wickersham &
Taft, counsel to the Depositor, will deliver the following opinion: [Assuming
compliance with the provisions of the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund will qualify as a "real estate
mortgage investment conduit" (a "REMIC") within the meaning of Sections 860A
through 860G (the "REMIC Provisions") of the Internal Revenue Code of 1986 (the
"Code"), and (i) the Class A, Class B and Class C Certificates will evidence
"regular interests" in such REMIC and (ii) the Class R Certificates will be the
sole class of "residual interests" in such REMIC, each within the meaning of the
REMIC Provisions in effect on the date hereof.] [Assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, the Trust Fund
will be classified as a grantor trust under Subpart E, part I of subchapter J of
the Code, and not as an association taxable as a corporation or as a
partnership.]
The ---------- Certificates [may] [will] [will not] be treated as having
been issued with original issue discount for Federal income tax reporting
purposes. The prepayment assumption that will be used in determining the rate of
accrual of [original issue discount,] market discount and premium, if any, for
Federal income tax purposes will be based on the assumption that subsequent to
the date of any determination the Mortgage Loans will prepay at a rate equal to
[a CPR of --%]. No representation is made that the Mortgage Loans will prepay at
that rate or at any other rate. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the Prospectus.
The ------------------- Certificates may be treated for Federal income tax
purposes as having been issued at a premium. Whether any holder of [either] such
Class of Certificates will be treated as holding a Certificate with amortizable
bond premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of [each] such Class of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Premium"
in the Prospectus.
The Offered Certificates will be treated as "qualifying real property
loans" within the meaning of Section 593(d) of the Code, assets described in
Section 7701(a)(19)(C) of the Code and "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code, and interest (including original issue
discount, if any) on the Offered Certificates will be interest described in
Section 856(c)(3)(B) of the Code. Moreover, the Offered Certificates will be
"qualified mortgages" within the meaning of Section 860(A)(3) of the Code. See
"Certain Federal Income Tax Consequences--REMICs--Characterization of
Investments in REMIC Certificates" in the Prospectus.
------------------------, a ---------------, will act as REMIC
Administrator for the Trust Fund. [The Master Servicer will be responsible for
the fees and normal disbursements of the REMIC Administrator.] See "Certain
Federal Income Tax Consequences--REMICs--Reporting and Other Administrative
Matters" and "The Pooling and Servicing Agreements--Certain Matters Regarding
the Master Servicer, the Special Servicer, the REMIC Administrator and the
Depositor", "--Events of Default" and "--Rights Upon Event of Default" in the
Prospectus.
For further information regarding the Federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
SPECIAL TAX CONSIDERATIONS APPLICABLE
TO REMIC RESIDUAL CERTIFICATES
The IRS has issued REMIC Regulations that significantly affect holders of
REMIC Residual Certificates. The REMIC Regulations impose restrictions on the
transfer or acquisition of certain residual interests, including the Class R
Certificates. In addition, the REMIC Regulations provide special rules
applicable to: (i) thrift institutions holding residual interests having
"significant value" and (ii) the transfer of "noneconomic" residual interests to
United States persons. Pursuant to the Pooling and Servicing Agreement, the
Class R Certificates may not be transferred to non-United States persons. See
"Certain Federal Income Tax Consequences--REMICS--Taxation of Owners of REMIC
Residual Certificates" in the Prospectus.
The REMIC Regulations provide for the determination of whether a residual
interest has "significant value" for purposes of applying the rules relating to
"excess inclusions" with respect to residual interests. Based on the REMIC
Regulations, the Class R Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess inclusions
with respect to the Class R Certificates, which will be in an amount equal to
all or virtually all of the taxable income includable by holders of the Class R
Certificates. See "Certain Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Residual Certificates--Excess Inclusions" in the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, if "a significant purpose of the transfer was
to impede the assessment or collection of tax." Based on the REMIC Regulations,
the Class R Certificates may constitute noneconomic residual interests during
some or all of their terms for purposes of the REMIC Regulations and,
accordingly, if a significant purpose of a transfer is to impede the assessment
or collection of tax, transfers of the Class R Certificates may be disregarded
and purported transferors may remain liable for any taxes due with respect to
the income on the Class R Certificates. All transfers of the Class R
Certificates will be subject to certain restrictions under the terms of the
Pooling and Servicing Agreement that are intended to reduce the possibility of
any such transfer being disregarded to the extent that the Class R Certificates
constitute noneconomic residual interests. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Noneconomic REMIC Residual Certificates" in the Prospectus.
The Class R Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the term of the
Trust Fund that significantly exceeds the amount of cash distributions received
by such Certificateholders from the Trust Fund with respect to such periods.
Furthermore, the tax on such income may exceed the cash distributions with
respect to such periods. Consequently, Class R Certificateholders should have
other sources of funds sufficient to pay any federal income taxes due in the
earlier years of the Trust Fund's term as a result of their ownership of the
Class R Certificates. In addition, the required inclusion of this amount of
taxable income during the Trust Fund's earlier accrual periods and the deferral
of corresponding tax losses or deductions until later accrual periods or until
the ultimate sale or disposition of a Class R Certificate (or possibly later
under the "wash sale" rules of Section 1091 of the Code) may cause the Class R
Certificateholders' after-tax rate of return to be zero or negative even if the
Class R Certificateholders' pre-tax rate of return is positive. That is, on a
present value basis, the Class R Certificateholders' resulting tax liabilities
could substantially exceed the sum of any tax benefits and the amount of any
cash distributions on the Class R Certificates over their life.
Potential investors in Class R Certificates should be aware that under the
Pooling and Servicing Agreement, the holder of the largest Percentage Interest
in the Class R Certificates shall, by its acceptance of such Certificates, agree
to irrevocably appoint the Master Servicer as its agent to perform all of the
duties of the tax matters person for the REMIC.
Purchasers of the Class R Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in such
Certificates.
For further information regarding the federal income tax consequences of
investing in the Class R Certificates, see "Yield and Maturity
Considerations--Additional Yield Considerations Applicable Solely to the Class R
Certificates" herein and "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.
PLAN OF DISTRIBUTION
[Subject to the terms and conditions set forth in the Underwriting
Agreement dated ------------, 199-- (the "Underwriting Agreement"), the
Depositor has agreed to sell and PaineWebber Incorporated (the "Underwriter")
has agreed to purchase the Senior Certificates. The Underwriter is obligated to
purchase all Senior Certificates offered hereby if any are purchased.]
[The Depositor has been advised by the Underwriter that it proposes
initially to offer all of the Senior Certificates to the public at the public
offering prices set forth on the cover page of this Prospectus Supplement and to
certain dealers at such prices less a concession not in excess of ---% of the
initial Certificate Principal Balance of the Senior Certificates. The
Underwriter may allow and such dealers may reallow concessions not in excess of
- ---% of the initial aggregate Certificate Principal Balance of the Senior
Certificates. After the initial public offering, the public offering price and
such concessions may be changed.]
[Distribution of the Senior Certificates will be made [by ---------] from
time to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor from the sale of the
Senior Certificates will be -----% of the aggregate of the Certificate Principal
Balances initially represented by the Senior Certificates, plus accrued interest
at the Pass-Through Rate from the Cut-off Date but before deducting expenses
payable by the Depositor. In connection with the purchase and sale of the Senior
Certificates, the Underwriter may be deemed to have received compensation from
the Depositor in the form of underwriting discounts.]
The Underwriting Agreement provides that the Depositor and its parent
corporation will indemnify the Underwriter against certain civil liabilities,
including liabilities under the Securities Act of 1933, or will contribute to
payments the Underwriter may be required to make in respect thereof.
There can be no assurance that a secondary market for the Certificates will
develop or, if it does develop, that it will continue. The primary source of
information available to investors concerning the Certificates will be the
monthly statements discussed in the Prospectus under "Description of the
Certificates--Statements to Certificateholders," which will include information
as to the outstanding principal balance of the Certificates and the status of
the applicable form of credit enhancement. There can be no assurance that any
additional information regarding the Certificates will be available through any
other source. In addition, the Depositor is not aware of any source through
which price information about the Certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the Certificates
may adversely affect the liquidity of the Certificates, even if a secondary
market for the Certificates become available.
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon for
the Depositor and for the Underwriter by Cadwalader, Wickersham & Taft, New
York, New York.
RATING
It is a condition to issuance that the Senior Certificates offered hereby
be rated in the second highest rating category by such nationally recognized
statistical rating organization as the Depositor may designate. [rating agency
language] See "Yield on the Certificates and Prepayments of the Mortgage Loans"
herein.
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.
<PAGE>
SUBJECT TO COMPLETION, DATED ------, 199-
PROSPECTUS SUPPLEMENT [Version 3]
(To Prospectus dated ------------, 199--)
$------------------- initial Senior Certificate
Principal Balance (Approximate)
Senior Asset-Backed Certificates, Series 199---------
- -------% Pass-Through Rate
PAINEWEBBER MORTGAGE ACCEPTANCE CORPORATION IV
Depositor
- -----------------------------------------------------
Master Servicer
The Series 199----- Certificates will consist of a single class of Senior
Certificates and [a single class] [two classes] of Subordinate Certificates. The
Senior Certificates are designated as the Class A Certificates and the
Subordinate Certificates are designated as the Class B[-1 and Class B-2]
Certificates. Only the Senior Certificates are offered hereby.
The Series 199----- Certificates will represent in the aggregate the entire
beneficial ownership in a trust fund (the "Trust Fund") consisting primarily of
a segregated pool of conventional one- to four-family [30 year, fixed interest
rate] first mortgage loans (the "Mortgage Loans") having an aggregate principal
balance as of ----------, 199- of approximately $---------- (subject to a
permitted variance as described herein under "Additional Information") to be
sold by PaineWebber Mortgage Acceptance Corporation IV (the "Depositor").
Principal and interest are payable on the 25th day of each month or, if such day
is not a business day, then on the next succeeding business day, beginning in
- ------------- (each, a "Distribution Date").
The Class A Certificates evidence beneficial ownership of ----% (the
"Senior Percentage") of the Trust Fund, and are entitled to receive
distributions equal to the Senior Distribution Amount (as defined herein). The
Class B Certificates evidence in the aggregate a ----% beneficial ownership
interest in the Trust Fund. The rights of the Class B Certificateholders to
receive distributions with respect to the Mortgage Loans are subordinate to the
rights of the Class A Certificateholders to the extent described herein. See
"Description of the Certificates--General".
There is currently no secondary market for the Certificates offered hereby
and there can be no assurance that a secondary market for the Certificates will
develop. PaineWebber Incorporated expects to establish a market in the
Certificates offered hereby, but is not obligated to do so. There is no
assurance that any such market, if established, will continue.
Prospective investors should consider the information set forth under "Risk
Factors" on page S----- of this Prospectus Supplement and page ---- of the
accompanying Prospectus.
[An election will be made to treat the Trust Fund as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes. As
described more fully herein and in the Prospectus, the Class A Certificates will
constitute "regular interests" in the REMIC. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.]
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT AS
SET FORTH HEREIN. NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS
WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Aggregate
Initial Proceeds to
Certificate Underwriting the
Principal Price to Discounts and Depositor
Balance Public (1) Commissions (1) (2)
------- ---------- ----------- -------
Class A $ % % %
Certificates....
- --------------------------------------------------------------------------------
(1) Plus accrued interest from --------------, 199--.
(2) Before deducting expenses payable by the Depositor estimated to be
$-------------.]
[The Senior Certificates offered hereby will be [purchased by PaineWebber
Incorporated (the "Underwriter") from the Depositor and will be] offered by [the
Underwriter] from time to time to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. Proceeds to
the Depositor from the sale of the Senior Certificates, before deducting
expenses payable by the Depositor estimated to be $-----------, will be ----% of
the aggregate of the initial Certificate Principal Balance of the Senior
Certificates, plus accrued interest at the Pass-Through Rate from
- --------------, 199--.]
The Senior Certificates offered hereby [are] [will be purchased by
PaineWebber Incorporated (the "Underwriter") from the Depositor and will be]
offered subject to receipt and acceptance by the Underwriter, to prior sale and
to the Underwriter's right to reject any order in whole or in part and to
withdraw, cancel or modify the offer without notice. It is expected that
delivery of the Senior Certificates offered hereby will be made at the office of
PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York, 10019
[or through the facilities of The Depository Trust Company] on or about
- -------------------, 199--.
-----------------------
PaineWebber Incorporated
- ------------, 199--
The Senior Certificates offered by this Prospectus Supplement will be part
of a separate series of Certificates being offered by the Depositor pursuant to
its Prospectus dated -----------, 199--, of which this Prospectus Supplement is
a part and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY OF PROSPECTUS SUPPLEMENT ..............................................
RISK FACTORS ..................................................................
THE MORTGAGE POOL ..............................................................
ADDITIONAL INFORMATION .........................................................
DESCRIPTION OF THE CERTIFICATES ................................................
General ...............................................................
Subordinate Certificates and Reserve Fund .............................
YIELD ON THE CERTIFICATES AND PREPAYMENTS OF THE MORTGAGE LOANS ................
Delay in Payment of Interest ..........................................
Prepayment Considerations and Risks ...................................
POOLING AND SERVICING AGREEMENT ................................................
General ...............................................................
The Master Servicer ...................................................
The Trustee ...........................................................
Servicing and Other Compensation and Payment of Expenses ..............
Voting Rights .........................................................
Termination ...........................................................
CERTAIN FEDERAL INCOME TAX CONSEQUENCES ........................................
Special Tax Considerations Applicable to ..............................
REMIC Residual Certificates .........................................
PLAN OF DISTRIBUTION ...........................................................
LEGAL MATTERS ..................................................................
RATING .........................................................................
Until ---------------, all dealers effecting transactions in the Senior
Certificates, whether or not participating in this distribution, may be required
to deliver a Prospectus Supplement and the Prospectus to which it relates. This
is in addition to the obligation of dealers to deliver a Prospectus Supplement
and Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SENIOR
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used but not defined herein shall have the meanings assigned
thereto in the Prospectus. An Index of Significant Definitions is included at
the end of the Prospectus.
Title of Series...............Asset-Backed Certificates, Series 199-----, ---%
Pass-Through Rate (the "Certificates").
Senior Certificates...........$------------- initial Certificate Principal
Balance (approximate), ---% Pass-Through Rate,
evidencing approximately -----% (the "Senior
Percentage") of the aggregate principal balance of
the Mortgage Loans as of ------------ 1, 199--
(the "Cut-off Date"), and which are entitled to
receive distributions equal to the Senior
Distribution Amount (as defined herein).
Subordinate Certificates......[As to Class B-1], $----------- initial
Certificate Principal Balance (approximate), ----%
Pass-Through Rate, evidencing approximately ----%
(the "Subordinate Percentage") of the aggregate
principal balance of the Mortgage Loans as of the
Cut-off Date, and which are subordinate to the
Senior Certificates to the extent of the Available
Subordination Amount (as defined herein). [The
Class B-2 Certificates, which have no Certificate
Principal Balance and no Pass-Through Rate,
represent the right to receive the amount, if any,
remaining in the Trust Fund after the Senior
Certificates and the Class B-1 Certificates have
been retired.] See "Description of the
Certificates--Distributions" herein.
The Subordinate Certificates are not being offered
hereby, and may be sold at any time in accordance
with the terms of the Pooling and Servicing
Agreement, dated as of ----------- 1, 199--,
pursuant to which the Series 199----- Certificates
will be issued (the "Agreement").
Depositor.....................PaineWebber Mortgage Acceptance Corporation IV, a
wholly-owned limited purpose finance subsidiary of
PaineWebber Group Inc., and an affiliate of the
Underwriter. See "The Depositor" in the
Prospectus.
Trustee.......................-----------------------------------------. See
"Pooling and Servicing Agreement--The Trustee"
herein.
Master Servicer...............-----------------------------. See "Pooling and
Servicing Agreement--The Master Servicer" herein.
Interest......................Passed through monthly on each Distribution Date,
commencing on ---------- 25, 199--.
Principal (including
prepayments)..................Passed through monthly on each Distribution Date,
commencing on ---------- 25, 199--.
Senior Distribution Amount....On each Distribution Date, to the extent of
available funds and subject to the limits of the
subordination provisions described below, the
holders of Class A Certificates will be entitled
to receive an amount equal to the Senior
Percentage times the sum of (i) all scheduled
payments on the Mortgage Loans, with interest at
the Net Mortgage Rate, due during the related Due
Period whether or not received, (ii) all mortgagor
prepayments received during the preceding calendar
month, and (iii) the unpaid principal balance of
each defaulted Mortgage Loan finally liquidated
during the preceding calendar month.
Subordinate Certificates
and Reserve Fund..............The rights of the Class B Certificateholders to
receive distributions with respect to the Mortgage
Loans will be subordinate to such rights of the
Class A Certificateholders to the extent of the
Available Subordination Amount, as described
herein. This subordination is intended to enhance
the likelihood of regular receipt in full by the
Class A Certificateholders of the Senior
Distribution Amount and to protect them against
losses. The Maximum Subordination Amount initially
will equal approximately $---------- (--% of
aggregate principal balance of the Mortgage Loans
as of the Cut-off Date). Commencing ----------,
19--, the Maximum Subordination Amount will
gradually decline annually in accordance with a
schedule set forth in the Agreement, and on
----------, 19-- and each ---------- thereafter
will be reduced to equal the greater of --% of the
aggregate principal balance of the Mortgage Loans
then outstanding and the sum of the principal
balances of the ---- largest Mortgage Loans
outstanding.
The protection afforded to the Class A
Certificateholders from the subordination
provisions will be effected both by the
preferential right (limited to the portion of the
Maximum Subordination Amount remaining at any time
(the "Available Subordination Amount")) of the
Class A Certificateholders to receive current
distributions from the Mortgage Pool equal to the
Senior Distribution Amount, and by the
establishment of a reserve fund (the "Reserve
Fund"). [The Reserve Fund is not part of the Trust
Fund.] The Reserve Fund will be established with
an initial cash deposit by the Master Servicer of
$---------- (the "Initial Deposit"), and will be
augmented by the retention of distributions of
principal and interest otherwise payable to the
Class B Certificateholders until the Reserve Fund
reaches the balance required pursuant to the
Agreement (the "Specified Reserve Fund Balance").
Thereafter, distributions of principal otherwise
payable to the Class B Certificateholders will be
retained to the extent necessary to maintain the
Reserve Fund at the Specified Reserve Fund
Balance, as described herein. See "Description of
the Certificates--Subordinate Certificates and
Reserve Fund" herein.
The subordination provisions and the Reserve Fund
are intended to enhance the likelihood of timely
payment of principal and interest and to protect
the Class A Certificateholders against losses;
however, in certain circumstances the Reserve Fund
could be depleted and shortfalls could result. If
on any Distribution Date, the aggregate amount of
collections on the Mortgage Loans, Advances by the
Master Servicer (as described below), and amounts
available in the Reserve Fund do not provide
sufficient funds to pay the Senior Distribution
Amount, the amount of the shortfall, plus interest
at the Net Mortgage Rate, will be added to the
amount the Class A Certificateholders are entitled
to receive on the next Distribution Date. In the
event the Reserve Fund is depleted before the
Available Subordination Amount is reduced to zero,
the Class A Certificateholders will nevertheless
have a preferential right to receive current
distributions from the Mortgage Pool, limited by
the then Available Subordination Amount. The Class
A Certificateholders will bear their proportionate
share of any losses realized on the Mortgage Loans
following the depletion of the Reserve Fund and
the reduction of the Available Subordination
Amount to zero.
Advances......................In the event that the amount eligible for
distribution to the Class A Certificateholders on
any Distribution Date is less than the Senior
Distribution Amount, the Master Servicer may, but
is not obligated to, make voluntary advances of
cash (the "Advances") to the Class A
Certificateholders in respect of delinquent
scheduled payments to the extent that the Master
Servicer determines such advances will be
recoverable from future payments and collections
on the Mortgage Loans or otherwise. See
"Description of the Certificates--Advances" in the
Prospectus.
The Mortgage Pool.............The Mortgage Pool will consist of 30-year, fixed
rate, level monthly payment, fully amortizing
Mortgage Loans, with an aggregate principal
balance as of the Cut-off Date of approximately
$----------- (subject to a permitted variance of
plus or minus -----%). [Include appropriate
information, with corresponding changes, for
different types of loans.] See "The Mortgage Pool"
herein.
Denominations.................The Senior Certificates offered hereby will be
offered in registered form, in denominations
evidencing initial Certificate Principal Balances
of $----------- and multiples of $------- in
excess thereof, with one Certificate evidencing an
additional amount equal to the remainder of the
aggregate initial Certificate Principal Balance.
Record Date...................All distributions will be made by or on behalf of
the Trustee to the persons in whose names the
Certificates are registered at the close of
business on the last business day of the month
preceding the month in which the related
Distribution Date occurs. See "Description of the
Certificates--Distributions" herein.
Optional Termination..........At its option, the [Depositor][Master Servicer]
may repurchase all of the Mortgage Loans in the
Trust Fund and thereby effect early retirement of
the Certificates on any Distribution Date on which
the aggregate principal balance of the Mortgage
Loans remaining in the Trust Fund is less than --%
of the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date. See "Pooling and
Servicing Agreement--Termination" herein and
"Description of the Certificates--Termination" in
the Prospectus.
Special Prepayment
Considerations................The rate of principal payments on the Senior
Certificates collectively will depend on the rate
and timing of principal payments (including
prepayments, defaults and liquidations) on the
Mortgage Loans. As is the case with
mortgage-backed securities generally, the Senior
Certificates are subject to substantial inherent
cash-flow uncertainties because the Mortgage Loans
may be prepaid at any time. Generally, when
prevailing interest rates are increasing,
prepayment rates on mortgage loans tend to
decrease, resulting in a reduced return of
principal to investors at a time when reinvestment
at such higher prevailing rates would be
desirable. Conversely, when prevailing interest
rates are declining, prepayment rates on mortgage
loans tend to increase, resulting in a greater
return of principal to investors at a time when
reinvestment at comparable yields may not be
possible. See "Yield on the Certificates and
Prepayments of the Mortgage Loans" herein, and
"Maturity and Prepayment Considerations" in the
Prospectus.
Special Yield Considerations..The yield to maturity on the Senior Certificates
will depend on the rate and timing of principal
payments (including prepayments, defaults,
liquidations) on the Mortgage Loans, as well as
other factors as described herein. The yield to
investors on the Certificates will be adversely
affected by any allocation thereto of prepayment
interest shortfalls on the Mortgage Loans, which
are expected to result from the distribution of
interest only to the date of prepayment (rather
than a full month's interest) in connection with
prepayments in full, and the lack of any
distribution of interest on the amount of any
partial prepayments.
See "Yield on the Certificates and Prepayments of
the Mortgage Loans" herein, and "Maturity and
Prepayment Considerations" in the Prospectus.
[Certain Federal
Income Tax Consequences.......Upon the issuance of the Offered Certificates,
Cadwalader, Wickersham & Taft, counsel to the
Depositor, will deliver the following opinion:
[Assuming compliance with the provisions of the
Pooling and Servicing Agreement, for federal
income tax purposes, the Trust Fund will qualify
as a "real estate mortgage investment conduit" (a
"REMIC") within the meaning of Sections 860A
through 860G (the "REMIC Provisions") of the
Internal Revenue Code of 1986 (the "Code"), and
(i) the Class A, Class B and Class C Certificates
will evidence "regular interests" in such REMIC
and (ii) the Class R Certificates will be the sole
class of "residual interests" in such REMIC, each
within the meaning of the REMIC Provisions in
effect on the date hereof.] [Assuming compliance
with the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund will
be classified as a grantor trust under Subpart E,
part I of subchapter J of the Code, and not as an
association taxable as a corporation or as a
partnership.]
Under the REMIC Regulations, the Class R
Certificates will not be regarded as having
"significant value" for purposes of applying the
rules relating to "excess inclusions." In
addition, the Class R Certificates may constitute
"non-economic" residual interests for purposes of
the REMIC Regulations. Transfers of the Class R
Certificates will be restricted under the Pooling
and Servicing Agreement to United States Persons
in a manner designed to prevent a transfer of a
non-economic residual interest from being
disregarded under the REMIC Regulations. See
"Certain Federal Income Tax Consequences--Special
Tax Considerations Applicable to REMIC Residual
Certificates" herein and "Certain Federal Income
Tax Consequences--REMICs--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions"
and "--Noneconomic REMIC Residual Certificates" in
the Prospectus.
The Class R Certificateholders may be required to
report an amount of taxable income with respect to
the early years of the Trust Fund's term that
significantly exceeds distributions on the Class R
Certificates during such years, with corresponding
tax deductions or losses deferred until the later
years of the Trust Fund's term.
Accordingly, on a present value basis, the tax
detriments occurring in the earlier years may
substantially exceed the sum of any tax benefits
in the later years. As a result, the Class R
Certificateholders' after-tax rate of return may
be zero or negative, even if their pre-tax rate of
return is positive.
See "Yield and Maturity Considerations,"
especially "--Additional Yield Considerations
Applicable Solely to the Class R Certificates",
and "Certain Federal Income Tax
Consequences--Special Tax Considerations
Applicable to REMIC Residual Certificates" herein.
For further information regarding the Federal
income tax consequences of investing in the
Offered Certificates, see "Certain Federal Income
Tax Consequences" herein and in the Prospectus.
Rating........................It is a condition to the issuance of the
Certificates offered hereby that the Senior
Certificates be rated ---- by -----------. 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. A security rating does not
address the frequency of prepayments of Mortgage
Loans, or the corresponding effect on yield to
investors. See "Yield on the Certificates" and
"Rating" herein.
Legal Investment..............The Senior Certificates will constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA")
so long as they are rated as described herein,
and, as such, are legal investments for certain
entities to the extent provided in SMMEA. See
"Legal Investment" in the Prospectus and "Rating"
herein
<PAGE>
RISK FACTORS
[To be Provided]
THE MORTGAGE POOL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date, after deducting payments
of principal due on such date, of [approximately] $----------------- [(subject
to a permitted variance of plus or minus --%)]. The Mortgage Loans to be
included in the Mortgage Pool will be acquired by the Depositor from
- ------------------------, in its capacity as Unaffiliated Seller. In addition,
the [Unaffiliated Seller] will be the Master Servicer for the Certificates.
[All of the Mortgage Loans have monthly payments due on the first day of
each month. None of the Mortgage Loans are Buydown Mortgage Loans. At
origination each Mortgage Loan had a term to maturity of up to 30 years. The
mortgagor with respect to each Mortgage Loan represented in its loan application
that the Mortgaged Property initially would be owner-occupied as its primary
residence.] [Insert alternate description of loan features if applicable.]
All Mortgage Loans will have Net Mortgage Rates of ----%. As to any
Mortgage Loan, the "Net Mortgage Rate" is equal to the Mortgage Rate minus the
Servicing Fee Rate. The Mortgage Loans will have Mortgage Rates ranging from
- ---% to ---%, with a weighted average Mortgage Rate as of the Cut-off Date of
- ---%. The weighted average maturity of the Mortgage Loans as of the Cut-off Date
will be approximately --- years and --- months. None of the Mortgage Loans will
have been originated prior to ------------- or will have an unexpired term at
the Cut-off Date of less than approximately --- years and --- months or more
than approximately --- years and -- months. The Mortgage Loans will each have a
principal balance at origination of not less than $----------- or more than
$--------.
The Mortgage Loans will also have the following characteristics as of the
Cut-off Date (expressed as a percentage of the aggregate principal balance of
the Mortgage Loans having such characteristics relative to the aggregate
principal balance of all Mortgage Loans):
No more than ----% of the Mortgage Loans will have Loan-to-Value
Ratios at origination exceeding 80%. Mortgage Loans with Loan-to-Value
Ratios at origination exceeding 80% will be covered by policies of
primary mortgage guaranty insurance (each, a "Primary Credit Insurance
Policy") insuring against default as to the principal amount of the
Mortgage Loans exceeding 75% (or a lesser percentage) of the
Collateral Values of the Mortgaged Properties at origination and such
insurance will be maintained until the Loan-to-Value Ratios are
reduced to 80% or less. [insert information as to FHA insurance or VA
guarantee if applicable.]
At least ---% of the Mortgage Loans will be secured by detached
one-family dwelling units.
No more than ---% of the Mortgage Loans will be secured by
Mortgaged Properties located in ----------- and no more than ------%
of the Mortgage Loans will be secured by Mortgaged Properties located
in -------. Except as indicated in the preceding sentence, no more
than ---% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one state.
No more than ---% of the Mortgage Loans will be secured by
Mortgaged Properties located in any one zip code area or housing
development, and no more than ---% will be secured by Mortgaged
Properties located in any one zip code area or housing development in
California.
No more than -----% of the Mortgage Loans will be secured by
vacation or second homes. No more than ---% of the Mortgage Loans will
be secured by condominium units.
[The foregoing type of description will be used if precise information on
the Mortgage Loans is not available on the date of the Prospectus Supplement; a
description similar to the following description will be used if precise
information is available.]
[Set forth below is a description of certain additional characteristics of
the Mortgage Loans as of the Cut-off Date:]
MORTGAGE RATES
Percentage of
Aggregate Aggregate
Unpaid Unpaid
Number of Principal Principal
Mortgage Rates Loans Balance Balance
- -------------- ----- ------- -------
---------- $--------- --------%
Total............................ $ 100%
========== ========== =========
As of the Cut-off Date, the weighted average Mortgage Rate was -----% per annum.
REMAINING TERMS TO STATED MATURITY
Percentage of
Aggregate Aggregate
Remaining Terms Unpaid Unpaid
Stated Maturity Number of Principal Principal
(in Months) Loans Balance Balance
- -------------- ----- ------- -------
---------- $--------- --------%
Total............................ $ 100%
========== ========== =========
As of the Cut-off Date, the weighted average remaining term to stated maturity
was approximately ------- months.
ORIGINAL LOAN-TO-VALUE RATIOS
Percentage of
Aggregate Aggregate
Unpaid Unpaid
Number of Principal Principal
Original Loan-to-Value Ratios Loans Balance Balance
- ----------------------------- ----- ------- -------
Up to 70.00%........................... $ %
70.01% - 80.00%........................
80..01% - 90.00%....................... ---------- ---------- ---------
More than 90.00%....................... ---------- ---------- ---------
Total............................ $ 100%
========== ========== =========
As of the Cut-off Date, the weighted average loan-to-value ratio at origination
of the Mortgage Loans was ------% per annum.
ORIGINAL LOAN AMOUNTS
Percentage of
Aggregate Aggregate
Unpaid Unpaid
Number of Principal Principal
Original Loan Amounts Loans Balance Balance
- --------------------- ----- ------- -------
Up to $50,000.00....................... $ %
$50,000.00 - $99,000.00................
$100,000.00 - $149,999.99..............
$150,000.00 - $199,999.99..............
$200,000.00 - $249,999.99..............
$250,000.00 - $299,999.99..............
$300,000.00 - $349,999.99..............
$350,000.00 - $399,999.99..............
$400,000.00 - $449,999.99..............
$450,000.00 - $500,000.00.............. ---------- ---------- ---------
Total............................ $ 100%
========== ========== =========
As of the Cut-off Date, the average unpaid balance of the Mortgage Loans was
$----------- and the unpaid principal balances of the largest and smallest
Mortgage Loans were $------------ and $------------, respectively.
TYPES OF LOANS
Percentage of
Aggregate Aggregate
Unpaid Unpaid
Number of Principal Principal
Types Loans Balance Balance
- ----- ----- ------- -------
Conventional Loans secured by: $ %
One-family detached...............
Low-rise condominiums/2
family..........................
High-rise condominiums/3-4
family.......................... ---------- ---------- ---------
Total............................ $ 100%
========== ========== =========
YEARS OF ORIGINATION OF MORTGAGE LOANS
Percentage of
Aggregate Aggregate
Unpaid Unpaid
Years of Number of Principal Principal
Origination Loans Balance Balance
- ----------- ----- ------- -------
199-................................... $ %
199-...................................
199-...................................
199-...................................
199-................................... ---------- ---------- ---------
Total............................ $ 100%
========== ========== =========
OCCUPANTS OF MORTGAGED PROPERTIES
Percentage of
Aggregate Aggregate
Unpaid Unpaid
Number of Principal Principal
Owner Loans Balance Balance
- ----- ----- ------- -------
Primary Residence............. $ %
Vacation/second home..........
Non-owner occupied
investment property......... ---------- ---------- ---------
Total............................ $ 100%
========== ========== =========
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
Percentage of
Aggregate Aggregate
Unpaid Unpaid
Number of Principal Principal
States Loans Balance Balance
- ------ ----- ------- -------
$ %
---------- ---------- ---------
Total............................ $ 100%
========== ========== =========
[The foregoing information will be modified to the extent necessary to
describe different types of mortgage loans].
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Certificates,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise, if the Depositor deems such removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the Mortgage Pool prior to the issuance of the
Certificates unless including such mortgage loans would materially alter the
characteristics of the Mortgage Pool as described herein. The Depositor believes
that the information set forth herein will be representative of the
characteristics of the Mortgage Pool as it will be constituted at the time the
Certificates are issued, although the range of Mortgage Rates and maturities and
certain other characteristics of the Mortgage Loans in the Mortgage Pool may
vary.
A report on Form 8-K containing a detailed description of the Mortgage
Loans will be available to purchasers of the Certificates at or before initial
issuance and will be filed with the Securities and Exchange Commission within
fifteen days after such initial issuance. The report on Form 8-K will specify
the precise aggregate principal balance of the Mortgage Loans outstanding as of
the Cut-off Date and will set forth on a precise basis the other information
presented in this Prospectus Supplement on an approximate basis.
DESCRIPTION OF THE CERTIFICATES
The Series 199----- Certificates will consist of a single class of Senior
Certificates (the "Class A Certificates") and [a single class] [two classes] of
Subordinate Certificates (the "Class B[-1" and "Class B-2]" Certificates). The
Class A Certificates have an initial Certificate Principal Balance of
$--------------- (approximate), evidencing approximately ----% (the "Senior
Percentage") of the aggregate principal balance of the Mortgage Loans in the
Trust Fund as of the Cut-off Date. The Class B[-1] Certificates have an initial
Certificate Principal Balance of $-------------- evidencing ---% (the
"Subordinate Percentage") of the aggregate principal balance of the Mortgage
Loans in the Trust Fund as of the Cut-off Date. [The Class B-2 Certificates,
which have no Certificate Principal Balance and no Pass-Through Rate, represent
the right to receive the balance of the Trust Fund after retirement of the
Senior Certificates and the Class B-1 Certificates, as described herein.] The
Class B[-1 and Class B-2] Certificates are not being offered hereby, and may be
sold at any time to one or more institutional investors in accordance with the
terms of the Agreement.
General
- -------
The Class A Certificates will evidence beneficial ownership of the Senior
Percentage of the Mortgage Loans and the other assets included in the Trust
Fund, and will be entitled to receive distributions equal to the entire Senior
Distribution Amount. The Subordinate Percentage in the Trust Fund will be
evidenced by Class B Certificates, which will be subordinate to the Class A
Certificates to the extent of the Available Subordination Amount. The Class B
Certificates are not being offered hereby. The Class A Certificates will be
offered in registered form, in minimum denominations of approximately
$---------- and integral multiples thereof.
On each Distribution Date, to the extent of available funds and subject to
the limits of the subordination provisions described below, the holders of Class
A Certificates will be entitled to receive an amount equal to the Senior
Percentage times the sum of (i) all scheduled payments on the Mortgage Loans,
with interest at the Net Mortgage Rate, due during the related Due Period
whether or not received, (ii) all mortgagor prepayments received during the
preceding calendar month, and (ii) the unpaid principal balance of each
defaulted Mortgage Loan finally liquidated during the preceding calendar month.
The Certificates will be issued in fully registered form only. The Class A
Certificates will be transferable and exchangeable at the corporate trust office
of the Trustee at its Corporate Trust Department. No service charge will be made
for any registration of exchange or transfer of Class A Certificates, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
Distributions of principal and interest on the Certificates will be made on
each Distribution Date beginning ----------, to the persons in whose names the
Certificates are registered at the close of business on the last business day of
the month preceding the month in which payment is made (the "Record Date").
Distributions will be made by wire transfer in immediately available funds to
the account of a Certificateholder at a bank or other entity having appropriate
facilities therefor, or by check mailed to the address of the person entitled
thereto as it appears on the Certificate Register, except that the final
distribution in retirement of Certificates will be made only upon presentation
and surrender of the Certificates at the office or agency of the Trustee
specified in the final distribution notice to Certificateholders.
Subordinate Certificates and Reserve Fund
- -----------------------------------------
The Class B Certificates are Subordinate Certificates, and the rights of
the holders thereof to receive distributions on the Mortgage Loans will be
subordinate to the rights of the holders of the Class A Certificates to the
extent of the Available Subordination Amount. This subordination is intended to
enhance the likelihood of regular receipt in full by the Class A
Certificateholders of the Senior Distribution Amount and to protect them against
losses. The Maximum Subordination Amount initially will equal approximately
$---------- (--% of aggregate principal balance of the Mortgage Loans as of the
Cut-off Date). Commencing ----------, 19--, the Maximum Subordination Amount
will gradually decline annually in accordance with a schedule set forth in the
Agreement, and on ----------, 19-- and each ------------ thereafter will be
reduced to equal the greater of ---% of the aggregate principal balance of the
Mortgage Loans then outstanding or the sum of the principal balances of the
three largest Mortgage Loans outstanding. The Available Subordination Amount as
of any Distribution Date is equal to the Maximum Subordination Amount less the
Cumulative Subordination Payments as of the preceding Distribution Date. As of
any Distribution Date, Cumulative Subordination Payments will equal (i) the
total of all amounts distributed to the Class A Certificateholders over the term
of the Agreement, minus (ii) the Senior Percentage times the sum of all
Available Distribution Amounts for all Distribution Dates up to and including
such Distribution Date plus all Late Collections (all amounts received which
represent late payments or collections of scheduled payments which were
delinquent) previously applied to reimburse Advances made by the Master
Servicer, minus (iii) the total amount of unreimbursed Advances then
outstanding.
The protection afforded to the Class A Certificateholders from the
subordination provisions will be effected both by the preferential right
(limited to the Available Subordination Amount) of the Class A
Certificateholders to receive current distributions from the Mortgage Pool equal
to the Senior Distribution Amount and by the establishment of a reserve fund
(the "Reserve Fund"). [The Reserve Fund is not part of the Trust Fund.] The
Reserve Fund will be established with an initial cash deposit by the Master
Servicer of $---------- (the "Initial Deposit") and will be augmented by the
retention of distributions of principal and interest otherwise payable to the
Class B Certificateholders until the Reserve Fund reaches the required balance
(the "Specified Reserve Fund Balance"). Thereafter, distributions of principal
otherwise payable to the Class B Certificateholders will be retained to the
extent necessary to maintain the Reserve Fund at the Specified Reserve Fund
Balance.
As of any Distribution Date until ---------- 1, 19--, the Specified Reserve
Fund Balance will be the sum of (i) the Initial Deposit and (ii) the greater of
(x) ---% of the aggregate principal balance of the Mortgage Loans on the Cut-off
Date and (y) the Available Subordination Amount as of the related Determination
Date less the outstanding principal balance of the Mortgage Loans represented by
the Class B Certificates as of the related Determination Date. As of each
Distribution Date following ---------- 1, 19--, the Specified Reserve Fund
Balance will be the sum of (i) the Initial Deposit and (ii) the greater of (x)
- ---% of the aggregate principal balance of the Mortgage Loans as of the related
Determination Date and (y) the Available Subordination Amount as of the related
Determination Date less the outstanding principal balance represented by the
Class B Certificates as of the related Determination Date. However, the amount
determined pursuant to each clause (ii) above will not be less than the lesser
of (a) the sum of the outstanding principal balances of the three largest
Mortgage Loans as of the related Determination Date and (b) the Available
Subordination Amount. See "Subordination" in the Prospectus.
The subordination provisions and the Reserve Fund are intended to enhance
the likelihood of timely payment of principal and interest and to protect the
Class A Certificateholders against losses; however, in certain circumstances the
Reserve Fund could be depleted and shortfalls could result. If on any
Distribution Date the aggregate amount of collections on the Mortgage Loans,
Advances by the Master Servicer (as described below), and amounts available in
the Reserve Fund do not provide sufficient funds to make full distributions to
the Class A Certificateholders, the amount of the shortfalls, plus interest
thereon at the applicable Pass-Through Rate, will be added to the amount the
Class A Certificateholders are entitled to receive on the next Distribution
Date. In the event the Reserve Fund is depleted before the Available
Subordination Amount is reduced to zero, the Class A Certificateholders will
nevertheless have a preferential right to receive current distributions from the
Mortgage Pool, limited by the then Available Subordination Amount. The Class A
Certificateholders will bear their proportionate share of any losses realized on
the Mortgage Loans following the depletion of the Reserve Fund and the reduction
of the Available Subordination Amount to zero. The Class A Certificateholders
will bear their proportionate share of any losses realized on the Mortgage Loans
in excess of the Available Subordination Amount.
YIELD ON THE CERTIFICATES AND PREPAYMENTS
OF THE MORTGAGE LOANS
Delay in Payment of Interest
- ----------------------------
The effective yield to the holders of the Certificates will be lower than
the yield otherwise produced by the Pass-Through Rate and purchase price because
monthly interest will not be payable to such holders until the 25th day (or if
such day is not a business day, then on the next succeeding business day) of the
month following the month of accrual (without any additional distribution of
interest or earnings thereon in respect of such delay). See "Yield
Considerations" and "Description of the Certificates--Retained Interest,
Servicing Compensation and Payment of Expenses" in the Prospectus.
Prepayment Considerations and Risks
- -----------------------------------
The rate of principal payments on the Senior Certificates, the aggregate
amount of distributions on the Senior Certificates and the yield to maturity of
the Senior Certificates will be directly related to the rate of payments of
principal on the Mortgage Loans. The rate of principal payments on the Mortgage
Loans will in turn be affected by the amortization schedules of the Mortgage
Loans and by the rate of principal prepayments thereon (including for this
purpose payments resulting from refinancings, liquidations of the Mortgage Loans
due to defaults, casualties, condemnations and repurchases by the Unaffiliated
Seller, the Master Servicer and Depositor). The Mortgage Loans may be prepaid by
the mortgagors at any time without payment of any prepayment fee or penalty.
Prepayments, liquidations and purchases of the Mortgage Loans will result in
distributions to Certificateholders of amounts which would otherwise be
distributed over the remaining terms of the Mortgage Loans. See "Maturity and
Prepayment Considerations" in the Prospectus. Since the rate of payment of
principal on the Mortgage Loans will depend on future events and a variety of
factors (as described more fully herein and in the Prospectus under "Yield
Considerations" and "Maturity and Prepayment Considerations"), no assurance can
be given as to such rate or the rate of principal prepayments.
In general, if prevailing mortgage rates fell significantly below the
Mortgage Rates on the Mortgage Loans, the rate of prepayment (and refinancing)
would be expected to increase. Conversely, if prevailing mortgage rates rose
significantly above the Mortgage Rates on the Mortgage Loans, the rate of
prepayment on the Mortgage Loans would be expected to decrease. The rate of
payments (including prepayments) on pools of mortgage loans is also influenced
by a variety of economic, geographic, social and other factors, including
changes in mortgagors' housing needs, job transfers, unemployment, mortgagors'
net equity in the mortgaged properties and servicing decisions. Accordingly,
there can be no certainty as to the rate of prepayments on the Mortgage Loans
during any period or over the life of the Certificates. See "Yield
Considerations" and "Maturity and Prepayment Considerations" in the Prospectus.
The Mortgage Loans are subject to assumption under circumstances described
under "Description of the Certificates--Collection and Other Servicing
Procedures" and "Certain Legal Aspects of Residential Loans--Enforceability of
Certain Provisions; Prepayment Charges and Prepayments" in the Prospectus. The
extent to which the Mortgage Loans are assumed by purchasers of the Mortgaged
Properties rather than prepaid by the related mortgagors in connection with the
sales of the Mortgage Properties will affect the weighted average life of the
Senior Certificates. See "Maturity and Prepayment Considerations" in the
Prospectus.
Since the rate of principal payments (including prepayments) on the
Mortgage Loans will significantly affect the yield to maturity on the
Certificates, prospective investors are urged to consult their investment
advisors as to both the rate of future principal payments (including
prepayments) on the Mortgage Loans and the suitability of the Certificates to
their investment objectives.
POOLING AND SERVICING AGREEMENT
General
- -------
The Certificates offered hereby will be issued pursuant to a Pooling and
Servicing Agreement (the "Agreement") to be dated as of ------------- 1, 199--,
among the Depositor, the Master Servicer and the Trustee, a form of which is
filed as an exhibit to the Registration Statement. Reference is made to the
Prospectus for important information additional to that set forth herein
regarding the terms and conditions of the Agreement and the Certificates. [The
Trustee will appoint ------------------- (the "Custodian"), to serve as
Custodian in connection with the Certificates.] The Certificates will be
transferable and exchangeable at the corporate trust office of
- -----------------------------------------, located in
- --------------------------------, which will serve as Certificate Registrar.
- -------------------- [---------- will act as paying agent and authenticating
agent.] No service charge will be made for any transfer or exchange of
Certificates but the [Trustee] [Certificate Registrar] may require payment of a
sum sufficient to cover any tax or governmental charge that may be imposed in
connection with the transfer or exchange of Certificates. The Depositor will
provide to a prospective or actual Certificateholder without charge, on written
request, a copy (without exhibits) of the Agreement. Requests should be
addressed to PaineWebber Mortgage Acceptance Corporation IV, 1285 Avenue of the
Americas, New York, New York 10019, Attention: ----------------.
The Master Servicer
- -------------------
-----------------------------, a --------------------- (the "Master
Servicer"), will act as Master Servicer for the 199------ Certificates pursuant
to the Agreement. The Master Servicer's principal executive offices are located
at --------- ---------------------------, and its telephone number is --------
- -----------. [Describe other locations and general operations of the Master
Servicer.]
The following table summarizes the foreclosure experience on conventional
residential first trust deeds or mortgage loans serviced by the Master Servicer
during the periods indicated:
Year Ended December 31,
-------------------------------------------------------
199_ 199_ 199_ 199_
-------------------------------------------------------
(Dollar Amounts in Thousands)
Principal Balance
(end of period).... $--------- $--------- $--------- $---------
Total Number of
Loans.............. ---------- ---------- ---------- ----------
Total Number of
Foreclosures...... ---------- ---------- ---------- ----------
Percent Foreclosed by
Number of Loans.... ---------% ---------% ---------% ---------%
The following table summarizes the delinquency experience on conventional
residential first trust deeds or mortgage loans serviced by the Master Servicer
during the periods indicated:
Year Ended December 31,
-------------------------------------------------------
199_ 199_ 199_ 199_
-------------------------------------------------------
(Dollar Amounts In Thousands)
Period of Delinquency
30-59 days $ $ $ $
Principal Balance
Number of Loans
Percent of
Delinquent by % % % %
Number of Loans
Period of Delinquency:
60-89 days $ $ $ $
Principal Balance
Number of Loans
Percent of
Delinquent by % % % %
Number of Loans
Period of Delinquency:
90 days or more $ $ $ $
Principal Balance
Number of Loans
Percent of
Delinquent by % % % %
Number of Loans
In Foreclosure $ $ $ $
Principal Balance
Number of Loans
Percent of
Delinquent by % % % %
Number of Loans
Total Delinquent and in
Foreclosure
Principal Balance $ $ $ $
Number of Loans
Percent of
Delinquent by % % % %
Number of Loans
While the above foreclosure and delinquency experience is typical of the
Master Servicer's recent experience, there can be no assurance that the future
experience on the Mortgage Loans will be the same. In addition, the foregoing is
based on all of the conventional loans in the Master Servicer's servicing
portfolio. The Mortgage Loans may be more recently originated than and may have
certain other characteristics unlike the majority of the loans in the Master
Servicer's conventional servicing portfolio.
The Trustee
- -----------
------------------------------------------------------------------------, a
- ----------------------------------- (the "Trustee"), will act as Trustee for the
Series 199------- Certificates pursuant to the Agreement. The Trustee's
principal executive offices are located at -----------------, and its telephone
number is -------------.
Servicing and Other Compensation and Payment of Expenses
- --------------------------------------------------------
The principal compensation to be paid to the Master Servicer in respect of
its master servicing activities for the Certificates will be equal to the
product of the Servicing Fee Rate times the Scheduled Principal Balance of each
Mortgage Loan in the Mortgage Pool. As to any Mortgage Loan, the Servicing Fee
Rate is equal to ---% per annum. The Master Servicer is obligated to pay certain
ongoing expenses associated with the Mortgage Pool and incurred by the Master
Servicer in connection with its responsibilities under the Agreement, including
compensation of any Sub-Servicers. The Master Servicer is also obligated to
include in each distribution on the Certificates that portion of its servicing
compensation equal to interest at the Net Mortgage Rate on the balance of any
Mortgage Loan as to which a prepayment or liquidation occurs, such interest
commencing on the date of the prepayment or liquidation and ending on the due
date of the Mortgage Loan immediately following the date of the prepayment or
liquidation. See "Description of the Certificates--Retained Interest, Servicing
Compensation and Payment of Expenses" in the Prospectus for information
regarding other possible compensation to the Master Servicer and for information
regarding expenses payable by the Master Servicer.
Voting Rights
- -------------
At all times, [--]% of all Voting Rights will be allocated among all
holders of the [Senior] Certificates [and the Class B-1 Certificates] in
proportion to the then outstanding Certificate Principal Balances of their
respective Certificates[, and [--]% of all Voting Rights will be allocated among
holders of the Class B-2 Certificates in proportion to the percentage interests
evidenced by their respective Certificates].
Termination
- -----------
The circumstances under which the obligations created by the Agreement will
terminate in respect of a series of Certificates are described in "Description
of the Certificates Termination" in the Prospectus. The [Depositor] [Master
Servicer] will have the right to repurchase all remaining Mortgage Loans in the
Mortgage Pool and thereby effect early retirement of the Certificates, subject
to the aggregate principal balance of the Mortgage Loans at the time of
repurchase being less than ---% of the aggregate principal balance of such
Mortgage Loans as of the Cut-off Date. In the event the [Depositor] [Master
Servicer] exercises such option, the purchase price distributed with respect to
each Senior Certificate will be 100% of its then outstanding Certificate
Principal Balance plus interest thereon at the Pass-Through Rate. In no event
will the trust created by the Agreement for a series of Certificates continue
beyond the expiration of 21 years from the death of the survivor of the person
or persons named in the Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Cadwalader, Wickersham &
Taft, counsel to the Depositor, will deliver the following opinion: [Assuming
compliance with the provisions of the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund will qualify as a "real estate
mortgage investment conduit" (a "REMIC") within the meaning of Sections 860A
through 860G (the "REMIC Provisions") of the Internal Revenue Code of 1986 (the
"Code"), and (i) the Class A, Class B and Class C Certificates will evidence
"regular interests" in such REMIC and (ii) the Class R Certificates will be the
sole class of "residual interests" in such REMIC, each within the meaning of the
REMIC Provisions in effect on the date hereof.] [Assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, the Trust Fund
will be classified as a grantor trust under Subpart E, part I of subchapter J of
the Code, and not as an association taxable as a corporation or as a
partnership.]
The ---------- Certificates [may] [will] [will not] be treated as having
been issued with original issue discount for Federal income tax reporting
purposes. The prepayment assumption that will be used in determining the rate of
accrual of [original issue discount,] market discount and premium, if any, for
Federal income tax purposes will be based on the assumption that subsequent to
the date of any determination the Mortgage Loans will prepay at a rate equal to
[a CPR of --%]. No representation is made that the Mortgage Loans will prepay at
that rate or at any other rate. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the Prospectus.
The ------------------- Certificates may be treated for Federal income tax
purposes as having been issued at a premium. Whether any holder of [either] such
Class of Certificates will be treated as holding a Certificate with amortizable
bond premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of [each] such Class of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Premium"
in the Prospectus.
The Offered Certificates will be treated as "qualifying real property
loans" within the meaning of Section 593(d) of the Code, assets described in
Section 7701(a)(19)(C) of the Code and "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code, and interest (including original issue
discount, if any) on the Offered Certificates will be interest described in
Section 856(c)(3)(B) of the Code. Moreover, the Offered Certificates will be
"qualified mortgages" within the meaning of Section 860(A)(3) of the Code. See
"Certain Federal Income Tax Consequences--REMICs--Characterization of
Investments in REMIC Certificates" in the Prospectus.
------------------------, a ---------------, will act as REMIC
Administrator for the Trust Fund. [The Master Servicer will be responsible for
the fees and normal disbursements of the REMIC Administrator.] See "Certain
Federal Income Tax Consequences--REMICs--Reporting and Other Administrative
Matters" and "The Pooling and Servicing Agreements--Certain Matters Regarding
the Master Servicer, the Special Servicer, the REMIC Administrator and the
Depositor", "--Events of Default" and "--Rights Upon Event of Default" in the
Prospectus.
For further information regarding the Federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
Special Tax Considerations Applicable to REMIC Residual Certificates
- --------------------------------------------------------------------
The IRS has issued REMIC Regulations that significantly affect holders of
REMIC Residual Certificates. The REMIC Regulations impose restrictions on the
transfer or acquisition of certain residual interests, including the Class R
Certificates. In addition, the REMIC Regulations provide special rules
applicable to: (i) thrift institutions holding residual interests having
"significant value" and (ii) the transfer of "non-economic" residual interests
to United States persons. Pursuant to the Pooling and Servicing Agreement, the
Class R Certificates may not be transferred to non-United States persons. See
"Certain Federal Income Tax Consequences--REMICS--Taxation of Owners of REMIC
Residual Certificates" in the Prospectus.
The REMIC Regulations provide for the determination of whether a residual
interest has "significant value" for purposes of applying the rules relating to
"excess inclusions" with respect to residual interests. Based on the REMIC
Regulations, the Class R Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess inclusions
with respect to the Class R Certificates, which will be in an amount equal to
all or virtually all of the taxable income includable by holders of the Class R
Certificates. See "Certain Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Residual Certificates--Excess Inclusions" in the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "non-economic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, if "a significant purpose of the transfer was
to impede the assessment or collection of tax." Based on the REMIC Regulations,
the Class R Certificates may constitute non-economic residual interests during
some or all of their terms for purposes of the REMIC Regulations and,
accordingly, if a significant purpose of a transfer is to impede the assessment
or collection of tax, transfers of the Class R Certificates may be disregarded
and purported transferors may remain liable for any taxes due with respect to
the income on the Class R Certificates. All transfers of the Class R
Certificates will be subject to certain restrictions under the terms of the
Pooling and Servicing Agreement that are intended to reduce the possibility of
any such transfer being disregarded to the extent that the Class R Certificates
constitute noneconomic residual interests. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Noneconomic REMIC Residual Certificates" in the Prospectus.
The Class R Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the term of the
Trust Fund that significantly exceeds the amount of cash distributions received
by such Certificateholders from the Trust Fund with respect to such periods.
Furthermore, the tax on such income may exceed the cash distributions with
respect to such periods. Consequently, Class R Certificateholders should have
other sources of funds sufficient to pay any federal income taxes due in the
earlier years of the Trust Fund's term as a result of their ownership of the
Class R Certificates. In addition, the required inclusion of this amount of
taxable income during the Trust Fund's earlier accrual periods and the deferral
of corresponding tax losses or deductions until later accrual periods or until
the ultimate sale or disposition of a Class R Certificate (or possibly later
under the "wash sale" rules of Section 1091 of the Code) may cause the Class R
Certificateholders' after-tax rate of return to be zero or negative even if the
Class R Certificateholders' pre-tax rate of return is positive. That is, on a
present value basis, the Class R Certificateholders' resulting tax liabilities
could substantially exceed the sum of any tax benefits and the amount of any
cash distributions on the Class R Certificates over their life.
Potential investors in Class R Certificates should be aware that under the
Pooling and Servicing Agreement, the holder of the largest Percentage Interest
in the Class R Certificates shall, by its acceptance of such Certificates, agree
to irrevocably appoint the Master Servicer as its agent to perform all of the
duties of the tax matters person for the REMIC.
Purchasers of the Class R Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in such
Certificates.
For further information regarding the federal income tax consequences of
investing in the Class R Certificates, see "Yield and Maturity
Considerations--Additional Yield Considerations Applicable Solely to the Class R
Certificates" herein and "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.
PLAN OF DISTRIBUTION
[Subject to the terms and conditions set forth in the Underwriting
Agreement dated ------------, 199-- (the "Underwriting Agreement"), the
Depositor has agreed to sell and PaineWebber Incorporated (the "Underwriter")
has agreed to purchase the Senior Certificates. The Underwriter is obligated to
purchase all Senior Certificates offered hereby if any are purchased.]
[The Depositor has been advised by the Underwriter that it proposes
initially to offer all of the Senior Certificates to the public at the public
offering prices set forth on the cover page of this Prospectus Supplement and to
certain dealers at such prices less a concession not in excess of ---% of the
initial Certificate Principal Balance of the Senior Certificates. The
Underwriter may allow and such dealers may reallow concessions not in excess of
- ---% of the initial aggregate Certificate Principal Balance of the Senior
Certificates. After the initial public offering, the public offering price and
such concessions may be changed.]
[Distribution of the Senior Certificates will be made [by ---------] from
time to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor from the sale of the
Senior Certificates will be -----% of the aggregate of the Certificate Principal
Balances initially represented by the Senior Certificates, plus accrued interest
at the Pass-Through Rate from the Cut-off Date but before deducting expenses
payable by the Depositor. In connection with the purchase and sale of the Senior
Certificates, the Underwriter may be deemed to have received compensation from
the Depositor in the form of underwriting discounts.]
The Underwriting Agreement provides that the Depositor and its parent
corporation will indemnify the Underwriter against certain civil liabilities,
including liabilities under the Securities Act of 1933, or will contribute to
payments the Underwriter may be required to make in respect thereof.
There can be no assurance that a secondary market for the Certificates will
develop or, if it does develop, that it will continue. The primary source of
information available to investors concerning the Certificates will be the
monthly statements discussed in the Prospectus under "Description of the
Certificates--Statements to Certificateholders," which will include information
as to the outstanding principal balance of the Certificates and the status of
the applicable form of credit enhancement. There can be no assurance that any
additional information regarding the Certificates will be available through any
other source. In addition, the Depositor is not aware of any source through
which price information about the Certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the Certificates
may adversely affect the liquidity of the Certificates, even if a secondary
market for the Certificates become available.
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon for
the Depositor and for the Underwriter by Cadwalader, Wickersham & Taft, New
York, New York.
RATING
[It is a condition to issuance that the Senior Certificates offered hereby
be rated in the second highest rating category by a nationally recognized
statistical rating organization as the Depositor may designate.] [rating agency
language] See "Yield on the Certificates and Prepayments of the Mortgage Loans"
herein.
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.
<PAGE>
SUBJECT TO COMPLETION, DATED ------, 199-
PROSPECTUS SUPPLEMENT [Version 4]
(To Prospectus dated ------------, 199--)
$------------------- (Approximate)
Mortgage Asset-Backed Certificates, Series 199-----
PaineWebber Mortgage Acceptance Corporation IV
Depositor
- ---------------------------------------------
Master Servicer
Class A-1: $---------- initial Certificate Principal Balance
(approximate), ----% Certificate Interest Rate
Class A-2: $---------- initial Certificate Principal Balance
(approximate), ----% Certificate Interest Rate
Class A-3: $---------- initial Certificate Principal Balance
(approximate), ----% Certificate Interest Rate
Class A-4: $---------- initial Certificate Principal Balance
(approximate), ----% Certificate Interest Rate
The Series 199----- Certificates will consist of four classes of Senior
Certificates and two classes of Subordinate Certificates. The Senior
Certificates will consist of Class A-1 Certificates, Class A-2 Certificates,
Class A-3 Certificates and Class A-4 Certificates, the latter of which is a
class of Accrual Certificates. The Subordinate Certificates will consist of
Class B-1 and Class B-2 Certificates. Only the Senior Certificates are offered
hereby.
Interest on the Senior Certificates will be distributed, to the extent of
available funds, [quarterly on each ------------ 25, ------------25,
- ---------------25 and ------------ 25,] or, if any such day is not a business
day, then on the next succeeding business day, beginning in ------------, 199--
(each, a "Distribution Date"), in an amount equal to the interest accrued during
the period since the immediately preceding Distribution Date (the "Interest
Accrual Period"). [Quarterly] distributions of interest on the Class A-4
Certificates will commence only upon the retirement of the Class A-1, Class A-2
and Class A-3 Certificates. Prior to that time interest will accrue on the Class
A-4 Certificates and the amount so accrued during each Interest Accrual Period
will be added to the Certificate Principal Balance thereof on the following
Distribution Date.
Distributions in respect of principal on the Senior Certificates will be made on
each Distribution Date in the order of their respective Final Scheduled
Distribution Dates, so that no payment of principal will be made with respect to
any class of Senior Certificates until all classes of Senior Certificates having
an earlier Final Scheduled Distribution Date have been retired. Principal
payments on the Certificates of a particular class will be made on a pro rata
basis among the Certificates of that class.
Certain unscheduled distributions (each, a "Special Distribution") shall be made
solely to Senior Certificateholders as provided herein on the 25th day of any
calendar month in which no Distribution Date occurs, or if such day is not a
business day, then on the next succeeding business day (each, a "Special
Distribution Date"), in the event that the Master Servicer projects that the
amount which will be on deposit in the Certificate Account and which would be
available for distribution in the succeeding calendar month would be
insufficient to pay Senior Certificateholders the optimal amount of principal
and interest to which they will be entitled as of such future date.
The Series 199------ Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (the "Trust Fund") consisting
primarily of a segregated pool of conventional one- to four-family 30-year,
fixed interest rate first mortgage loans (the "Mortgage Loans"), having an
aggregate principal balance as of ---------------, 199- of approximately
$--------------- and an aggregate Cash Flow Value (as defined herein) as of such
date of approximately $------------- (subject in each case to a permitted
variance as described herein under "Additional Information"), to be acquired by
PaineWebber Mortgage Acceptance Corporation IV (the "Depositor"), together with
other assets described herein.
Except under certain circumstances described herein, losses realized on the
Mortgage Loans will be allocated first to the Class B-1 Certificates. As further
described herein, until -----------, -----, or on any Distribution Date
thereafter on which the Senior Percentage (as described herein) is greater than
the initial Senior Percentage, the Cash Flow Value decline resulting from all
mortgagor prepayments on the Mortgage Loans will be distributed solely to
holders of the Senior Certificates in the sequential order described above.
The yield to maturity on the Certificates will be affected by the rate of
principal payments (including prepayments) on the Mortgage Loans. [The Mortgage
Loans may be prepaid at any time without penalty]. See "Yield on the
Certificates and Prepayments of the Mortgage Loans" herein.
There is currently no secondary market for the Certificates offered hereby and
there can be no assurance that a secondary market for the Certificates will
develop. PaineWebber Incorporated expects to establish a market in the
Certificates offered hereby, but is not obligated to do so. There is no
assurance that any such market, if established, will continue.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE S----- OF THIS PROSPECTUS SUPPLEMENT AND PAGE ---- OF THE
ACCOMPANYING PROSPECTUS.
An election will be made to treat the Trust Fund as a "real estate mortgage
investment conduit" ("REMIC") for federal income tax purposes. As described more
fully herein and in the Prospectus, the Senior Certificates and Class B-1
Certificates will constitute the "regular interests" in the REMIC. See "Certain
Federal Income Tax Consequences" herein and in the Prospectus.
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR,
THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT AS SET FORTH
HEREIN. NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS WILL BE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- --------------------------------------------------------------------------------
Final Price to Underwriting Proceeds to
Scheduled Public Discounts and the Depositor
Distribution (2) Commissions (2)(3)
Date
(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A-1...... ------% ------% ------%
Class A-2...... ------% ------% ------%
Class A-3...... ------% ------% ------%
Class A-4...... ------% ------% ------%
Total.......... $--------- $--------- $---------
- --------------------------------------------------------------------------------
<FN>
- ----------
(1) Determined on the assumption that there are no prepayments on the Mortgage
Loans and on the other assumptions herein.
(2) Plus accrued interest from -------- 1, 199--.
(3) Before deducting expenses payable by the Depositor estimated to be
$-----------.
</FN>
</TABLE>
The Senior Certificates offered hereby [are] [will be purchased by PaineWebber
Incorporated (the "Underwriter") from the Depositor and will be] offered subject
to receipt and acceptance by the Underwriter, to prior sale and to the
Underwriter's right to reject any order in whole or in part and to withdraw,
cancel or modify the offer without notice. It is expected that delivery of the
Senior Certificates offered hereby will be made at the office of PaineWebber
Incorporated, 1285 Avenue of the Americas, New York, New York, 10019 [or through
the facilities of The Depository Trust Company] on or about -------------------,
199--.
---------------------------------------
- ------------, 199--
The Senior Certificates offered by this Prospectus Supplement will be part of a
separate series of Certificates being offered by the Depositor pursuant to its
Prospectus dated -----------, 199--, of which this Prospectus Supplement is a
part and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY OF PROSPECTUS SUPPLEMENT .........................................
RISK FACTORS .............................................................
THE MORTGAGE POOL ........................................................
ADDITIONAL INFORMATION ...................................................
DESCRIPTION OF THE CERTIFICATES ..........................................
Interest on the Senior Certificates .............................
Principal of the Senior Certificates ............................
Cash Flow Value .................................................
Distributions ...................................................
Special Distributions ...........................................
Advances ........................................................
Allocation of Losses; Subordination .............................
Example of Distributions ........................................
YIELD ON THE CERTIFICATES AND PREPAYMENTS OF THE MORTGAGE LOANS .........
Delay in Payment of Interest ....................................
Prepayment Considerations and Weighted Average Life .............
POOLING AND SERVICING AGREEMENT ..........................................
General .........................................................
The Master Servicer .............................................
The Trustee .....................................................
Servicing and Other Compensation and Payment of Expenses ........
Voting Rights ...................................................
Termination .....................................................
CERTAIN FEDERAL INCOME TAX CONSEQUENCES ..................................
Special Tax Considerations Applicable to REMIC ..................
Residual Certificates .........................................
PLAN OF DISTRIBUTION .....................................................
LEGAL MATTERS ............................................................
RATING ...................................................................
Until ---------------, all dealers effecting transactions in the Senior
Certificates, whether or not participating in this distribution, may be required
to deliver a Prospectus Supplement and the Prospectus to which it relates. This
is in addition to the obligation of dealers to deliver a Prospectus Supplement
and Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SENIOR
CERTIFICATES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used but not defined herein shall have the meanings assigned
thereto in the Prospectus. An Index of Significant Definitions is included at
the end of the Prospectus.
Title of Series........................Asset-Backed Certificates, Series
199----- (the "Certificates").
Senior Certificates....................Class A-1, Class A-2, Class A-3 and Class
A-4 Certificates, having the aggregate
initial Certificate Principal Balances
and Certificate Interest Rates
respectively set forth on the cover page
hereof, and constituting "Senior
Certificates" as described in the
Prospectus. The Senior Certificates
collectively will have an initial
Certificate Principal Balance equal to
----% (the initial "Senior Percentage")
of the aggregate Cash Flow Value of the
Mortgage Loans as of -------- 1, 199--
(the "Cut-off Date").
Subordinate Certificates...............As to Class B-1, $-------------- initial
Certificate Principal Balance
(approximate), ----% Certificate Interest
Rate, evidencing approximately ----% of
the aggregate Cash Flow Value of the
Mortgage Loans as of the Cut-off Date.
The Class B-2 Certificates, which have no
Certificate Principal Balance and no
Certificate Interest Rate, represent the
right to receive [(i) on any Distribution
Date, the excess, if any, of the amount
of funds available for distribution on
such Distribution Date over the optimal
amounts of principal and interest payable
to the Senior Certificateholders and
Class B-1 Certificateholders on such
Distribution Date and (ii)] the amount,
if any, remaining in the Trust Fund after
the Senior Certificates and the Class B-1
Certificates have been retired. See
"Description of the
Certificates--Distributions" herein.
The Subordinate Certificates are not
being offered hereby, and may be sold at
any time in accordance with the terms of
the Pooling and Servicing Agreement,
dated as of ----------- 1, 199--,
pursuant to which the Series 199-----
Certificates will be issued (the
"Agreement").
Depositor..............................PaineWebber Mortgage Acceptance
Corporation IV, a direct wholly-owned
limited purpose finance subsidiary of
PaineWebber Group Inc. and an affiliate
of the Underwriter. See "The Depositor"
in the Prospectus.
Trustee................................----------------------------------------.
See "Pooling and Servicing Agreement--The
Trustee" herein.
Master Servicer........................---------------------. See "Pooling and
Servicing Agreement--The Master Servicer"
herein.
Interest...............................The Senior Certificates will bear
interest at the respective Certificate
Interest Rates specified on the cover
page hereof. Accrued Certificate Interest
on the Class A-1, Class A-2 and Class A-3
Certificates will be paid, to the extent
of available funds, [quarterly on each
------ 25, ------ 25, ------ 25 and
------ 25], or if such day is not a
business day, the business day
immediately following (each, a
"Distribution Date"), commencing ------
25, 199--, in an amount equal to the
interest accrued during the related
Interest Accrual Period. Interest on the
Class A-4 Certificates will accrue but
will not be paid thereon until the Class
A-1, Class A-2 and Class A-3 Certificates
have been retired. Prior to that time,
interest accrued on the Class A-4
Certificates during the preceding
Interest Accrual Period will be added to
the Certificate Principal Balance thereof
on each Distribution Date. Interest
accruing on the Certificate Principal
Balances of the Class A-1, Class A-2 and
Class A-3 Certificates during any
Interest Accrual Period but unpaid on the
related Distribution Date shall be due
and owing on the subsequent Distribution
Date together with interest at the
weighted average of the Certificate
Interest Rates for the Class A-1, Class
A-2 and Class A-3 Certificates. With
respect to any Distribution Date, all
such unpaid Accrued Certificate Interest
from previous Distribution Dates,
together with compounded interest
thereon, shall constitute the
"Outstanding Senior Interest Shortfall"
for the Distribution Date.
Shortfalls in collections of one full
month's interest resulting from principal
prepayments in full (or other
liquidations) on Mortgage Loans will be
covered by payments by the Master
Servicer, but only to the extent of its
servicing compensation for the concurrent
period; any such shortfall not so covered
will be allocated to reduce the Accrued
Certificate Interest on all Certificates
as described herein. Shortfalls in
collections of interest resulting from
delinquencies will be borne by the
Subordinate Certificates so long as they
remain outstanding. See "Description of
the Certificates--Accrued Certificate
Interest" herein.
Principal (including prepayments)......The initial aggregate Certificate
Principal Balance of the Certificates
(including the Subordinate Certificates)
will equal the aggregate Cash Flow Value
of the Mortgage Loans as of the Cut-off
Date. See "Description of the
Certificates--Cash Flow Value" herein.
Distributions in respect of principal
will be made on each Distribution Date,
to the extent of available funds, to the
holders of Senior Certificates in an
aggregate amount equal to (i) the amount
of interest, if any, accrued on the Class
A-4 Certificates for the related Interest
Accrual Period but not then payable
thereon, plus (ii) the decline in the
aggregate Cash Flow Value of the Mortgage
Loans over the related Deposit Period (as
defined herein) times the applicable
Senior Percentage or, as such decline
relates to mortgagor prepayments, the
Senior Prepayment Percentage, minus (iii)
the principal portion of any Special
Distributions since the immediately
preceding Distribution Date.
The Senior Prepayment Percentage will
initially be 100%; starting on
----------, it will decline gradually in
accordance with a schedule until it
equals the Senior Percentage, but will be
100% for any Distribution Date on which
the Senior Percentage is less than the
initial Senior Percentage. See
"Description of the
Certificates--Principal of the Senior
Certificates" herein.
Distributions in respect of principal of
the Senior Certificates will be allocated
first to the Class A-1 Certificates, then
the Class A-2 Certificates, then the
Class A-3 Certificates, and finally the
Class A-4 Certificates, in each case
until the Certificate Principal Balance
of the respective class has been reduced
to zero. Based upon the assumptions set
forth herein, each class of Senior
Certificates is projected to be retired,
and the Certificate Principal Balance
thereof reduced to zero, not later than
its Final Scheduled Distribution Date.
See "Description of the
Certificates--Cash Flow Value" herein.
The Mortgage Loans shall be divided into
Cash Flow Value Groups for purposes of
determining Cash Flow Value. The Cash
Flow Value of any Cash Flow Value Group
is equal to the lesser of (i) the present
value of the future scheduled payments
thereon, [plus reinvestment income,]
discounted [quarterly] at the highest
Certificate Interest Rate applicable to
any class of [Senior] Certificates then
outstanding, and (ii) ---% (the "Maximum
Cash Flow Value Percentage") of the
aggregate Stated Principal Balance (as
defined herein) of the Mortgage Loans
comprising such Cash Flow Value Group.
The Cash Flow Value of any Cash Flow
Value Group is based upon the assumption
that all the Mortgage Loans comprising
such Cash Flow Value Group constitute a
single, fully-amortizing fixed rate
mortgage loan (a) bearing interest at a
fixed rate equal to the highest rate
borne by any of the Mortgage Loans
comprising such Cash Flow Value Group;
(b) having an outstanding principal
balance equal to the aggregate of the
Stated Principal Balances of all the
Mortgage Loans comprising such Cash Flow
Value Group; (c) maturing in the month of
the scheduled maturity date of the latest
maturing Mortgage Loan included in such
Cash Flow Value Group; and (d) that
provides for fixed, level, monthly
payments.
Special Distributions..................The Senior Certificates will be subject
to special distributions on the 25th day
of each month (or, if such day is not a
business day, on the next succeeding
business day) other than a month in which
a Distribution Date falls (each such
date, a "Special Distribution Date"),
under the limited circumstances described
herein. See "Description of the
Certificates--Special Distributions"
herein and in the Prospectus.
Allocation of Losses...................Subject to the limitations described
herein, the decline in Cash Flow Value
resulting from losses of principal
realized on the Mortgage Loans will be
allocated to the Subordinate Certificates
prior to allocation to the Senior
Certificates. See "Description of the
Certificates--Allocation of Losses;
Subordination" herein.
The Mortgage Pool......................The Mortgage Pool will consist of
[30-year,] fixed rate, level monthly
payment, fully amortizing Mortgage Loans,
with an aggregate principal balance as of
the Cut-off Date of approximately
$----------- (subject to a permitted
variance of plus or minus -----%) and an
aggregate Cash Flow Value as of the
Cut-off Date of approximately $---------
(subject to a permitted variance of plus
or minus --------%). [Include appropriate
information, with corresponding changes,
for different types of loans.] See "The
Mortgage Pool" herein.
Denominations..........................The Senior Certificates of each class
will be offered in registered form, in
denominations evidencing initial
Certificate Principal Balances of
$------- and multiples of $------- in
excess thereof, with one Certificate
evidencing an additional amount equal to
the remainder of the aggregate initial
Certificate Principal Balance of such
Class.
Record Date............................All distributions will be made by the
[Trustee] [Master Servicer] to the
persons in whose names the Certificates
are registered at the close of business
on the last business day of the month
preceding the month in which the related
Distribution Date occurs. See
"Description of the
Certificates--Distributions" herein.
Advances...............................The Master Servicer will be obligated to
make Advances to holders of the
Certificates in respect of delinquent
payments of principal and interest on the
Mortgage Loans and in respect of certain
amounts representing interest not covered
by current net income on Mortgaged
Properties acquired on behalf of
Certificateholders by foreclosure or deed
in lieu of foreclosure. See "Description
of the Certificates--Advances" herein and
in the Prospectus.
Optional Termination...................At its option, the Master Servicer may
repurchase all of the Mortgage Loans in
the Trust Fund and thereby effect early
retirement of the Certificates on any
Distribution Date on which the aggregate
principal balance of the Mortgage Loans
remaining in the Trust Fund is less than
--% of the aggregate principal balance of
the Mortgage Loans as of the Cut-off
Date. See "Pooling and Servicing
Agreement--Termination" herein and
"Description of the
Certificates--Termination" in the
Prospectus.
Special Prepayment Considerations......The rate of principal payments on the
Senior Certificates collectively will
depend on the rate and timing of
principal payments (including
prepayments, defaults and liquidations)
on the Mortgage Loans. As is the case
with mortgage-backed securities
generally, the Senior Certificates are
subject to substantial inherent cash-flow
uncertainties because the Mortgage Loans
may be prepaid at any time. Generally,
when prevailing interest rates are
increasing, prepayment rates on mortgage
loans tend to decrease, resulting in a
reduced return of principal to investors
at a time when reinvestment at such
higher prevailing rates would be
desirable. Conversely, when prevailing
interest rates are declining, prepayment
rates on mortgage loans tend to increase,
resulting in a greater return of
principal to investors at a time when
reinvestment at comparable yields may not
be possible.
[The multiple class structure of the
Senior Certificates results in the
allocation of prepayments among certain
classes as follows (to be included as
appropriate):]
[Sequentially paying classes: (All)
classes of the Senior Certificates are
subject to various priorities for payment
of principal as described herein.
Distributions on classes having an
earlier priority of payment will be
immediately affected by the prepayment
speed of the Mortgage Loans early in the
life of the Mortgage Pool. Distributions
on classes with a later priority of
payment will not be directly affected by
the prepayment until such time as
principal is distributable on such
classes; however, the timing of
commencement of principal distributions
and the weighted average lives of such
classes will be affected by the
prepayment speed experienced both before
and after the commencement of principal
distributions on such classes.]
[PAC Certificates: Principal
distributions on the PAC Certificates
will be payable in amounts determined
based on schedules as described herein,
provided that the prepayment speed of the
Mortgage Loans each month remains between
approximately ----% SPA and ----% SPA.
However, as discussed herein, actual
principal distributions may be greater or
less than the described amounts. If the
prepayment speed of the Mortgage Loans is
consistently higher than ----% of SPA,
then the Companion Certificates will be
retired, and the rate of principal
distributions and the weighted average
lives of the remaining PAC Certificates
will become significantly more sensitive
to changes in the prepayment speed of the
Mortgage Loans and principal
distributions thereon will be more likely
to deviate from the described amounts.]
[TAC Certificates: Principal
distributions on the TAC Certificates
would be payable in amounts determined
based on schedules as described herein,
if the prepayment speed of the Mortgage
Loans were to remain at a constant level
of approximately ---% SPA. However, as
discussed herein, actual principal
distributions are likely to deviate from
the described amounts, because it is
highly unlikely that the actual
prepayment speed of the Mortgage Loans
each month will remain at ---% SPA. If
the Companion Certificates are retired
before all of the TAC Certificates are
retired, the rate of principal
distributions and the weighted average
lives of the remaining TAC Certificates
will become significantly more sensitive
to changes in the prepayment speed of the
Mortgage Loans, and principal
distributions thereon will be more likely
to deviate from the described amounts.]
[Companion Certificates: Because of the
application of amounts available for
principal distributions among the Senior
Certificates in any given month, first to
the (PAC) (TAC) Certificates up to the
described amounts and then to the
Companion Certificates, the rate of
principal distributions and the weighted
average lives of the Companion
Certificates will be extremely sensitive
to changes in the prepayment speed of the
Mortgage Loans. The weighted average
lives of the Companion Certificates will
be significantly more sensitive to
changes in the prepayment speed than that
of either the (PAC) (TAC) Certificates or
a fractional undivided interest in the
Mortgage Loans.]
[Subordination features: As described
herein, during certain periods all or a
disproportionately large percentage of
principal prepayments on the Mortgage
Loans will be allocated among the Senior
Certificates, and during certain periods
none or a disproportionately small
percentage (or, as compared to the Class
(B) Certificates during certain periods,
a disproportionately large percentage) of
such prepayments will be distributed on
the Class (M) Certificates. As a result,
the weighted average lives of the Class
(M) Certificates will be extended and, as
a relative matter, the subordination
afforded the [Senior] Certificates by the
Class (M) Certificates (together with the
Class (B) Certificates) will be
increased. (Similar descriptions to be
added to other classes with subordination
features.)]
See "Description of the
Certificates--Principal of the Senior
Certificates," "Yield on the Certificates
and Prepayments of the Mortgage Loans"
herein, and "Maturity and Prepayment
Considerations" in the Prospectus.
Special Yield Considerations...........The yield to maturity on each respective
class of the Senior Certificates will
depend on the rate and timing of
principal payments (including
prepayments, defaults and liquidations)
on the Mortgage Loans and the allocation
thereof (and of any losses on the
Mortgage Loans) to reduce the Certificate
Principal Balance (or Notional Amount) of
such class, as well as other factors such
as the Pass-Through Rate (and any
adjustments thereto) and the purchase
price for such Certificates. The yield to
investors on any class of Senior
Certificates will be adversely affected
by any allocation thereto of prepayment
interest shortfalls on the Mortgage
Loans, which are expected to result from
the distribution of interest only to the
date of prepayment (rather than a full
month's interest) in connection with
prepayments in full, and the lack of any
distribution of interest on the amount of
any partial prepayments.
In general, if a class of Senior
Certificates is purchased at a premium
and principal distributions thereon occur
at a rate faster than anticipated at the
time of purchase, the investor's actual
yield to maturity will be lower than that
assumed at the time of purchase.
Conversely, if a class of Senior
Certificates is purchased at a discount
and principal distributions thereon occur
at a rate slower than that assumed at the
time of purchase, the investor's actual
yield to maturity will be lower than that
originally anticipated.
The Senior Certificates were structured
based on a number of assumptions,
including a prepayment assumption of ---%
SPA and weighted average lives
corresponding thereto as set forth herein
under "Special Prepayment
Considerations." The yield assumptions
for the respective classes that are to be
offered hereunder will vary as determined
at the time of sale.
[The multiple class structure of the
Senior Certificates causes the yield of
certain classes to be particularly
sensitive to changes in the prepayment
speed of the Mortgage Loans and other
factors, as follows (to be included as
appropriate):]
[Interest strip and inverse floater
classes: The yield to investors on the
(identify classes) will be extremely
sensitive to the rate and timing of
principal payments on the Mortgage Loans
(including prepayments, defaults and
liquidations), which may fluctuate
significantly over time. A rapid rate of
principal payments on the Mortgage Loans
could result in the failure of investors
in the (identify interest strip and
inverse floater strip classes) to recover
their initial investments, and a slower
than anticipated rate of principal
payments on the Mortgage Loans could
adversely affect the yield to investors
on the (identify non-strip inverse
floater classes).]
[Variable Strip Certificates: In addition
to the foregoing, the yield on the
Variable Strip Certificates will be
materially adversely affected to a
greater extent than the yields on the
other Senior Certificates if the Mortgage
Loans with higher Mortgage Rates prepay
faster than the Mortgage Loans with lower
Mortgage Rates, because holders of the
Variable Strip Certificates generally
have rights to relatively larger portions
of interest payments on the Mortgage
Loans with higher Mortgage Rates than on
Mortgage Loans with lower Mortgage
Rates.]
[Adjustable rate (including inverse
floater) classes: The yield on the
(identify floating rate classes) will be
sensitive, and the yield on the (identify
inverse floater classes) will be
extremely sensitive, to fluctuations in
the level of [the index]. The
Pass-Through Rate on the (identify
inverse floater classes) will vary
inversely with, and at a multiple of,
(the index).]
[Inverse floater companion classes: In
addition to the foregoing, in the event
of relatively low prevailing interest
rates (including (the index)) and
relatively high rates of principal
prepayments over an extended period,
while investors in the (identify inverse
floater companion classes) may then be
experiencing a high current yield on such
Certificates, such yield may be realized
only over a relatively short period, and
it is unlikely that such investors would
be able to reinvest such principal
prepayments on such Certificates at a
comparable yield.]
[Subordination features: The yield to
maturity on the Class (M) Certificates
will be extremely sensitive to losses due
to defaults on the Mortgage Loans (and
the timing thereof), to the extent such
losses are not covered by the Class (B)
Certificates, because the entire amount
of such losses (rather than a pro rata
portion thereof) will be allocable to the
Class (M) Certificates, as described
herein. (Similar descriptions to be added
for other classes with subordination
features.)]
[Residual Certificates: Holders of the
Residual Certificates are entitled to
receive distributions of principal and
interest as described herein; however,
holders of such Certificates may have tax
liabilities with respect to their
Certificates during the early years of
their term that substantially exceed the
principal and interest payable thereon
during such periods. (In addition, such
distributions will be reduced to the
extent that they are subject to United
States federal income tax withholding.)]
See "Yield on the Certificates and
Prepayments of the Mortgage Loans",
(especially "-------------- Yield
Considerations," "----------------- Yield
Considerations" and "--Additional Yield
Considerations Applicable Solely to the
Residual Certificates" and "Certain
Federal Income Tax Consequences") herein,
and "Yield Considerations" in the
Prospectus.
Certain Federal Income
Tax Consequences.....................Upon the issuance of the Offered
Certificates, Cadwalader, Wickersham &
Taft, counsel to the Depositor, will
deliver the following opinion: [Assuming
compliance with the provisions of the
Pooling and Servicing Agreement, for
federal income tax purposes, the Trust
Fund will qualify as a "real estate
mortgage investment conduit" (a "REMIC")
within the meaning of Sections 860A
through 860G (the "REMIC Provisions") of
the Internal Revenue Code of 1986 (the
"Code"), and (i) the Class A, Class B and
Class C Certificates will evidence
"regular interests" in such REMIC and
(ii) the Class R Certificates will be the
sole class of "residual interests" in
such REMIC, each within the meaning of
the REMIC Provisions in effect on the
date hereof.] [Assuming compliance with
the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust
Fund will be classified as a grantor
trust under Subpart E, part I of
subchapter J of the Code, and not as an
association taxable as a corporation or
as a partnership.]
Under the REMIC Regulations, the Class R
Certificates will not be regarded as
having "significant value" for purposes
of applying the rules relating to "excess
inclusions." In addition, the Class R
Certificates may constitute "noneconomic"
residual interests for purposes of the
REMIC Regulations. Transfers of the Class
R Certificates will be restricted under
the Pooling and Servicing Agreement to
United States Persons in a manner
designed to prevent a transfer of a
noneconomic residual interest from being
disregarded under the REMIC Regulations.
See "Certain Federal Income Tax
Consequences--Special Tax Considerations
Applicable to REMIC Residual
Certificates" herein and "Certain Federal
Income Tax Consequences--REMICs--Taxation
of Owners of REMIC Residual
Certificates--Excess Inclusions" and
"--Noneconomic REMIC Residual
Certificates" in the Prospectus.
The Class R Certificateholders may be
required to report an amount of taxable
income with respect to the early years of
the Trust Fund's term that significantly
exceeds distributions on the Class R
Certificates during such years, with
corresponding tax deductions or losses
deferred until the later years of the
Trust Fund's term. Accordingly, on a
present value basis, the tax detriments
occurring in the earlier years may
substantially exceed the sum of any tax
benefits in the later years. As a result,
the Class R Certificateholders' after-tax
rate of return may be zero or negative,
event if their pre-tax rate of return is
positive.
See "Yield and Maturity Considerations,"
especially "--Additional Yield
Considerations Applicable Solely to the
Class R Certificates", and "Certain
Federal Income Tax Consequences--Special
Tax Considerations Applicable to REMIC
Residual Certificates" herein.
For further information regarding the
Federal income tax consequences of
investing in the Offered Certificates,
see "Certain Federal Income Tax
Consequences" herein and in the
Prospectus.
Rating.................................It is a condition to the issuance of the
Certificates offered hereby that the
Senior Certificates be rated ---- by
--------. 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. A security rating does not
address the frequency of prepayments of
Mortgage Loans, or the corresponding
effect on yield to investors. See "Yield
on the Certificates" and "Rating" herein.
Legal Investment.......................The Senior Certificates will constitute
"mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") so long
as they are rated as described herein,
and, as such, are legal investments for
certain entities to the extent provided
in SMMEA. See "Legal Investment" in the
Prospectus and "Rating" herein.
<PAGE>
RISK FACTORS
[To Be Provided]
THE MORTGAGE POOL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date, after deducting payments
of principal due on such date, of [approximately] $----------------- [(subject
to a permitted variance of plus or minus --%)]. The Mortgage Loans to be
included in the Mortgage Pool will be acquired by the Depositor from
- ------------------------, in its capacity as Unaffiliated Seller. In addition,
the [Unaffiliated Seller] will be the Master Servicer for the Certificates.
[All of the Mortgage Loans have monthly payments due on the first day of
each month. None of the Mortgage Loans are Buydown Mortgage Loans. At
origination each Mortgage Loan had a term to maturity of up to 30 years. The
mortgagor with respect to each Mortgage Loan represented in its loan application
that the property securing such Mortgage Loan (the "Mortgaged Property")
initially would be owner-occupied as its primary residence.]
All Mortgage Loans will have Net Mortgage Rates of ----%. As to any
Mortgage Loan, the "Net Mortgage Rate" is equal to the Mortgage Rate minus the
Servicing Fee Rate. The Mortgage Loans will have Mortgage Rates ranging from
- ---% to ---%, with a weighted average Mortgage Rate as of the Cut-off Date of
- ---%. The Mortgage Loans will have Servicing Fee Rates ranging from ---% to
- ---%, with a weighted average Servicing Fee Rate as of the Cut-off Date of ---%.
The weighted average maturity of the Mortgage Loans as of the Cut-off Date will
be approximately --- years and --- months. None of the Mortgage Loans will have
been originated prior to ------------- or will have an unexpired term at the
Cut-off Date of less than approximately --- years and --- months or more than
approximately --- years and -- months. The Mortgage Loans will each have a
principal balance at origination of not less than $----------- or more than
$--------.
The Mortgage Loans will also have the following characteristics as of the
Cut-off Date (expressed as a percentage of the aggregate principal balance of
the Mortgage Loans having such characteristics relative to the aggregate
principal balance of all Mortgage Loans):
No more than ----% of the Mortgage Loans will have Loan-to-Value
Ratios at origination exceeding 80%. Mortgage Loans with Loan-to-Value
Ratios at origination exceeding 80% will be covered by policies of primary
mortgage guaranty insurance (each, a "Primary Credit Insurance Policy")
insuring against default as to the principal amount of the Mortgage Loans
exceeding 75% (or a lesser percentage) of the Collateral Values of the
Mortgaged Properties at origination and such insurance will be maintained
until the Loan-to-Value Ratios are reduced to 80% or less. [insert
information as to FHA insurance or VA guarantee if applicable.]
At least ---% of the Mortgage Loans will be secured by detached
one-family dwelling units.
No more than ---% of the Mortgage Loans will be secured by Mortgaged
Properties located in ----------- and no more than ------% of the Mortgage
Loans will be secured by Mortgaged Properties located in -------. Except as
indicated in the preceding sentence, no more than ---% of the Mortgage
Loans will be secured by Mortgaged Properties located in any one state.
No more than ---% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code area or housing development, and no
more than ---% will be secured by Mortgaged Properties located in any one
zip code area or housing development in California.
No more than -----% of the Mortgage Loans will be secured by vacation
or second homes. No more than ---% of the Mortgage Loans will be secured by
condominium units.
[The foregoing type of description will be used if precise information on
the Mortgage Loans is not available on the date of the Prospectus Supplement; a
description similar to the following description will be used if precise
information is available.]
[Set forth below is a description of certain additional characteristics of
the Mortgage Loans as of the Cut-off Date:
<TABLE>
MORTGAGE RATES
<CAPTION>
Percentage of
Aggregate Aggregate
Unpaid Unpaid
Number of Principal Principal
Mortgage Rates Loans Balance Balance
-------------- ----- ------- -------
<S> <C> <C> <C> <C>
% $ %
---------- ---------- ---------
Total.............. 100%
========== ========== =========
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate was ---% per annum.
<TABLE>
REMAINING TERMS TO STATED MATURITY
<CAPTION>
Percentage of
Aggregate Aggregate
Unpaid Unpaid
Remaining Terms Number of Principal Principal
to Stated Maturity (in --- Months) Loans Balance Balance
---------------------------------- ----- ------- -------
<S> <C> <C> <C>
$ %
---------- ---------- ---------
Total.............. 100%
========== ========== =========
</TABLE>
As of the Cut-off Date, the weighted average remaining term to stated maturity
was approximately ------ months.
<TABLE>
ORIGINAL LOAN-TO-VALUE RATIOS
<CAPTION>
Percentage of
Aggregate Aggregate
Unpaid Unpaid
Number of Principal Principal
Original Loan Amounts Loans Balance Balance
--------------------- ----- ------- -------
<S> <C> <C> <C> <C>
Up to 70.00%............................ $ %
70.01% - 80.00%.........................
80.01% - 90.00%.........................
More than 90.00%........................ ---------- ---------- ---------
Total.............. 100%
========== ========== =========
</TABLE>
As of the Cut-off Date, the weighted average loan-to-value ratio at origination
of the Mortgage Loans was ---% per annum.
<TABLE>
ORIGINAL LOAN AMOUNTS
<CAPTION>
Percentage of
Aggregate Aggregate
Unpaid Unpaid
Number of Principal Principal
Original Loan Amounts Loans Balance Balance
--------------------- ----- ------- -------
<S> <C> <C> <C>
Up to 50,000.00........................ $ %
$50,000 - $ 99,999.00..................
$100,000 - $149,999.00.................
$150,000 - $199,999.99.................
$200,000 - $249,999,99.................
$250,000 - $299,999.99.................
$300,000 - $349,999.99.................
$350,000 - $399,999.99.................
$400,000 - $449,999,99.................
$450,000 - $499,999.99................. ---------- ---------- ---------
Total.............. 100%
========== ========== =========
</TABLE>
As of the Cut-off Date, the average unpaid balance of the Mortgage Loans was
$-------- and the unpaid principal balances of the largest and smallest Mortgage
Loans were $-------- and $---------, respectively.
<TABLE>
TYPES OF LOANS
<CAPTION>
Percentage of
Aggregate Aggregate
Unpaid Unpaid
Number of Principal Principal
Types Loans Balance Balance
----- ----- ------- -------
<S> <C> <C> <C>
Conventional Loans secured by $ %
One-Family detached..................
Low-rise condominiums/2 family.......
High-rise condominiums/3-4 family.... ---------- ---------- ---------
Total.............. 100%
========== ========== =========
</TABLE>
<TABLE>
YEARS OF ORIGINATION OF MORTGAGE LOANS
<CAPTION>
Percentage of
Aggregate Aggregate
Unpaid Unpaid
Number of Principal Principal
Years of Origination Loans Balance Balance
-------------------- ----- ------- -------
<S> <C> <C> <C>
199-.................................... $ %
199-....................................
199-....................................
199-....................................
199-.................................... ---------- ---------- --------
Total.............. 100%
========== ========== =========
</TABLE>
<TABLE>
OCCUPANTS OF MORTGAGED PROPERTIES
<CAPTION>
Percentage of
Aggregate Aggregate
Unpaid Unpaid
Number of Principal Principal
Loans Balance Balance
----- ------- -------
<S> <C> <C> <C>
Owner $ %
Primary residence....................
Vacation/second home................. ---------- ---------- --------
Non-owner occupied investment
property................................ ---------- ---------- --------
Total.............. 100%
========== ========== =========
</TABLE>
<TABLE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTY
<CAPTION>
Percentage of
Aggregate Aggregate
Unpaid Unpaid
Number of Principal Principal
States Loans Balance Balance
------ ----- ------- -------
<S> <C> <C> <C>
$ %
---------- ---------- --------
Total.............. 100%
========== ========== =========
</TABLE>
[The foregoing information will be modified to the extent necessary to describe
different types of mortgage loans].
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Certificates,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise, if the Depositor deems such removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the Mortgage Pool prior to the issuance of the
Certificates unless including such mortgage loans would materially alter the
characteristics of the Mortgage Pool as described herein. The Depositor believes
that the information set forth herein will be representative of the
characteristics of the Mortgage Pool as it will be constituted at the time the
Certificates are issued, although the range of Mortgage Rates and maturities and
certain other characteristics of the Mortgage Loans in the Mortgage Pool may
vary.
A report on Form 8-K containing a detailed description of the Mortgage
Loans will be available to purchasers of the Certificates at or before initial
issuance and will be filed with the Securities and Exchange Commission within
fifteen days after such initial issuance. The report on Form 8-K will specify
the precise aggregate principal balance of the Mortgage Loans outstanding as of
the Cut-off Date and will set forth on a precise basis the other information
presented in this Prospectus Supplement on an approximate basis.
DESCRIPTION OF THE CERTIFICATES
The Series 199----- Certificates will consist of four classes of Senior
Certificates (the "Class A-1, Class A-2, Class A-3 and Class A-4 Certificates")
and two classes of Subordinate Certificates (the "Class B-1" and "Class B-2"
Certificates). The Senior Certificates have an initial aggregate Certificate
Principal Balance of $--------------- (approximate), evidencing approximately
- ----% (the initial Senior Percentage) of the aggregate Cash Flow Value of the
Mortgage Loans in the Trust Fund as of the Cut-off Date. The Class B-1
Certificates have an initial Certificate Principal Balance of $--------------
evidencing ---% (the initial Subordinate Percentage) of the aggregate Cash Flow
Value of the Mortgage Loans in the Trust Fund as of the Cut-off Date. The Class
B-2 Certificates, which have no Certificate Principal Balance and no Certificate
Interest Rate, represent the right to receive [(i) on any Distribution Date, the
excess, if any, of the Available Distribution Amount (as defined herein) for
such Distribution Date over the optimal amounts of principal and interest
payable to the Senior Certificateholders and Class B-1 Certificateholders on
such Distribution Date, and (ii)] the balance of the Trust Fund after retirement
of the Senior Certificates and the Class B-1 Certificates, as described herein.
The Class B-1 and Class B-2 Certificates are not being offered hereby, and may
be sold at any time in accordance with the terms of the Agreement.
Interest on the Senior Certificates
- -----------------------------------
The Certificates will bear interest at the respective Certificate Interest
Rates specified on the cover page hereof. Accrued Certificate Interest on the
Class A-1, Class A-2 and Class A-3 Certificates will be paid [quarterly on each
- ------ 25, ------ 25, ------ 25 and ------ 25,] or if such day is not a business
day on the business day immediately following (each, a "Distribution Date") in
an amount equal to the interest accrued during the period following the
immediately preceding Distribution Date (each, an "Interest Accrual Period").
Interest on the Class A-4 Certificates will accrue but will not be paid thereon
until the Class A-1, Class A-2 and Class A-3 Certificates have been retired.
Prior to that time, interest accrued on the Class A-4 Certificates during the
preceding Interest Accrual Period will be added to the Certificate Principal
Balance thereof on each Distribution Date. All calculations of Accrued
Certificate Interest shall be based on a year of twelve 30-day months and will
be subject to reduction as provided herein.
Any unpaid Accrued Certificate Interest on the Certificate Principal
Balances of the Class A-1, Class A-2 and Class A-3 Certificates (and, following
the retirement of the Class A-3 Certificates, the Class A-4 Certificates) from
previous Distribution Dates, together with compounded interest thereon, shall
constitute the "Outstanding Senior Interest Shortfall" for the current
Distribution Date and shall be due and payable on the current Distribution Date.
The Master Servicer will be obligated to apply amounts otherwise payable to
it as servicing compensation to cover any shortfalls in collections of one full
month's interest at the applicable Net Mortgage Rate resulting from principal
prepayments in full (or other liquidations) of Mortgage Loans, to the extent of
an aggregate amount equal to its total servicing compensation for the concurrent
period. For any Distribution Date, Accrued Certificate Interest on each
Certificate will be reduced in the event of such shortfalls in collections of
one full month's interest resulting from principal prepayments in full (or other
liquidations) of Mortgage Loans during the Prepayment Period, to the extent not
covered by the application of servicing compensation of the Master Servicer. The
aggregate amount of any such shortfalls will be allocated among all of the
outstanding Senior Certificates and the Class B-1 Certificates, in proportion to
the respective amounts of Accrued Certificate Interest that would otherwise have
been payable thereon absent such reductions and absent any delinquencies or
losses.
Principal of the Senior Certificates
- ------------------------------------
On each Distribution Date, the [Master Servicer] [Trustee] will make
distributions in respect of principal to the Senior Certificateholders in the
amounts described below. All distributions in respect of principal will be
allocated first to the Class A-1 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero. Thereafter, principal distributions
will be allocated to the Class A-2 Certificates, then the Class A-3
Certificates, and finally the Class A-4 Certificates, in each case until the
Certificate Principal Balance of each class has been reduced to zero and such
class of Senior Certificates has been retired. Based upon the assumptions that
[set forth applicable assumptions], it is projected that each class of Senior
Certificates will be retired and the Certificate Principal Balance thereof
reduced to zero not later than Final Scheduled Distribution Date of such class.
Principal distributions on any class of Certificates will be allocated on a pro
rata basis among the Certificates of such class. [Insert alternative language
for programmed amortization classes or other variations, if applicable.]
Distributions in respect of principal on the Senior Certificates will be
made on each Distribution Date in an aggregate amount equal to the sum of (i)
the amount of Accrued Certificate Interest on the Class A-4 Certificates for the
related Interest Accrual Period which is not then payable thereon (if any), and
(ii) the Senior Principal Distribution Amount as described below; provided, that
the aggregate distribution in respect of principal on any Distribution Date will
not exceed the amount by which the Available Distribution Amount exceeds the sum
of (i) the amount of Accrued Certificate Interest then payable on all of the
Senior Certificates and (ii) the Outstanding Senior Interest Shortfall for such
Distribution Date.
For any Distribution Date, the "Senior Principal Distribution Amount" is an
amount equal to (i) the then applicable Senior Percentage times the decline in
the aggregate Cash Flow Values of the Mortgage Loans over the [three-month]
period ending on the Determination Date immediately preceding the Distribution
Date (each such period, a "Deposit Period"), exclusive of the portion of such
Cash Flow Value decline which is attributable to prepayments by mortgagors, plus
(ii) the then applicable Senior Prepayment Percentage times the portion of such
Cash Flow Value decline over the Deposit Period which is attributable to full
and partial prepayments by mortgagors, minus (iii) the principal portion of any
Special Distributions since the immediately preceding Distribution Date.
The Senior Prepayment Percentage for each Distribution Date is the
percentage indicated below:
Distribution Date Senior Prepayment Percentage
----------------- ----------------------------
- ----------- through ------------..... 100%
Senior Percentage, plus ---% of the
- ----------- through ------------..... difference between the Senior Percentage
and 100%
Senior Percentage, plus ---% of the
- ----------- through ------------..... difference between the Senior Percentage
and 100%
Senior Percentage, plus ---% of the
- ----------- through ------------..... difference between the Senior Percentage
and 100%
Senior Percentage plus ---% of the
- ----------- through ------------..... difference between the Senior Percentage
and 100%
- ----------- and thereafter........... Senior Percentage
provided, however, that if the Senior Percentage as of any Distribution Date is
greater than the initial Senior Percentage, the Senior Prepayment Percentage for
such Distribution Date shall be 100%.
Cash Flow Value
- ---------------
The initial aggregate Certificate Principal Balance of the Certificates
(including the Subordinate Certificates) will equal the aggregate Cash Flow
Value of the Mortgage Loans as of the Cut-off Date. For purposes of calculating
Cash Flow Values, each Mortgage Loan will be considered to be included in a
group (a "Cash Flow Value Group") of Mortgage Loans having the same Net Mortgage
Rate [describe any other characteristics of such groups]. As of the date of any
determination, the "Cash Flow Value" of any Cash Flow Value Group will be the
lesser of (i) the present value on such date of the assumed future scheduled
payments on such Cash Flow Value Group (each, a "Scheduled Cash Flow Value
Deposit"), [together with reinvestment income thereon, to the Distribution Date
immediately following the date on which any such Scheduled Cash Flow Value
Deposit is assumed to have been received,] discounted [quarterly] at the highest
Certificate Interest Rate of any class of Certificates then outstanding, and
(ii) the applicable Maximum Cash Flow Value Percentage times the Stated
Principal Balance of the Mortgage Loans comprising such Cash Flow Value Group as
of such date. [Specify or describe Maximum Cash Flow Value Percentage for any
Cash Flow Value Group.] The "Stated Principal Balance" of any Mortgage Loan as
of any date of determination is equal to the outstanding principal balance
thereof as of the Cut-off Date, after application of principal payments due on
or before such date, whether or not received, minus the principal portion of all
monthly payments due on or before such date of determination which were received
or with respect to which Advances were made, minus all unscheduled collections
of principal with respect to such Mortgage Loan, minus any reduction in the
outstanding principal balance of the Mortgage Loan after the Cut-off Date
resulting from a bankruptcy proceeding involving the related mortgagor. The Cash
Flow Value of any Mortgage Loan is equal to the portion of the Cash Flow Value
of the related Cash Flow Value Group allocated to such Mortgage Loan in the same
proportion which the Stated Principal Balance of such Mortgage Loan bears to the
aggregate Stated Principal Balance of all the Mortgage Loans in such Cash Flow
Value Group.
The Cash Flow Value of each Cash Flow Value Group is determined on the
assumptions that (A) such Cash Flow Value Group constitutes a single,
fully-amortizing, fixed-rate mortgage loan (i) bearing interest at a fixed rate
equal to the highest Mortgage Rate borne by any of the Mortgage Loans comprising
such Cash Flow Value Group, (ii) having an outstanding principal balance equal
to the aggregate Stated Principal Balance of the Mortgage Loans comprising such
Cash Flow Value Group, (iii) maturing in the month of the scheduled maturity
date of the latest maturing Mortgage Loan included in such Cash Flow Value
Group, and (iv) that provides for fixed, level, monthly payments (each a
"Scheduled Cash Flow Value Group Deposit")[; and (B) each Scheduled Cash Flow
Value Group Deposit is (i) received on the assumed date of receipt (which shall
be the Master Servicer Advance Date (as defined below) in any month) and (ii) is
reinvested at the Assumed Reinvestment Rate pending distribution. The "Assumed
Reinvestment Rate" is an assumed annual rate of return, compounded quarterly of
- ----% to -------------, 199--, -----% to ------------, 199- and ----%
thereafter].
Distributions
- -------------
With respect to any Distribution Date, the Available Distribution Amount
will equal the total amount of all cash on deposit in the Certificate Account as
of the corresponding Determination Date, together with Advances made by the
Master Servicer for the concurrent Master Servicer Advance Date and together
with interest and investment income earned on amounts held in the Certificate
Account, exclusive of:
(a) all monthly payments collected but due on a date subsequent to the
latest Due Period, together with interest and investment income earned
thereon after receipt,
(b) all prepayments and other unscheduled recoveries of principal, and
related payments of interest thereon, received subsequent to the related
Prepayment Period, together with interest and investment income earned
thereon after receipt, and
(c) all amounts in the Certificate Account which are payable or
reimbursable to the Master Servicer.
On each Distribution Date, the Available Distribution Amount will be
distributed in the following order of priority, in each case to the extent of
available funds:
(i) to the holders of the Senior Certificates, the amounts described
above under "Interest on the Senior Certificates" and "Principal of the
Senior Certificates"; and
(ii) to the holders of the Class B-1 Certificates, an amount equal to
(a) Accrued Certificate Interest on the Certificate Principal Balance of
the Class B-1 Certificates for such Distribution Date, and (b) unpaid
Accrued Certificate Interest from prior Distribution Dates together with
compounded interest thereon (the "Outstanding Subordinate Interest
Shortfall"), and (c) as a distribution in respect of principal, the lesser
of (i) the outstanding Certificate Principal Balance thereof and (ii) the
difference between the decline in the aggregate Cash Flow Values of the
Mortgage Loans during the related Deposit Period and the sum of (x) the
Senior Principal Distribution Amount and (y) the principal portion of any
Special Distributions since the immediately preceding Distribution Date;
and
(iii) to the holders of the Class B-2 Certificates, any remaining
portion of the Available Distribution Amount.
All distributions will be made by or on behalf of the [Trustee] [Master
Servicer] to the persons in whose names the Certificates are registered at the
close of business on each Record Date, which will be the last business day of
the month preceding the month in which the related Distribution Date occurs.
Such distributions shall be made [either (i) by check mailed to the address of
each Certificateholder as it appears in the Certificate Register or (ii) at the
request to the Trustee in writing by the Record Date immediately prior to such
Distribution Date of any holder of Certificates having an initial Certificate
Principal Balance in excess of $-------------, by wire transfer in immediately
available funds to the account of such Certificateholder specified in the
request.] Distributions to holders of each respective class of Certificates will
be allocated among such holders in proportion to their respective Percentage
Interest in that class.
Special Distributions
- ---------------------
The Senior Certificates will be subject to special distributions (each, a
"Special Distribution") on the 25th day of each month (or, if such day is not a
business day, on the next succeeding business day) other than a month in which a
Distribution Date falls (each such date, a "Special Distribution Date"). On the
- --- business day before each Special Distribution Date (each such date, a
"Special Distribution Date"). On the business day before each Special
Distribution Date (each such date a "Special Determination Date") the Master
Servicer shall determine whether the Projected Distribution Amount for the
Distribution Date or Special Distribution Date, as the case may be, in the
following calendar month will equal or exceed the Optimal Senior Distribution
Amount for such date. The "Optimal Senior Distribution Amount" is the amount
which the Master Servicer projects would be distributable on the Distribution
Date or Special Distribution Date, as the case may be, in the calendar month
following such Special Determination Date, assuming a distribution thereon to
the Senior Certificateholders equal to (i) Accrued Certificate Interest on the
aggregate Certificate Principal Balance of the Senior Certificates, plus (ii)
the Senior Principal Distribution Amount, plus (iii) the Outstanding Senior
Interest Shortfall. As of each Special Determination Date, the "Projected
Distribution Amount" is the amount which the Master Servicer projects would be
available for distribution on the Distribution Date or Special Distribution
Date, as the case may be, in the immediately succeeding calendar month, based
upon (i) collections on the Mortgage Loans, together with any interest and
investment income with respect thereto, as of such Special Determination Date,
(ii) Advances to be made by the Master Servicer on the Master Servicer Advance
Date (as defined below) in the same calendar month as such Special Determination
Date, (iii) reinvestment of the amounts described in (i) and (ii) in permitted
instruments having the then highest available yield for such investments of
similar maturity, and (iv) projected collections and Advances with respect to
the Mortgage Loans following such Special Determination Date through the
Determination Date or Special Determination Date, as the case may be, in the
immediately succeeding calendar month. The calculations described in each of the
two immediately preceding sentences are based upon the assumption that during
the period following the Special Determination Date on which such calculations
are made, there shall be no defaults in monthly payments on the Mortgage Loans,
no Principal Prepayments or final liquidations with respect to the Mortgage
Loans, and no acquisitions of Mortgaged Properties through foreclosure or
deed-in-lieu foreclosure or dispositions of Mortgaged Properties already so
acquired.
In the event that the Projected Distribution Amount calculated as of any
Special Determination Date with respect to any Distribution Date or Special
Distribution Date, as the case may be, in the following calendar month is less
than the Optimal Senior Distribution Amount calculated for such date, the Master
Servicer shall make or cause to be made on the immediately succeeding Special
Distribution Date, to the extent of available funds, a Special Distribution to
Senior Certificateholders. The amount of such Special Distribution shall be the
minimum amount necessary to eliminate the deficit described in the foregoing
sentence, in light of such Special Distribution. All Special Distributions shall
be made on the class of outstanding Senior Certificates with the earliest Final
Scheduled Distribution Date and shall be allocated, without priority, to reduce
the Certificate Principal Balance of such class of Senior Certificates and to
pay interest at the applicable Certificate Interest Rate on the amount of such
reduction. No portion of any Special Distribution shall be made on any class of
Senior Certificates until all classes of Senior Certificates with earlier Final
Scheduled Distribution Dates have been retired.
Advances
- --------
Subject to the following limitations, the Master Servicer will be obligated
to advance on or before the 25th day of each month, or if such 25th day is not a
business day then on the business day immediately following (each, a "Master
Servicer Advance Date"), out of its own funds, the aggregate of payments of
principal and interest (adjusted to the Net Mortgage Rate) which were due during
the related Due Period and delinquent as of the Determination Date in such
calendar month, plus certain amounts representing interest not covered by any
current net income on Mortgaged Properties acquired on behalf of
Certificateholders by foreclosure or deed in lieu of foreclosure.
The Master Servicer will be obligated to make Advances regardless of
whether such Advances are deemed to be recoverable from the related Mortgage
Loans.
All Advances will be reimbursable to the Master Servicer either (a) from
late collections, Insurance Proceeds and Liquidation Proceeds from the Mortgage
Loan as to which such unreimbursed Advance was made or (b) as to any Advance
with respect to which the Master Servicer cannot reimburse itself out of the
liquidation proceeds for the related Mortgaged Loan or REO Property (an
"Unrecovered Advance"), out of any funds in the Certificate Account prior to the
distributions on the Senior Certificate.
Allocation of Losses; Subordination
- -----------------------------------
Any liquidation loss on a Mortgage Loan, to the extent that the proceeds of
such liquidation are less than the Cash Flow Value of such Mortgage Loan, will
be allocated first to the Class B-1 Certificates, until the Certificate
Principal Balance of the Class B-1 Certificates has been reduced to zero; any
additional liquidation losses, to the same extent, will be allocated to the
Senior Certificates. Allocation of any such losses to the Subordinate
Certificates will be effected as follows. Immediately after each Distribution
Date, the aggregate Certificate Principal Balance of the Subordinate
Certificates will be recalculated as equal to the excess, if any, of the then
aggregate Cash Flow Value of all of the Mortgage Loans which remain outstanding
over the aggregate Certificate Principal Balance of the Senior Certificates
immediately after such Distribution Date. In addition, the Senior Percentage
will be recalculated after each Distribution Date and will equal the then
aggregate Certificate Principal Balance of the Senior Certificates divided by
the then aggregate Cash Flow Value of all of the Mortgage Loans which remain
outstanding (but not more than 100%); and the corresponding percentage for the
Subordinate Certificates (the "Subordinate Percentage") will equal 100% minus
the Senior Percentage. Any allocation of losses to the Subordinate Certificates
will have the effect of increasing the Senior Percentage and, accordingly, the
portion of future distributions payable to the Senior Certificateholders
relative to that payable to the Subordinate Certificateholders. Conversely,
payments to the Senior Certificateholders with respect to the Cash Flow Value
decline resulting from mortgagor prepayments when the Senior Prepayment
Percentage exceeds the Senior Percentage will have the effect of decreasing the
Senior Percentage and accelerating the amortization of the Senior Certificates.
In addition, such payment to the Senior Certificateholders of mortgagor
prepayments when the Senior Prepayment Percentage exceeds the Senior Percentage
will have the effect of preserving the availability of the subordination
provided by the Subordinate Certificates. In the event that the Certificate
Principal Balance of the Subordinate Certificates is reduced to zero while one
or more classes of Senior Certificates remain outstanding and additional losses
cause the Certificate Principal Balance of the Senior Certificates to exceed the
aggregate Cash Flow Value of the Mortgage Loans, the Certificate Principal
Balance of each remaining Senior Class will be reduced by such class's pro rata
share of such excess.
Example of Distributions
- ------------------------
The following chart sets forth an example of distributions on the
Certificates, based upon the assumption that the Certificates were issued in
- --------- 199-- and that distributions are made on the 25th of -----------,
- -----------, --------- and ------------.
- --------- 1......................... Cut-off Date. The initial principal
balance of the Mortgage Loans will be
the aggregate principal balance of the
Mortgage Loans as of --------- 1,
199--, after deducting any principal
payments due on or before such date.
Any principal and interest payments
due on or before --------- 1, will not
be part of the Trust Fund, and the
Depositor will retain such amounts
when they are received.
- --------- 2 through
------- 31..................... Prepayment Period. Principal
prepayments, and interest thereon to
the date of prepayment, received at
any time during this period will be
deposited into the Certificate Account
for distribution on -------- 25.
- ------------ 25
-------- 25 and
-------- 25.................... With respect to any Principal
Prepayment in full of a Mortgage Loan,
during the prior calendar month, the
Master Servicer will deposit into the
Certificate Account, to the extent of
servicing compensation earned for the
concurrent period, an amount which,
together with interest from the
mortgagor [and reinvestment income in
such calendar month on the proceeds of
such liquidation or prepayment], will
constitute one month's interest at the
Net Mortgage Rate on the Stated
Principal Balance of such prepaid
Mortgage Loan.
- -------- 31......................... Record Date. Distributions on
-------- 25 will be made to
Certificateholders of record at the
close of business on the last business
day of the month immediately preceding
the month of distribution.
- ------- 2 to
--------- 20................... Deposit Period. Payments due during
the three related Due Periods
(--------- 2- ------------ 1,
------------ 2- ------- 1, ------- 2-
-------- 1) from mortgagors will be
deposited in the Certificate Account
as received, and will include
scheduled principal payments plus
interest on the ---------,
------------ and October balances,
less interest from the date of
prepayment of any Mortgage Loan
prepaid in full during the Prepayment
Period.
- ------------ 20,
-------- 20 and
-------- 20.................... Advance Determination Date. Master
Servicer determines aggregate amount
of delinquent monthly payments due for
the immediately preceding Due Period.
- ------------ 25,
-------- 25 and
-------- 25.................... Master Servicer Advance Date. Master
Servicer deposits in Certificate
Account the aggregate amount
determined on the related Advance
Determination Date.
- ------------ 20 and
-------- 20.................... Special Determination Date. Master
Servicer calculates Projected
Distribution Amount and Optimal Senior
Distribution Amount with respect to
------- 25 and -------- 25,
respectively.
- ------------ 25 and
-------- 25.................... If Projected Distribution Amount
calculated on immediately preceding
Special Determination Date with
respect to Distribution Date or
Special Distribution Date, as the case
may be, in following month is less
than Optimal Senior Distribution
Amount calculated for such date,
[Master Servicer] [Trustee] shall make
a Special Distribution in minimum
amount necessary to eliminate such
deficit, in light of such Special
Distribution.
- -------- 20......................... Determination Date. Master Servicer
calculates amounts of principal and
interest to be distributed on --------
25.
- -------- 25......................... Distribution Date. On -------- 25,
the [Master Servicer] [Trustee] will
distribute or cause to be distributed
to the Certificateholders the amounts
determined on -------- 20.
Succeeding [three month] periods follow the above pattern, except for the
Cut-off Date.
YIELD ON THE CERTIFICATES AND
PREPAYMENTS OF THE MORTGAGE LOANS
Delay in Payment of Interest
- ----------------------------
The effective yield to the holders of the Certificates will be lower than
the yield otherwise produced by the Certificate Interest Rate and purchase price
because [quarterly] interest will not be payable to such holders until the 25th
day (or if such day is not a business day, then on the next succeeding business
day) of the month following the Interest Accrual Period (without any additional
distribution of interest or earnings thereon in respect of such delay). See
"Yield Considerations" and "Description of the Certificates--Retained Interest,
Servicing Compensation and Payment of Expenses" in the Prospectus.
Prepayment Considerations and Weighted Average Life
- ---------------------------------------------------
Because the Cash Flow Value decline resulting from principal payments on
the Mortgage Loans will be distributed to the holders of the Certificates (to
the extent collected or advanced), and because, as described above, the Senior
Prepayment Percentage of the Cash Flow Value decline resulting from prepayments
initially will be distributed solely to the holders of Senior Certificates, the
rate of payment of principal of the Senior Certificates, the weighted average
life of each class of the Senior Certificates and the aggregate amount of
distributions on the Senior Certificates will be directly related to the rate of
payment of principal of the Mortgage Loans. The rate of principal payments on
the underlying Mortgage Loans will in turn be affected by the rate of principal
prepayments thereon (including for this purpose payments resulting from
refinancing, liquidations of the Mortgage Loans due to defaults, casualties,
condemnations, and repurchases by the Depositor, the Master Servicer or
Unaffiliated Sellers). [The Mortgage Loans may be prepaid by the mortgagors at
any time without payment of any prepayment fee or penalty.] The actual rate of
principal prepayments on pools of mortgage loans is influenced by a variety of
economic, tax, geographic, demographic, social, legal and other factors and has
fluctuated considerably in recent years. In addition, the rate of principal
prepayments may differ among pools of mortgages at any time because of specific
factors relating to the mortgage loans in the particular pool, including, among
other things, the age of the mortgage loans, the geographic locations of the
Mortgaged Properties and the extent of the mortgagors' equity in real property
securing the loans, and changes in the mortgagors' housing needs, job transfers,
unemployment and servicing decisions. Generally, however, if prevailing interest
rates fall significantly below the Mortgage Rates on the Mortgage Loans, the
Mortgage Loans are likely to be subject to higher prepayment rates than if
prevailing rates remain at or above the Mortgage Rates on the Mortgage Loans.
Conversely, if prevailing interest rates rise significantly above the Mortgage
Rates on the Mortgage Loans, the rate of prepayments would be expected to
decrease. See "Maturity and Prepayment Considerations" in the Prospectus.
The yield to maturity of any class of the Senior Certificates will depend
on the rate of payment of principal on the Mortgage Loans and the price paid by
the purchaser. [Specifically, since the Class -- Certificates are being offered
at discounts from their original Certificate Principal Balances, if the
purchaser of a Class -- Certificate calculates its yield to maturity based on an
assumed rate of payment of principal faster than that actually realized on the
Mortgage Loans, its actual yield to maturity will be lower than that so
calculated.] The timing of changes in the rate of prepayments on the Mortgage
Loans may significantly affect an investor's actual yield to maturity, even if
the average rate of principal payments experienced over time is consistent with
an investor's expectation. In general, the earlier a prepayment of principal on
the underlying Mortgage Loans, the greater the effect on an investor's yield to
maturity, inasmuch as 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 the period immediately following the issuance of the Certificates would
not be fully offset by a subsequent like reduction (or increase) in the rate of
principal payments.
The Final Scheduled Distribution Date for each class of Senior Certificates
is the latest Distribution Date on which the Certificate Principal Balance
thereof is expected to be reduced to zero, based on the assumptions used for
determining the Cash Flow Values of the Mortgage Loans which are [expected to
be] included in the Mortgage Pool, as described above, including the assumption
that no prepayments or defaults occur with respect to the Mortgage Loans.
However, [many of the Mortgage Loans included in a Cash Flow Value Group may
have original terms, maturity dates or Mortgage Rates shorter or less than
indicated under those assumptions. For these reasons, and] because of the
likelihood of prepayments, the weighted average life for each class of Senior
Certificates is likely to be shorter than would be the case if payments actually
made on the Mortgage Loans conformed to the above described assumptions, and the
actual last Distribution Date for any class of Senior Certificates could occur
significantly earlier than the Final Scheduled Distribution Date.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
- ----------------------------- ("-------") assumes that each Mortgage Loan
(regardless of interest rate, principal amount, original term to maturity or
geographic location) prepays at a rate of 0.2% per annum of its outstanding
principal balance in the first month after origination, that this prepayment
rate increases by 0.2% per annum in each month through the 30th month after
origination and remains constant at 6% per annum in each month thereafter. The
- -------------------------- does not purport to be either a 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 Mortgage Loans.
The following table indicates the projected weighted average life of each
class of Senior Certificates and sets forth the percentage of the initial
Certificate Principal Balance of each class of Senior Certificates that would be
outstanding after each of the dates shown, at various percentages of the
- ------------ model. The column headed 0% --- assumes that no Mortgage Loans are
prepaid. The other columns assume prepayments at rates equal to -------%,
- ------% and --------% of the --------------- model. The table has been prepared
based on the characteristics of the Mortgage Loans as described below under "The
Mortgage Pool" [and on the specific characteristics of the Mortgage Loans
expected to be included in the Mortgage Pool]. For the 0% prepayment case, the
table has been prepared based on the assumptions used for determining the Cash
Flow Values of the Mortgage Loans, as described above. For all other prepayment
cases, the table has been prepared based on the same assumptions except (i) that
the Mortgage Loans included in each Cash Flow Value Group are each assumed to
have a Mortgage Rate, maturity date and original term equal to the weighted
average Mortgage Rate, maturity date and original term, respectively, of all
Mortgage Loans expected to be included in each Cash Flow Value Group, and (ii)
that all such Mortgage Loans are prepaid at the indicated percentage of the
- ------------------ model. There is no assurance [that the actual characteristics
of such Mortgage Loans will not differ from those assumed in preparing the
following table, and there is no assurance] that the prepayments of the Mortgage
Loans will conform to any of the assumed prepayment rates. [To the extent there
are changes in the weighted average original and remaining terms to maturity of
or Mortgage Rates on the Mortgage Loans actually included in the Mortgage Pool
from the assumptions used in the following table, distributions of principal of
the Certificates may occur earlier or later than indicated by the table, but the
final distribution of principal of each class of Certificates will in no event
be later than its Final Scheduled Distribution Date as shown on the cover page
of this Prospectus Supplement.]
<PAGE>
<TABLE>
Percent of Initial Certificate Principal Balance
<CAPTION>
Date CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS B-1
---- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
- ------------, 199-- .......
- ---------- 25, 1994 .......
- ---------- 25, 1995 .......
- ---------- 25, 1996 .......
- ---------- 25, 1997 .......
- ---------- 25, 1998 .......
- ---------- 25, 1999 .......
- ---------- 25, 2000 .......
- ---------- 25, 2001 .......
- ---------- 25, 2002 .......
- ---------- 25, 2003 .......
- ---------- 25, 2004 .......
- ---------- 25, 2005 .......
- ---------- 25, 2006 .......
- ---------- 25, 2007 .......
- ---------- 25, 2008 .......
- ---------- 25, 2009 .......
- ---------- 25, 2010 .......
- ---------- 25, 2011 .......
- ---------- 25, 2012 .......
- ---------- 25, 2013 .......
- ---------- 25, 2014 .......
- ---------- 25, 2015 .......
- ---------- 25, 2016 .......
- ---------- 25, 2017 .......
- ---------- 25, 20--- ......
Weighted Average Life
(years) (1).............
<FN>
- ----------
(1) The weighted average life of a Certificate is determined by (i)
multiplying the amount of each principal distribution by the number of years
from the date of issuance to the related Distribution Date, (ii) summing the
results and (iii) dividing the sum by the total principal distributed on the
Certificate.
</FN>
</TABLE>
<PAGE>
The percentages of --- in the table above illustrate the changes in
weighted average life for prepayment scenarios both slower and faster than
recent historical rates. The Depositor believes that the historical prepayment
experience on mortgage loans is not necessarily indicative of the future
prepayment experience of any mortgage loans, including the Mortgage Loans. In
addition, it is not likely that the Mortgage Loans will prepay at a constant
percentage of --- until maturity or that all of the Mortgage Loans will prepay
at the same percentage.
The Depositor makes no representation that the Mortgage Loans will prepay
in the manner or at any of the rates assumed in the table set forth above. Each
investor must make its own decision as to the appropriate prepayment assumption
to be used in deciding whether or not to purchase any of the Certificates. Since
unanticipated events and circumstances are likely to occur, it is probable that
principal reductions on the Certificates will be significantly different from
the hypothetical principal reductions shown. The actual return to an investor
also will be affected by the price paid by such investor for its Certificates
and such investor's individual tax situation.
POOLING AND SERVICING AGREEMENT
General
- -------
The Certificates offered hereby will be issued pursuant to a Pooling and
Servicing Agreement (the "Agreement") to be dated as of ------------- 1, 199--,
among the Depositor, the Master Servicer and the Trustee, a form of which is
filed as an exhibit to the Registration Statement. Reference is made to the
Prospectus for important information additional to that set forth herein
regarding the terms and conditions of the Agreement and the Certificates. [The
Trustee will appoint ---------------------------------------- (the "Custodian"),
to serve as Custodian in connection with the Certificates.] The Certificates
will be transferable and exchangeable at the corporate trust office of
- -------------------------------------------, located in
- --------------------------------, which will serve as Certificate Registrar.
- -------------------- [---------- will act as paying agent and authenticating
agent.] No service charge will be made for any transfer or exchange of
Certificates but the [Trustee] [Certificate Registrar] may require payment of a
sum sufficient to cover any tax or governmental charge that may be imposed in
connection with the transfer or exchange of Certificates. The Depositor will
provide to a prospective or actual Certificateholder without charge, on written
request, a copy (without exhibits) of the Agreement. Requests should be
addressed to PaineWebber Mortgage Acceptance Corp. IV, 1285 Avenue of the
Americas, New York, New York ------, Attention: ----------------.
The Master Servicer
- -------------------
-----------------------------, a --------------------- (the "Master
Servicer"), will act as Master Servicer for the 199------ Certificates pursuant
to the Agreement. The Master Servicer's principal executive offices are located
at --------- ---------------------------, and its telephone number is --------
- -----------. [Describe other locations and general operations of the Master
Servicer.]
<PAGE>
The following table summarizes the foreclosure experience on conventional
residential first trust deeds or mortgage loans serviced by the Master Servicer
during the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
199-- 199-- 199-- 199--
-------------------------------------------------
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C>
Principal Balance (end of $--------- $--------- $--------- $----------
period)......................
Total Number of Loans........ ---------- ---------- ---------- -----------
Total Number of
Foreclosures............... ---------- ---------- ---------- -----------
Percent Foreclosed
by Number of Loans........ ----------% ----------% -----------% ----------%
</TABLE>
The following table summarizes the delinquency experience on conventional
residential first trust deeds or mortgage loans serviced by the Master Servicer
during the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
199-- 199-- 199-- 199--
----------------------------------------------
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C>
Period of Delinquency:
30-59 days $ $ $ $
Principal Balance
Number of Loans
Percent of Delinquent by
Number of Loans % % % %
Period of Delinquency:
60-89 days $ $ $ $
Principal Balance
Number of Loans
Percent of Delinquent by
Number of Loans % % % %
Period of Delinquency:
90 days or more $ $ $ $
Principal Balance
Number of Loans
Percent of Delinquent by
Number of Loans % % % %
In foreclosure
Principal Balance $ $ $ $
Number of Loans
Percent Delinquent by
Number of Loans
% % % %
Total Delinquent and in
Foreclosure $ $ $ $
Principal Balance
Number of Loans
Percent Delinquent by
Number of Loans % % % %
</TABLE>
While the above foreclosure and delinquency experience is typical of the
Master Servicer's recent experience, there can be no assurance that the future
experience on the Mortgage Loans will be the same. In addition, the foregoing is
based on all of the conventional loans in the Master Servicer's servicing
portfolio. The Mortgage Loans may be more recently originated than and may have
certain other characteristics unlike the majority of the loans in the Master
Servicer's conventional servicing portfolio.
The Trustee
- -----------
------------------------------------------------------------------------, a
- ----------------------------------- (the "Trustee"), will act as Trustee for the
Series 199------- Certificates pursuant to the Agreement. The Trustee's
principal executive offices are located at -----------------, and its telephone
number is -------------.
Servicing and Other Compensation and Payment of Expenses
- --------------------------------------------------------
The principal compensation to be paid to the Master Servicer in respect of
its master servicing activities for the Certificates will be equal to the
product of the Servicing Fee Rate times the Scheduled Principal Balance of each
Mortgage Loan in the Mortgage Pool. The "Scheduled Principal Balance" of any
Mortgage Loan is equal to the outstanding principal balance thereof minus the
principal portion of all delinquent scheduled monthly payments. As to any
Mortgage Loan, the Servicing Fee Rate is equal to ---% per annum. The Master
Servicer is obligated to pay certain ongoing expenses associated with the
Mortgage Pool and incurred by the Master Servicer in connection with its
responsibilities under the Agreement. See "Description of the
Certificates--Servicing Compensation and Payment of Expenses" in the Prospectus
for information regarding other possible compensation to the Master Servicer and
for information regarding expenses payable by the Master Servicer.
Voting Rights
- -------------
At all times, --% of all Voting Rights will be allocated among all holders
of the Senior Certificates and the Class B-1 Certificates in proportion to the
then outstanding Certificate Principal Balances of their respective
Certificates, and --% of all Voting Rights will be allocated among holders of
the Class B-2 Certificates in proportion to the percentage interests evidenced
by their respective Certificates.
Termination
- -----------
The circumstances under which the obligations created by the Agreement will
terminate in respect of a series of Certificates are described in "Description
of the Certificates--Termination" in the Prospectus. The [Depositor] [Master
Servicer] will have the right to repurchase all remaining Mortgage Loans in the
Mortgage Pool and thereby effect early retirement of the Certificates, subject
to the aggregate principal balance of the Mortgage Loans at the time of
repurchase being less than ---% of the aggregate principal balance of such
Mortgage Loans as of the Cut-off Date. In the event the Master Servicer
exercises such option, the purchase price distributed with respect to each
Senior Certificate will be 100% of its then outstanding Certificate Principal
Balance plus interest thereon at the Certificate Interest Rate. In no event will
the trust created by the Agreement for a series of Certificates continue beyond
- ---------.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Cadwalader, Wickersham &
Taft, counsel to the Depositor, will deliver the following opinion: [Assuming
compliance with the provisions of the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund will qualify as a "real estate
mortgage investment conduit" (a "REMIC") within the meaning of Sections 860A
through 860G (the "REMIC Provisions") of the Internal Revenue Code of 1986 (the
"Code"), and (i) the Class A, Class B and Class C Certificates will evidence
"regular interests" in such REMIC and (ii) the Class R Certificates will be the
sole class of "residual interests" in such REMIC, each within the meaning of the
REMIC Provisions in effect on the date hereof.] [Assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, the Trust Fund
will be classified as a grantor trust under Subpart E, part I of subchapter J of
the Code, and not as an association taxable as a corporation or as a
partnership.]
The ---------- Certificates [may] [will] [will not] be treated as having
been issued with original issue discount for Federal income tax reporting
purposes. The prepayment assumption that will be used in determining the rate of
accrual of [original issue discount,] market discount and premium, if any, for
Federal income tax purposes will be based on the assumption that subsequent to
the date of any determination the Mortgage Loans will prepay at a rate equal to
[a CPR of --%]. No representation is made that the Mortgage Loans will prepay at
that rate or at any other rate. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the Prospectus.
The ------------------- Certificates may be treated for Federal income tax
purposes as having been issued at a premium. Whether any holder of [either] such
Class of Certificates will be treated as holding a Certificate with amortizable
bond premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of [each] such Class of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Premium"
in the Prospectus.
The Offered Certificates will be treated as "qualifying real property
loans" within the meaning of Section 593(d) of the Code, assets described in
Section 7701(a)(19)(C) of the Code and "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code, and interest (including original issue
discount, if any) on the Offered Certificates will be interest described in
Section 856(c)(3)(B) of the Code. Moreover, the Offered Certificates will be
"qualified mortgages" within the meaning of Section 860(A)(3) of the Code. See
"Certain Federal Income Tax Consequences--REMICs--Characterization of
Investments in REMIC Certificates" in the Prospectus.
------------------------, a ---------------, will act as REMIC
Administrator for the Trust Fund. [The Master Servicer will be responsible for
the fees and normal disbursements of the REMIC Administrator.] See "Certain
Federal Income Tax Consequences--REMICs--Reporting and Other Administrative
Matters" and "The Pooling and Servicing Agreements--Certain Matters Regarding
the Master Servicer, the Special Servicer, the REMIC Administrator and the
Depositor", "--Events of Default" and "--Rights Upon Event of Default" in the
Prospectus.
For further information regarding the Federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
Special Tax Considerations Applicable to REMIC Residual Certificates
- --------------------------------------------------------------------
The IRS has issued REMIC Regulations that significantly affect holders of
REMIC Residual Certificates. The REMIC Regulations impose restrictions on the
transfer or acquisition of certain residual interests, including the Class R
Certificates. In addition, the REMIC Regulations provide special rules
applicable to: (i) thrift institutions holding residual interests having
"significant value" and (ii) the transfer of "noneconomic" residual interests to
United States persons. Pursuant to the Pooling and Servicing Agreement, the
Class R Certificates may not be transferred to non-United States persons. See
"Certain Federal Income Tax Consequences--REMICS--Taxation of Owners of REMIC
Residual Certificates" in the Prospectus.
The REMIC Regulations provide for the determination of whether a residual
interest has "significant value" for purposes of applying the rules relating to
"excess inclusions" with respect to residual interests. Based on the REMIC
Regulations, the Class R Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess inclusions
with respect to the Class R Certificates, which will be in an amount equal to
all or virtually all of the taxable income includable by holders of the Class R
Certificates. See "Certain Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Residual Certificates--Excess Inclusions" in the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, if "a significant purpose of the transfer was
to impede the assessment or collection of tax." Based on the REMIC Regulations,
the Class R Certificates may constitute noneconomic residual interests during
some or all of their terms for purposes of the REMIC Regulations and,
accordingly, if a significant purpose of a transfer is to impede the assessment
or collection of tax, transfers of the Class R Certificates may be disregarded
and purported transferors may remain liable for any taxes due with respect to
the income on the Class R Certificates. All transfers of the Class R
Certificates will be subject to certain restrictions under the terms of the
Pooling and Servicing Agreement that are intended to reduce the possibility of
any such transfer being disregarded to the extent that the Class R Certificates
constitute noneconomic residual interests. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Noneconomic REMIC Residual Certificates" in the Prospectus.
The Class R Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the term of the
Trust Fund that significantly exceeds the amount of cash distributions received
by such Certificateholders from the Trust Fund with respect to such periods.
Furthermore, the tax on such income may exceed the cash distributions with
respect to such periods. Consequently, Class R Certificateholders should have
other sources of funds sufficient to pay any federal income taxes due in the
earlier years of the Trust Fund's term as a result of their ownership of the
Class R Certificates. In addition, the required inclusion of this amount of
taxable income during the Trust Fund's earlier accrual periods and the deferral
of corresponding tax losses or deductions until later accrual periods or until
the ultimate sale or disposition of a Class R Certificate (or possibly later
under the "wash sale" rules of Section 1091 of the Code) may cause the Class R
Certificateholders' after-tax rate of return to be zero or negative even if the
Class R Certificateholders' pre-tax rate of return is positive. That is, on a
present value basis, the Class R Certificateholders' resulting tax liabilities
could substantially exceed the sum of any tax benefits and the amount of any
cash distributions on the Class R Certificates over their life.
Potential investors in Class R Certificates should be aware that under the
Pooling and Servicing Agreement, the holder of the largest Percentage Interest
in the Class R Certificates shall, by its acceptance of such Certificates, agree
to irrevocably appoint the Master Servicer as its agent to perform all of the
duties of the tax matters person for the REMIC.
Purchasers of the Class R Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in such
Certificates.
For further information regarding the federal income tax consequences of
investing in the Class R Certificates, see "Yield and Maturity
Considerations--Additional Yield Considerations Applicable Solely to the Class R
Certificates" herein and "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.
PLAN OF DISTRIBUTION
[Subject to the terms and conditions set forth in the Underwriting
Agreement dated ------------, 199-- (the "Underwriting Agreement"), the
Depositor has agreed to sell and PaineWebber Incorporated (the "Underwriter")
has agreed to purchase the Senior Certificates. The Underwriter is obligated to
purchase all Senior Certificates offered hereby if any are purchased.]
The Depositor has been advised by the Underwriter that it proposes
initially to offer the Senior Certificates to the public at the public offering
prices set forth on the cover page of this Prospectus Supplement and to certain
dealers at such prices less a concession not in excess of the amount set forth
below for each class. The Underwriter may allow and such dealers may reallow
concessions not in excess of the amount set forth below for each class. After
the initial public offering, the public offering price and such concessions may
be changed.
<TABLE>
<CAPTION>
Concession Reallowance
(Percent of (Percent of
Certificate Certificate
Principal Balance) Principal Balance)
------------------ ------------------
<S> <C> <C>
Class A-1 Certificates.............
Class A-2 Certificates.............
Class A-3 Certificates.............
Class A-4 Certificates.............
</TABLE>
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Securities Act of 1933, or will contribute to payments the Underwriter may be
required to make in respect thereof.
The Underwriting Agreement provides that the Depositor and its parent
corporation will indemnify the Underwriter against certain civil liabilities,
including liabilities under the Securities Act of 1933, or will contribute to
payments the Underwriter may be required to make in respect thereof.
There can be no assurance that a secondary market for the Senior
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Senior
Certificates will be monthly statements discussed in the Prospectus under
"Description of the Certificates--Statements to the Certificateholders," which
will include information as to the outstanding principal balance of the Senior
Certificates and the status of the applicable form of credit enhancement. There
can be no assurance that any additional information regarding the Senior
Certificates will be available through any other source. In addition, the
Depositor is not aware of any source through which price information about the
Senior Certificates will be generally available on an ongoing basis. The limited
nature of such information regarding the Senior Certificates may adversely
affect the liquidity of the Senior Certificates, even if a secondary market for
the Senior Certificates becomes available.
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon for
the Depositor and for the Underwriter by Cadwalader, Wickersham & Taft, New
York, New York.
There can be no assurance that a secondary market for the Senior
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Senior
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates--Statements to Certificateholders," which will
include information as to the outstanding principal balance of the Senior
Certificates and the status of the applicable form of credit enhancement. There
can be no assurance that any additional information regarding the Senior
Certificates will be available through any other source. In addition, the
Depositor is not aware of any source through which price information about the
Senior Certificates will be generally available on an ongoing basis. The limited
nature of such information regarding the Senior Certificates may adversely
affect the liquidity of the Senior Certificates, even if a secondary market for
the Senior Certificates become available.
RATING
[It is a condition to issuance that the Senior Certificates offered hereby
be rated in the second highest rating category by a nationally recognized rating
organization as the Depositor may designate.] [rating agency language]
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.
<PAGE>
SUBJECT TO COMPLETION, DATED ------, 199-
PROSPECTUS SUPPLEMENT [Version 5]
(To Prospectus dated -----------, 199--)
$------------- (Approximate)
Asset-Backed Certificates, Series 199--
PAINEWEBBER MORTGAGE ACCEPTANCE CORPORATION IV
Depositor
Class A: $------- Initial Certificate Principal Balance (approximate)
---% Pass-Through Rate on Class A Principal Amount
Class B: No Initial Certificate Principal Balance ----% Pass-Through
Rate on Class B Notional Amount
The Series 199------- Certificates offered hereby will consist of Class A
Certificates and Class B Certificates. The Certificates will represent in the
aggregate the entire beneficial ownership interest in a trust fund (the "Trust
Fund") consisting of a segregated pool of [-----] Securities having an aggregate
principal balance as of ----------, 199- of approximately $---------- (subject
to a permitted variance described herein under "Substitution of Trust Fund
Assets") and as further described herein to be sold by PaineWebber Mortgage
Acceptance Corporation IV (the "Depositor") pursuant to a Trust Agreement
between the Depositor and ------, as trustee (the "Trustee"). The [----]
Securities will evidence ownership interests in segregated pools of [one- to
four- family first mortgage loans] (the "Mortgage Loans"). The Class A
Certificates evidence ownership of all principal payments and ---% of each
interest payment on the [-----] Securities, after deduction of the Trust
Administration Fee specified herein, which corresponds to interest at the
above-specified Pass-Through Rate on the outstanding Class A Certificate
Principal Balance for the [second] preceding month. The Class B Certificates
evidence ownership of ---% of each interest payment on the [-----] Securities,
after deduction of the Trust Administration Fee, which corresponds to interest
at the above-specified Pass-Through Rate on the outstanding Class B Notional
Amount for the [second] preceding month. The Notional Amount is used solely for
purposes of the determination of interest payments and certain other rights of
holders of Class B Certificates and does not represent an interest in principal
payments on the [------] Securities.
Principal and interest are payable on the ---- day of each month or, if such day
is not a business day, then on the next succeeding business day, beginning in
- ------------- (each, a "Distribution Date"). The Certificates offered hereby
will constitute a separate series of Certificates being offered by the Depositor
from time to time pursuant to the Prospectus dated -----------, 199-- which
accompanies this Prospectus Supplement and of which this Prospectus Supplement
is a part.
The yield to maturity on the Certificates will be affected by the rate of
principal payments (including prepayments) on the Mortgage Loans. [The Mortgage
Loans may be prepaid at any time without penalty.] The yield to maturity on the
Class B Certificates will be extremely sensitive to the rate of principal
payments on the Mortgage Loans and may fluctuate significantly from time to
time. The Class B Certificates will be adversely affected in the event of higher
than anticipated levels of prepayments. In addition, in the case of Class B
Certificates, a rapid rate of principal payments could result in the failure of
investors to recover their initial investment. See "Yield on the Certificates
and Prepayments on the [-----] Securities" herein.
There is currently no secondary market for the Certificates offered hereby and
there can be no assurance that a secondary market for the Certificates will
develop. PaineWebber Incorporated expects to establish a market in the
Certificates offered hereby, but is not obligated to do so. There is no
assurance that any such market, if established, will continue.
Prospective investors should consider the information set forth under "Risk
Factors" on page S----- of this Prospectus Supplement and page ---- of the
accompanying Prospectus.
ALTHOUGH DISTRIBUTIONS ON THE [-----] SECURITIES ARE GUARANTEED BY [------], THE
CERTIFICATES REPRESENT INTERESTS IN THE TRUST FUND ONLY AND ARE NOT GUARANTEED
BY [---], OR ANY OTHER PERSON, AND DO NOT REPRESENT AN OBLIGATION OF OR INTEREST
IN [-----], THE DEPOSITOR, THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES.
THE GUARANTEE OF [-----] IS [NOT] BACKED BY THE FULL FAITH AND CREDIT OF THE
UNITED STATES OF AMERICA. DISTRIBUTIONS WILL BE MADE ON THE CERTIFICATES ONLY
IF, AND TO THE EXTENT THAT, THE TRUSTEE RECEIVES DISTRIBUTIONS ON THE [-----]
SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
[-------------------------------------------------------------------------------
Aggregate
Initial Proceeds
Certificate Underwriting to the
Principal Price to Discounts and Depositor
Depositor Balance Public (1) Commissions (1)(2)
- --------------------------- ----------- ---------- ------------- ---------
Class A Certificates..... $ % % %
Class B Certificates..... None %(3) %(3) %(3)
Total.................... $ % % %
- ---------------------------
(1) Plus accrued interest from ----------------, 199--.
(2) Before deducting expenses payable by the Depositor estimated to be
$---------.]
(3) Stated as a percentage of the Class B Notional Amount.
[The Class A and Class B Certificates offered hereby will be purchased by
PaineWebber Incorporated (the "Underwriter") from the Depositor and will be
offered by the Underwriter from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the Depositor, before deducting expenses payable by the
Depositor, estimated to be $-----------, will be ----% of the aggregate initial
Class A Certificate Principal Balance, plus accrued interest at the Class A
Pass-Through Rate from --------------, 199--.]
The Class A and Class B Certificates offered hereby [are] [will be purchased by
PaineWebber Incorporated (the "Underwriter") from the Depositor and will be]
offered subject to receipt and acceptance by the Underwriter, to prior sale and
to the Underwriter's right to reject any order in whole or in part and to
withdraw, cancel or modify the offer without notice. It is expected that
delivery of the Series 199----- Certificates offered hereby will be made at the
office of PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New
York 10019 or through the facilities of The Depository Trust Company on or about
- -------------------, 199--.
PaineWebber Incorporated
- ----------------, 199--
The Certificates offered by this Prospectus Supplement will be part of a
separate series of Certificates being offered by the Depositor pursuant to its
Prospectus dated -----------, 199--, of which this Prospectus Supplement is a
part and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
<PAGE>
TABLE OF CONTENTS
PAGE
SUBJECT TO COMPLETION, DATED --------, --, 199-.................................
SUMMARY OF PROSPECTUS SUPPLEMENT................................................
RISK FACTORS....................................................................
DESCRIPTION OF THE CERTIFICATES.................................................
THE [-------] SECURITIES........................................................
[Substitution of Trust Fund Assets.........................................
YIELD ON THE CERTIFICATES AND PREPAYMENT ON THE [----------] SECURITIES........
Payment Delay..............................................................
Prepayment Considerations and Risks........................................
TRUST AGREEMENT.................................................................
General....................................................................
The Trustee................................................................
Voting Rights..............................................................
Transfer to ERISA Plans....................................................
Termination................................................................
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.........................................
SPECIAL TAX CONSIDERATIONS APPLICABLE TO REMIC RESIDUAL CERTIFICATES...........
PLAN OF DISTRIBUTION............................................................
LEGAL MATTERS...................................................................
RATING..........................................................................
Until ----------------, all dealers effecting transactions in the Certificates,
whether or not participating in this distribution, may be required to deliver a
Prospectus Supplement and the Prospectus to which it relates. This is in
addition to the obligation of dealers to deliver a Prospectus Supplement and
Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by
reference to the detailed information appearing elsewhere in this Prospectus
Supplement and in the accompanying Prospectus. Capitalized terms used herein but
not defined herein shall have the meaning assigned thereto in the Prospectus. An
Index of Significant Definitions is included at the end of the Prospectus.
Title of Series......................Asset-Backed Certificates, Series 199---
-- (the "Certificates").
Class A Certificates.................$------------------- initial Certificate
Principal Balance (approximate), ---%
Pass-Through Rate on such balance. The
initial Class A Certificate Balance is
equal to the aggregate principal balance of
the [------] Securities as of
--------------- 1, 199-- (the "Cut-off
Date").
Class B Certificates ................No Certificate Principal Balance, ----%
Pass-Through Rate on an amount equal to the
Class A Certificate Principal Balance
outstanding from time to time (with respect
to the Class B Certificates, the "Notional
Amount"). [To be revised, with
corresponding changes, if Class B
Certificates have a Certificate Principal
Balance.]
Depositor............................PaineWebber Mortgage Acceptance Corp. IV, a
wholly-owned limited purpose finance
subsidiary of PaineWebber Group Inc., and
an affiliate of the Underwriter. See "The
Depositor" in the Prospectus.
Trustee .............................--------------------------- ----------.
See "Trust Agreement--The Trustee" herein.
Principal (including prepayments)....All principal payments (including principal
prepayments) with respect to the [-------]
Securities will be passed through on each
Distribution Date to holders of the Class A
Certificates, commencing -----------------,
199-. Holders of Class A Certificates will
be entitled to receive such principal
payments on each Distribution Date on a pro
rata basis in accordance with the
Percentage Interest evidenced by their
respective Certificates. The Percentage
Interest evidenced by any Class A
Certificate is equal to the initial
Certificate Principal Balance thereof
divided by the aggregate initial
Certificate Principal Balance of all of the
Class A Certificates.
.....................................Holders of the Class B Certificates will
not receive any of principal payments on
the [--------] Securities. See "Description
of the Certificates" herein and in the
Prospectus.
Interest.............................Holders of the Class A Certificates will be
entitled to distributions of interest
payments on the [----] Securities on each
Distribution Date based on the Pass-Through
Rate and the then outstanding Certificate
Principal Balance thereof.
.....................................Holders of the Class B Certificates will be
entitled to distributions of interest
payments on the [------] Securities on each
Distribution Date based on the Pass-Through
Rate and the then outstanding Notional
Amount thereof.
[-----]Securities....................----% [-----] Securities having an
aggregate unpaid principal balance of
approximately $----- as of the Cut-off Date
and guaranteed as to the timely
distribution of interest and [the ultimate
distribution of] principal by [--------].
Such guarantee of [------] is [not] backed
by the full faith and credit of the United
States of America. See "The Trust
Funds--Agency Securities" in the
Prospectus.
Denominations........................The Class A Certificates offered hereby
will be offered in registered form, in
denominations evidencing initial
Certificate Principal Balances of
$----------- and multiples of $------- in
excess thereof, with one Certificate
evidencing the remainder of the aggregate
initial Class A Certificate Principal
Balance.
.....................................The Class B Certificates offered hereby
will be offered in registered form, in
denominations evidencing initial Notional
Amounts of $----------- and integral
multiples of $------ in excess thereof,
with one Certificate evidencing an
additional amount equal to the remainder
of the aggregate initial Notional Amount.
Record Date..........................All distributions will be made by or on
behalf of the Trustee to the persons in
whose names the Certificates are registered
at the close of business on the last
business day of the [second] month
preceding the month in which the related
Distribution Date occurs. See "Description
of the Certificates" herein.
Optional Termination.................At its option, the Depositor may repurchase
all of the [----] Securities in the Trust
Fund and thereby effect early retirement of
the Certificates on any Distribution Date
on which the aggregate principal balance of
the [----] Securities remaining in the
Trust Fund is less than --% of the
aggregate principal balance of the [----]
Securities as of the Cut-off Date. See
"Trust Agreement--Termination" herein and
"Description of the
Certificates--Termination" in the
Prospectus.
Yield Considerations and Risks.......The rate of payment of principal of each
Class A Certificate, the aggregate amount
of each distribution on and the yield to
maturity of all Certificates will depend on
the rate of payment of principal (including
prepayments) of the mortgage loans
underlying the [-----] Securities (the
"Mortgage Loans"). [The Mortgage Loans can
be prepaid at any time, without penalty.]
The rate of payment of principal varies
significantly from time to time and between
pools of mortgage loans at any time and
will be affected by a variety of factors.
The rate of payment of principal may also
be affected by any repurchase by the issuer
or guarantor of the Mortgage Loans. In such
event the repurchase price paid by the
issuer or guarantor would be passed through
to the Certificateholders as a prepayment
of principal.
.....................................The yield on Class B Certificates, which
are being offered without any principal
amount, will be especially sensitive to the
rate of principal payments on the Mortgage
Loans and may fluctuate significantly from
time to time. Investors should fully
consider the associated risks, including
the risk that if the rate of principal
payments is rapid the investors may not
recover their initial investment.
.....................................The effective yield of each Certificate
will be lower than the yield otherwise
produced by the applicable Pass-Through
Rate and purchase price of such Certificate
because, although interest will accrue from
the first day through the last day of each
month, principal and interest distributions
with respect to such month will not be
passed through to holders of the
Certificates until on or after the
[-------]th day of the month following the
month of accrual.
[Certain Federal Income Tax
Consequences....................Upon the issuance of the Offered
Certificates, Cadwalader, Wickersham &
Taft, counsel to the Depositor, will
deliver the following opinion: [Assuming
compliance with the provisions of the
Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund
will qualify as a "real estate mortgage
investment conduit" (a "REMIC") within the
meaning of Sections 860A through 860G (the
"REMIC Provisions") of the Internal Revenue
Code of 1986 (the "Code"), and (i) the
Class A, Class B and Class C Certificates
will evidence "regular interests" in such
REMIC and (ii) the Class R Certificates
will be the sole class of "residual
interests" in such REMIC, each within the
meaning of the REMIC Provisions in effect
on the date hereof.] [Assuming compliance
with the Pooling and Servicing Agreement,
for federal income tax purposes, the Trust
Fund will be classified as a grantor trust
under Subpart E, part I of subchapter J of
the Code, and not as an association taxable
as a corporation or as a partnership.]
.....................................Under the REMIC Regulations, the Class R
Certificates will not be regarded as having
"significant value" for purposes of
applying the rules relating to "excess
inclusions." In addition, the Class R
Certificates may constitute "noneconomic"
residual interests for purposes of the
REMIC Regulations. Transfers of the Class R
Certificates will be restricted under the
Pooling and Servicing Agreement to United
States Persons in a manner designed to
prevent a transfer of a noneconomic
residual interest from being disregarded
under the REMIC Regulations. See "Certain
Federal Income Tax Consequences--Special
Tax Considerations Applicable to REMIC
Residual Certificates" herein and "Certain
Federal Income Tax
Consequences--REMICs--Taxation of Owners of
REMIC Residual Certificates--Excess
Inclusions" and "--Noneconomic REMIC
Residual Certificates" in the Prospectus.
.....................................The Class R Certificateholders may be
required to report an amount of taxable
income with respect to the early years of
the Trust Fund's term that significantly
exceeds distributions on the Class R
Certificates during such years, with
corresponding tax deductions or losses
deferred until the later years of the Trust
Fund's term. Accordingly, on a present
value basis, the tax detriments occurring
in the earlier years may substantially
exceed the sum of any tax benefits in the
later years. As a result, the Class R
Certificateholders' after-tax rate of
return may be zero or negative, even if
their pre-tax rate of return is positive.
.....................................See "Yield and Maturity Considerations,"
especially "--Additional Yield
Considerations Applicable Solely to the
Class R Certificates", and "Certain Federal
Income Tax Consequences--Special Tax
Considerations Applicable to REMIC Residual
Certificates" herein.
.....................................For further information regarding the
Federal income tax consequences of
investing in the Offered Certificates, see
"Certain Federal Income Tax Consequences"
herein and in the Prospectus.
Rating...............................It is a condition to the issuance of the
Certificates offered hereby that the
Certificates be rated -------- by
------------------. 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. A security rating
does not address the frequency of
prepayments on the [-----] Securities or
the underlying Mortgage Loans, or the
corresponding effect on yield to investors.
See "Yield on the Certificates and
Prepayments on the [--------] Securities"
and "Rating" herein.
Legal Investment.....................The Certificates will constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") so long as they are rated
as described herein, and, as such, are
legal investments for certain entities to
the extent provided in SMMEA. See "Legal
Investment" in the Prospectus and "Rating"
herein.
<PAGE>
RISK FACTORS
[To Be Provided]
DESCRIPTION OF THE CERTIFICATES
The Series 199----- Certificates are to be issued as Class A
Certificates and Class B Certificates. The Class A Certificates evidence the
holders' beneficial ownership of an undivided interest in all principal payments
on the [-------] Securities and ---% of each interest payment on the [ ]
Securities, after deduction of the Trust Administration Fee (as defined herein).
The interest allocated to the Class A Certificates will be passed through
monthly to each holder thereof at a ---% Pass-Through Rate on the outstanding
Certificate Principal Balance thereof for the [second] month preceding the month
in which the distribution of interest is to be made. The Class B Certificates
evidence the holders' beneficial ownership of an undivided interest in ---% of
each interest payment on the [------] Securities, after deduction of the Trust
Administration Fee. The interest allocated to the Class B Certificates will be
passed through to each holder thereof at a ---% Pass-Through Rate on the
outstanding Notional Amount thereof for the [second] month preceding the month
in which the distribution of interest is to be made.
The aggregate Notional Amount for the Class B Certificates for any
month will be equal to the outstanding Certificate Principal Balance of the
Class A Certificates for that month. The Notional Amount is used solely for
purposes of the determination of interest payments and certain other rights of
holders of Class B Certificates and holders of Class B Certificates shall not
have any interest in, or be entitled to any payment with respect to, principal
payments on the [------] Securities. The aggregate initial Certificate Principal
Balance of the Class A Certificates and the aggregate initial Notional Amount of
the Class B Certificates shall each be approximately $----------- at the Cut-off
Date. The outstanding Certificate Principal Amount or Notional Amount, as the
case may be, of each Class of Certificates for any month will equal the unpaid
principal balance of the [-------] Securities for that month calculated based on
the applicable pool factors for the [------] Securities.
The Trust Administration Fee is payable out of interest payments on
the [------] Securities before calculating the amount of such interest which is
to be allocated to each Class of Certificates and is equal to ---% per annum,
payable monthly, on the aggregate unpaid principal balance of the [-------]
Securities for the [second] month preceding the month in which the distribution
of interest is to be made.
Pursuant to the [-----] program, principal and interest at a ---%
pass-through rate in respect of the [------] Securities is required to be paid
directly to the Trustee on the [-----]th of each month or, if such [-----]th day
is not a business day, on the next succeeding business day [by check] [in
next-day funds]. Payments of principal and interest will be collected by the
Trustee and held in a segregated [non]interest-bearing trust account in the name
of and for the benefit of the Certificateholders [and invested in Permitted
Investments for the benefit of the Trustee]. Assuming timely receipt thereof by
the Trustee by 1:00 p.m. on the [-----] distribution date, principal and
interest on the Certificates, at the applicable Pass-Through Rate, will be
distributed on the day of receipt; if payment on the [------] Securities is
received by the Trustee after 1:00 p.m. or the [-------] distribution date,
principal and interest at the applicable Pass-Through Rate will be distributed
on the next business day (the "Distribution Date"). In each case distributions
will be made to the holders of record of the Certificates on the last business
day of the [second] preceding month (the "Record Date"). The first Distribution
Date will be ----.
Distributions on the Certificates will be made by check mailed to the
registered holders entitled thereto or, upon written request to the Trustee made
at any time at least five business days prior to the related Distribution Date
of a holder of one or more Certificates by wire transfer in immediately
available funds to the account of such holder; provided, however, that the final
distribution in respect of any Certificate will be made only upon presentation
and surrender of such Certificate at the Corporate Trust Office of the Trustee
(as defined herein). Wire transfers will be made at the expense of the
Certificateholder requesting such wire transfer by deducting such expense from
the related transfer. The Corporate Trust Office of the Trustee is presently
located at ---------------------------, but such address may be changed by the
Trustee with prior written notice to registered Certificateholders.
Distributions will be made to the holders of the Certificates entitled
thereto only if, and to the extent that, the Trustee receives payments on the
[-------] Securities. The Trustee will be required to apply all payments
received in respect of the [-------] Securities accruing after the Cut-off Date
to the Certificates without making any deduction, other than deduction of the
Trust Administration Fee, certain expenses of the Trustee, if any, in connection
with any legal actions relating to the Trust Agreement or the Certificates, and
any applicable tax withholding. Although payment of principal and interest on
the [--------] Securities is guaranteed by [------], the Certificates are not
guaranteed by [------] or any other person and do not represent interests in or
obligations of the Depositor, the Trustee or any of their respective affiliates.
THE [-------] SECURITIES
The [-------] Securities are --------% [--------] Securities, each of
which is guaranteed as to the timely distribution of interest and [the ultimate
distribution of] principal by [-------]. The guarantee of [-------] is [an
obligation solely of ---------------- and is not] backed by the full faith and
credit of the United States of America.
[All] [None] of the Mortgage Loans are insured by the Federal Housing
Administration ("FHA Loans") or are partially guaranteed by the Veterans
Administration ("VA Loans"). All the Mortgage Loans have maximum original stated
maturities of approximately [30] years and are [fixed-rate, level payment, fully
amortizing] mortgage loans secured by first liens on [one- to four-] family
residential units. See "The Trust Funds--Agency Securities" in the Prospectus.
The aggregate outstanding principal balance of the [-----] Securities
at the Cut-off Date will be approximately $---------- [(subject to a permitted
variance of plus or minus 5%)]. The pass-through rate on each [-------] Security
is ------%. The maximum remaining term to maturity at the Cut-off Date of any
Mortgage Loan will be no greater than [------] months and it is expected that at
such Cut-off Date the weighted average remaining term to maturity ("WAM") of the
Mortgage Loans will be between [-------] and [-------] months, based on
information provided by [------] as of the issue date of the [-------]
Securities [, adjusted to reflect the number of months elapsed from such issue
date to the Cut-off Date]. It is also expected that the weighted average coupon
("WAC") of the Mortgage Loans will have been no less than ---% and no greater
than ---% as of the issue date of such [------] Securities. The information with
respect to weighted average remaining term to maturity and weighted average
coupon does not reflect the effect of payments (including prepayments) on the
Mortgage Loans subsequent to the issuance of such [------] Securities.
Consequently, actual pool characteristics at the Cut-off Date may differ
significantly from the parameters stated above.
[The schedule below is based on the --------------- dated
- -------------, 199--, as published in The Bond Buyer, and provides certain
information as to the issue dates of such [ ] Securities and their
- ------------------, 199-- principal balances. It also gives information as to
the WAC, WAM, and latest maturity date of the Mortgage Loans, in each case as of
the issue date of the related [------] Securities.
Principal
Pool Issue Latest Loan Balance at WAC at WAM at
Number Date Maturity Date --------, 199- Issue Date Issue Date
- -------- ------- --------------- ---------------- ---------- ----------
The WAC of such [------] Securities as of their issue dates was ---%.
The WAM of such [-------] Securities as of -------------, 199-- was ---- months,
computed by reducing the WAM of each [------] Security by the number of months
that elapsed from its issue date to -------------, 199--. The information with
respect to the WAC and the WAM does not reflect the effect of payments
(including prepayments) on the Mortgage Loans subsequent to the issuance of the
[------] Securities. The current WAC and WAM may, as a result, differ
significantly from those stated above.]
[The Depositor will acquire the [------] Securities from PaineWebber
Incorporated, an affiliate of the Depositor, in a negotiated transaction.] Since
all of the [------] Securities have not been identified by the Depositor at the
date of this Prospectus Supplement, there may be discrepancies between the
actual [------] Securities and the [------] Securities which the Depositor
currently expects to deposit with the Trustee pursuant to the Trust Agreement.
Any discrepancy may have a substantial effect on the yields obtained by
investors in the Certificates.
Specific information with respect to the actual [------] Securities
(including the unpaid principal balance and the approximate WAC and WAM of the
Mortgage Loans based on the information provided by [------] as of the issue
date of the [------] Securities) will be available to the underwriter[s] at the
Closing Date and will be set forth in a Current Report on Form 8-K which will be
filed with the Securities and Exchange Commission as soon as practicable
following the Closing Date.
[Substitution of Trust Fund Assets
If a portion of the [------] Securities expected to be included in the
Trust Fund is not delivered on or prior to the Cut-off Date, the Depositor will
deposit in the Trust Fund, on an interim basis, cash or cash equivalents, or
will deliver other [------] Securities without regard to pass-through rates or
maturities, such that the aggregate assets included in the Trust Fund have a
principal amount at least equal to the principal amount of the [-------]
Securities expected to be included in the Trust Fund. In such event, no later
than the first Distribution Date, the Depositor will deliver to the Trustee the
[-------] Securities described herein in substitution for any cash or cash
equivalents deposited in the Trust Fund or other [-------] Securities previously
delivered to the Trustee.]
YIELD ON THE CERTIFICATES AND PREPAYMENT
ON THE [----------] SECURITIES
Payment Delay
The effective yield of each Certificate will be lower than the yield
otherwise produced by the applicable Pass-Through Rate and purchase price of
such Certificate because, although interest will accrue from the first day of
each month, principal and interest distributions with respect to such month will
not be made to Certificateholders until on or about the ------- day of the month
following the month of accrual (or if such day is not a business day, then on
the next succeeding business day), resulting in a delay of approximately -------
days.
Prepayment Considerations and Risks
The rate of principal distributions on the Certificates is directly
related to the rate of payments of principal on the Mortgage Loans. Principal
payments on the Mortgage Loans will be passed through to the Certificateholders.
The rate of principal payments on the Mortgage Loans will be affected by the
rate of principal prepayments thereon (including for this purpose prepayments
resulting from liquidations due to defaults, casualties, condemnations and other
dispositions). [Mortgagors may prepay the Mortgage Loans at any time without
penalty.] If prevailing interest rates vary significantly from the interest
rates on the Mortgage Loans, the Mortgage Loans are likely to be subject to
higher or lower prepayment rates than if prevailing interest rates are at or
near the interest rates on the Mortgage Loans. In general, when the level of
prevailing interest rates declines significantly below the interest rates on the
Mortgage Loans, the rate of prepayments is likely to increase, and, when the
level of prevailing interest rates rises significantly above the interest rates
on the Mortgage Loans, the rate of prepayments is likely to decline. Prepayment
rates are influenced by a number of other factors, including the age and
assumability of the Mortgage Loans, general economic conditions and demographic
factors. See "Yield Considerations" and "Maturity and Prepayment Considerations"
in the Prospectus.
The actual ranges and dispersions of the interest rates and maturities
of the mortgage loans included in a pool underlying a [------] Security may have
a significant effect on the prepayment experience on that pool. Even pools with
the same pass-through rate and WAC and WAM of the underlying mortgage loans may
experience significantly different prepayment rates as a result of variations in
such ranges and dispersions.
[Under the GNMA I program, all mortgages underlying a GNMA Security
must have the same annual interest rate (except for mortgages relating to mobile
homes). The annual interest rate on a GNMA I Security is 0.50% less than the
annual interest rate on the underlying mortgage loans for such GNMA I Security.
The GNMA II program permits a variation in the annual rates on the underlying
mortgage loans of up to 1%. The annual interest rate on a GNMA II Security is
between 0.50% and 1.50% less than the highest annual interest rate on the
underlying mortgage loans.] [The maximum permitted variation in the annual
interest rates on mortgages underlying a FNMA Security is 2%. The annual
interest rate on a FNMA Security is between 0.50% and 2.55% less than the
highest annual interest rate on the underlying mortgage loans.] [Under FHLMC's
Cash Program, there was no required range within which interest rates on
mortgage loans underlying FHLMC Securities issued before June, 199-, had to
fall. This wide possible variation in interest rates on the mortgage loans
underlying a FHLMC Security issued under the FHLMC Cash Program before June 199-
is likely to make prepayments received on such a FHLMC Security less predictable
than the prepayment on an agency security backed by mortgage loans that bear the
same interest rate or that bear interest rates within a narrower range. FHLMC
has announced that, beginning with mortgage pools underlying FHLMC Securities
issued in June, 199-, FHLMC will restrict to 1% the range of annual interest
rates on the underlying mortgage loans in the 15- and 30-year single-family
fixed-rate Cash Program and that the maximum annual interest rate on the
mortgage loans underlying a FHLMC Security issued under the Cash Program will
not be more than 2% greater than the pass-through rate on such FHLMC Security.
In addition, mortgage loans underlying a FHLMC Security issued under the Cash
Program will be grouped by original maturity and remaining maturity to within a
maximum of six months]. [Under FHLMC's Guarantor Program, the interest rate on a
FHLMC Security is established based upon the lowest interest rate on the
underlying mortgage loans, minus a minimum servicing fee and the amount of
FHLMC's management and guaranty fees as agreed upon between the seller and
FHLMC. For FHLMC Pools formed under the Guarantor Program with Security numbers
beginning with 18-012, the range between the lowest and highest annual interest
rates on the mortgage loans in a FHLMC Pool may not exceed two percentage
points. For FHLMC Pools formed under the Guarantor Program beginning December,
199-, FHLMC has announced that it will restrict the range of annual interest
rates on the underlying mortgage loans to 1%.] [[-------] generally reserves the
right to waive such general program limits on the range of annual interest rates
in particular circumstances. Consequently, certain of the [-------] Securities
may not conform to the indicated ranges.]
[Certain of the conventional mortgage loans may have "due-on-sale"
clauses, which allow the holder of such mortgage loan to demand payment in full
of the remaining principal balance of such mortgage loan upon sale or certain
transfers of property securing such mortgage loan. The Depositor is unable to
provide more precise information as to the portion of the Mortgage Loans that
are subject to such "due-on-sale" clauses.] [All of the Mortgage Loans are FHA
Loans or VA Loans and consequently contain no "due-on-sale" provisions.] Both
FHLMC and FNMA enforce "due-on-sale" clauses to the extent permitted by
applicable law, except that FNMA may elect to repurchase a loan subject to a
"due-on-sale" clause in lieu of enforcement of such clause. [Consequently,
transfers of the property securing the Mortgage Loans may not affect prepayments
on such Mortgage Loans to the same extent as if such Mortgage Loans were
conventional mortgage loans containing "due-on-sale" clauses.]
[In addition, the Mortgage Loans underlying the FNMA Securities are
subject to a right of repurchase by FNMA in certain circumstances. Such a
repurchase would result in an acceleration of distributions of principal on the
FNMA Securities which would be treated as principal prepayments for purposes of
the Certificates. See "The Trust Funds--Agency Securities" in the Prospectus.]
The timing of changes in the rate of prepayments on the Mortgage Loans
may significantly affect an investor's actual yield to maturity even if the
average rate of principal payments experienced over time is consistent with an
investor's expectation. In general, the earlier a prepayment of principal of the
Mortgage Loans the greater the effect on an investor's yield to maturity. As a
result, 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 the
period immediately following the issuance of the Certificates may not be offset
by a subsequent like reduction (or increase) in the rate of principal payments.
A lower rate of principal prepayments than anticipated would
negatively affect the yield experienced by investors in Class A Certificates,
which are being offered at a discount from their original Certificate Principal
Balances. A higher rate of principal prepayments than anticipated would
negatively affect the yield experienced by investors in Class B Certificates,
which are being offered without any principal amount and could result in the
failure of investors to recover their initial investment.
Prepayments on mortgages are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
Standard Prepayment Assumption ("SPA"), represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of
mortgages. A prepayment assumption of 100% SPA assumes prepayment rates of 0.2%
per annum of the then outstanding principal balance of such mortgages in the
first month of the life of the mortgages 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 mortgages, 100% SPA
assumes a constant prepayment rate of 6% per annum each month. As used in the
table below, "SPA" assumes prepayment rates equal to ---% of 100% SPA; "---%
SPA" assumes prepayment rates equal to ---% of 100% SPA; "------% SPA" assumes
prepayment rates equal to ------% of 100% SPA. SPA does not purport to be an
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans.
The following table illustrates certain relationships between the
assumed purchase prices of the Certificates, as stated below, certain assumed
prepayment rates and the yields (calculated as described below) on the
Certificates, stated on a corporate bond equivalent basis. For purposes of the
illustration, it is assumed, among other things, that (i) the purchase prices of
the Class A Certificates and the Class B Certificates are ------% and ------% of
their aggregate Certificate Principal Balance and aggregate Notional Amount,
respectively, at the Cut-off Date, plus accrued interest from ---------, 199--
(ii) all of the Mortgage Loans have identical payment provisions, interest rates
of ---%, and remaining terms to maturity at the Cut-off Date equal to -----
months, (iii) such Mortgage Loans prepay monthly at the specified SPA, (iv) the
settlement date for the Certificates is -----------, 199--, and (v) payments of
principal and interest on the Mortgage Loans for a particular month are passed
through to holders of the --------- Certificates on the -------- day of the
[second] succeeding month, beginning ---------, 199--. There can be no assurance
as to the accuracy of any of such assumptions; consequently, such yields are set
forth for illustrative purposes only.
Standard Prepayment Assumption
------------------------------
----% ---% ---% ---% ---%
Yield
Class A Certificates
Class B Certificates
The yields set forth above were calculated by determining the monthly
discount rates which, when applied to an assumed stream of cash flows to be paid
on Certificates of a Class, would cause the discounted present value of such
assumed stream of cash flows to equal the assumed purchase price of such
Certificates and by converting such monthly rates to corporate bond equivalent
rates. Such calculation does not take into account variations that may occur in
the interest rates at which investors may be able to reinvest funds received by
them as distributions on the Certificates and consequently does not purport to
reflect the return on any investment in Certificates when such reinvestment
rates are considered.
The characteristics of the Mortgage Loans will not correspond exactly
to those assumed in the prepayment statistics above. The yields to maturity on
the Certificates will therefore differ from those set forth above even if all of
the Mortgage Loans prepay monthly at the related assumed prepayment rate. In
addition, it is not likely that any Mortgage Loan will prepay at a constant rate
until maturity or that all of the Mortgage Loans will prepay at the same rate,
and the timing of changes in the rate of prepayments may significantly affect
the yield to a holder of a Certificate.
The following table sets forth, among other things, the most recent
prepayment experience publicly available on ---------, 199- for [-----]
Securities issued and outstanding and having the same pass-through rates as the
[------] Securities to be deposited in the Trust Fund.
Pricing Speed Prepayment Experience
Trust Fund Asset (% OF SPA) (% OF SPA) (1)
- --------------------------- --------------------------- ----------------
3 mos. 6 mos. 1 yr.
------ ------ -----
[------------] Security %
--------------------------------------
(1) For periods ending
The historical rate of principal payments (including prepayments) set
forth in the table above has been computed from information published in THE
BOND BUYER. The Depositor believes that such information is accurate, but has no
means of verifying the data. The historical rate of principal payments
(including prepayments) on [------] Securities since their respective issuance
can also be computed from the information published in THE BOND BUYER. See "The
[------] Securities" herein. The Depositor makes no representation that the
Mortgage Loans will prepay in the manner or at any of the rates assumed in the
table set forth above.
The Depositor believes that the historical payment experience
(including prepayments) on such securities is not necessarily indicative of the
future prepayment experience of such securities or of the mortgage loans
underlying the [-------] Securities. Since the rate of principal payments
(including prepayments) on such mortgage loans will significantly affect the
yield to maturity on the Certificates, prospective investors are urged to
consult their investment advisors as to both the rate of future principal
payments (including prepayments) on the underlying mortgage loans and the
suitability of the Certificates to their investment objectives.
TRUST AGREEMENT
General
The Certificates offered hereby will be issued pursuant to a Trust
Agreement (the "Trust Agreement") to be dated as of ---------------, 199--,
among the Depositor and the Trustee, a form of which is filed as an exhibit to
the Registration Statement. Reference is made to the Prospectus for important
information additional to that set forth herein regarding the terms and
conditions of the Agreement and the Certificates. The Certificates will be
transferable and exchangeable at the Corporate Trust Office. No service charge
will be made for any transfer or exchange of Certificates but the [Trustee]
[Certificate Registrar] may require payment of a sum sufficient to cover any tax
or governmental charge that may be imposed in connection with the transfer or
exchange of Certificates. The Depositor will provide to a prospective or actual
Certificateholder without charge, on written request, a copy (without exhibits)
of the Agreement. Requests should be addressed to PaineWebber Mortgage
Acceptance Corporation IV, 1285 Avenue of the Americas, New York, New York
10019, Attention: ----------------.
The Trustee
---------------------------------------------------, a
- ------------------------------ (the "Trustee"), will act as Trustee for the
Series 199----- Certificates pursuant to the Trust Agreement. The Trustee's
principal executive offices are located at ---------, and its telephone number
is -------.
Voting Rights
At all times, [---% of] the Voting Rights will be allocated among the
holders of the [Class A] Certificates in proportion to the then outstanding
Certificate Principal Balances of their respective Certificates [and ---% of the
Voting Rights will be allocated among the holders of the Class B Certificates in
proportion to their respective percentage interests].
Transfer to ERISA Plans
No transfer of a Certificate or any interest therein may be made to an
employee benefit plan or other retirement plan or arrangement, including
individual retirement accounts and annuities, Keogh Plans and collective
investment funds in which such plans, accounts or arrangements are invested that
is subject to ERISA or the Code (each a "Plan") unless the prospective
transferee provides the Depositor and the Trustee with a certification of facts
and an opinion of counsel which establishes to the satisfaction of the Depositor
and the Trustee that such transfer will not result in a violation of ERISA or
cause the Depositor to be deemed a fiduciary of such Plan or result in the
imposition of an excise tax under the Code on the Depositor.
Termination
The circumstances under which the obligations created by the Agreement
will terminate in respect of a series of Certificates are described in
"Description of the Certificates--Termination" in the Prospectus. The Depositor
will have the right to repurchase all remaining [-------] Securities in the
Trust Fund and thereby effect early retirement of the Certificates, subject to
the aggregate principal balance of the [----------------] Securities at the time
of repurchase being less than ---% of the aggregate principal balance of such
[------------] Securities as of the Cut-off Date. In the event the Depositor
exercises such option, the repurchase price distributed with respect to each
Class A Certificate will be 100% of its then outstanding Certificate Principal
Balance plus interest thereon at the Pass-Through Rate, and with respect to each
Class B Certificate will be -------------. In no event will the trust created by
the Agreement for a series of Certificates continue beyond the expiration of 21
years from the death of the survivor of the person or persons named in the
Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Cadwalader, Wickersham
& Taft, counsel to the Depositor, will deliver the following opinion: [Assuming
compliance with the provisions of the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund will qualify as a "real estate
mortgage investment conduit" (a "REMIC") within the meaning of Sections 860A
through 860G (the "REMIC Provisions") of the Internal Revenue Code of 1986 (the
"Code"), and (i) the Class A, Class B and Class C Certificates will evidence
"regular interests" in such REMIC and (ii) the Class R Certificates will be the
sole class of "residual interests" in such REMIC, each within the meaning of the
REMIC Provisions in effect on the date hereof.] [Assuming compliance with the
Pooling and Servicing Agreement, for federal income tax purposes, the Trust Fund
will be classified as a grantor trust under Subpart E, part I of subchapter J of
the Code, and not as an association taxable as a corporation or as a
partnership.]
The ---------- Certificates [may] [will] [will not] be treated as
having been issued with original issue discount for Federal income tax reporting
purposes. The prepayment assumption that will be used in determining the rate of
accrual of [original issue discount,] market discount and premium, if any, for
Federal income tax purposes will be based on the assumption that subsequent to
the date of any determination the Mortgage Loans will prepay at a rate equal to
[a CPR of --%]. No representation is made that the Mortgage Loans will prepay at
that rate or at any other rate. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the Prospectus.
The ------------------- Certificates may be treated for Federal income
tax purposes as having been issued at a premium. Whether any holder of [either]
such Class of Certificates will be treated as holding a Certificate with
amortizable bond premium will depend on such Certificateholder's purchase price
and the distributions remaining to be made on such Certificate at the time of
its acquisition by such Certificateholder. Holders of [each] such Class of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Premium"
in the Prospectus.
The Offered Certificates will be treated as "qualifying real property
loans" within the meaning of Section 593(d) of the Code, assets described in
Section 7701(a)(19)(C) of the Code and "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code, and interest (including original issue
discount, if any) on the Offered Certificates will be interest described in
Section 856(c)(3)(B) of the Code. Moreover, the Offered Certificates will be
"qualified mortgages" within the meaning of Section 860(A)(3) of the Code. See
"Certain Federal Income Tax Consequences--REMICs--Characterization of
Investments in REMIC Certificates" in the Prospectus.
------------------------, a ---------------, will act as REMIC
Administrator for the Trust Fund. [The Master Servicer will be responsible for
the fees and normal disbursements of the REMIC Administrator.] See "Certain
Federal Income Tax Consequences--REMICs--Reporting and Other Administrative
Matters" and "The Pooling and Servicing Agreements--Certain Matters Regarding
the Master Servicer, the Special Servicer, the REMIC Administrator and the
Depositor", "--Events of Default" and "--Rights Upon Event of Default" in the
Prospectus.
For further information regarding the Federal income tax consequences
of investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
SPECIAL TAX CONSIDERATIONS APPLICABLE
TO REMIC RESIDUAL CERTIFICATES
The IRS has issued REMIC Regulations that significantly affect holders
of REMIC Residual Certificates. The REMIC Regulations impose restrictions on the
transfer or acquisition of certain residual interests, including the Class R
Certificates. In addition, the REMIC Regulations provide special rules
applicable to: (i) thrift institutions holding residual interests having
"significant value" and (ii) the transfer of "noneconomic" residual interests to
United States persons. Pursuant to the Pooling and Servicing Agreement, the
Class R Certificates may not be transferred to non-United States persons. See
"Certain Federal Income Tax Consequences--REMICS--Taxation of Owners of REMIC
Residual Certificates" in the Prospectus.
The REMIC Regulations provide for the determination of whether a
residual interest has "significant value" for purposes of applying the rules
relating to "excess inclusions" with respect to residual interests. Based on the
REMIC Regulations, the Class R Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess inclusions
with respect to the Class R Certificates, which will be in an amount equal to
all or virtually all of the taxable income includable by holders of the Class R
Certificates. See "Certain Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Residual Certificates--Excess Inclusions" in the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, if "a significant purpose of the transfer was
to impede the assessment or collection of tax." Based on the REMIC Regulations,
the Class R Certificates may constitute noneconomic residual interests during
some or all of their terms for purposes of the REMIC Regulations and,
accordingly, if a significant purpose of a transfer is to impede the assessment
or collection of tax, transfers of the Class R Certificates may be disregarded
and purported transferors may remain liable for any taxes due with respect to
the income on the Class R Certificates. All transfers of the Class R
Certificates will be subject to certain restrictions under the terms of the
Pooling and Servicing Agreement that are intended to reduce the possibility of
any such transfer being disregarded to the extent that the Class R Certificates
constitute noneconomic residual interests. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Noneconomic REMIC Residual Certificates" in the Prospectus.
The Class R Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the term of the
Trust Fund that significantly exceeds the amount of cash distributions received
by such Certificateholders from the Trust Fund with respect to such periods.
Furthermore, the tax on such income may exceed the cash distributions with
respect to such periods. Consequently, Class R Certificateholders should have
other sources of funds sufficient to pay any federal income taxes due in the
earlier years of the Trust Fund's term as a result of their ownership of the
Class R Certificates. In addition, the required inclusion of this amount of
taxable income during the Trust Fund's earlier accrual periods and the deferral
of corresponding tax losses or deductions until later accrual periods or until
the ultimate sale or disposition of a Class R Certificate (or possibly later
under the "wash sale" rules of Section 1091 of the Code) may cause the Class R
Certificateholders' after-tax rate of return to be zero or negative even if the
Class R Certificateholders' pre-tax rate of return is positive. That is, on a
present value basis, the Class R Certificateholders' resulting tax liabilities
could substantially exceed the sum of any tax benefits and the amount of any
cash distributions on the Class R Certificates over their life.
Potential investors in Class R Certificates should be aware that under
the Pooling and Servicing Agreement, the holder of the largest Percentage
Interest in the Class R Certificates shall, by its acceptance of such
Certificates, agree to irrevocably appoint the Master Servicer as its agent to
perform all of the duties of the tax matters person for the REMIC.
Purchasers of the Class R Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in such
Certificates.
For further information regarding the federal income tax consequences
of investing in the Class R Certificates, see "Yield and Maturity
Considerations--Additional Yield Considerations Applicable Solely to the Class R
Certificates" herein and "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.
PLAN OF DISTRIBUTION
[Subject to the terms and conditions set forth in the Underwriting
Agreement dated ------------, 199-- (the "Underwriting Agreement"), the
Depositor has agreed to sell and PaineWebber Incorporated (the "Underwriter")
has agreed to purchase the Class A and Class B Certificates. The Underwriter is
obligated to purchase all Certificates offered hereby if any are purchased.]
[The Depositor has been advised by the Underwriter that it proposes
initially to offer all of the Class A and Class B Certificates to the public at
the public offering prices set forth on the cover page of this Prospectus
Supplement and to certain dealers at such prices less a concession not in excess
of ---% of the initial Certificate Principal Balance of the Class A Certificates
and ---% of the initial Notional Amount of the Class B Certificates. The
Underwriter may allow and such dealers may reallow concessions not in excess of
- ---% of the initial aggregate Certificate Principal Balance of the Class A
Certificates and ---% of the initial Notional Amount of the Class B
Certificates. After the initial public offering, the public offering price and
such concessions may be changed.]
[Distribution of the Class A and Class B Certificates will be made [by
- ---------] from time to time in negotiated transactions or otherwise at varying
prices to be determined at the time of sale. Proceeds to the Depositor from the
sale of the Class A and Class B Certificates will be -----% of the aggregate of
the Certificate Principal Balances initially represented by the Class A
Certificates, plus accrued interest at the Pass-Through Rate from the Cut-off
Date but before deducting expenses payable by the Depositor. In connection with
the purchase and sale of the Class A and Class B Certificates, the Underwriter
may be deemed to have received compensation from the Depositor in the form of
underwriting discounts.]
The Underwriting Agreement provides that the Depositor and its parent
corporation will indemnify the Underwriter against certain civil liabilities,
including liabilities under the Securities Act of 1933, or will contribute to
payments the Underwriter may be required to make in respect thereof.
There can be no assurance that a secondary market for the Certificates
will develop or, if it does develop, that it will continue. The primary source
of information available to investors concerning the Certificates will be the
monthly statements discussed in the Prospectus under "Description of the
Certificates--Statements to Certificateholders," which will include information
as to the outstanding principal balance of the Certificates and the status of
the applicable form of credit enhancement. There can be no assurance that any
additional information regarding the Certificates will be available through any
other source. In addition, the Depositor is not aware of any source through
which price information about the Certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the Certificates
may adversely affect the liquidity of the Certificates, even if a secondary
market for the Certificates become available.
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon
for the Depositor and for the Underwriter by Cadwalader, Wickersham & Taft, New
York, New York.
RATING
It is a condition to the issuance of the Certificates that they will
have been rated in the highest rating category by such nationally recognized
statistical rating organization as the Depositor may designate. [rating agency
language] See "Yield on the Certificates and Prepayments on the [-----]
Securities" herein.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. Each rating should be evaluated independently of any
other rating.
<PAGE>
SUBJECT TO COMPLETION, DATED ---------, 199-
Prospectus Supplement [Version 6]
(To Prospectus Dated -------------- 199-)
$-------------
---------------------------
MASTER SERVICER AND SELLER
---------------------------
Company
----------------- Trust Series 199--1
Collateralized Asset-Backed Bonds, Series 199--1
The ---------------- Trust Series 199--1 (the "Issuer") will be formed
pursuant to a Trust Agreement to be dated as of ---, 199- between -------------
(the "Company") and ------------------, the Owner Trustee. The Issuer will issue
$----------- aggregate principal amount of Collateralized Asset-Backed Bonds,
Series 199--1 (the "Bonds"). The Bonds will be issued pursuant to an Indenture
to be dated as of ----, 199-, between the Issuer and ------------------------,
the Indenture Trustee.
Prospective investors should review the information set forth under "Risk
Factors" on page S-13 of this Prospectus Supplement and the information set
forth under "Risk Factors" on page 13 of the Prospectus before purchasing any of
the Bonds.
The Bonds will represent indebtedness of the trust fund (the "Trust Fund")
created by the Trust Agreement. The Trust Fund will consist of adjustable-rate,
conventional, one- to four-family, first lien mortgage loans (the "Mortgage
Loans"). In addition, the Bonds will have the benefit of an irrevocable and
unconditional financial guaranty insurance policy (the "Bond Insurance Policy")
issued by ------------------ (the "Bond Insurer") as described under
"Description of the Bonds--Bond Insurance Policy" herein.
(Continued on following page)
---------------------------
THE ASSETS PLEDGED TO SECURE THE BONDS AND PROCEEDS FROM THE BOND INSURANCE
POLICY ARE THE SOLE SOURCE OF PAYMENTS ON THE BONDS. THE BONDS WILL REPRESENT
OBLIGATIONS SOLELY OF THE ISSUER AND WILL NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF THE COMPANY, THE MASTER SERVICER, THE OWNER TRUSTEE, THE INDENTURE
TRUSTEE OR ANY OF THEIR AFFILIATES, OTHER THAN THE ISSUER. NEITHER THE BONDS NOR
THE UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY.
THESE BONDS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------
There is currently no secondary market for the Bonds.
- ---------------------- (together, the "Underwriters") intend to make a secondary
market in the Bonds, but are not obligated to do so. There can be no assurance
that a secondary market for the Bonds will develop or, if it does develop, that
it will continue or provide Bondholders with sufficient liquidity of investment.
The Bonds will not be listed on any securities exchange.
The Bonds will be purchased from the Company by the Underwriters and will
be offered by the Underwriters from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The proceeds to the Company from the sale of the Bonds are expected to be
approximately $-------------------- before the deduction of expenses payable by
the Company estimated to be approximately $-----------------.
The Bonds are offered by the Underwriters subject to prior sale, when, as
and if delivered to and accepted by the Underwriters and subject to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject any order in whole or in part. It is expected
that delivery of the Bonds will be made on or about ---------- 199- in
book-entry form through the Same Day Funds Settlement System of The Depository
Trust Company as discussed herein, against payment therefor in immediately
available funds.
------------------------------------------------------
THE UNDERWRITERS ARE ACTING AS CO-LEAD MANAGERS IN CONNECTION WITH ALL
ACTIVITIES RELATING TO THIS OFFERING.
The date of this Prospectus Supplement is --- --, 199-
(Continued from previous page)
The interest rates on the Mortgage Loans will be subject to monthly,
semi-annual or annual adjustment commencing after the related Initial Period (as
defined herein) based on the related Index (as defined herein) and the
respective Gross Margins described herein, subject to certain periodic and
lifetime limitations as described more fully herein.
The Mortgage Loans were generally underwritten in accordance with the
underwriting standards described in "Description of the Mortgage
Pool--Underwriting" and Appendix A to this Prospectus Supplement. See also "Risk
Factors--Underwriting Standards" in this Prospectus Supplement. Approximately
- ----% of the Mortgage Loans, by aggregate principal balance as of the Cut-off
Date, are secured by Mortgaged Properties in California. See "Risk
Factors--Delinquencies and Potential Delinquencies" in this Prospectus
Supplement.
Payments on the Bonds will be made on the 25th day of each month or, if
such day is not a business day, then on the next business day, commencing in
- ----- 199- (each, a "Payment Date"). As described herein, interest will accrue
on the Bonds at a floating rate (the "Bond Interest Rate") equal, on the first
Payment Date, to ----%, and thereafter, equal to the lesser of (i) One-Month
LIBOR (as defined herein) plus ----% per annum, except as described herein, and
(ii) the Available Funds Interest Rate (as defined herein). See "Description of
the Bonds--Interest Payments on the Bonds" herein. As described herein, interest
payable with respect to each Payment Date will accrue on the basis of a 360-day
year and the actual number of days elapsed during the period commencing on the
Payment Date immediately preceding the month in which such Payment Date occurs
and ending on the calendar day immediately preceding such Payment Date, except
with respect to the first Payment Date, which has an accrual period from --- --,
199- to ----- ---, 199-, and will be based on the Bond Principal Balance thereof
and the then-applicable Bond Interest Rate thereof, as reduced by certain
interest shortfalls. Payments in respect of principal of the Bonds will be made
as described herein under "Description of the Bonds--Priority of Payment."
The Bonds may be redeemed in whole, but not in part, by the Issuer on any
Payment Date on or after the earlier of (i) the Payment Date on which the
aggregate Principal Balance (as defined herein) of the Mortgage Loans is less
than or equal to 25% of the aggregate Principal Balance of the Mortgage Loans as
of the Cut-off Date or (ii) the Payment Date occurring in June 2004. See
"Description of the Bonds--Optional Redemption" herein.
The Bonds initially will be registered in the name of Cede & Co., as
nominee of The Depository Trust Company ("DTC"), as further described herein.
The interests of beneficial owners of the Bonds will be represented by book
entries on the records of DTC and the participating members of DTC. Definitive
certificates will be available for the Bonds only under the limited
circumstances described herein. See "Description of the Bonds--Book-Entry Bonds"
herein.
It is a condition of the issuance of the Bonds that they be rated "AAA" by
Standard & Poor's Ratings Services ("S&P") and "Aaa" by Moody's Investors
Service, Inc. ("Moody's").
The yield to maturity on the Bonds will depend on, among other things, the
rate and timing of principal payments (including prepayments, repurchases,
defaults, liquidations and negative amortization) on the Mortgage Loans. The
Mortgage Loans generally may be prepaid in full or in part at any time; however,
prepayment may subject the mortgagor to a prepayment charge with respect to
approximately half of the Mortgage Loans. In addition, the yield on the Bonds
will be sensitive to fluctuations in the level of One-Month LIBOR, which may
vary significantly over time. See "Certain Yield and Prepayment Considerations"
herein and "Yield and Prepayment Considerations" in the Prospectus.
THE BONDS OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF BONDS BEING OFFERED PURSUANT TO THE COMPANY'S PROSPECTUS
DATED -------- ---, 199-, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND
WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT
INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE BONDS MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE BONDS, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus.
The Bonds...........................$------------- Collateralized Asset-Backed
Bonds, Series 199--1. Only the Bonds are
offered hereby. The Bonds will be issued
pursuant to an Indenture, dated as of ---
--, 199- between the Issuer and the
Indenture Trustee.
Issuer..............................The Bonds will be issued by
------------------ Trust Series 199--1 (the
"Issuer"), a Delaware business trust
established pursuant to the Trust Agreement,
dated as of ------- --, 199- (the "Trust
Agreement"), between the Company and the
Owner Trustee. The Bonds will represent
obligations solely of the Issuer, and the
proceeds of the assets of the Issuer (such
assets, the "Trust Fund") and the Bond
Insurance Policy will be the sole source of
payments on the Bonds.
Company.............................PaineWebber Mortgage Acceptance Corporation
IV (the "Company"). See "The Company" in the
Prospectus.
Master Servicer.....................---------------------- ( the "Master
Servicer"). See "Description of the
Servicing Agreement--The Master Servicer;
the Subservicer" herein.
Subservicer.........................The Mortgage Loans will be subserviced by
------- Funding, Inc. ("-------------"). See
"Description of the Servicing Agreement--The
Master Servicer; the Subservicer" herein.
Owner Trustee.......................------------------- a ------- trust company.
Indenture Trustee...................---------------------------, a -----------.
Cut-off Date........................----- ---, 199-.
Delivery Date.......................On or about ------ ---, 199-.
Payment Date........................The 25th day of each month (or, if such day
is not a business day, the next business
day), beginning on ------ 25, 199- (each, a
"Payment Date").
Denominations and Registration.....The Bonds will be issued, maintained and
transferred on the book-entry records of DTC
and its Participants (as defined in the
Prospectus). The Bonds will be offered in
registered form, in minimum denominations of
$25,000 and integral multiples of $1 in
excess thereof. The Bonds will be
represented by one or more Bonds registered
in the name of Cede & Co., as nominee of
DTC. No Beneficial Owner will be entitled to
receive a Bond in fully registered,
certificated form (a "Definitive Bond"),
except under the limited circumstances
described herein. See "Description of the
Bonds--Book-Entry Bonds" herein.
The Mortgage Pool...................The Mortgage Loans are secured by first
liens on one- to four-family real properties
(each, a "Mortgaged Property"). The Mortgage
Loans have individual principal balances at
origination of at least $-------- but not
more than $------- with an average principal
balance at origination of approximately
$----------. The Mortgage Loans have terms
to maturity of up to 30 years from the date
of origination and a weighted average
remaining term to stated maturity of
approximately ---- months as of the Cut-off
Date.
The Mortgage Rate on each Mortgage Loan will
be subject to monthly, semi-annual or annual
adjustment, commencing after an initial
period from origination of three months, six
months, eleven months, one year, two years
or three years (such period, the "Initial
Period"), on its Adjustment Date (as defined
herein), to equal the sum (rounded as
described herein) of the related Index
described below and a fixed percentage set
forth in the related Mortgage Note (the
"Gross Margin"). However, (i) on any
Adjustment Date such Mortgage Rate may not
increase or decrease by more than the
Periodic Rate Cap (as defined herein),
except as described herein, (ii) over the
life of such Mortgage Loan, such Mortgage
Rate may not exceed the related maximum
Mortgage Rate (the "Maximum Mortgage Rate"),
which Maximum Mortgage Rates will range from
-------% to --------% and (iii) over the
life of such Mortgage Loan, such Mortgage
Rate may not be lower than the minimum
Mortgage Rate (the "Minimum Mortgage Rate"),
which Minimum Mortgage Rates will range from
-------% to --------% per annum. As of the
Cut-off Date, the Mortgage Loans will have
Mortgage Rates of at least -------% per
annum but not more than -------% per annum,
with a weighted average of -----%. The
Mortgage Loans will have Gross Margins
ranging from ------% to -------% with a
weighted average of ------% as of the
Cut-off Date.
Approximately ------% of the Mortgage Loans
(by aggregate principal balance as of the
Cut-off Date) (the "Convertible Mortgage
Loans") provide that, at the option of the
related Mortgagors, the adjustable interest
rate on such Mortgage Loan may be converted
to a fixed interest rate, provided that
certain conditions have been satisfied. Such
Convertible Mortgage Loans will be
repurchased upon conversion by the Master
Servicer as described herein. See
"Description of the Mortgage
Pool--Convertible Mortgage Loans" herein.
Approximately -----% of the Mortgage Loans
(by aggregate principal balance as of the
Cut-off Date) (the "Negative Amortization
Loans") provide for negative amortization.
To the extent that accrued interest on any
Negative Amortization Loan exceeds the
related monthly payment, such excess
("Deferred Interest") is added to the
principal balance of such Mortgage Loan on
the Due Date and thereafter accrues interest
at the related Mortgage Rate. Investors
should consider the potential effect of the
negative amortization feature on the rate of
default and loss on the Negative
Amortization Loans. See "Certain Yield and
Prepayment Considerations" and "Description
of the Mortgage Pool--Negative Amortization
Loans" herein.
For a further description of the Mortgage
Loans, see "Description of the Mortgage
Pool" herein.
The Indices.........................As of any Adjustment Date with respect to
any Mortgage Loan, the Index applicable to
the determination of the related Mortgage
Rate will be one of the following: (i) the
average of the interbank offered rates for
one month U.S. dollar deposits in the London
market based on quotations of major banks as
most recently available generally 45 days
prior to the Adjustment Date ("Negative
Amortization Loan One-Month LIBOR"); (ii)
the average of the interbank offered rates
for six month U.S. dollar deposits in the
London market based on quotations of major
banks as most recently available generally
45 days prior to the Adjustment Date
("Six-Month LIBOR"); (iii) the weekly
average yield on U.S. Treasury securities
adjusted to a constant maturity of six
months ("Six-Month CMT") as published by the
Federal Reserve Board in Statistical Release
H.15(519) and most recently available as of
the first business day generally 45 days
prior to the Adjustment Date; or (iv) the
weekly average yield on U.S. Treasury
securities adjusted to a constant maturity
of one year ("One-Year CMT") as published by
the Federal Reserve Board in Statistical
Release H.15(519) and most recently
available as of the first business day
generally 45 days prior to the Adjustment
Date. The Negative Amortization Loans will
have an Index of Negative Amortization Loan
One-Month LIBOR, the other Mortgage Loans
will have an Index of Six-Month LIBOR,
Six-Month CMT or One-Year CMT.
Interest Payments...................Interest on the Bonds will be paid monthly
on each Payment Date, commencing in -----
199-, in an amount (the "Interest Payment
Amount") equal to interest accrued on the
Bond Principal Balance thereof immediately
prior to such Payment Date at the Bond
Interest Rate for the related Interest
Period (as defined below), minus (i) any
Prepayment Interest Shortfalls and Relief
Act Shortfalls (each as defined herein) to
the extent not covered by the Master
Servicer by Compensating Interest (as
defined herein) for such Payment Date and
(ii) any Deferred Interest (as defined
herein) allocated thereto on such Payment
Date as described herein. The Bond Interest
Rate on each Payment Date after the first
Payment Date will be a floating rate equal
to the lesser of (i)(a) with respect to each
Payment Date up to and including the earlier
of (x) the Payment Date in ----- 2004 and
(y) the Payment Date which occurs on or
prior to the date on which the aggregate
Principal Balance of the Mortgage Loans is
less than 25% of the aggregate Principal
Balance of the Mortgage Loans as of the
Cut-off Date, One-Month LIBOR (as defined
herein) plus -----%, and (b) with respect to
each Payment Date thereafter, One-Month
LIBOR plus -----% and (ii) the Available
Funds Interest Rate with respect to such
Payment Date. The Bond Interest Rate for the
first Payment Date will equal -------% per
annum. Interest on the Bonds in respect of
any Payment Date will accrue from the
preceding Payment Date (or in the case of
the first Payment Date, from the Delivery
Date through the day preceding such Payment
Date (each such period, an "Interest
Period")) on the basis of the actual number
of days in the Interest Period and a 360-day
year.
The "Available Funds Interest Rate" for any
Payment Date is a rate per annum equal to
the lesser of (x) the fraction, expressed as
a percentage, the numerator of which is (i)
an amount equal to (A) 1/12 of the aggregate
Principal Balance of the then outstanding
Mortgage Loans times the weighted average of
the Expense Adjusted Mortgage Rates on the
then outstanding Mortgage Loans minus (B)
the amount of the fee payable to the Owner
Trustee with respect to the Trust Agreement
and the premium with respect to the Bonds
payable to the Bond Insurer with respect to
the Bond Insurance Policy for such Payment
Date, and the denominator of which is (ii)
an amount equal to (A) the then outstanding
aggregate Bond Principal Balance of the
Bonds multiplied by (B) the actual number of
days elapsed in the related Interest Period
divided by 360 and (y) ---------% per annum
(the "Maximum Bond Interest Rate").The
amount of the fee payable to the Owner
Trustee together with the amount of the
premium payable to the Bond Insurer
(together, the "Administrative Fee") will
accrue at ------% per annum based on the
Bond Principal Balance of the Bonds.
The "Expense Adjusted Mortgage Rate" on any
Mortgage Loan is equal to the then
applicable Mortgage Rate thereon minus the
sum of (i) the Minimum Spread, (ii) the
Servicing Fee Rate and (iii) the Indenture
Trustee Fee Rate. For any Payment Date, the
Minimum Spread is equal to 0.500% per annum,
the Servicing Fee Rate is equal to 0.500%
per annum and the Indenture Trustee Fee Rate
is equal to 0.015% per annum.
As further described herein, with respect to
the Bonds and any Payment Date, to the
extent that (a) the lesser of (x) the amount
payable if clause (i) of the definition of
Bond Interest Rate above is used to
calculate interest and (y) the amount
payable if the Maximum Bond Interest Rate is
used to calculate interest exceeds (b) the
amount payable if clause (ii) of the
definition of Bond Interest Rate above is
used to calculate interest (such excess, the
"Available Funds Cap Carry-Forward Amount"),
the holders of the Bonds will be paid the
amount of such Available Funds Cap
Carry-Forward Amount with interest thereon
at the Bond Interest Rate for the Bonds
applicable from time to time after certain
payments to the holders of the Bonds and the
Bond Insurer to the extent of available
funds. The Bond Insurance Policy does not
cover the Available Funds Cap Carry-Forward
Amount, nor do the ratings assigned to the
Bonds address the payment of the Available
Funds Cap Carry-Forward Amount.
To the extent that Deferred Interest causes
a shortfall in interest collections on the
Mortgage Loans that would otherwise cause a
shortfall in the amount of interest payable
to the Bondholders, such amount will be paid
using principal collections on the Mortgage
Loans through the priority of payment
provisions described herein. To the extent
that the Interest Payment Amount for any
Payment Date exceeds Available Funds for
such Payment Date, the lesser of such excess
and the aggregate amount of Deferred
Interest, if any, that is added to the
principal balance of the Negative
Amortization Loans on the Due Date occurring
in the month in which such Payment Date
occurs will be added to the Bond Principal
Balance of the Bonds and subtracted from the
Interest Payment Amount for such Payment
Date.
Principal Payments..................Principal payments will be payable on the
Bonds on each Payment Date in an aggregate
amount equal to the Principal Payment Amount
for such Payment Date. The Principal Payment
Amount will include, to the extent of
available funds and except as otherwise
described herein, the principal portion of
all scheduled monthly payments (whether
received or advanced) due from Mortgagors on
the related Due Date, and all unscheduled
amounts received during the preceding
calendar month that are allocable to
principal (including proceeds of
repurchases, prepayments, liquidations and
insurance (excluding proceeds paid in
respect of the Bond Insurance Policy)) and
may be reduced as a result of
overcollateralization in excess of the
required level, as described herein. In
addition, on any Payment Date, to the extent
of funds available therefor, Bondholders
will also be entitled to receive payments
generally equal to the amount, if any,
necessary to bring the Subordination Amount
up to the Required Subordination Amount
(such amount, the "Subordination Increase
Amount"). On the Payment Date in ----- ----,
principal will be payable on the Bonds in an
amount equal to the Bond Principal Balance
on such Payment Date.
The "Bond Principal Balance" of the Bonds on
any date of determination is the initial
principal balance thereof as of the Delivery
Date, increased by any Deferred Interest
allocated thereto, and reduced by all
payments of principal thereon prior to such
date of determination.
Bond Insurer........................------------------- (the "Bond Insurer").
See ------------------------ herein.
Bond Insurance Policy...............On the Delivery Date, the Bond Insurer will
issue a Bond Insurance Policy in favor of
the Indenture Trustee on behalf of the
holders of the Bonds. On each Payment Date,
a draw will be made on the Bond Insurance
Policy to cover (a) any shortfall in amounts
available to make payments of the Interest
Payment Amount and (b) the Subordination
Deficit (as defined herein). The Bond
Insurance Policy will also cover any unpaid
Preference Amount. In addition, the Bond
Insurance Policy will guarantee the payment
of the outstanding Bond Principal Balance of
each Bond on the Payment Date in -----
---------(after giving effect to all other
amounts distributable and allocable to
principal on such Payment Date).The Bond
Insurance Policy does not insure the payment
of the Available Funds Cap Carry-Forward
Amount (as defined herein). See "Description
of the Bonds--Bond Insurance Policy" herein
and "Description of Credit Enhancement" in
the Prospectus.
The Certificates....................Trust Certificates, Series 199--1. The
Certificates will be issued pursuant to the
Trust Agreement and will represent the
beneficial ownership interest in the Issuer.
The Certificates are not offered hereby.
Credit Enhancement..................The credit enhancement provided for the
benefit of the Bondholders consists solely
of (a) the overcollateralization provisions
which utilize the internal cash flows of the
Mortgage Loans and (b) the Bond Insurance
Policy.
Overcollateralization. Initially, the
aggregate Principal Balance of the Mortgage
Loans as of the Cut-off Date will exceed the
aggregate Bond Principal Balance of the
Bonds as of the Delivery Date by
approximately $------------- or -----% of
the aggregate Principal Balance of the
Mortgage Loans as of the Cut-off Date. This
amount is the required level of
overcollateralization (the "Required
Subordination Amount") as of the Delivery
Date and may increase or decrease, subject
to certain trigger tests, in accordance with
the provisions of the Indenture. An increase
would result in a temporary period of
accelerated amortization of the Bonds to
increase the actual level of
overcollateralization to its required level;
a decrease would result in a temporary
period of decelerated amortization to reduce
the actual level of overcollateralization to
its required level. See "Description of the
Bonds--Overcollateralization Provisions."
The Bond Insurance Policy. The Bonds will
have the benefit of the Bond Insurance
Policy, as discussed more fully herein. See
"Description of the Bonds--Bond Insurance
Policy" herein.
Advances............................The Master Servicer is required to make
advances ("Advances") in respect of
delinquent payments of principal and
interest on the Mortgage Loans, subject to
the limitations described herein. See
"Description of the Bonds--Advances" herein
and in the Prospectus.
Optional Redemption of the Bonds....The Bonds may be redeemed in whole, but not
in part, by the Issuer on any Payment Date
on or after the earlier of (i) the Payment
Date on which the aggregate Principal
Balance (as defined herein) of the Mortgage
Loans is less than or equal to 25% of the
aggregate Principal Balance of the Mortgage
Loans as of the Cut-off Date or (ii) the
Payment Date occurring in ------ ------. See
"Description of the Bonds--Optional
Redemption" herein and "The
Agreements--Termination; Redemption of
Bonds" in the Prospectus.
Special Prepayment Considerations...The rate and timing of principal payments on
the Bonds will depend, among other things,
on the rate and timing of principal payments
(including prepayments, defaults,
liquidations, negative amortization and
purchases of the Mortgage Loans due to a
breach of a representation or warranty) on
the related Mortgage Loans. As is the case
with mortgage-backed securities generally,
the Bonds are subject to substantial
inherent cash-flow uncertainties because the
Mortgage Loans may be prepaid at any time;
however, a prepayment may subject the
related Mortgagor to a prepayment charge
with respect to approximately half of the
Mortgage Loans. Generally, when prevailing
interest rates increase, prepayment rates on
mortgage loans tend to decrease, resulting
in a slower return of principal to investors
at a time when reinvestment at such higher
prevailing rates would be desirable.
Conversely, when prevailing interest rates
decline, prepayment rates on mortgage loans
tend to increase, resulting in a faster
return of principal to investors at a time
when reinvestment at comparable yields may
not be possible.
See "Certain Yield and Prepayment
Considerations" herein, and "Maturity and
Prepayment Considerations" in the
Prospectus.
Special Yield Considerations........The yield to maturity on the Bonds will
depend on, among other things, the rate and
timing of principal payments (including
prepayments, defaults, liquidations,
negative amortization and purchases of the
Mortgage Loans due to a breach of a
representation or warranty) on the Mortgage
Loans and the allocation thereof to reduce
the Bond Principal Balance thereof. The
yield to maturity on the Bonds will also
depend on the Bond Interest Rate and the
purchase price for such Bonds.
If the Bonds are purchased at a premium and
principal payments thereon occur at a rate
faster than anticipated at the time of
purchase, the investor's actual yield to
maturity will be lower than that assumed at
the time of purchase. Conversely, if the
Bonds are purchased at a discount and
principal payments thereon occur at a rate
slower than that assumed at the time of
purchase, the investor's actual yield to
maturity will be lower than that assumed at
the time of purchase.
The Bonds were structured assuming, among
other things, a constant prepayment rate
("CPR") of 20% and corresponding weighted
average lives as described herein. The
prepayment, yield and other assumptions to
be used for pricing purposes for the Bonds
may vary as determined at the time of sale.
See "Certain Yield and Prepayment
Considerations" herein and "Yield
Considerations" in the Prospectus.
Federal Income Tax Consequences.....In the opinion of Tax Counsel (as defined in
the Prospectus), for federal income tax
purposes, the Bonds will be characterized as
indebtedness and not as representing an
ownership interest in the Trust Fund or an
equity interest in the Issuer or the
Company. In addition, for federal income tax
purposes, the Issuer will not be (i)
classified as an association taxable as a
corporation for federal income tax purposes
(other than as a "qualified REIT subsidiary"
as defined in Section 856(i) of the Code),
(ii) a taxable mortgage pool as defined in
Section 7701(i) of the Code, or (iii) a
"publicly traded partnership" as defined in
Treasury Regulation Section 1.7704-1.
For further information regarding certain
federal income tax consequences of an
investment in the Bonds see "Federal Income
Tax Consequences" herein and "Federal Income
Tax Consequences" and "State and Other Tax
Consequences" in the Prospectus.
Legal Investment....................The Bonds will constitute "mortgage related
securities" for purposes of SMMEA for so
long as they are rated in at least the
second highest rating category by one or
more nationally recognized statistical
rating agencies. Institutions whose
investment activities are subject to legal
investment laws and regulations or to review
by certain regulatory authorities may be
subject to restrictions on investment in the
Bonds. See "Legal Investment" herein.
Rating..............................It is a condition to the issuance of the
Bonds that they be rated "AAA" by Standard &
Poor's Ratings Services ("S&P") and "Aaa" by
Moody's Investors Service, Inc. ("Moody's").
A security rating is not a recommendation to
buy, sell or hold securities and may be
subject to revision or withdrawal at any
time by the assigning rating organization. A
security rating does not address the
frequency of prepayments of Mortgage Loans,
or the corresponding effect on yield to
investors.
The ratings do not represent any assessment
of the Master Servicer's ability to
repurchase any Converting Mortgage Loan
following the conversion of the related
Mortgage Rate to a fixed rate, or the effect
on the yield to Bondholders resulting from
any such conversion and the failure of the
Master Servicer to repurchase such
Converting Mortgage Loan. Also, the ratings
issued by S&P and Moody's on payment of
principal and interest on the Bonds do not
cover the payment of the Available Funds Cap
Carry-Forward Amount. See "Certain Yield and
Prepayment Considerations" and "Ratings"
herein.
RISK FACTORS
Prospective Bondholders should consider, among other things, the items
discussed under "Risk Factors" in the Prospectus and the following factors in
connection with the purchase of the Bonds:
Underwriting Standards
The Mortgage Loans were underwritten generally in accordance with
underwriting standards described in "Description of the Mortgage
Pool--Underwriting" below and Appendix A attached hereto which are primarily
intended to provide single family mortgage loans for non-conforming credits
which do not satisfy the requirements of typical "A" credit borrowers. A
"non-conforming credit" means a mortgage loan which is ineligible for purchase
by FNMA or FHLMC due to credit characteristics that do not meet the FNMA or
FHLMC underwriting guidelines, including mortgagors whose creditworthiness and
repayment ability do not satisfy such FNMA or FHLMC underwriting guidelines and
mortgagors who may have a record of credit write-offs, outstanding judgments,
prior bankruptcies and other credit items that do not satisfy such FNMA or FHLMC
underwriting guidelines. Accordingly, Mortgage Loans underwritten under the
Originators' non-conforming credit underwriting standards or to standards that
do not meet the requirements for typical "A" credit borrowers are likely to
experience rates of delinquency, foreclosure and loss that are higher, and may
be substantially higher, than mortgage loans originated in accordance with the
FNMA or FHLMC underwriting guidelines or to typical "A" credit borrowers.
Potential Delinquencies
Approximately ------% of the Mortgage Loans (by aggregate outstanding
principal balance as of the Cut-off Date) are secured by Mortgaged Properties
located in the State of California. In the event California experiences a
decline in real estate values, losses on the Mortgage Loans may be greater than
otherwise would be the case.
Approximately -----% of the Mortgage Loans (by aggregate outstanding
principal balance as of the Cut-off Date) will have Loan-to-Value Ratios in
excess of 80% but will not be covered by a primary mortgage insurance policy.
Such Mortgage Loans will be affected to a greater extent than Mortgage Loans
with primary mortgage insurance or a Loan-to-Value Ratio equal to or less than
80% by any decline in the value of the related Mortgaged Property. No assurance
can be given that values of the Mortgaged Properties have remained or will
remain at their levels on the dates of origination of the related Mortgage
Loans. If the residential real estate market should experience an overall
decline in property values such that the outstanding balances of the 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. Any decrease in the value of such
Mortgage Loans may result in the allocation of losses to the Bonds which are not
covered by overcollateralization or the Bond Insurance Policy. See "Primary
Mortgage Insurance, Hazard Insurance; Claims Thereunder" in the Prospectus.
---------- has limited historical delinquency and default experience that
may be referred to for purposes of estimating the future delinquency and loss
experience of the Mortgage Loans underwritten pursuant to the underwriting
standards described herein, which include those of non-related bulk purchasers.
There can be no assurance that the delinquency experience of the servicing
portfolios described herein with respect to mortgage loans serviced by
- ---------- will correspond to the delinquency experience of the Mortgage Loans
underwritten pursuant to such underwriting standards. See "Description of the
Servicing Agreement--The Master Servicer; the Subservicer" herein.
Risk of Mortgage Loan Yield Reducing Bond Interest Rate on the Bonds
The Bond Interest Rate is based upon, among other factors as described
herein under "Description of the Bonds--Interest Payments on the Bonds," the
value of an index (One-Month LIBOR (as defined herein)) which is different from
the value of the indices applicable to the Mortgage Loans (Negative Amortization
Loan One-Month LIBOR, Six-Month LIBOR, Six-Month CMT and One-Year CMT (each as
defined herein)), as described under "Description of the Mortgage Pool" herein.
Investors should note that the value of One-Month LIBOR on the Bonds may differ
from Negative Amortization Loan One-Month LIBOR, due to the different reference
date. The Mortgage Rate of each Mortgage Loan adjusts monthly, semi-annually or
annually, commencing after the Initial Period, based upon the related Index,
whereas the Bond Interest Rate on the Bonds adjusts monthly based upon One-Month
LIBOR plus ----% (or after the earlier of (x) the Payment Date in June 2004 and
(y) the Payment Date which occurs on or prior to the date on which the aggregate
Principal Balance of the Mortgage Loans is less than 25% of the aggregate
Principal Balance of the Mortgage Loans as of the Cut-off Date, One-Month LIBOR
plus -----%), limited by the Available Funds Interest Rate (as defined herein).
In addition, One-Month LIBOR and the Indices on the Mortgage Loans may respond
differently to economic and market factors, and there is not necessarily any
correlation between them. Moreover, the Mortgage Loans are subject to Periodic
Rate Caps, Maximum Mortgage Rates and Minimum Mortgage Rates (each, as defined
herein). Thus, it is possible, for example, that One-Month LIBOR may rise during
periods in which the Indices are stable or falling or that, even if both
One-Month LIBOR and the Indices rise during the same period, One-Month LIBOR may
rise much more rapidly than the Indices. See "Description of the Bonds--Interest
Payments on the Bonds."
DESCRIPTION OF THE MORTGAGE POOL
General
The Mortgage Pool will consist of conventional, adjustable-rate, monthly
payment, first lien mortgage loans with terms to maturity of not more than 30
years from the date of origination or modification. As of the Cut-off Date, the
principal balance of the Mortgage Loans was equal to $----------. The Company
will acquire the Mortgage Loans to be included in the Mortgage Pool from
- ------------------ (-------), the parent of the Company, which in turn acquired
them from ICI Funding (in such capacity, the "Seller"), which in turn acquired
them pursuant to various agreements from affiliates of ------------ and various
mortgage loan conduit sellers (collectively, the "Originators"). All of the
Mortgage Loans will be subserviced by --------------. The Company will convey
the Mortgage Loans to the Issuer on the Delivery Date pursuant to the Trust
Agreement. ---------------- will make certain representations and warranties
with respect to the Mortgage Loans and, as more particularly described in the
Prospectus, will have certain repurchase or substitution obligations in
connection with a breach of any such representation or warranty, as well as in
connection with an omission or defect in respect of certain constituent
documents required to be delivered with respect to the Mortgage Loans, in any
event if such breach, omission or defect cannot be cured and it materially and
adversely affects the interests of holders of the Securities or the Bond
Insurer. See "Description of the Mortgage Pool--Representations by Sellers" and
"Description of the Bonds--Assignment of Trust Fund Assets" in the Prospectus.
The Mortgage Loans will have been originated or acquired by the Originators in
accordance with the underwriting criteria described herein.
See "--Underwriting" below and Appendix A.
The representations and warranties made by -------------- will be pledged
to the Indenture Trustee for the benefit of the Bondholders and the Bond
Insurer.
Approximately --------% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, will have Loan-to-Value Ratios in excess of 80%
but will not be covered by a primary mortgage insurance policy. Each other
Mortgage Loan with a Loan-to-Value Ratio in excess of 80% will be covered by a
primary mortgage insurance policy. See "Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder" in the Prospectus.
Mortgage Loans
Mortgage Rate Adjustment
The Mortgage Rate on each Mortgage Loan will adjust monthly (with respect
to -----% of the Mortgage Loans), semi-annually (with respect to -----% of the
Mortgage Loans) or annually (with respect to -----% of the Mortgage Loans)
commencing after an initial period after origination (the "Initial Period") of
three months, six months, eleven months, one year, two years or three years, in
each case on each applicable Adjustment Date to a rate equal to the sum,
generally rounded to the nearest one-eighth of one percentage point (12.5 basis
points), of (i) the related Index plus (ii) a fixed percentage (the "Gross
Margin"). In addition, the Mortgage Rate on each Mortgage Loan (other than the
Negative Amortization Loans) is subject on its first Adjustment Date following
its origination to a cap (the "Initial Periodic Rate Cap") and on each
Adjustment Date thereafter to a periodic rate cap (the "Periodic Rate Cap"). All
of the Mortgage Loans are also subject to specified maximum and minimum lifetime
Mortgage Rates ("Maximum Mortgage Rates" and "Minimum Mortgage Rates,"
respectively). The Mortgage Loans were generally originated with an initial
Mortgage Rate below the sum of the current Index and the Gross Margin. Due to
the application of the Periodic Rate Caps, Maximum Mortgage Rates and Minimum
Mortgage Rates, the Mortgage Rate on any Mortgage Loan, as adjusted on any
related Adjustment Date, may not equal the sum of the related Index and the
Gross Margin. The Due Date for each Mortgage Loan is the first day of the month.
Approximately -----% of the Mortgage Loans will not have reached their
first Adjustment Date as of the Delivery Date. All of the Mortgage Loans with an
Initial Period of three months have already reached their first Adjustment Date.
The initial Mortgage Rate is generally lower than the rate that would have been
produced if the applicable Gross Margin had been added to the related Index in
effect at origination. Mortgage Loans that have not reached their first
Adjustment Date are, therefore, more likely to be subject to the Periodic Rate
Cap on their first Adjustment Date.
Six-Month Libor Index
The Index applicable to the determination of the Mortgage Rate on
approximately ------% of the Mortgage Loans (by principal balance as of the
Cut-off Date) will be the average of the interbank offered rates for six-month
United States dollar deposits in the London market as published by FNMA and as
most recently available as of the first business day generally 45 days prior to
such Adjustment Date.
The table below sets forth historical average rates of Six-Month LIBOR for
the months indicated as made available from FNMA. Such average rates may
fluctuate significantly from month to month as well as over longer periods and
may not increase or decrease in a constant pattern from period to period. There
can be no assurance that levels of Six-Month LIBOR published by FNMA, or
published on a different Reference Date would have been at the same levels as
those set forth below. The following does not purport to be representative of
future levels of Six-Month LIBOR (as published by FNMA). No assurance can be
given as to the level of Six-Month LIBOR on any Adjustment Date or during the
life of any Mortgage Loan based on Six-Month LIBOR.
Six-Month LIBOR
MONTH 1993 1994 1995 1996 1997
- ----- ---- ---- ---- ---- ----
January.................... 3.44% 3.39% 6.69% 5.34% 5.71%
February................... 3.33 4.00 6.44 5.29 5.68
March...................... 3.38 4.25 6.44 5.52 5.96
April...................... 3.31 4.63 6.31 5.42 6.08
May........................ 3.44 5.00 6.06 5.64
June....................... 3.56 5.25 5.88 5.84
July....................... 3.56 5.33 5.88 5.92
August..................... 3.44 5.33 5.94 5.74
September.................. 3.38 5.69 5.99 5.75
October.................... 3.50 6.00 5.95 5.58
November................... 3.52 6.44 5.74 5.55
December................... 3.50 7.00 5.56 5.62
One-Year CMT Index
The Index applicable to the determination of the Mortgage Rate on
approximately 11.59% of the Mortgage Loans (by principal balance as of the
Cut-off Date) will be the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year as published by the Federal Reserve
Board in Statistical Release H.15(519) and most recently available as of the
first business day generally 45 days prior to the Adjustment Date.
The table below sets forth historical average rates of One-Year CMT for the
months indicated as made available from Telerate Page 7052. Such average rates
may fluctuate significantly from month to month as well as over longer periods
and may not increase or decrease in a constant pattern from period to period.
There can be no assurance that levels of One-Year CMT published by Telerate Page
7052, or published on a different Reference Date would have been at the same
levels as those set forth below. The following does not purport to be
representative of future levels of One-Year CMT (as published by Telerate Page
7052). No assurance can be given as to the level of One-Year CMT on any
Adjustment Date or during the life of any Mortgage Loan based on One-Year CMT.
One-Year CMT
Month 1993 1994 1995 1996 1997
- ----- ---- ---- ---- ---- ----
January...................... 3.50% 3.54% 7.08% 5.11% 5.60%
February..................... 3.38 3.85 6.73 4.94 5.52
March........................ 3.33 4.28 6.43 5.31 5.79
April........................ 3.25 4.74 6.27 5.53 5.99
May.......................... 3.36 5.31 6.02 5.64
June......................... 3.55 5.24 5.66 5.81
July......................... 3.45 5.47 5.59 5.84
August....................... 3.47 5.56 5.72 5.69
September.................... 3.36 5.74 5.64 5.84
October...................... 3.38 6.11 5.60 5.57
November..................... 3.58 6.48 5.45 5.43
December..................... 3.61 7.10 5.32 5.47
Negative Amortization Loans
Approximately -----% of the Mortgage Loans ("Negative Amortization Loans")
have a negative amortization feature whereby interest payments on such Mortgage
Loans may be deferred and may be added to the Principal Balance thereof. The
amount of the monthly payment on each Negative Amortization Loan adjusts
annually on each "Payment Adjustment Date" to an amount which would amortize
fully the outstanding principal balance of the Negative Amortization Loan over
its remaining term, and pay interest at the Mortgage Rate as adjusted on the
immediately preceding Rate Adjustment Date, subject to a payment cap (the
"Payment Cap") that limits any increase or decrease in the amount of the monthly
payment on any Payment Adjustment Date to an amount not greater than 7.5% of the
amount of the monthly payment due on the preceding Due Date, to the extent that
the related Mortgagor has elected to have the monthly payment limited by the
Payment Cap. The Payment Cap shall not be in effect on the fifth anniversary of
the first Due Date and on each fifth anniversary thereafter (each such
anniversary, a "Recast Date"). The weighted average first Recast Date of the
Negative Amortization Loans, rounded to the nearest Due Date, is --------- --,
- ----. If on any Rate Adjustment Date, due to the addition of Deferred Interest,
the principal balance of any Negative Amortization Loan would exceed 110% of the
original principal balance thereof (such limitation, a "Negative Amortization
Cap"), the related monthly payment will be recalculated, without regard to the
Payment Cap, to equal an amount sufficient to amortize such Negative
Amortization Loan over its remaining term at the Mortgage Rate as adjusted on
the immediately preceding Rate Adjustment Date. Any monthly payment so
recalculated will remain in effect until the earliest of the next Payment
Adjustment Date, the next Recast Date or the next Due Date on which the
principal balance of the related Negative Amortization Loan would exceed the
Negative Amortization Cap.
The Mortgage Notes provide that at least 30 days prior to any Payment
Adjustment Date the related Mortgagor must be notified of (i) the monthly
payment that would be sufficient to amortize fully the then outstanding
principal balance of the related Negative Amortization Loan over its remaining
term (the "Full Payment") and (ii) the monthly payment that would be equal to
the above amount subject to the Payment Cap (the "Limited Payment"). Upon timely
notice, a Mortgagor may elect to pay the Limited Payment, subject only to the
related Negative Amortization Cap and the applicable provisions on the related
Recast Date.
On any Rate Adjustment Date an increase in the Mortgage Rate on a Negative
Amortization Loan will result in a larger portion of each subsequent monthly
payment being allocated to interest and a smaller portion being allocated to
principal, and conversely, a decrease in the Mortgage Rate on a Negative
Amortization Loan will result in a larger portion of each subsequent monthly
payment being allocated to principal and a smaller portion being allocated to
interest. However, because Mortgage Rates on the Negative Amortization Loans
adjust on a monthly basis but monthly payments due on the Negative Amortization
Loans adjust only annually, and because the application of Payment Caps may
limit the amount by which the monthly payments may adjust, the amount of a
monthly payment may be more or less than the amount necessary to fully amortize
the principal balance of the Negative Amortization Loan over its then remaining
term at the applicable Mortgage Rate. Accordingly, Negative Amortization Loans
may be subject to reduced amortization (if the monthly payment due on a Due Date
is sufficient to pay interest accrued during the related accrual period at the
applicable Mortgage Rate but is not sufficient to reduce principal in accordance
with a fully amortizing schedule); negative amortization (if interest accrued
during the related accrual period at the applicable Mortgage Rate is greater
than the entire monthly payment due on the related Due Date (such excess accrued
interest, "Deferred Interest")); or accelerated amortization (if the monthly
payment due on a Due Date is greater than the amount necessary to pay interest
accrued during the related accrual period at the applicable Mortgage Rate and to
reduce principal in accordance with a fully amortizing schedule). In addition,
subsequent to the final Recast Date and the final Payment Adjustment Date, the
addition of any Deferred Interest to the principal balance of any Negative
Amortization Loan that is not offset by subsequent accelerated amortization will
result in a final lump sum payment at maturity greater than, and potentially
substantially greater than, the monthly payment due on the immediately preceding
Due Date.
The maximum increase in the principal balance of a Negative Amortization
Loan due to the addition of Deferred Interest to the principal balance of such
Negative Amortization Loan and the resulting Loan-to-Value Ratio on such
Negative Amortization Loan will depend on the relationships between the Payment
Cap, the Maximum Mortgage Rate, the Negative Amortization Cap and the related
Index. If the outstanding principal balance of a Negative Amortization Loan
having a Loan-to-Value Ratio of 80% was to increase to an amount equal to the
Negative Amortization Cap, the Loan-to-Value Ratio (as based on the then
outstanding principal balance) thereof would in no event exceed approximately
88%.
Convertible Loans
Approximately ----% of the Mortgage Loans ("Convertible Mortgage Loans")
provide that, at the option of the related Mortgagors, the adjustable interest
rate on such Mortgage Loans may be converted to a fixed interest rate. Upon
conversion, the Mortgage Rate will be converted to a fixed interest rate
determined in accordance with the formula set forth in the related Mortgage Note
which formula is intended to result in a Mortgage Rate which is not less than
the then current market interest rate (subject to applicable usury laws). After
such conversion, the monthly payments of principal and interest will be adjusted
to provide for full amortization over the remaining term to scheduled maturity.
Upon notification from a Mortgagor of such Mortgagor's intent to convert from an
adjustable interest rate to a fixed interest rate and prior to the conversion of
any such Mortgage Loan (a "Converting Mortgage Loan"), the Master Servicer will
be obligated to purchase the Converting Mortgage Loan at a price equal to the
outstanding principal balance thereof plus accrued interest thereon at the
related Mortgage Rate plus any unreimbursed Advances with respect to such
Mortgage Loan net of any subservicing fees (the "Conversion Price").
In the event that the Master Servicer fails to purchase a Converting
Mortgage Loan (such Mortgage Loan, following its conversion, a "Converted
Mortgage Loan"), neither the Company nor any of its affiliates nor any other
entity is obligated to purchase or arrange for the purchase of any Converted
Mortgage Loan. Any such Converted Mortgage Loan will remain in the Mortgage Pool
as a fixed-rate Mortgage Loan and will result in the Mortgage Pool's having
fixed-rate Mortgage Loans and as a result the Bond Interest Rate may be reduced.
See "Certain Yield and Prepayment Considerations" herein.
Following the purchase of any Converted Mortgage Loan as described above,
the purchaser will be entitled to receive an assignment from the Indenture
Trustee of such Mortgage Loan and the purchaser will thereafter own such
Mortgage Loan free of any further obligation to the Indenture Trustee or the
Bondholders with respect thereto.
Mortgage Loan Characteristics
All percentages of the Mortgage Loans described herein are approximate
percentages (except as otherwise indicated) by aggregate principal balance as of
the Cut-off Date.
The Mortgage Loans generally have original terms to stated maturity of
approximately 30 years.
Effective with the first payment due on a Mortgage Loan after each related
Adjustment Date, the Monthly Payment will be adjusted to an amount that will
fully amortize the outstanding principal balance of the Mortgage Loan over its
remaining term. The weighted average number of months from the Cut-off Date to
the next Adjustment Date is 12 months.
As of the Cut-off Date, each Mortgage Loan will have an unpaid principal
balance of not less than $------- or more than $-------- and the average unpaid
principal balance of the Mortgage Loans will be approximately $--------. The
latest stated maturity date of any of the Mortgage Loans will be ------- --,
- ------; however, the actual date on which any Mortgage Loan is paid in full may
be earlier than the stated maturity date due to unscheduled payments of
principal.
The weighted average remaining term to stated maturity of the Mortgage
Loans will be approximately ---- months.
The earliest year of origination of any Mortgage Loan is ----- and the
latest month and year of origination will be --------- ---.
None of the Mortgage Loans are Buydown Mortgage Loans.
Set forth below is a description of certain additional characteristics of
the Mortgage Loans as of the Cut-off Date (except as otherwise indicated).
Dollar amounts and percentages may not add up to totals due to rounding.
Principal Balances of the Mortgage Loans at Origination
Percentage Of
Aggregate Cut-Off Date
Original Unpaid Aggregate
Mortgage Loan Number Of Principal Principal
Principal Balance ($) Mortgage Loans Balance Balance
--------------------- -------------- ------- -------
0.01 - 50,000.00 $ %
50,000.01 - 100,000.00
100,000.01 - 150,000.00..........
150,000.01 - 200,000.00..........
200,000.01 - 250,000.00..........
250,000.01 - 300,000.00..........
300,000.01 - 350,000.00..........
350,000.01 - 400,000.00..........
400,000.01 - 450,000.00..........
450,000.01 - 500,000.00..........
500,000.01 - 550,000.00..........
550,000.01 - 600,000.00..........
650,000.01 - 700,000.00..........
Total............................
The average original principal balance of the Mortgage Loans will be
approximately $------------.
Current Balances of the Mortgage Loans at the Cut-off Date
Percentage Of
Aggregate Cut-Off Date
Original Unpaid Aggregate
Mortgage Loan Number Of Principal Principal
Principal Balance (%) Mortgage Loans Balance Balance
--------------------- -------------- ------- -------
0.01 - 50,000.00 $ %
50,000.01 - 100,000.00
100,000.01 - 150,000.00..........
150,000.01 - 200,000.00..........
200,000.01 - 250,000.00..........
250,000.01 - 300,000.00..........
300,000.01 - 350,000.00..........
350,000.01 - 400,000.00..........
400,000.01 - 450,000.00..........
450,000.01 - 500,000.00..........
500,000.01 - 550,000.00..........
550,000.01 - 600,000.00..........
650,000.01 - 700,000.00..........
Total............................
The average current principal balance of the Mortgage Loans will be
approximately $------------.
Mortgage Rates at Origination
Percentage Of
Aggregate Cut-Off Date
Unpaid Aggregate
Number Of Principal Principal
Mortgage Rates (%) Mortgage Loans Balance Balance
------------------ -------------- ------- -------
3.000 - 3.499 $ %
4.000 - 4.499...................
4.500 - 4.999...................
5.000 - 5.499...................
5.500 - 5.999...................
6.000 - 6.499...................
6.500 - 6.999...................
7.000 - 7.499...................
7.500 - 7.999...................
8.000 - 8.499...................
8.500 - 8.999...................
9.000 - 9.499...................
9.500 - 9.999...................
10.000 - 10.499..................
10.500 - 10.999..................
11.000 - 11.499..................
11.500 - 11.999..................
12.000 - 12.499..................
12.500 - 12.999..................
13.000 - 13.499..................
13.500 - 13.999..................
14.000 - 14.499..................
14.500 - 14.999..................
15.500 - 15.999..................
16.000 - 16.499..................
Total.......................
The weighted average Mortgage Rate of the Mortgage Loans at origination will
be approximately ------% per annum.
Mortgage Rates at Cut-off Date
Percentage Of
Aggregate Cut-Off Date
Unpaid Aggregate
Number Of Principal Principal
Mortgage Rates (%) Mortgage Loans Balance Balance
------------------ -------------- ------- -------
5.000 - 5.499................... $ %
5.500 - 5.999...................
6.000 - 6.499...................
6.500 - 6.999...................
7.000 - 7.499...................
7.500 - 7.999...................
8.000 - 8.499...................
8.500 - 8.999...................
9.000 - 9.499...................
9.500 - 9.999...................
10.000 - 10.499..................
10.500 - 10.999..................
11.000 - 11.499..................
11.500 - 11.999..................
12.000 - 12.499..................
12.500 - 12.999..................
13.000 - 13.499..................
13.500 - 13.999..................
14.000 - 14.499..................
14.500 - 14.999..................
15.500 - 15.999..................
16.500 - 16.999..................
Total.......................
The weighted average Mortgage Rate of the Mortgage Loans as of the Cut-off
Date will be approximately -----% per annum.
Next Adjustment Date
Percentage Of
Aggregate Cut-Off Date
Unpaid Aggregate
Number Of Principal Principal
Next Adjustment Date Mortgage Loans Balance Balance
-------------------- -------------- ------- -------
The weighted average remaining months to the next Adjustment Date of the
Mortgage Loans will be approximately -- months.
Gross Margin
Percentage Of
Aggregate Cut-Off Date
Unpaid Aggregate
Number Of Principal Principal
Gross Margin (%) Mortgage Loans Balance Balance
---------------- -------------- ------- -------
2.000-2.249...................... $ %
2.500-2.749......................
2.750-2.999......................
3.000-3.249......................
3.250-3.499......................
3.500-3.749......................
3.750-3.999......................
4.000-4.249......................
4.250-4.499......................
4.500-4.749......................
4.750-4.999......................
5.000-5.249......................
5.250-5.499......................
5.500-5.749......................
5.750-5.999......................
6.000-6.249......................
6.250-6.499......................
6.500-6.749......................
6.750-6.999......................
7.000-7.249......................
7.250-7.499......................
7.500-7.749......................
7.750-7.999......................
8.000-8.249......................
8.250-8.499......................
8.500-8.749......................
8.750-8.999......................
9.000-9.249......................
9.250-9.499......................
10.000-10.249....................
10.750-10.999....................
11.000-11.249....................
Total.......................
The weighted average Gross Margin of the Mortgage Loans will be approximately
- -------% per annum.
Maximum Mortgage Rate
Percentage Of
Aggregate Cut-Off Date
Unpaid Aggregate
Number Of Principal Principal
Maximum Mortgage Rate (%) Mortgage Loans Balance Balance
------------------------- -------------- ------- -------
10.000 - 10.499.................. $ %
10.500 - 10.999..................
11.000 - 11.499..................
11.500 - 11.999..................
12.000 - 12.499..................
12.500 - 12.999..................
13.000 - 13.499..................
13.500 - 13.999..................
14.000 - 14.499..................
14.500 - 14.999..................
15.000 - 15.499..................
15.500 - 15.999..................
16.000 - 16.499..................
16.500 - 16.999..................
17.000 - 17.499..................
17.500 - 17.999..................
18.000 - 18.499..................
18.500 - 18.999..................
19.000 - 19.499..................
19.500 - 19.999..................
20.000 - 20.499..................
20.500 - 20.999..................
21.000 - 21.499..................
21.500 - 21.999..................
22.000 - 22.499..................
22.500 - 22.999..................
23.000 - 23.499..................
Total.......................
The weighted average Maximum Mortgage Rate of the Mortgage Loans will be
approximately -----% per annum.
Index
Percentage Of
Aggregate Cut-Off Date
Unpaid Aggregate
Number Of Principal Principal
Index Mortgage Loans Balance Balance
----- -------------- ------- -------
Negative Amortization Loan
One-Month LIBOR............... $ %
Six-Month LIBOR..................
Six-Month CMT....................
One-Year CMT.....................
Total........................
For a description of the Indices, see "Summary--The Indices" herein.
Initial Periodic Rate Cap
Percentage Of
Aggregate Cut-Off Date
Unpaid Aggregate
Number Of Principal Principal
Initial Periodic Rate Cap (%) Mortgage Loans Balance Balance
----------------------------- -------------- ------- -------
1.000............................ $ %
1.500...........................
2.000...........................
3.000...........................
6.500...........................
Unlimited(1)....................
Total.......................
(1) Subject to the Maximum Rate Cap and the Minimum Rate Cap.
Periodic Rate Cap
Percentage Of
Aggregate Cut-Off Date
Unpaid Aggregate
Number Of Principal Principal
Periodic Rate Cap (%) Mortgage Loans Balance Balance
--------------------- -------------- ------- -------
1.000............................ $ %
1.500............................
2.000............................
Unlimited(1).....................
Total........................
(1) Subject to the Maximum Rate Cap and the Minimum Rate Cap.
Original Loan-to-Value Ratios
Percentage Of
Aggregate Cut-Off Date
Unpaid Aggregate
Number Of Principal Principal
Original Loan-to-Value Ratios Mortgage Loans Balance Balance
----------------------------- -------------- ------- -------
Less than or equal to 25.00%..... $ %
25.01% - 30.00%..................
30.01% - 35.00%..................
35.01% - 40.00%..................
40.01% - 45.00%..................
45.01% - 50.00%..................
50.01% - 55.00%..................
55.01% - 60.00%..................
60.01% - 65.00%..................
65.01% - 70.00%..................
70.01% - 75.00%..................
75.01% - 80.00%..................
80.01% - 85.00%..................
85.01% - 90.00%..................
90.01% - 95.00%..................
95.01% - 100.00%.................
Total........................
The minimum and maximum Loan-to-Value Ratios at origination of the Mortgage
Loans were approximately ------% and 100.00%, respectively, and the weighted
average Loan-to-Value Ratio at origination of the Mortgage Loans was
approximately -------%.
Mortgage Loan Amortization
Percentage Of
Aggregate Cut-Off Date
Unpaid Aggregate
Number Of Principal Principal
Mortgage Loans Balance Balance
-------------- ------- -------
Level Amortization............... $ %
Negative Amortization (110% Cap).
Total........................
Occupancy Types
Percentage Of
Aggregate Cut-Off Date
Unpaid Aggregate
Occupancy Number Of Principal Principal
(As indicated by Borrower) Mortgage Loans Balance Balance
-------------------------- -------------- ------- -------
Owner-Occupied Primary Residence. $ %
Second Homes.....................
Non-Owner Occupied...............
Total........................
Mortgage Loan Program
Percentage Of
Aggregate Cut-Off Date
Unpaid Aggregate
Number Of Principal Principal
Loan Program Mortgage Loans Balance Balance
------------ -------------- ------- -------
Full Documentation............... $ %
Limited Documentation............
No Ratio.........................
Alternate Documentation..........
No Income No Asset...............
Lite (Self Employed B/C).........
Express..........................
Total........................
See "--Underwriting" below and Appendix A attached hereto for a description
of each Originator's documentation programs.
Risk Categories of Mortgage Loans
Percentage Of
Aggregate Cut-Off Date
Unpaid Aggregate
Number Of Principal Principal
Credit Grade Mortgage Loans Balance Balance
------------ -------------- ------- -------
Total........................
Property Types
Percentage Of
Aggregate Cut-Off Date
Unpaid Aggregate
Number Of Principal Principal
Property Types Mortgage Loans Balance Balance
-------------- -------------- ------- -------
Single-family.................... $ %
Planned Unit Development.........
Two- to Four-Family..............
Condominium......................
CondoSelect......................
Manufactured Housing.............
Total........................
Geographic Distribution of Mortgaged Properties
Percentage Of
Aggregate Cut-Off Date
Unpaid Aggregate
Number Of Principal Principal
State Mortgage Loans Balance Balance
----- -------------- ------- -------
California....................... $ %
Colorado.........................
Florida..........................
Georgia..........................
Hawaii...........................
Illinois.........................
Maryland.........................
New Jersey.......................
Utah.............................
Washington.......................
Other (no more than 3% in any
one state).................
Total........................
No more than approximately ------% of the Mortgage Loans will be secured by
Mortgaged Properties located in any one zip code.
Purposes of Mortgage Loans
Percentage Of
Aggregate Cut-Off Date
Unpaid Aggregate
Number Of Principal Principal
Loan Purpose Mortgage Loans Balance Balance
------------ -------------- ------- -------
Purchase......................... $ %
Refinance/No Equity Take-Out.....
Refinance/Equity Take-Out........
Construction.....................
Total........................
In general, in the case of a Mortgage Loan made for "no equity take-out"
refinance purposes, substantially all of the proceeds are used to pay in full
the principal balance of a previous mortgage loan of the mortgagor with respect
to a Mortgaged Property and to pay origination and closing costs associated with
such refinancing. Mortgage Loans made for "equity take-out" refinance purposes
may involve the use of the proceeds to pay in full the principal balance of a
previous mortgage loan and related costs except that a portion of the proceeds
are generally retained by the mortgagor for uses unrelated to the Mortgaged
Property. The amount of such proceeds retained by the mortgagor may be
substantial.
See "--Underwriting" below and Appendix A attached hereto for a description
of each Originator's risk categories.
Specific information with respect to the Mortgage Loans will be available to
purchasers of the Bonds on or before the time of issuance of such Bonds. If not
included in the Prospectus Supplement, such information will be included in the
Form 8-K.
Underwriting
The Mortgage Loans were acquired by --------- from the Originators.
Approximately ----% and ------% of the Mortgage Loans were underwritten pursuant
to ----------------------------- and -------------------------- respectively, as
described in Appendix A attached hereto. Approximately -------% of the Mortgage
Loans were acquired in bulk purchases from underwriters the underwriting
standards of whom were reviewed for acceptability by --------------; of such
loans, -----%, -----%, -------% and ------% were acquired from -----, -----,
- -----, and ----- whose underwriting standards are generally described in
Appendix A attached hereto. All of the Mortgage Loans were generally
underwritten in accordance with the description in the Prospectus. All of the
Mortgage Loans were reviewed for all legal documentation and all of the Mortgage
Loans received collateral review. See "The Mortgage Pools--Underwriting
Standards" in the Prospectus.
Delinquency And Foreclosure Experience Of The Seller
Based solely upon information provided by the Seller, the following tables
summarize, for the respective dates indicated, the delinquency, foreclosure,
bankruptcy and REO property status with respect to all mortgage loans originated
or acquired by the Seller. The indicated periods of delinquency are based on the
number of days past due on a contractual basis. The monthly payments under all
of such mortgage loans are due on the first day of each calendar month.
At December 31, 1996 March 31, 1997
------------------------------------------------
Number Principal Number Principal
of Loans Amount of Loans Amount
-------- ------ -------- ------
(Dollars in thousands) (Dollars in thousands)
Total Loans Outstanding....... $ $
DELINQUENCY(1)
Period of Delinquency:
30-59 Days....................
60-89 Days....................
90 Days or More...............
Total Delinquencies...........
Delinquencies as a Percentage
of Total Loans Outstanding..
FORECLOSURES PENDING(2)
Foreclosures Pending as a
Percentage of Total Loans
Outstanding...................
BANKRUPTCIES PENDING(3)
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding...................
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending..........
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding...................
REO PROPERTIES(4)
REO Properties as a
Percentage of Total Loans
Outstanding...................
- --------
1 The delinquency balances, percentages and numbers set forth under this
heading exclude (a) delinquent mortgage loans that were in foreclosure at
the respective dates indicated ("Foreclosure Loans"), (b) delinquent
mortgage loans as to which the related mortgagor was in bankruptcy
proceedings at the respective dates indicated ("Bankruptcy Loans") and (c)
REO properties that have been purchased upon foreclosure of the related
mortgage loans. All Foreclosure Loans, Bankruptcy Loans and REO properties
have been segregated into the sections of the table entitled "Foreclosures
Pending," "Bankruptcies Pending" and "REO Properties," respectively, and
are not included in the "30-59 Days," "60-89 Days," "90 Days or More" and
"Total Delinquencies" sections of the table. See the section of the table
entitled "Total Delinquencies plus Foreclosures Pending and Bankruptcies
Pending" for total delinquency balances, percentages and numbers which
include Foreclosure Loans and Bankruptcy Loans, and see the section of the
table entitled "REO Properties" for delinquency balances, percentages and
numbers related to REO properties that have been purchased upon foreclosure
of the related mortgage loans.
2 Mortgage loans that are in foreclosure but as to which the mortgaged
property has not been liquidated at the respective dates indicated. It is
generally the Master Servicer's policy, with respect to mortgage loans
originated by the Seller, to commence foreclosure proceedings when a
mortgage loan is between 31 and 60 days delinquent.
3 Mortgage loans as to which the related mortgagor is in bankruptcy
proceedings at the respective dates indicated.
4 REO properties that have been purchased upon foreclosure of the related
mortgage loans, including mortgaged properties that were purchased by the
Seller after the respective dates indicated.
The above data on delinquency, foreclosure, bankruptcy and REO property
status are calculated on the basis of the total mortgage loans originated or
acquired by the Seller. However, the total amount of mortgage loans on which the
above data are based includes many mortgage loans which were not, as of the
respective dates indicated, outstanding long enough to give rise to some of the
indicated periods of delinquency or to foreclosure or bankruptcy proceedings or
REO property status. In the absence of such mortgage loans, the delinquency,
foreclosure, bankruptcy and REO property percentages indicated above would be
higher and could be substantially higher. Because the Mortgage Pool will consist
of a fixed group of Mortgage Loans, the actual delinquency, foreclosure,
bankruptcy and REO property percentages with respect to the Mortgage Pool may
therefore be expected to be higher, and may be substantially higher, than the
percentages indicated above.
Based solely on information provided by the Seller, the following table
presents the changes in the Seller's charge-off and recoveries for the period
indicated.
Three Months Ended
March 31, 1997
--------------
(Dollars in thousands)
Charge-offs:
Mortgage Loan Properties.................
REO Properties...........................
Recoveries:
Mortgage Loan Properties.................
REO Properties...........................
Net charge-offs..........................
Ratio of net charge-offs to average loans
outstanding during the three months ended
March 31, 1997....................................
The above data on charge-offs and recoveries are calculated on the basis of
the total mortgage loans originated or acquired by the Seller. However, the
total amount of mortgage loans on which the above data are based includes many
mortgage loans which were not, as of the respective dates indicated, outstanding
long enough to give rise to some of the indicated charge-offs. In the absence of
such mortgage loans, the charge-off percentages indicated above would be higher
and could be substantially higher. Because the Mortgage Pool will consist of a
fixed group of Mortgage Loans, the actual charge-off percentages with respect to
the Mortgage Pool may therefore be expected to be higher, and may be
substantially higher, than the percentages indicated above.
The information set forth in the preceding paragraphs concerning
- ------------- has been provided by ----------------.
For loss and delinquency information with respect to mortgage loans
serviced by --------------, see "Description of the Servicing Agreement--The
Master Servicer; the Subservicer" herein.
Additional Information
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. The Company believes that the information
set forth herein will be substantially representative of the characteristics of
the Mortgage Pool as it will be constituted at the time the Bonds are issued
although the range of Mortgage Rates and maturities and certain other
characteristics of the Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the Bonds
and will be filed, together with the Servicing Agreement, the Trust Agreement
and the Indenture, with the Securities and Exchange Commission within fifteen
days after the initial issuance of the Bonds. In the event Mortgage Loans are
removed from or added to the Mortgage Pool as set forth in the preceding
paragraph, such removal or addition will be noted in the Current Report on Form
8-K.
See "The Mortgage Pools" and "Certain Legal Aspects of Mortgage Loans" in
the Prospectus.
THE ISSUER
The --------------- Trust Series 199--1, is a business trust formed under
the laws of the State of Delaware pursuant to the Trust Agreement dated as of
- ----------, 199- between the Company and -------------------- as the Owner
Trustee for the transactions described in this Prospectus Supplement. The Trust
Agreement constitutes the "governing instrument" under the laws of the State of
Delaware relating to business trusts. After its formation, the Issuer will not
engage in any activity other than (i) acquiring and holding the Mortgage Loans
and the other assets of the Issuer and proceeds therefrom, (ii) issuing the
Bonds and the Certificates, (iii) making payments on the Bonds and the
Certificates and (iv) engaging in other activities that are necessary, suitable
or convenient to accomplish the foregoing or are incidental thereto or connected
therewith.
The assets of the Issuer will consist of the Mortgage Loans and certain
related assets.
The Issuer's principal offices are in ---------------------------------, in
care of ---------------------------, as Owner Trustee, at the address listed
below.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Trust Agreement.
The Owner Trustee is a ---------------- banking corporation and its principal
offices are located in ---------------.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Bondholders under
the Trust Agreement under any circumstances, except for the Owner Trustee's own
misconduct, gross negligence, bad faith or grossly negligent failure to act or
in the case of the inaccuracy of certain representations made by the Owner
Trustee in the Trust Agreement. All persons into which the Owner Trustee may be
merged or with which it may be consolidated or any person resulting from such
merger or consolidation shall be the successor of the Owner Trustee under the
Trust Agreement.
THE INDENTURE TRUSTEE
------------------------------- will act as Indenture Trustee with respect
to the Indenture. The Indenture Trustee will provide to a prospective or actual
Bondholder without charge, upon written request, a copy of the Indenture.
Requests should be addressed to the Indenture Trustee at ---------------------
- -----------------------------------------------------------------------------.
[BOND INSURER]
DESCRIPTION OF THE BONDS
General
The Bonds will be issued pursuant to the Indenture dated as of -----, 199-,
between the Issuer and ----------------------------, as Indenture Trustee. The
Certificates (together with the Bonds, the "Securities") will be issued pursuant
to the Trust Agreement dated as of ----------------, 199-, between the Company
and -----------------------, as Owner Trustee. The following summaries describe
certain provisions of the Securities, the Indenture, the Trust Agreement and the
Servicing Agreement. The summaries do not purport to be complete and are subject
to, and qualified in their entirety by reference to, the provisions of the
applicable agreement. Only the Bonds are offered hereby.
The Bonds will be secured by the pledge by the Issuer of its assets to the
Indenture Trustee pursuant to the Indenture which will consist of the following
(such assets, collectively, the "Trust Fund"): (i) the Mortgage Loans; (ii)
collections in respect of principal and interest of the Mortgage Loans received
after the Cut-Off Date (other than payments due on or before the Cut-off Date);
(iii) the amounts on deposit in any Collection Account (as defined in the
Prospectus), including the account in which amounts are deposited prior to
payment to the Bondholders (the "Payment Account"), including net earnings
thereon; (iv) certain insurance policies maintained by the Mortgagors or by or
on behalf of the Master Servicer or related subservicer in respect of the
Mortgage Loans; (v) an assignment of the Company's rights under the Purchase
Agreement and the Servicing Agreement; and (vi) proceeds of the foregoing.
The Bonds will be issued in denominations of $25,000 and integral multiples
of $1 in excess thereof. See "--Book-Entry Bonds" below.
Book-Entry Bonds
General. Beneficial Owners that are not Participants or Intermediaries (as
defined in the Prospectus) but desire to purchase, sell or otherwise transfer
ownership of, or other interests in, the related Book-Entry Bonds may do so only
through Participants and Intermediaries. In addition, Beneficial Owners will
receive all payments of principal of and interest on the related Book-Entry
Bonds from the Paying Agent (as defined in the Prospectus) through DTC and
Participants. Accordingly, Beneficial Owners may experience delays in their
receipt of payments. Unless and until Definitive Bonds are issued for the
related Book-Entry Bonds, it is anticipated that the only registered Bondholder
of such Book-Entry Bonds will be Cede, as nominee of DTC. Beneficial Owners will
not be recognized by the Indenture Trustee or the Master Servicer as
Bondholders, as such term is used in the Indenture, and Beneficial Owners will
be permitted to receive information furnished to Bondholders and to exercise the
rights of Bondholders only indirectly through DTC, its Participants and
Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Bonds among Participants and to receive and transmit payments of
principal of, and interest on, such Book-Entry Bonds. Participants and
Intermediaries with which Beneficial Owners have accounts with respect to such
Book-Entry Bonds similarly are required to make book-entry transfers and receive
and transmit such payments on behalf of their respective Beneficial Owners.
Accordingly, although Beneficial Owners will not possess physical certificates
evidencing their interests in the Book-Entry Bonds, the Rules provide a
mechanism by which Beneficial Owners, through their Participants and
Intermediaries, will receive payments and will be able to transfer their
interests in the Book-Entry Bonds.
None of the Company, the Master Servicer, the Bond Insurer, the Owner
Trustee or the Indenture Trustee will have any liability for any actions taken
by DTC or its nominee, including, without limitation, actions for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in the Book-Entry Bonds held by Cede, as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
Definitive Bonds. Definitive Bonds will be issued to Beneficial Owners or
their nominees, respectively, rather than to DTC or its nominee, only under the
limited conditions set forth in the Prospectus under "Description of the
Bonds--Form of Bonds."
Upon the occurrence of an event described in the Prospectus in the third
paragraph under "Description of the Bonds--Form of Bonds," the Indenture Trustee
is required to notify, through DTC, Participants who have ownership of
Book-Entry Bonds as indicated on the records of DTC of the availability of
Definitive Bonds for their Book-Entry Bonds. Upon surrender by DTC of the
definitive certificates representing the Book-Entry Bonds and upon receipt of
instructions from DTC for re-registration, the Indenture Trustee will reissue
the Book-Entry Bonds as Definitive Bonds issued in the respective principal
amounts owned by individual Beneficial Owners, and thereafter the Indenture
Trustee will recognize the holders of such Definitive Bonds as Bondholders under
the Indenture.
For additional information regarding DTC and the Book-Entry Bonds, see
"Description of the Bonds--Form of Bonds" in the Prospectus.
Payments
Payments on the Bonds will be made by the Indenture Trustee or the Paying
Agent on the 25th day of each month or, if such day is not a Business Day, then
the next succeeding Business Day, commencing in -------- 199-. Payments on the
Bonds will be made to the persons in whose names such Bonds are registered at
the close of business on the day prior to each Payment Date or, if the Bonds are
no longer Book-Entry Bonds, on the Record Date. See "Description of the
Bonds--Payments" in the Prospectus. Payments will be made by check or money
order mailed (or upon the request, at least five Business Days prior to the
related Record Date, of a Holder owning Bonds having denominations aggregating
at least $5,000,000, by wire transfer or otherwise) to the address of the person
entitled thereto (which, in the case of Book-Entry Bonds, will be DTC or its
nominee) as it appears on the Security Register in amounts calculated as
described herein as of the Determination Date. However, the final payment in
respect of the Bonds will be made only upon presentation and surrender thereof
at the office or the agency of the Indenture Trustee specified in the notice to
Holders of such final payment. A "Business Day" is any day other than (i) a
Saturday or Sunday or (ii) a day on which banking institutions in New York City,
Delaware, California or in the city in which the corporate trust offices of the
Indenture Trustee or the principal office of the Bond Insurer are located, are
required or authorized by law to be closed.
Available Funds
The "Available Funds" for any Payment Date will equal the amount received
by the Indenture Trustee and available in the Payment Account on each Payment
Date. The Available Funds will generally be equal to the sum of (i) the
aggregate amount of scheduled payments on the related Mortgage Loans due on the
related Due Date and received on or prior to the related Determination Date,
(ii) any amounts representing interest on amounts in the Payment Account and
miscellaneous fees and collections, including assumption fees, to the extent not
paid to any Subservicer, (iii) any unscheduled payments and receipts, including
Mortgagor prepayments on such Mortgage Loans, received during the related
Prepayment Period, and (iv) all Advances made for such Payment Date in respect
of such Mortgage Loans, in each case net of amounts reimbursable therefrom to
the Master Servicer and any Subservicer and reduced by Servicing Fees,
Administrative Fees and fees of the Indenture Trustee paid by the Master
Servicer. With respect to any Payment Date, (i) the Due Date is the first day of
the month in which such Payment Date occurs, and (ii) the Determination Date is
the fourth Business Day prior to such Payment Date, or if such day is not a
business day, the immediately preceding business day.
Interest Payments On The Bonds
On each Payment Date, holders of the Bonds will be entitled to receive an
amount (the "Interest Payment Amount") equal to interest accrued during the
related Interest Period (as defined herein) on the Bond Principal Balance
thereof at the then-applicable Bond Interest Rate (as defined below), minus (i)
any Prepayment Interest Shortfalls and Relief Act Shortfalls (each as defined
below) to the extent not covered by the Master Servicer by Compensating Interest
(as defined below) for such Payment Date and (ii) any Deferred Interest for such
Payment Date allocated thereto as described below. With respect to each Payment
Date, interest payable on the Bonds will accrue during the Interest Period.
Interest will be calculated on the basis of the actual number of days in the
Interest Period and a 360-day year. Notwithstanding the foregoing, if payments
are not made as required under the Bond Insurance Policy, additional interest
shortfalls may be allocated to the Bonds as described below. See "Description of
the Bonds--Bond Insurance Policy."
To the extent that Deferred Interest causes a shortfall in interest
collections on the Mortgage Loans that would otherwise cause a shortfall in the
amount of interest payable to the Bondholders, such amount will be paid using
principal collections on the Mortgage Loans through the priority of payment
provisions described under "--Priority of Payment" below. To the extent that the
Interest Payment Amount for any Payment Date exceeds Available Funds for such
Payment Date, the lesser of such excess and the aggregate amount of Deferred
Interest, if any, that is added to the principal balance of the Negative
Amortization Loans on the Due Date occurring in the month in which such Payment
Date occurs will be added to the Bond Principal Balance of the Bonds and
subtracted from the Interest Payment Amount for such Payment Date.
The "Prepayment Interest Shortfall" for any Payment Date is equal to the
aggregate shortfall, if any, in collections of interest resulting from Mortgagor
prepayments on the Mortgage Loans during the preceding calendar month. Such
shortfalls will result because interest on prepayments in full is distributed
only to the date of prepayment, and because no interest is distributed on
prepayments in part, as such prepayments in part are applied to reduce the
outstanding principal balance of the related Mortgage Loans as of the Due Date
in the month of prepayment. However, with respect to any Payment Date, any
Prepayment Interest Shortfalls during the preceding calendar month will be
offset by the Master Servicer, but only to the extent such Prepayment Interest
Shortfalls do not exceed an amount equal to the total servicing fee payable to
the Master Servicer and any Subservicer with respect to such Payment Date. No
assurance can be given that the servicing compensation available to cover
Prepayment Interest Shortfalls will be sufficient therefor. See "The Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses." The
"Relief Act Shortfalls" for any Payment Date are any shortfalls relating to the
Relief Act (as defined in the Prospectus) or similar legislation or regulations.
On each Payment Date after the first Payment Date, the Bond Interest Rate
will be a floating rate equal to the lesser of (i)(a) with respect to each
Payment Date up to and including the earlier of (x) the Payment Date in --------
- ------- and (y) the Payment Date which occurs on or prior to the date on which
the aggregate Principal Balance of the Mortgage Loans is less than 25% of the
aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date,
One-Month LIBOR (as defined herein) plus 0.22%, and (b) with respect to each
Payment Date thereafter, One-Month LIBOR plus 0.44% and (ii) the Available Funds
Interest Rate with respect to such Payment Date. On the first Payment Date, the
Bond Interest Rate will be equal to -------% per annum.
The "Available Funds Interest Rate" for any Payment Date is a rate per
annum equal to the lesser of (x) the fraction, expressed as a percentage, the
numerator of which is (i) an amount equal to (A) 1/12 of the aggregate Principal
Balance of the then outstanding Mortgage Loans times the weighted average of the
Expense Adjusted Mortgage Rates on the then outstanding Mortgage Loans minus (B)
the amount of the fee payable to the Owner Trustee with respect to the Trust
Agreement and the premium with respect to the Bonds payable to the Bond Insurer
with respect to the Bond Insurance Policy for such Payment Date, and the
denominator of which is (ii) an amount equal to (A) the then outstanding
aggregate Bond Principal Balance of the Bonds multiplied by (B) the actual
number of days elapsed in the related Interest Period (as defined herein)
divided by 360 and (y) --------% per annum (the "Maximum Bond Interest Rate").
The amount of the fee payable to the Owner Trustee together with the amount of
the premium payable to the Bond Insurer (together, the "Administrative Fee")
will accrue at --------% per annum based on the Bond Principal Balance of the
Bonds.
The "Expense Adjusted Mortgage Rate" on any Mortgage Loan is equal to the
then applicable Mortgage Rate thereon minus the sum of (i) the Minimum Spread,
(ii) the Servicing Fee Rate and (iii) the Indenture Trustee Fee Rate. For any
Payment Date, the Minimum Spread is equal to 0.500% per annum, the Servicing Fee
Rate is equal to 0.500% per annum and the Indenture Trustee Fee Rate is equal to
0.015% per annum.
As further described herein, with respect to the Bonds and any Payment
Date, to the extent that (a) the lesser of (x) the amount payable if clause (i)
of the definition of Bond Interest Rate above is used to calculate interest and
(y) the amount payable if the Maximum Bond Interest Rate is used to calculate
interest exceeds (b) the amount payable if clause (ii) of the definition of Bond
Interest Rate above is used to calculate interest (such excess, the "Available
Funds Cap Carry-Forward Amount"), the holders of the Bonds will be paid the
amount of such Available Funds Cap Carry-Forward Amount with interest thereon at
the Bond Interest Rate for the Bonds applicable from time to time after certain
payments to the holders of the Bonds and the Bond Insurer to the extent of
available funds. The Bond Insurance Policy does not cover the Available Funds
Cap Carry-Forward Amount, nor do the ratings assigned to the Bonds address the
payment of the Available Funds Cap Carry-Forward Amount.
As described herein, the Interest Payment Amount allocable to the Bonds is
based on their Bond Principal Balance. The "Bond Principal Balance" of any Bond
as of any date of determination is equal to the initial Bond Principal Balance
thereof, increased by any Deferred Interest allocated thereto, and reduced by
all amounts allocable to the Principal Payment Amount and the Subordination
Increase Amount previously distributed with respect to such Bond.
The "Principal Balance" of any Mortgage Loan is, at any given time, the
Principal Balance as of the Cut-off Date of such Mortgage Loan, increased by all
Deferred Interest thereon, minus (a) the sum of all amounts paid or advanced
with respect to such Mortgage Loan with respect to principal and (b) the
principal portion of any losses with respect thereto for any previous Payment
Date.
Calculation Of One-Month LIBOR
On the second business day preceding each Payment Date, commencing with the
Payment Date occurring in -------- 199- (each such date, an "Interest
Determination Date"), the Indenture Trustee will determine the London interbank
offered rate for one-month United States dollar deposits ("One-Month LIBOR") for
the next Interest Period for the Bonds on the basis of the offered rates of the
Reference Banks for one-month United States dollar deposits, as such rates
appear on the Reuter Screen LIBO Page, as of 11:00 a.m. (London time) on such
Interest Determination Date. As used in this section, "business day" means a day
on which banks are open for dealing in foreign currency and exchange in London
and New York City; "Reuter Screen LIBO Page" means the display designated as
page "LIBO" on the Reuter Monitor Money Rates Service (or such other page as may
replace the LIBO page on that service for the purpose of displaying London
interbank offered rates of major banks); and "Reference Banks" means leading
banks selected by the Indenture Trustee and engaged in transactions in
Eurodollar deposits in the international Eurocurrency market (i) with an
established place of business in London, (ii) whose quotations appear on the
Reuter Screen LIBO Page on the Interest Determination Date in question, (iii)
which have been designated as such by the Indenture Trustee and (iv) not
controlling, controlled by, or under common control with, the Company or the
Seller.
On each Interest Determination Date, One-Month LIBOR for the related
Interest Period for the Bonds will be established by the Indenture Trustee as
follows:
(a) If on such Interest Determination Date two or more Reference
Banks provide such offered quotations, One-Month LIBOR for the related
Interest Period shall be the arithmetic mean of such offered quotations
(rounded upwards if necessary to the nearest whole multiple of
0.0625%).
(b) If on such Interest Determination Date fewer than two
Reference Banks provide such offered quotations, One-Month LIBOR for
the related Interest Period shall be the higher of (x) OneMonth LIBOR
as determined on the previous Interest Determination Date and (y) the
Reserve Interest Rate. The "Reserve Interest Rate" shall be the rate
per annum that the Indenture Trustee determines to be either (i) the
arithmetic mean (rounded upwards if necessary to the nearest whole
multiple of 0.0625%) of the one-month United States dollar lending
rates which New York City banks selected by the Indenture Trustee are
quoting on the relevant Interest Determination Date to the principal
London offices of leading banks in the London interbank market or (ii)
in the event that the Indenture Trustee can determine no such
arithmetic mean, the lowest one-month United States dollar lending rate
which New York City banks selected by the Indenture Trustee are quoting
on such Interest Determination Date to leading European banks.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Indenture Trustee and the Indenture Trustee's calculation of the rate of
interest applicable to the Bonds for the related Interest Period shall (in the
absence of manifest error) be final and binding.
Principal Payments On The Bonds
The "Principal Payment Amount" for any Payment Date will be equal to the
lesser of (a) the sum of the Available Funds remaining after distributions
pursuant to clause (i) of "--Priority of Payment" below and any portion of any
Insured Amount for such Payment Date representing a Subordination Deficit and
(b) the sum of:
(i) the principal portion of all scheduled monthly payments on the
Mortgage Loans received or Advanced (as defined herein) on the Mortgage
Loans with respect to the related Due Date;
(ii) the principal portion of all proceeds of the repurchase of a
Mortgage Loan (or, in the case of a substitution, certain amounts
representing a principal adjustment) pursuant to the Servicing
Agreement during the preceding calendar month;
(iii) the principal portion of all other unscheduled collections
received during the related Prepayment Period (or deemed to be received
during the related Prepayment Period) (including, without limitation,
full and partial Principal Prepayments made by the respective
Mortgagors, Liquidation Proceeds and Insurance Proceeds (excluding
proceeds paid in respect of the Bond Insurance Policy)), to the extent
not distributed in the preceding month; and
(iv) any Insured Payment made with respect to any Subordination
Deficit;
minus
(v) the amount of any Subordination Reduction Amount for such
Payment Date.
In no event will the Principal Payment Amount with respect to any Payment
Date be (x) less than zero or (y) greater than the then outstanding Bond
Principal Balance of the Bonds.
Priority Of Payment
On each Payment Date, Available Funds and any Insured Amount with respect
to such Payment Date will be allocated to the Securities in the following order
of priority, in each case to the extent of Available Funds remaining:
(i) to the Bondholders, the Interest Payment Amount with respect
to such Payment Date;
(ii) to the Bondholders, the Principal Payment Amount with
respect to such Payment Date;
(iii) to the Bond Insurer, the aggregate of all payments, if any,
made by the Bond Insurer under the Bond Insurance Policy and any other
amounts due to the Bond Insurer pursuant to the Insurance Agreement, to
the extent not previously paid or reimbursed (the "Reimbursement
Amount");
(iv) to the Bondholders, the Subordination Increase Amount (as
defined in "--Overcollateralization Provisions" below), in reduction of
the Bond Principal Balance thereof, until the Bond Principal Balance
has been reduced to zero;
(v) to the Bondholders, any Available Funds Cap Carry-Forward
Amount for such Payment Date;
(vi) to the Indenture Trustee, for any amounts owing to the
Indenture Trustee; and
(vii) any remaining amounts to the holders of the Certificates.
Overcollateralization Provisions
Overcollateralization Resulting From Cash Flow Structure.
With respect to any Payment Date, the excess, if any, of (x) the sum of the
aggregate Principal Balances of the Mortgage Loans as of the close of business
on the last day of the period commencing on the second day of the month
preceding the month of such Payment Date (or, with respect to the first Payment
Date, the day following the Cut-Off Date) and ending on the related Due Date
(such period, the "Due Period") over (y) the Bond Principal Balance of the Bonds
as of such Payment Date (and following the making of all payments made on such
Payment Date) is the "Subordination Amount" as of such Payment Date. The
Indenture requires that, on each Payment Date, the Net Monthly Excess Cashflow,
if any, be applied on such Payment Date as an accelerated payment of principal
on the Bonds, but only to the limited extent hereafter described. The "Net
Monthly Excess Cashflow" for any Payment Date is equal to the amount of
Available Funds remaining after application to items (i) through (iii) under
"--Priority of Payment" herein. This application has the effect of accelerating
the amortization of the Bonds relative to the amortization of the Mortgage
Loans. The Indenture requires that the Net Monthly Excess Cashflow will be
applied as an accelerated payment of principal on the Bonds until the
Subordination Amount has increased to the level equal to the Required
Subordination Amount for such Payment Date.
Any amount of Net Monthly Excess Cashflow actually applied as an
accelerated payment of principal is a "Subordination Increase Amount." The
required level of the Subordination Amount with respect to a Payment Date is the
"Required Subordination Amount" with respect to such Payment Date. Initially,
the aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date
will exceed the aggregate Bond Principal Balance of the Bonds as of the Delivery
Date by approximately $------------- or -----% of the aggregate Principal
Balance of the Mortgage Loans as of the Cut-off Date. This amount is the initial
Required Subordination Amount. The Indenture generally provides that the
Required Subordination Amount may, over time, decrease, or increase, subject to
certain floors, caps and triggers.
In the event that the Required Subordination Amount is permitted to
decrease or "step down" on a Payment Date in the future, the Indenture provides
that a portion of the principal which would otherwise be distributed to the
Holders of the Bonds on such Payment Date shall be distributed to the Holders of
the Certificates on such Payment Date. This has the effect of decelerating the
amortization of the Bonds relative to the amortization of the Mortgage Loans,
and of reducing the Subordination Amount. With respect to any Payment Date, the
difference, if any, between (a) the Subordination Amount that would result on
such Payment Date after taking into account all payments to be made on such
Payment Date (exclusive of any reductions thereto attributable to Subordination
Reduction Amounts (as described below) on such Payment Date) and (b) the
Required Subordination Amount for such Payment Date is the "Excess Subordination
Amount" with respect to such Payment Date. With respect to any Payment Date, an
amount equal to the lesser of (a) the Excess Subordination Amount and (b) the
principal collections received by the Master Servicer with respect to the prior
Due Period is the "Subordination Reduction Amount." In addition, a Subordination
Reduction Amount may result even prior to the occurrence of any decrease or
"step down" in the Required Subordination Amount. This is because the Holders of
the Bonds will generally be entitled to receive 100% of collected principal,
even though the Bond Principal Balance of the Bonds will represent less than
100% of the Mortgage Loans' principal balance. In the absence of the provisions
relating to the Subordination Reduction Amount, the foregoing may otherwise
increase the Subordination Amount above the Required Subordination Amount even
without the application of any Net Monthly Excess Cashflow.
The Indenture provides that, on any Payment Date, all unscheduled
collections on account of principal (other than any such amount applied to the
payment of a Subordination Reduction Amount) with respect to Mortgage Loans
during the calendar month preceding the calendar month in which such Payment
Date occurs (the "Prepayment Period") will be distributed to the Holders of the
Bonds on such Payment Date. If any Mortgage Loan became a Liquidated Mortgage
Loan (as defined below) during such Prepayment Period, the net Liquidation
Proceeds (as defined in the Prospectus) related thereto and allocated to
principal may be less than the Principal Balance of the related Mortgage Loan;
the amount of any such insufficiency is generally defined as a "Realized Loss."
A "Liquidated Mortgage Loan" is, in general, a defaulted Mortgage Loan as to
which the Master Servicer has determined that all amounts that it expects to
recover on such Mortgage Loan have been recovered (exclusive of any possibility
of a deficiency judgment). The principal balance of any Mortgage Loan after it
becomes a Liquidated Mortgage Loan shall equal zero. The Indenture does not
contain any provision which requires that the amount of any Realized Loss should
be distributed to the Holders of the Bonds on the Payment Date which immediately
follows the event of loss; i.e., the Indenture does not require the current
recovery of losses. However, the occurrence of a Realized Loss will reduce the
Subordination Amount, which, to the extent that such reduction causes the
Subordination Amount to be less than the Required Subordination Amount
applicable to the related Payment Date, will require the payment of a
Subordination Increase Amount on such Payment Date (or, if insufficient funds
are available on such Payment Date, on subsequent Payment Dates, until the
Subordination Amount equals the Required Subordination Amount). The effect of
the foregoing is to allocate losses to overcollateralization by reducing, or
eliminating entirely, payments of Net Monthly Excess Cashflow and of
Subordination Reduction Amounts which the holders of the Certificates would
otherwise receive.
Overcollateralization And The Bond Insurance Policy. The Indenture defines
a "Subordination Deficit" with respect to a Payment Date to be the amount, if
any, by which (x) the aggregate Bond Principal Balance of the Bonds as of such
Payment Date, and following the making of all payments to be made on such
Payment Date (except for any payment to be made as to principal from proceeds of
the Bond Insurance Policy), exceeds (y) the aggregate Principal Balances of the
Mortgage Loans as of the close of business on the Due Date preceding such
Payment Date. The Indenture requires the Indenture Trustee to make a claim for
an Insured Amount under the Bond Insurance Policy not later than the third
Business Day prior to any Payment Date as to which the Indenture Trustee has
determined that a Subordination Deficit will occur for the purpose of applying
the proceeds of such Insured Amount as a payment of principal to the Holders of
the Bonds on such Payment Date. Investors in the Bonds should realize that,
under extreme loss or delinquency scenarios, they may temporarily receive no
payments of principal.
Bond Insurance Policy
The following summary describes certain terms of the Bond Insurance Policy,
to be dated as of the Delivery Date. The summary does not purport to be complete
and is subject to, and qualified in its entirety by reference to, the provisions
of the Bond Insurance Policy.
On the Delivery Date, the Bond Insurer will issue the Bond Insurance Policy
in favor of the Indenture Trustee on behalf of the Bondholders. The Bond
Insurance Policy will unconditionally and irrevocably guarantee certain payments
on the Bonds. Draws will be made on the Bond Insurance Policy (any such draw, an
"Insured Amount") to cover Deficiency Amounts and Preference Amounts. A
"Deficiency Amount" means (A) with respect to each Payment Date prior to the
Final Scheduled Payment Date, an amount equal to the sum of (i) the excess, if
any, of the Interest Payment Amount over the Available Funds for such Payment
Date and (ii) any Subordination Deficit; (B) with respect to the Final Scheduled
Payment Date, an amount equal to the sum of (i) the excess, if any, of the
Interest Payment Amount over the Available Funds for such Payment Date and (ii)
the excess, if any, of the Bond Principal Balance of all Outstanding Bonds due
on such Final Scheduled Payment Date over Available Funds not used to pay the
Interest Payment Amount for such Final Scheduled Payment Date; and (C) for any
date on which the acceleration of the Bonds has been directed or consented to by
the Bond Insurer pursuant to Section 5.02 of the Indenture, an amount equal to
the excess, if any, of the sum of the Bond Principal Balance of the Bonds,
together with accrued and unpaid interest thereon through the date of payment of
such accelerated Bonds, over the Available Funds for such date of payment. For
purposes of the foregoing, amounts in the Payment Account available for interest
distributions on any Payment Date shall be deemed to include all amounts in the
Payment Account for such Payment Date available for distribution on such Payment
Date. A "Preference Amount" means any amount previously distributed to a
Bondholder that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time, in accordance with a final
nonappealable order of a court having competent jurisdiction. Prepayment
Interest Shortfalls, Relief Act Shortfalls and any Available Funds Cap
Carry-Forward Amount will not be covered by the Bond Insurance Policy. Deferred
Interest will not be covered by the Bond Insurance Policy except with respect to
Deferred Interest which is added to the Bond Principal Balance of the Bonds.
Pursuant to the terms of the Indenture, draws under the Bond Insurance Policy in
respect of any Subordination Deficit will be paid to the Bondholders by the
Paying Agent as principal. In the absence of payments under the Bond Insurance
Policy, Bondholders will directly bear the credit risks associated with their
investment to the extent such risks are not covered by the Subordination Amount
or otherwise.
Advances
Prior to each Payment Date, the Master Servicer is required under the
Servicing Agreement to make Advances (out of its own funds, advances made by a
Subservicer, or funds held in the Collection Account (as described in the
Prospectus) for future payment or withdrawal) with respect to any payments of
principal and interest (net of the Servicing Fee Rate) which were due on the
Mortgage Loans on the immediately preceding Due Date and which are delinquent on
the business day next preceding the related Determination Date.
Such Advances are required to be made only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections, Insurance
Proceeds, or Liquidation Proceeds. The purpose of making such Advances is to
maintain a regular cash flow to the Bondholders, rather than to guarantee or
insure against losses. Any failure by the Master Servicer to make an Advance as
required under the Servicing Agreement will constitute an Event of Default
thereunder, in which case the Indenture Trustee, as successor Master Servicer,
will be obligated to make any such Advance, in accordance with the terms of the
Servicing Agreement.
All Advances will be reimbursable to the Master Servicer on a first
priority basis from late collections, Insurance Proceeds or Liquidation Proceeds
from the Mortgage Loan as to which such unreimbursed Advance was made. In
addition, any Advances previously made which are deemed by the Master Servicer
to be nonrecoverable from related late collections, Insurance Proceeds and
Liquidation Proceeds may be reimbursed to the Master Servicer out of any funds
in the Collection Account prior to payments on the Bonds.
The Paying Agent
The Paying Agent shall initially be the Indenture Trustee. The Paying Agent
shall have the revocable power to withdraw funds from the Payment Account for
the purpose of making payments to the Bondholders.
Optional Redemption
The Bonds may be redeemed in whole, but not in part, by the Issuer on any
Payment Date on or after the earlier of (i) the Payment Date on which the
aggregate Principal Balance of the Mortgage Loans is less than or equal to 25%
of the aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date
or (ii) the Payment Date occurring in ------- ------. The purchase price will be
equal to 100% of the aggregate outstanding Bond Principal Balance and accrued
and unpaid interest thereon (including any Available Funds Cap Carry-Forward
Amount) at the Bond Interest Rate through the date on which the Bonds are
redeemed in full together with all amounts due and owing to the Bond Insurer and
the Indenture Trustee. The "Final Scheduled Payment Date" is the Payment Date
occurring in ----------.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the Bonds will depend on the price paid by the
holder for such Bond, the Bond Interest Rate and the rate and timing of
principal payments (including payments in excess of required installments,
prepayments or terminations, liquidations, repurchases and negative
amortization) on the Mortgage Loans and the allocation thereof. Such yield may
be adversely affected by a higher or lower than anticipated rate of principal
payments on the Mortgage Loans in the Trust Fund. The rate of principal payments
on such Mortgage Loans will in turn be affected by the amortization schedules of
the Mortgage Loans, the rate and timing of principal prepayments thereon by the
Mortgagors and liquidations of defaulted Mortgage Loans, the negative
amortization feature of the Negative Amortization Loans and purchases of
Mortgage Loans due to certain breaches of representations and warranties or the
conversion of Convertible Mortgage Loans. The timing of changes in the rate of
prepayments, liquidations, repurchases and negative amortization of the Mortgage
Loans may, and the timing of losses will, significantly affect the yield to an
investor, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. Since the rate and timing of
principal payments on the Mortgage Loans will depend on future events and on a
variety of factors (as described more fully herein and in the Prospectus under
"Yield Considerations" and "Maturity and Prepayment Considerations"), no
assurance can be given as to such rate or the timing of principal payments on
the Bonds. In the event that substantial numbers of Mortgagors exercise their
conversion rights with respect to Convertible Mortgage Loans, and the related
Subservicers or the Master Servicer purchase the Converting and Converted
Mortgage Loans, the Mortgage Pool will experience some prepayment of principal.
Certain of the Mortgage Loans may be prepaid in full or in part at any time
without penalty. The Mortgage Loans (except for the Convertible Mortgage Loans)
generally are assumable under certain circumstances if, in the sole judgment of
the Master Servicer or Subservicer, the prospective purchaser of a Mortgaged
Property is creditworthy and the security for such Mortgage Loan is not impaired
by the assumption. The Convertible Mortgage Loans are not assumable if the
related Mortgagor has exercised its option to convert such Mortgage Loan into a
fixed rate mortgage loan, in which case the Mortgage Note with respect to such
mortgage loan would generally contain a customary "due on sale" provision. The
Master Servicer shall enforce any due-on-sale clause contained in any Mortgage
Note or Mortgage, to the extent permitted under applicable law and governmental
regulations; provided, however, if the Master Servicer determines that it is
reasonably likely that any Mortgagor will bring, or if any Mortgagor does bring,
legal action to declare invalid or otherwise avoid enforcement of a due-on-sale
clause contained in any Mortgage Note or Mortgage, the Master Servicer shall not
be required to enforce the due-on-sale clause or to contest such action. The
extent to which the Mortgage Loans are assumed by purchasers of the Mortgaged
Properties rather than prepaid by the related Mortgagors in connection with the
sales of the Mortgaged Properties will affect the weighted average life of the
Bonds and may result in a prepayment experience on the Mortgage Loans that
differs from that on other conventional mortgage loans. See "Maturity and
Prepayment Considerations" in the Prospectus. Prepayments, liquidations and
purchases of the Mortgage Loans will result in payments to holders of the Bonds
of principal amounts which would otherwise be distributed over the remaining
terms of the Mortgage Loans. Factors affecting prepayment (including defaults
and liquidations) of mortgage loans (other than mortgage loans similar to the
CondoSelect Loans, as described below) include changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties, changes in the value of the mortgaged properties, mortgage market
interest rates and servicing decisions.
To accommodate changes in the interest portion of the monthly payment due
on each Negative Amortization Loan resulting from monthly changes in the
Mortgage Rate, the monthly payment will be adjusted annually on each Payment
Adjustment Date, subject to an increase or decrease of not more than 7.5% in the
monthly payment from that in effect immediately prior to such Payment Adjustment
Date, except as otherwise provided under "Description of the Mortgage
Pool--Negative Amortization Loans" herein. However, due to the Payment Cap and
the fact that the Mortgage Rates on the Negative Amortization Loans are subject
to change monthly while the monthly payments due thereon are only subject to
change annually, the portion of each monthly payment allocated to interest and
that allocated to principal could vary significantly. If an adjustment of the
Mortgage Rate on any Negative Amortization Loan results in Deferred Interest,
such Deferred Interest will be added to the principal balance of the Negative
Amortization Loan, resulting in negative amortization. If an adjustment to the
Mortgage Rate on any Negative Amortization Loan causes the amount of the accrued
interest to exceed the scheduled interest component of the monthly payment and
to be less than the entire monthly payment, the principal balance will not be
reduced in accordance with a fully amortizing schedule, and therefore reduced
amortization will result. If an adjustment to the Mortgage Rate on any Negative
Amortization Loan causes the amount of interest accrued in any month to be less
than the scheduled interest component of the then current monthly payment, such
excess will be applied to reduce the outstanding principal balance on the
related Negative Amortization Loan, thereby resulting in accelerated
amortization of such Negative Amortization Loan.
Several factors contribute to the increased risk of default in connection
with negatively amortizing mortgage loans. The outstanding principal balance of
a mortgage loan which is subject to negative amortization increases by the
amount of interest which is deferred as herein described. During periods in
which the outstanding principal balance of a Negative Amortization Loan is
increasing due to the addition of Deferred Interest thereto, such increasing
principal balance of the Negative Amortization Loan may approach or exceed the
value of the related Mortgaged Property, thus increasing the likelihood of
defaults as well as the amount of any loss experienced with respect to any such
Negative Amortization Loan that is required to be liquidated. Additionally,
although increases in the amount of the related monthly payments are subject to
Payment Caps, such Payment Caps are not in effect on any of the Recast Dates, as
described herein, or when the outstanding principal balance exceeds the Negative
Amortization Cap, in which cases the monthly payment for each such Negative
Amortization Loan will be recalculated to equal an amount which would be
sufficient to fully amortize such Negative Amortization Loan over its remaining
term at the Mortgage Rate as adjusted on the immediately preceding Rate
Adjustment Date. The amount of such increased monthly payment may be
substantially higher than the monthly payment in effect prior to such
recalculation and the repayment of the Negative Amortization Loans will be
dependent on the ability of the Mortgagor to make such larger monthly payments.
Furthermore, each Negative Amortization Loan provides for the payment of any
remaining unamortized principal balance of such Negative Amortization Loan (due
to the addition of Deferred Interest, if any, to the principal balance of such
Negative Amortization Loan) in a single payment at the maturity of the Negative
Amortization Loan. Because the Mortgagors may be so required to make a larger
single payment upon maturity, it is possible that the default risk associated
with the Negative Amortization Loans is greater then that associated with fully
amortizing mortgage loans.
The Convertible Mortgage Loans provide that the Mortgagors may, during a
specified period of time, convert the adjustable interest rate of such Mortgage
Loans to a fixed interest rate. The Company is not aware of any publicly
available statistics that set forth principal prepayment, conversion experience
or conversion forecasts of adjustable-rate mortgage loans over an extended
period of time, and its experience with respect to adjustable-rate mortgages is
insufficient to draw any conclusions with respect to the expected prepayment or
conversion rates on the Convertible Mortgage Loans. As is the case with
conventional, fixed-rate mortgage loans originated in a high interest rate
environment which may be subject to a greater rate of principal prepayments when
interest rates decrease, adjustable-rate mortgage loans may be subject to a
greater rate of principal prepayments (or purchases by the related Subservicer
or the Master Servicer) due to their refinancing or conversion to fixed interest
rate loans in a low interest rate environment. For example, if prevailing
interest rates fall significantly, adjustable-rate mortgage loans could be
subject to higher prepayment and conversion rates than if prevailing interest
rates remain constant because the availability of fixed-rate or other
adjustable-rate mortgage loans at competitive interest rates may encourage
Mortgagors to refinance their adjustable-rate mortgages to "lock in" a lower
fixed interest rate or to take advantage of the availability of such other
adjustable-rate mortgage loans, or, in the case of convertible adjustable-rate
mortgage loans, to exercise their option to convert the adjustable interest
rates to fixed interest rates. The conversion feature may also be exercised in a
rising interest rate environment as Mortgagors attempt to limit their risk of
higher rates. Such a rising interest rate environment may also result in an
increase in the rate of defaults on the Mortgage Loans. If the related
Subservicer or the Master Servicer purchases Converting or Converted Mortgage
Loans, a Mortgagor's exercise of the conversion option will result in a payment
of the principal portion thereof to the Bondholders, as described herein.
Alternatively, to the extent Subservicers fail to purchase Converting Mortgage
Loans and the Master Servicer does not purchase Converted Mortgage Loans, the
Mortgage Pool will include additional fixed-rate Mortgage Loans.
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. Increases in the monthly payments of the Mortgage Loans to an amount in
excess of the monthly payment required at the time of origination may result in
a default rate higher than that on level payment mortgage loans, particularly
since the Mortgagor under each Mortgage Loan was qualified on the basis of the
Mortgage Rate in effect at origination. The repayment of such Mortgage Loans
will be dependent on the ability of the Mortgagor to make larger monthly
payments as the Mortgage Rate increases. In addition, 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 Mortgaged
Properties are located. The risk of delinquencies and loss is greater and
prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values. See "Maturity and Prepayment Considerations" in the
Prospectus.
The amount of interest otherwise payable to holders of the Bonds will be
reduced by any interest shortfalls to the extent not covered by the Bond
Insurance Policy or by the Master Servicer as described herein. If payments were
not made as required under the Bond Insurance Policy, interest shortfalls not
allocable to Overcollateralization and not covered by the Master Servicer will
be allocated to the Bonds as described herein. See "Yield Considerations" in the
Prospectus and "Description of the Bonds--Interest Payments on the Bonds" herein
for a discussion of the effect of principal prepayments on the Mortgage Loans on
the yield to maturity of the Bonds and certain possible shortfalls in the
collection of interest.
In addition, the yield to maturity of the Bonds will depend on, among other
things, the price paid by the holders of the Bonds and the then applicable Bond
Interest Rate. The extent to which the yield to maturity of a Bond is sensitive
to prepayments will depend, in part, upon the degree to which it is purchased at
a discount or premium. In general, if a Bond is purchased at a premium and
principal payments thereon occur at a rate faster than anticipated at the time
of purchase, the investor's actual yield to maturity will be lower than that
assumed at the time of purchase. Conversely, if a Bond is purchased at a
discount and principal payments thereon occur at a rate slower than that assumed
at the time of purchase, the investor's actual yield to maturity will be lower
than that assumed at the time of purchase. For additional considerations
relating to the yield on the Bonds, see "Yield Considerations" and "Maturity and
Prepayment Considerations" in the Prospectus.
In addition, the yield to maturity on the Bonds may be affected by
shortfalls with respect to interest in the event that the interest accrued on
the Bonds at the Bond Interest Rate is greater than the amount of interest
accrued on the Mortgage Loans at the related Mortgage Rates less the sum of the
Servicing Fee Rate, the Indenture Trustee Fee Rate and the Administrative Fee
Rate. In such event, the resulting shortfall will only be payable to the extent
that on any future Payment Date interest accrued on the Mortgage Loans at the
related Mortgage Rates less such rates is greater than the interest accrued on
the Bonds, and only to the extent of Available Funds following distributions to
the Bondholders pursuant to clauses (i) through (iv) under "Description of the
Securities--Priority of Payment."
The Bond Interest Rate is based upon, among other factors as described
herein under "Description of the Bonds--Interest Payments on the Bonds," the
value of an index (One-Month LIBOR (as defined herein)) which is different from
the value of the indices applicable to the Mortgage Loans (Negative Amortization
Loan One-Month LIBOR, Six-Month LIBOR, Six-Month CMT and One-Year CMT).
Investors should note that the value of One-Month LIBOR on the Bonds may differ
from Negative Amortization Loan One-Month LIBOR, due to the different reference
date. The Mortgage Rate of each Mortgage Loan adjusts monthly, semi-annually or
annually, commencing after the Initial Period, based upon the related Index,
whereas the Bond Interest Rate on the Bonds adjusts monthly based upon One-Month
LIBOR plus 0.22% (or after the earlier of (x) the Payment Date in ----- -------
and (y) the Payment Date which occurs on or prior to the date on which the
aggregate Principal Balance of the Mortgage Loans is less than 25% of the
aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date,
One-Month LIBOR plus 0.44%), limited by the Available Funds Interest Rate (as
defined herein). In addition, One-Month LIBOR and the Indices on the Mortgage
Loans may respond differently to economic and market factors, and there is not
necessarily any correlation between them. Moreover, the Mortgage Loans are
subject to Periodic Rate Caps, Maximum Mortgage Rates and Minimum Mortgage Rates
(each, as defined herein). Thus, it is possible, for example, that One-Month
LIBOR may rise during periods in which the Indices are stable or falling or
that, even if both One-Month LIBOR and the Indices rise during the same period,
One-Month LIBOR may rise much more rapidly than the Indices.
Although the Mortgage Rates on the Mortgage Loans will adjust monthly,
semi-annually or annually, such increases and decreases may be limited by the
Periodic Rate Cap, the Maximum Mortgage Rate and the Minimum Mortgage Rate, if
applicable, on each such Mortgage Loan, and will be based on the applicable
Index (which may not rise and fall consistently with prevailing mortgage rates)
plus the related Gross Margin (which may be different from the prevailing
margins on other mortgage loans). As a result, the Mortgage Rates on the
Mortgage Loans at any time may not equal the prevailing rates for other
adjustable-rate loans and accordingly, the rate of prepayment may be lower or
higher than would otherwise be anticipated. In addition, because all of the
Mortgage Loans have Maximum Mortgage Rates, if prevailing mortgage rates were to
increase above the Maximum Mortgage Rates, the rate of prepayment on the
Mortgage Loans may be slower than would otherwise be the case. In general, if
prevailing mortgage rates fall significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayments (including refinancings) will be
expected to increase. Conversely, if prevailing mortgage rates rise
significantly above the Mortgage Rates on the Mortgage Loans, the rate of
prepayment on the Mortgage Loans will be expected to decrease.
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security to the date of payment to the investor
of each dollar distributed in reduction of principal of such security (assuming
no losses). The weighted average life of the Bonds will be influenced by, among
other things, the rate at which principal of the Mortgage Loans is paid, which
may be in the form of scheduled amortization, prepayments or liquidations.
Because the amortization schedule of each Mortgage Loan will be recalculated
monthly, semi-annually or annually after the initial Adjustment Date for such
Mortgage Loan, any partial prepayments thereof will not reduce the term to
maturity of such Mortgage Loan. In addition, an increase in the Mortgage Rate on
a Mortgage Loan will result in a larger monthly payment and in a larger
percentage of such monthly payment being allocated to interest and a smaller
percentage being allocated to principal, and conversely, a decrease in the
Mortgage Rate on the Mortgage Loan will result in a lower monthly payment and in
a larger percentage of each monthly payment being allocated to principal and a
smaller percentage being allocated to interest.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
Constant Prepayment Rate model ("CPR"), assumes that the outstanding principal
balance of a pool of mortgage loans prepays at a specified constant annual rate
or CPR. In generating monthly cash flows, this rate is converted to an
equivalent constant monthly rate. To assume a 20% CPR or any other CPR
percentage is to assume that the stated percentage of the outstanding principal
balance of the pool is prepaid over the course of a year. No representation is
made that the Mortgage Loans will prepay at that or any other rate.
The table set forth below has been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics of
the Mortgage Loans that are expected to be included in the Trust Fund as
described under "Description of the Mortgage Pool" herein and the performance
thereof. The table assumes, among other things, that: (i) the Mortgage Pool
consists of five Mortgage Loans with the following characteristics:
<TABLE>
<CAPTION>
Original Months to Remaining
Term to Next Rate Term to Maximum Minimum Initial
Principal Mortgage Maturity Adjustment Maturity Gross Mortgage Mortgage Periodic Periodic
Balance Rate (in months) Date (in months) Margin Rate Rate Cap Cap
------- ---- ----------- ---- ----------- ------ ---- ---- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$
</TABLE>
(ii) the first and second mortgage loans listed above have an Index of Six-Month
LIBOR, (iii) the third mortgage loan listed above is a negative amortization
loan with the same characteristics as the Negative Amortization Loans and an
Index of Negative Amortization Loan One-Month LIBOR; (iv) the fourth and fifth
mortgage loans listed above have an Index of One-Year CMT; (v) Negative
Amortization Loan One-Month LIBOR, Six-Month LIBOR and One-Year CMT remain
constant at -----%, ----% and ------%, respectively; (vi) payments on the Bonds
are based upon the actual number of days in the month and a 360-day year and are
received, in cash, on the 25th day of each month, commencing in ---- 199-; (vii)
there are no delinquencies or losses on the Mortgage Loans, there are no
conversions of Mortgage Loans from adjustable to fixed rates and principal
payments on the Mortgage Loans are timely received together with prepayments, if
any, at the respective constant percentages of CPR set forth in the following
table; (viii) there are no repurchases of the Mortgage Loans; (ix) there is no
Prepayment Interest Shortfall or any other interest shortfall in any month; (x)
the scheduled monthly payment for the Mortgage Loan is calculated based on its
principal balance, Mortgage Rate and remaining term to maturity such that such
Mortgage Loan will amortize in amounts sufficient to repay the remaining
principal balance of such Mortgage Loan by its remaining term to maturity, (xi)
the Indices remain constant at the rates listed above and the Mortgage Rate on
the Mortgage Loan is adjusted on the next Adjustment Date (and on subsequent
Adjustment Dates, as necessary) to equal the related Index plus the applicable
Gross Margin, subject to the Maximum Mortgage Rate listed below and the related
Periodic Rate Cap; (xii) with respect to each Mortgage Loan (other than the
Negative Amortization Loans), the monthly payment on the Mortgage Loan is
adjusted on the Due Date immediately following the next related Adjustment Date
(and on subsequent Adjustment Dates, as necessary) to equal a fully amortizing
payment as described in clause (x) above; (xiii) payments on the Mortgage Loans
earn no reinvestment return; (xiv) the Administrative Fee Rate is --------% per
annum, the Indenture Trustee Fee Rate is ------% per annum and the Servicing Fee
Rate is 0.50% per annum; (xv) there are no additional ongoing Trust Fund
expenses payable out of the Trust Fund; (xvi) there are no investment earnings
on amounts in any Collection Account, including the Payment Account, and no
other miscellaneous servicing fees are passed through to the Bondholders; and
(xvii) the Bonds will be purchased on ---- ---, 199-.
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the table set forth below,
which is hypothetical in nature and is provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Mortgage Loans will prepay at a
constant level of CPR until maturity or that all of the Mortgage Loans will
prepay at the same level of CPR. Moreover, the diverse remaining terms to stated
maturity of the Mortgage Loans could produce slower or faster principal payments
than indicated in the table at the various constant percentages of CPR
specified, even if the weighted average remaining term to stated maturity of the
Mortgage Loans is as assumed. Any difference between such assumptions and the
actual characteristics and performance of the Mortgage Loans, or actual
prepayment experience, will affect the percentages of initial Bond Principal
Balance outstanding over time and the weighted average life of the Bonds.
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of the Bonds, and sets forth the percentages
of the initial Bond Principal Balance of the Bonds that would be outstanding
after each of the dates shown at various percentages of CPR.
Percent Of Initial Bond Principal Balance Outstanding
At The Following Percentages Of CPR
Bonds
-----------------------------------------------------------
Payment Date 0% 10% 15% 20% 25% 30% 40%
- ------------ -- --- --- --- --- --- ---
Initial Percentage..
Weighted Average Life in Years**
Weighted Average Life in Years***
(*) Indicates a number that is greater than zero but less than 0.5%.
(**) The weighted average life of a Bond is determined by (i) multiplying
the net reduction, if any, of Bond Principal Balance by the number of
years from the date of issuance of the Bond to the related Payment Date,
(ii) adding the results, and (iii) dividing the sum by the aggregate of
the net reductions of the Bond Principal Balance described in (i) above.
(***) Calculated pursuant to footnote **, but assumes the Issuer exercises its
option to redeem the Bonds on the first Payment Date on which it would be
permitted to do so. See "Description of the Bonds--Optional Redemption"
herein.
This table has been prepared based on the assumptions described in the second
paragraph preceding this table (including the assumptions regarding the
characteristics and performance of the Mortgage Loans which differ from the
actual characteristics and performance thereof) and should be read in
conjunction therewith.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing Agreement,
dated as of ----, 199- between the Company and the Master Servicer (the
"Servicing Agreement"). The summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the provisions of the
Servicing Agreement. Whenever particular sections or defined terms of the
Servicing Agreement are referred to, such sections or defined terms are thereby
incorporated herein by reference.
The Master Servicer; The Subservicer
--------- ----- (in its capacity as master servicer, the "Master Servicer")
will act as master servicer for the Mortgage Loans pursuant to the Servicing
Agreement. See ------------ in the Prospectus. ----------------- has entered
into subservicing arrangements with --------. Notwithstanding these agreements,
- ------------ ------- will remain primarily liable for servicing the Mortgage
Loans. All of the Mortgage Loans will initially be subserviced by
- ---------------.
[Description Of Subject]
The following table sets forth certain information concerning delinquency
experience including bankruptcies and foreclosures in progress on one- to
four-family residential mortgage, consumer, and commercial loans included in
Wendover's servicing portfolio at the dates indicated. Consumer and commercial
loans represented less than ---% of the overall portfolio volume at ----------
- ----, 199-. As at December 31, -----, ------, -------- and ------- and March 31,
1997, the total principal balance of loans being serviced by ---------- was (in
millions) $--------, $-----------, $----------- $----------- and $------------
respectively. The indicated periods of delinquency are based on the number of
days past due on a contractual basis. No mortgage, consumer, or commercial loan
is considered delinquent for these purposes until it is one month past due on a
contractual basis.
<TABLE>
<CAPTION>
At December 31, At March 31, 1997
---------------------------------------------------------------- ------------------------------------------
1993 1994 1995 1996 1997
-------------------- ------------------- -------------------- -------------------- --------------------
Percent of Percent of Percent of Percent of Percent of
Number Servicing Number Servicing Number Servicing Number Servicing Number Servicing
Of Loans Portfolio of Loans Portfolio Of Loans Portfolio Of Loans Portfolio Of Loans Portfolio
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio(1)
Period of
Delinquency:
30-59 days.........
60-89 days.........
90 days or more....
Total Delinquencies
(excluding
Foreclosures)
Foreclosures Pending
- -----------------------
1 Includes purchased mortgage servicing rights owned by Wendover totaling
----- loans for $---- million unpaid principal balance and ------ loans for
$----- million unpaid principal balance as of December 31, ---- and -----,
respectively, and ----- loans for $---- million unpaid principal balance as
of --------- ------.
</TABLE>
General. There can be no assurance that the delinquency and foreclosure
experience of the Mortgage Loans will correspond to the delinquency and
foreclosure experience of the servicing portfolio of ----------- set forth in
the foregoing tables. The statistics shown above represent the respective
delinquency and foreclosure experiences only at the dates presented, whereas the
aggregate delinquency and foreclosure experience on the Mortgage Loans will
depend on the results obtained over the life of the Trust Fund. Each servicing
portfolio includes mortgage loans with a variety of payment and other
characteristics (including geographic location) which are not necessarily
representative of the payment and other characteristics of the Mortgage Loans.
In addition, --------- servicing portfolio includes consumer and commercial
loans. Each servicing portfolio includes mortgage loans underwritten pursuant to
guidelines not necessarily representative of those applicable to the Mortgage
Loans. It should be noted that if the residential real estate market should
experience an overall decline in property values, the actual rates of
delinquencies and foreclosures could be higher than those previously experienced
by -----. In addition, adverse economic conditions may affect the timely payment
by mortgagors of scheduled payments of principal and interest on the Mortgage
Loans and, accordingly, the actual rates of delinquencies and foreclosures with
respect to the Mortgage Loans.
Servicing And Other Compensation And Payment Of Expenses
The Servicing Fee for each Mortgage Loan is payable out of the interest
payments on such Mortgage Loan. The Servicing Fee Rate in respect of each
Mortgage Loan will be equal to 0.50% per annum of the outstanding principal
balance of such Mortgage Loan. The Servicing Fee consists of (a) servicing
compensation payable to the Master Servicer in respect of its master servicing
responsibilities and (b) subservicing and other related compensation payable to
the Subservicer (including such compensation paid to the Master Servicer as the
direct servicer of a Mortgage Loan for which there is no Subservicer). The
Subservicer will be entitled to retain in the form of additional servicing
compensation half of any late payment charges. The Master Servicer will not be
entitled to any such additional servicing compensation and any such amounts,
including prepayment penalties, to the extent received by the Master Servicer,
will be included in Available Funds.
THE INDENTURE
The following summary describes certain terms of the Indenture. The summary
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, the provisions of the Trust Agreement and Indenture. Whenever
particular defined terms of the Indenture are referred to, such defined terms
are thereby incorporated herein by reference. See "The Agreements" in the
Prospectus.
Control By Bond Insurer
Pursuant to the Indenture, unless a Bond Insurer Default exists (i) the
Bond Insurer shall be deemed to be the holder of the Bonds for certain purposes
(other than with respect to payment on the Bonds), and will be entitled to
exercise all rights of the Bondholders thereunder, including the rights of
Bondholders referred to under "--Events of Default" and "--Rights Upon Event of
Default," without the consent of such Bondholders, and the Bondholders may
exercise such rights only with the prior written consent of the Bond Insurer and
(ii) the Indenture Trustee may take actions which would otherwise be at its
option or within its discretion, including the actions referred to under
"--Events of Default" and "--Rights Upon Event of Default," only at the
direction of the Bond Insurer. A "Bond Insurer Default" means the existence and
continuation of (i) a failure of the Bond Insurer to make a payment under the
Bond Insurance Policy in accordance with its terms or (ii) certain bankruptcy or
insolvency actions by or against the Bond Insurer.
Events Of Default
An "Event of Default" with respect to the Bonds is defined in the Indenture
as follows: (a) the failure to pay (i) the Interest Payment Amount or the
Principal Payment Amount with respect to a Payment Date on such Payment Date, or
(ii) any Subordination Increase Amount or Available Funds Carry-Forward Amount
with respect to a Payment Date, but only to the extent funds are available to
make such payment as described under "Description of the Bonds--Priority of
Payment"; (b) a default in the observance of certain negative covenants in the
Indenture; (c) a default in the observance of any other covenant of the
Indenture, and the continuation of any such default for a period of thirty days
after notice to the Issuer by the Indenture Trustee or the Bond Insurer, or if a
Bond Insurer Default exists, by the Holders of at least 25% of the Bond
Principal Balance of the Bonds; (d) any representation or warranty made by the
Issuer in the Indenture or in any certificate or other writing delivered
pursuant thereto having been incorrect in a material respect as of the time
made, and the circumstance in respect of which such representation or warranty
is incorrect not having been cured within thirty days after notice thereof is
given to the Issuer by the Indenture Trustee or the Bond Insurer, or, if a Bond
Insurer Default exists, by Bondholders representing at least 25% of the Bond
Principal Balance of the Bonds; (e) certain events of bankruptcy, insolvency,
receivership or reorganization of the Issuer; or (f) the failure by the Issuer
on the Final Scheduled Payment Date to reduce the Bond Principal Balance of the
Bonds to zero.
Rights Upon Event Of Default
In case an Event of Default should occur and be continuing with respect to
the Bonds, the Indenture Trustee may, and on request of the Bond Insurer or
Bondholders representing more than 50% of the Bond Principal Balance of the
Bonds of such Series then outstanding shall, declare the principal of such
Series of Bonds to be due and payable. Such declaration may under certain
circumstances be rescinded by Bondholders representing more than 50% of the Bond
Principal Balance of the Bonds.
If, following an Event of Default, the Bonds have been declared to be due
and payable, the Indenture Trustee may, in its discretion (provided that the
Bond Insurer or Bondholders representing more than 50% of the Bond Principal
Balance of the Bonds have not directed the Indenture Trustee to sell the assets
included in the Trust Estate), refrain from selling such assets and continue to
apply all amounts received on such assets to payments due on the Bonds in
accordance with their terms, notwithstanding the acceleration of the maturity of
such Bonds. The Indenture Trustee, however, unless otherwise directed by the
Bond Insurer, must sell the assets included in the Trust Estate if collections
in respect of such assets are determined to be insufficient to pay certain
expenses payable under the Indenture and to make all scheduled payments on the
Bonds, in which case payments will be made on the Bonds in the same manner as
described in the next sentence with regard to instances in which such assets are
sold. In addition, upon an Event of Default the Indenture Trustee may, with the
consent of the Bond Insurer, sell the assets included in the Trust Estate, in
which event the collections on, or the proceeds from the sale of, such assets
will be applied as provided below; provided, however, that any proceeds of a
claim under the Bond Insurance Policy shall be used only to pay interest and
principal on the Bonds as provided in clauses (iii) and (iv): (i) to the payment
of the fees of the Indenture Trustee and Owner Trustee which have not been
previously paid; (ii) to the Bond Insurer, any premium then due, provided no
Bond Insurer Default exists; (iii) to the Bondholders, the amount of interest
then due and unpaid on the Bonds (but not including any Available Funds Cap
Carry-Forward Amount), without preference or priority of any kind; (iv) to the
Bondholders, the amount of principal then due and unpaid on the Bonds, without
preference or priority of any kind; (v) to the Bond Insurer, any Reimbursement
Amount, to the extent not previously reimbursed; (vi) to the Bondholders, the
amount of any Available Funds Cap Carry-Forward Amount not previously paid; and
(vii) to the Issuer.
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,
the Indenture Trustee shall be under no obligation to exercise any of the rights
and powers under the Indenture at the request or direction of any of the
Bondholders, unless such Bondholders shall have offered to the Indenture Trustee
reasonable security or indemnity satisfactory to it against the costs, expenses
and liabilities which might be incurred by it in compliance with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, Bondholders representing more than 50%
of the Bond Principal Balance of the Bonds shall have the right to direct the
time, method, and place of conducting any proceeding or any remedy available to
the Indenture Trustee or exercising any trust or power conferred on the
Indenture Trustee with respect to the Bonds; and Bondholders representing more
than 50% of the Bond Principal Balance of the Bonds 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 the holder of each
outstanding Bond affected thereby.
Limitation On Suits
No Bondholder will have any right to institute any proceedings with respect
to the Indenture unless (1) such Bondholder has previously given written notice
to the Indenture Trustee of a continuing Event of Default; (2) Bondholders
representing not less than 25% of the Bond Principal Balance of the Bonds have
made written request to the Indenture Trustee to institute proceedings in
respect of such Event of Default in its own name as Indenture Trustee; (3) such
Bondholders have offered to the Indenture Trustee reasonable indemnity
satisfactory to it against the costs, expenses and liabilities to be incurred in
compliance with such request; (4) for 60 days after its receipt of such notice,
request and offer of indemnity the Indenture Trustee has failed to institute any
such proceedings; (5) no direction inconsistent with such written request has
been given to the Indenture Trustee during such 60-day period by the Bondholders
representing more than 50% of the Bond Principal Balance of the Bonds; and (6)
such Bondholders have the consent of the Bond Insurer, unless a Bond Insurer
Default exists.
The Indenture Trustee
The Indenture Trustee may resign at any time, in which event the Issuer
will be obligated to appoint, at the direction of the Bond Insurer, a successor
Indenture Trustee. The Indenture Trustee also may be removed at any time by the
Bond Insurer, or if a Bond Insurer Default exists, then by Bondholders
representing more than 50% of the Bond Principal Balance of the Bonds, if the
Indenture Trustee ceases to be eligible to continue as such under the Indenture
or if the Indenture Trustee becomes incapable of acting, bankrupt, insolvent or
if a receiver or public officer takes charge of the Indenture Trustee or its
property. Any resignation or removal of the Indenture Trustee and appointment of
a successor Indenture Trustee will not become effective until acceptance of the
appointment by the successor Indenture Trustee.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Bonds will be characterized as
indebtedness and not as representing an ownership interest in the Trust Fund or
an equity interest in the Issuer or the Company. In addition, for federal income
tax purposes, the Issuer will not be (i) classified as an association taxable as
a corporation for federal income tax purposes (other than as a "qualified REIT
subsidiary" as defined in Section 856(i) of the Code), (ii) a taxable mortgage
pool as defined in Section 7701(i) of the Code, or (iii) a "publicly traded
partnership" as defined in Treasury Regulation Section 1.7704-1. The Bonds will
not be treated as having been issued with "original issue discount" (as defined
in the Prospectus). The prepayment assumption that will be used in determining
the rate of amortization of market discount and premium, if any, for federal
income tax purposes will be based on the assumption that, subsequent to the date
of any determination the Mortgage Loans will prepay at a rate equal to 20% CPR.
No representation is made that the Mortgage Loans will prepay at that rate or at
any other rate. See "Federal Income Tax Consequences" in the Prospectus.
The Bonds will not be treated as assets described in Section 7701(a)(19)(C)
of the Code or "real estate assets" under Section 856(c)(5)(A) of the Code. In
addition, interest on the Bonds will not be treated as "interest on obligations
secured by mortgages on real property" under Section 856(c)(3)(B) of the Code.
The Bonds will also not be treated as "qualified mortgages" under Section
860G(a)(3)(C) of the Code.
Prospective investors in the Bonds should see "Federal Income Tax
Consequences" and "State and Other Tax Consequences" in the Prospectus for a
discussion of the application of certain federal income and state and local tax
laws to the Issuer and purchasers of the Bonds.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated ------ ---, 199- (the "Underwriting Agreement"), among -------------- (
- ------------- ), -------------- ( ---------- together with --------------
"Underwriters"), the Company and ----------- the Underwriters have agreed to
purchase and the Company has agreed to sell to the Underwriters the Bonds. It is
expected that delivery of the Bonds will be made only in book-entry form through
the Same Day Funds Settlement System of DTC, on or about ----- ----, 199-,
against payment therefor in immediately available funds.
The Bonds will be purchased from the Company by the Underwriters and will
be offered by the Underwriters from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The proceeds to the Company from the sale of the Bonds are expected to be
approximately $------------------ before the deduction of expenses payable by
the Company estimated to be approximately $------------. The Underwriters may
effect such transactions by selling the Bonds to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriters. In connection with the sale of
the Bonds, the Underwriters may be deemed to have received compensation from the
Company in the form of underwriting compensation. The Underwriters and any
dealers that participate with the Underwriters in the distribution of the Bonds
may be deemed to be underwriters and any profit on the resale of the Bonds
positioned by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933.
The Underwriting Agreement provides that the Company and ----- will jointly
and severally indemnify the Underwriters, and that under limited circumstances
the Underwriters will indemnify the Company, against certain civil liabilities
under the Securities Act of 1933, or contribute to payments required to be made
in respect thereof.
There can be no assurance that a secondary market for the Bonds will
develop or, if it does develop, that it will continue or provide the Bondholders
with sufficient liquidity of investment. The primary source of information
available to investors concerning the Bonds will be the monthly statements
discussed in the Prospectus under "Description of the Bonds--Reports to
Bondholders," which will include information as to the outstanding principal
balance of the Bonds. There can be no assurance that any additional information
regarding the Bonds will be available through any other source. In addition, the
Company is not aware of any source through which price information about the
Bonds will be generally available on an ongoing basis. The limited nature of
such information regarding the Bonds may adversely affect the liquidity of the
Bonds, even if a secondary market for the Bonds becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Bonds will be passed upon for the
Company by Cadwalader, Wickersham & Taft, New York, New York and for the
Underwriters by --------------, New York, New York.
RATINGS
It is a condition of the issuance of the Bonds that they be rated "AAA" by
Standard & Poor's Ratings Services ("S&P") and "Aaa" by Moody's Investors
Service, Inc. ("Moody's").
S&P's ratings on mortgage pass-through certificates address the likelihood
of the receipt by Bondholders of payments required under the Indenture. S&P's
ratings take into consideration the credit quality of the mortgage pool,
structural and legal aspects associated with the Bonds, and the extent to which
the payment stream in the mortgage pool is adequate to make payments required
under the Bonds. S&P's rating on the Bonds does not, however, constitute a
statement regarding frequency of prepayments on the mortgages. See "Certain
Yield and Prepayment Considerations" herein. The ratings issued by S&P on
payment of principal and interest do not cover the payment of the Available
Funds Cap Carry-Forward Amount.
The rating process of Moody's addresses the structural and legal aspects
associated with the Bonds, including the nature of the underlying mortgage
loans. The ratings assigned to the Bonds do not represent any assessment of the
likelihood or rate of principal prepayments. The ratings do not address the
possibility that Bondholders might suffer a lower than anticipated yield. The
ratings do not address the likelihood that Bondholders will be paid any
Prepayment Interest Shortfalls, Relief Act Shortfalls or the Available Funds Cap
Carry-Forward Amount. The ratings do not address the likelihood that Bondholders
will be paid any Deferred Interest except to the extent Deferred Interest is
added to the Bond Principal Balance.
The Company has not requested a rating on the Bonds by any rating agency
other than S&P and Moody's. However, there can be no assurance as to whether any
other rating agency will rate the Bonds, or, if it does, what rating would be
assigned by any such other rating agency. A rating on the Bonds by another
rating agency, if assigned at all, may be lower than the ratings assigned to the
Bonds by S&P and Moody's.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Bonds are subsequently lowered for any reason, no person or entity is obligated
to provide any additional support or credit enhancement with respect to the
Bonds.
The ratings do not address the likelihood that the Master Servicer will
repurchase any Converting Mortgage Loan following the conversion of the related
Mortgage Rate to a fixed rate, and do not address the effect on the yield to
Bondholders resulting from any such conversion and the failure of the Master
Servicer to repurchase such Converting Mortgage Loan.
LEGAL INVESTMENT
The Bonds will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") for so long as they
are rated in at least the second highest rating category by one or more
nationally recognized statistical rating agencies, and, as such, are legal
investments for certain entities to the extent provided in SMMEA. SMMEA
provides, however, that states could override its provision on legal investment
and restrict or condition investment in mortgage related securities by taking
statutory action on or prior to October 3, 1991.
The Company makes no representations as to the proper characterization of
the Bonds for legal investment or other purposes, or as to the ability of
particular investors to purchase the Bonds under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of the
Bonds. Accordingly, all institutions whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or review
by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Bonds constitute a legal investment
or are subject to investment, capital or other restrictions.
See "Legal Investment Matters" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and the Code impose certain requirements on employee benefit plans and certain
other retirement plans and arrangements (including, but not limited to,
individual retirement accounts and annuities), as well as on collective
investment funds and certain separate and general accounts in which such plans
or arrangements are invested (all of which are hereinafter referred to as a
"Plan") and on persons who are fiduciaries with respect to such Plans. Any Plan
fiduciary which proposes to cause a Plan to acquire any of the Bonds would be
required to determine whether such an investment is permitted under the
governing Plan instruments and is prudent and appropriate for the Plan in view
of its overall investment policy and the composition and diversification of its
portfolio. In addition, ERISA and the Code prohibit certain transactions
involving the assets of a Plan and "disqualified persons" (within the meaning of
the Code) and "parties in interest" (within the meaning of ERISA) who have
certain specified relationships to the Plan. Therefore, a Plan fiduciary
considering an investment in the Bonds should also consider whether such an
investment might constitute or give rise to a prohibited transaction under ERISA
or the Code. Any Plan fiduciary which proposes to cause a Plan to acquire any of
the Bonds should consult with its counsel with respect to the potential
consequences under ERISA and the Code of the Plan's acquisition and ownership of
such Bonds.
EXPERTS
The consolidated financial statements of the Bond Insurer,
- ------------------------------, as of December 31, 1996 and 1995 and for each of
the years in the three-year period ended December 31, 1996 are incorporated by
reference herein and in the registration statement in reliance upon the report
of --------------------------, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
=====================================================
No dealer, salesman or other person has been
authorized to give any information or to make any
representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made,
such information or representations must not be
relied upon as having been authorized by the Company
or by the Underwriters. This Prospectus Supplement
and the Prospectus do not constitute an offer to
sell, or a solicitation of an offer to buy, the bonds
offered hereby to anyone in any jurisdiction in which
the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is
unlawful to make any such offer or solicitation.
Neither the delivery of this Prospectus Supplement
and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that
information herein or therein is correct as of any
time since the date of this Prospectus Supplement or
the Prospectus.
------------------
TABLE OF CONTENTS
Page
Prospectus Supplement
Summary..............................................
Risk Factors.........................................
Description of the Mortgage Pool.....................
The Issuer...........................................
The Owner Trustee....................................
The Indenture Trustee................................
Description of the Bonds.............................
Certain Yield and Prepayment Considerations..........
Description of the Servicing Agreement...............
The Indenture........................................
Federal Income Tax Consequences......................
Method of Distribution...............................
Legal Opinions.......................................
Ratings..............................................
Legal Investment.....................................
ERISA Considerations.................................
Experts..............................................
Appendix A--Underwriting Guidelines Applicable
to the Mortgage Loans...........................
Prospectus
PAINEWEBBER
MORTGAGE ACCEPTANCE
CORPORATION IV
SERIES 199--1
$
COLLATERALIZED
ASSET-BACKED BONDS
SERIES 199--1
-------------------
PROSPECTUS SUPPLEMENT
-------------------
- -----------------------------------------------------
---------------------, 199-
------------------------------------
=====================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses expected to be incurred in connection with the issuance and
distribution of the securities being registered, other than underwriting
compensation, are as set forth below. All such expenses except for the
registration and filing fees are estimated:
SEC Registration Fee $442,500.00
Legal Fees and Expenses 600,000.00
Accounting Fees and Expenses 200,000.00
Trustee's Fees and Expenses
(including counsel fees) 90,000.00
Printing and Engraving Expenses 180,000.00
Rating Agency Fees 240,000.00
Miscellaneous 100,000.00
----------
Total $1,852,500.00
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subsection (a) of Section 145 of the General Corporation Law of Delaware
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful on the merits or
otherwise in the defense of any action, suit or proceeding referred to in
subsections (a) and (b), or in the defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith; that
indemnification and advancement of expenses provided by, or granted pursuant to,
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and empowers the corporation to purchase and
maintain insurance on behalf of a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
The By-laws of the Depositor provide, in effect, that to the full extent
permitted by law, the Depositor shall indemnify and hold harmless each person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative and whether or not by or in the right of the
Depositor, by reason of the fact that he is or was a director or officer, or his
testator or intestate is or was a director or officer of the Depositor, or by
reason of the fact that such person is or was serving at the request of the
Depositor as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise of any type or kind,
domestic or foreign, against expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement, actually and reasonably incurred as a
result of such action, suit or proceeding.
Pursuant to Section 145 of the General Corporation Law of Delaware,
liability insurance is maintained covering directors and principal officers of
the Depositor.
Section 8(b) of the proposed form of Underwriting Agreement provides that
each Underwriter severally will indemnify and hold harmless the Depositor, each
of its directors, each of its officers who signs the Registration Statement, and
each person, if any, who controls the Depositor within the meaning of the
Securities Act of 1933, as amended, and the Securities Exchange of 1934, as
amended, against any losses, claims, damages or liabilities to which any of them
may become subject under the Securities Act of 1933, the Securities Exchange Act
of 1934 or other federal or state law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or an alleged untrue
statement of a material fact contained in the registration statement when it
became effective, or in the Registration Statement, any related preliminary
prospectus or the Prospectus, or any amendment or supplement thereto, or any
related preliminary prospectus supplement, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made therein in
reliance upon and in conformity with written information furnished to the
Depositor by such Underwriter, specifically for use in the preparation thereof,
and will reimburse the Depositor for any legal or other expenses reasonably
incurred by the Depositor in connection with investigating or defending against
such loss, claim, damage, liability or action.
The Pooling and Servicing Agreements and the Trust Agreements will provide
that no director, officer, employee or agent of the Depositor is liable to the
Trust Fund or the Certificateholders, except for such person's own willful
misfeasance, bad faith or gross negligence in the performance of duties or
reckless disregard of obligations and duties. The Pooling and Servicing
Agreements and the Trust Agreements will further provide that, with the
exceptions stated above, a director, officer, employee or agent of the Depositor
is entitled to be indemnified against any loss, liability or expense incurred in
connection with legal action relating to such Pooling and Servicing Agreements,
Trust Agreements and related Certificates other than such expenses related to
particular Mortgage Loans.
ITEM 16. EXHIBITS.
*1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Registrant.
*3.2 By-Laws of the Registrant.
*4.1 Form of Pooling and Servicing Agreement (Version 1, relating to
Certificates with various combinations of Credit Support).
*4.2 Form of Pooling and Servicing Agreement (Version 2, relating to a
typical "shifting interest" Senior/Subordinated Series).
*4.3 Form of Pooling and Servicing Agreement (Version 3, relating to a
typical Senior/Subordinated Series without "shifting interests").
*4.4 Form of Pooling and Servicing Agreement (Version 4, relating to a
typical multi-class series).
*4.5 Form of Trust Agreement (relating to Certificates evidencing
ownership interests in a Trust Fund including Agency Securities).
*4.6 Form of Unaffiliated Seller's Agreement (Version 1, for a series
using a multi-class, "shifting interest" or reserve fund
structure).
*4.7 Form of Unaffiliated Seller's Agreement (Version 2, for a series
using various forms of insurance policies and surety bonds as
credit support).
*4.8 Form of Custodial Agreement.
***4.9 Form of Trust Agreement (Version 6, relating to Notes)
***4.10 Form of Indenture (Version 6, relating to Notes)
***4.11 Form of Servicing Agreement (Version 6, relating to Notes)
5.1 Opinion of Cadwalader, Wickersham & Taft with respect to
legality.
8.1 Opinion of Cadwalader, Wickersham & Taft with respect to certain
tax matters (included as part of Exhibit 5.1).
23.1 Consent of Cadwalader, Wickersham & Taft (included as part of
Exhibit 5.1).
24.1 Power of Attorney (included on page II-7 of this Registration
Statement)
*99.1 Form of FHA Mortgage Insurance Certificate (28.1**).
*99.2 Form of VA Loan Guaranty (28.2**).
*99.3 Form of Pool Insurance Policy (28.3**).
*99.4 Form of Special Hazard Credit Insurance Policy (28.4**).
*99.5 Form of Bankruptcy Bond (28.5**).
*99.6 Form of Letter of Credit (28.6**).
- ------------
* Incorporated by reference from the Registration Statement on Form S-11
(File No. 33-14827).
** Exhibit number in Registration Statement on Form S-11 (File No. 33-14827).
*** Incorporated by reference from the Registration Statement on Form S-3 (File
No. 333-30939).
ITEM 17. UNDERTAKINGS.
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or in the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Registrant
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The Registrant hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
B. Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such officer, director or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
PaineWebber Mortgage Acceptance Corporation IV certifies that it has reasonable
grounds to believe that it meets all of the requirements for filing on Form S-3,
reasonably believes that the security rating requirement contained in
Transaction Requirement B.5 of Form S-3 will be met by the time of the sale of
the securities registered hereunder, and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on the 17th day of
August, 1998.
PAINEWEBBER MORTGAGE
ACCEPTANCE CORPORATION IV
By: /s/ John A. Taylor
Name: John A. Taylor
Title: President
<PAGE>
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John A. Taylor, Daniel Leyden, Ramesh Singh, and
Joseph Piscina, and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for and in his name,
place and stead, in any and all capacities to sign any or all amendments
(including post-effective amendments) to this Registration Statement and any or
all other documents in connection therewith, and to file the same, with all
exhibits thereto, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as might or could be done in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated.
SIGNATURE TITLE DATE
/s/ John A. Taylor President August 17, 1998
- -------------------------- (Principal Executive Officer)
John A. Taylor
/s/ Daniel Leyden Senior Vice President August 17, 1998
- -------------------------- (Principal Accounting and
Daniel Leyden Financial Officer)
/s/ Ramesh Singh Director August 17, 1998
- --------------------------
Ramesh Singh
/s/ Joseph Piscina Director August 17, 1998
- --------------------------
Joseph Piscina
<PAGE>
EXHIBIT INDEX
-------------
Number Description of Document
- ------ -----------------------
*1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Registrant.
*3.2 By-Laws of the Registrant.
*4.1 Form of Pooling and Servicing Agreement (Version 1, relating
to Certificates with various combinations of Credit
Support).
*4.2 Form of Pooling and Servicing Agreement (Version 2, relating
to a typical "shifting interest" Senior/Subordinated
Series).
*4.3 Form of Pooling and Servicing Agreement (Version 3, relating
to a typical Senior/Subordinated Series without "shifting
interests").
*4.4 Form of Pooling and Servicing Agreement (Version 4, relating
to a typical multi-class series).
*4.5 Form of Trust Agreement (relating to Certificates evidencing
ownership interests in a Trust Fund including Agency
Securities).
*4.6 Form of Unaffiliated Seller's Agreement (Version 1, for a
series using a multi-class, "shifting interest" or reserve
fund structure).
*4.7 Form of Unaffiliated Seller's Agreement (Version 2, for a
series using various forms of insurance policies and surety
bonds as credit support).
*4.8 Form of Custodial Agreement.
***4.9 Form of Trust Agreement (Version 5, relating to Notes).
***4.10 Form of Indenture (Version 5, relating to Notes).
***4.11 Form of Servicing Agreement (Version 5, relating to Notes).
5.1 Opinion of Cadwalader, Wickersham & Taft with respect to
legality.
8.1 Opinion of Cadwalader, Wickersham & Taft with respect to
certain tax matters (included as part of Exhibit 5.1).
23.1 Consent of Cadwalader, Wickersham & Taft (included as part
of Exhibit 5.1).
24.1 Power of Attorney (included on page II-7 of this
Registration Statement)
*99.1 Form of FHA Mortgage Insurance Certificate (28.1**).
*99.2 Form of VA Loan Guaranty (28.2**).
*99.3 Form of Pool Insurance Policy (28.3**).
*99.4 Form of Special Hazard Credit Insurance Policy (28.4**).
*99.5 Form of Bankruptcy Bond (28.5**).
*99.6 Form of Letter of Credit (28.6**).
* Incorporated by reference from the Registration Statement on Form S-11
(File No. 33-14827).
** Exhibit number in Registration Statement on Form S-11 (File No. 33-14827).
*** Incorporated by reference from the Registration Statement on Form S-3 (File
No. 333-30939).
Exhibit 5.1
August 18, 1998
PaineWebber Mortgage Acceptance Corporation IV
1285 Avenue of the Americas
New York, New York 10019
Re: Asset-Backed Certificates and Asset-Backed Notes
Gentlemen:
We have acted as special counsel to PaineWebber Mortgage Acceptance
Corporation IV (the "Depositor") in connection with the Registration Statement
on Form S-3 (the "Registration Statement"), which Registration Statement is
being filed with the Securities and Exchange Commission (the "Commission"),
pursuant to the Securities Act of 1933, as amended (the "Act"). The Prospectus
describes Asset-Backed Certificates ("Certificates") and Asset-Backed Notes
("Notes") to be sold by the Depositor in one or more series (each, a "Series")
of Certificates or Notes, as applicable. Each Series of Certificates will be
issued under a separate pooling and servicing agreement (each, a "Pooling and
Servicing Agreement") among the Depositor, a master servicer (a "Servicer"), a
trustee (a "Trustee") and, if applicable, such other parties to be identified in
the Prospectus Supplement for such Series. Each Series of Notes will be issued
under a separate indenture (each, an "Indenture") between the Depositor or a
trust formed by the Depositor (in either case, the "Issuer"), an indenture
trustee (an "Indenture Trustee") and, if applicable, such other parties to be
identified in the Prospectus Supplement for such Series. The forms of Pooling
and Servicing Agreement (each, a "Pooling and Servicing Agreement"), filed as
exhibits to Depositor's Registration Statement on Form S-11 (File No. 33-14827),
are incorporated by reference as exhibits to the Registration Statement. The
form of Indenture (an "Indenture"), filed as an exhibit to Depositor's
Registration Statement on Form S-3 (File No. 333-30939), is incorporated by
reference as an exhibit to the Registration Statement. Capitalized terms used
and not otherwise defined herein have the respective meanings given to such
terms in the Registration Statement.
In rendering the opinions set forth below, we have examined and relied upon
the following: (1) the Registration Statement, the Prospectus and the forms of
Prospectus Supplements constituting a part thereof, each substantially in the
form filed with the Commission; (2) the forms of Pooling and Servicing
Agreements; (3) the form of Indenture and (4) such other documents, materials
and authorities as we have deemed necessary in order to enable us to render our
opinion set forth below. We express no opinion with respect to any Series of
Certificates for which we do not act as counsel to the Depositor.
Based on the foregoing, we are of the opinion that:
1. When a Pooling and Servicing Agreement for a Series of Certificates
has been duly and validly authorized, executed and delivered by the
Depositor, a Servicer, a Trustee and any other party thereto, such Pooling
and Servicing Agreement will constitute a valid and legally binding
agreement of the Depositor, enforceable against the Depositor in accordance
with its terms, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium, receivership or other laws relating
to creditors' rights generally, and to general principles of equity
including principles of commercial reasonableness, good faith and fair
dealing (regardless of whether enforcement is sought in a proceeding at law
or in equity), and except that the enforcement of rights with respect to
indemnification and contribution obligations may be limited by applicable
law.
2. When an Indenture for a Series of Notes has been duly and validly
authorized, executed and delivered by the Depositor, an Indenture Trustee
and any other party thereto, such Indenture will constitute a valid and
legally binding agreement of the Issuer, enforceable against the Issuer in
accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium, receivership or other
laws relating to creditors' rights generally, and to general principles of
equity including principles of commercial reasonableness, good faith and
fair dealing (regardless of whether enforcement is sought in a proceeding
at law or in equity), and except that the enforcement of rights with
respect to indemnification and contribution obligations may be limited by
applicable law.
3. When a Pooling and Servicing Agreement for a Series of Certificates
has been duly and validly authorized, executed and delivered by the
Depositor, a Servicer, a Trustee and any other party thereto, and the
Certificates of such Series have been duly executed, authenticated,
delivered and sold as contemplated in the Registration Statement, such
Certificates will be legally and validly issued, fully paid and
nonassessable, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium, receivership or other laws relating
to creditors' rights generally, and to general principles of equity
including principles of commercial reasonableness, good faith and fair
dealing (regardless of whether enforcement is sought in a proceeding at law
or in equity), and will be validly issued and outstanding and entitled to
the benefits provided by such Pooling and Servicing Agreement.
4. When an Indenture for a Series of Notes has been duly and validly
authorized, executed and delivered by the Issuer, an Indenture Trustee and
any other party thereto, and the Notes of such Series have been duly
executed, authenticated, delivered and sold as contemplated in the
Registration Statement, such Notes will be legally and validly issued,
fully paid and nonassessable obligations of the Issuer, enforceable against
the Issuer in accordance with its terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium, receivership
or other laws relating to creditors' rights generally, and to general
principles of equity including principles of commercial reasonableness,
good faith and fair dealing (regardless of whether enforcement is sought in
a proceeding at law or in equity), and will be validly issued and
outstanding and entitled to the benefits provided by such Indenture.
5. The description of federal income tax consequences appearing under
the heading "Certain Federal Income Tax Consequences" in the Prospectus
accurately describes the material federal income tax consequences to
holders of Offered Certificates or Offered Notes, as applicable, under
existing law and subject to the qualifications and assumptions stated
therein.
We hereby consent to the filing of this letter as an Exhibit to the
Registration Statement and to the reference to this firm under the headings
"Legal Matters" and "Certain Federal Income Tax Consequences" in the Prospectus,
which is a part of the Registration Statement. This consent is not to be
construed as an admission that we are a person whose consent is required to be
filed with the Registration Statement under the provisions of the Act.
Very truly yours,
/s/ Cadwalader, Wickersham & Taft
