<PAGE>
Pursuant to Rule 424(b)(5)
Registration No. 333-15685
PROSPECTUS SUPPLEMENT
(To Prospectus dated July 28, 1998)
$247,997,172
(APPROXIMATE)
PAINEWEBBER MORTGAGE ACCEPTANCE CORPORATION IV
DEPOSITOR
PROVIDENT FUNDING ASSOCIATES, L.P.
ORIGINATOR AND SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1998-1
------------------------
The Mortgage Pass-Through Certificates, Series 1998-1 (collectively, the
'Certificates') will represent the entire beneficial interest in a pool (the
'Mortgage Pool') of fixed-rate first lien mortgage loans (the 'Mortgage Loans')
on one- to four-family residential properties (each a 'Mortgaged Property') and
certain related property (the 'Trust Fund'). The Series 1998-1 Certificates will
consist of 17 classes (each a 'Class'): the Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5, Class A-6, Class A-7, Class A-8 and Class A-R Certificates
(collectively, the 'Class A Certificates'); Class X and Class PO Certificates
(collectively with the Class A Certificates, the 'Senior Certificates'); the
Class M Certificates; and the Class B-1, Class B-2, Class B-3, Class B-4 and
Class B-5 Certificates (collectively, the 'Class B Certificates' and, together
with the Class M Certificates, the 'Subordinated Certificates'). Only the
Classes identified in the table below (collectively, the 'Offered Certificates')
are offered hereby.
------------------------
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE OFFERED
CERTIFICATES, SEE THE INFORMATION HEREIN UNDER 'RISK FACTORS' BEGINNING ON
PAGE S-16 AND IN THE PROSPECTUS BEGINNING ON PAGE 13.
------------------------
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR,
THE SELLER, PROVIDENT, THE SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL ENTITY, THE DEPOSITOR, THE SELLER, THE
SERVICER, THE TRUSTEE OR ANY OF THEIR AFFILIATES OR ANY OTHER
PERSON. DISTRIBUTIONS ON THE CERTIFICATES WILL BE PAYABLE SOLELY
FROM THE ASSETS TRANSFERRED TO THE TRUST FUND FOR THE BENEFIT OF
CERTIFICATEHOLDERS.
------------------------
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 SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
INITIAL CLASS PASS-THROUGH
CLASS DESIGNATION PRINCIPAL BALANCE (1) RATE
<S> <C> <C>
Class A-1................ $ 168,680,000 6.75%
Class A-2................ $ 16,360,500 6.50%
Class A-3................ $ 5,330,000 7.00%
Class A-4................ $ 11,030,500 7.00%
Class A-5................ $ 9,750,000 (2)
Class A-6................ $ 3,250,000 (3)
Class A-7................ $ 19,852,941 (4)
<CAPTION>
INITIAL CLASS PASS-THROUGH
CLASS DESIGNATION PRINCIPAL BALANCE (1) RATE
<S> <C> <C>
Class A-8................ $ 5,147,059 (5)
Class X.................. (6) (7)
Class PO................. $ 213,572 (8)
Class A-R................ $ 100 6.75%
Class M.................. $ 4,629,500 6.75%
Class B-1................ $ 2,377,000 6.75%
Class B-2................ $ 1,376,000 6.75%
</TABLE>
(1) Subject to the permitted variance described herein.
(2) The Pass-Through Rate for the Class A-5 Certificates for any Distribution
Date will be equal to the lesser of (i) the London Interbank offered rate
quotations for one-month Eurodollar deposits ('LIBOR') determined monthly as
set forth in this Prospectus Supplement for the related Interest Accrual
Period plus 0.80% and (ii) 9.00%. The Pass-Through Rate for the Class A-5
Certificates for the first Distribution Date is expected to be approximately
6.45625% per annum.
(3) The Pass-Through Rate for the Class A-6 Certificates for any Distribution
Date will be equal to (i) 24.60% minus (ii) the product of 3.0 and LIBOR,
subject to a minimum rate of 0% and a maximum rate of 24.60%. The
Pass-Through Rate for the Class A-6 Certificates for the first Distribution
Date is expected to be approximately 7.63125% per annum.
(4) The Pass-Through Rate for the Class A-7 Certificates for any Distribution
Date will be equal to the lesser of (i) LIBOR for the related Interest
Accrual Period plus 0.75% and (ii) 8.50%. The Pass-Through Rate for the
Class A-7 Certificates for the first Distribution Date is expected to be
approximately 6.40625% per annum.
(5) The Pass-Through Rate for the Class A-8 Certificates for any Distribution
Date will be equal to (i) 29.892856% minus (ii) the product of 3.857143 and
LIBOR, subject to a minimum rate of 0% and a maximum rate of 29.892856%. The
Pass-Through Rate for the Class A-8 Certificates for the first Distribution
Date is expected to be approximately 8.07589% per annum.
(6) The Class X Certificates will be interest-only certificates, will have no
principal balance and will bear interest on their notional amount (the
'Notional Amount'), which is initially expected to be approximately
$229,442,969, the Cut-Off Date Principal Balance of the Non-Discount
Mortgage Loans.
(7) The Pass-Through Rate for the Class X Certificates for any Distribution Date
will be equal to the excess of (a) the weighted average of the Net Mortgage
Rates of the Non-Discount Mortgage Loans over (b) 6.75% per annum. The
Pass-Through Rate for the Class X Certificates for the first Distribution
Date is expected to be approximately 0.41896% per annum.
(8) The Class PO Certificates will be principal-only certificates and will not
bear interest.
------------------------
The Offered 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 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 Offered Certificates are expected to be approximately $245,595,057,
plus accrued interest, before deducting issuance expenses payable by the
Depositor, which are expected to be approximately $602,692.18. See 'Method of
Distribution' herein.
The Offered Certificates are offered by the Underwriter, subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to its right to reject orders in whole or in part. It is expected that delivery
of the Offered Certificates, other than the Class X, the Class PO and the Class
A-R Certificates, will be made in book-entry form only through the facilities of
The Depository Trust Company, and that the Class X, the Class PO and the Class
A-R Certificates will be delivered at the offices of PaineWebber Incorporated in
New York, New York, on or about July 30, 1998 (the 'Closing Date').
------------------------
PAINEWEBBER INCORPORATED
------------------------
JULY 28, 1998
<PAGE>
The Mortgage Loans will be sold to the Depositor by Paine Webber Real
Estate Securities Inc. ('PWRES') and were acquired by PWRES from Provident
Funding Associates, L.P. ('Provident').
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 Certificates, other than the Class A-R
Certificates, will be designated as the 'regular interests' in the REMIC. The
Class A-R Certificates will be designated as the 'residual interests' in the
REMIC. Prospective investors are cautioned that a Class A-R Certificateholder's
REMIC taxable income and the tax liability thereon will exceed cash
distributions to such holder in certain periods, in which event such holder must
have sufficient alternative sources of funds to pay such tax liability. See
'Certain Federal Income Tax Consequences' herein and in the Prospectus.
The Class A-R Certificates will be subject to certain transfer
restrictions. See 'Description of the Certificates--Restrictions on Transfer of
the Class A-R, Class M and Class B Certificates.'
THE YIELD TO INVESTORS ON EACH CLASS OF OFFERED CERTIFICATES WILL BE
SENSITIVE IN VARYING DEGREES TO, AMONG OTHER THINGS, THE RATE AND TIMING OF
PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) OF THE MORTGAGE LOANS, WHICH MAY VARY
SIGNIFICANTLY OVER TIME, AND IN THE CASE OF THE CLASS A-5, CLASS A-6, CLASS A-7
AND CLASS A-8 CERTIFICATES, THE LEVEL OF LIBOR FROM TIME TO TIME. THE YIELD TO
MATURITY OF A CLASS OF OFFERED CERTIFICATES PURCHASED AT A DISCOUNT OR PREMIUM
WILL BE MORE SENSITIVE TO THE RATE AND TIMING OF PAYMENTS THEREON. HOLDERS OF
THE OFFERED CERTIFICATES SHOULD CONSIDER, IN THE CASE OF ANY SUCH CERTIFICATES
PURCHASED AT A DISCOUNT, AND PARTICULARLY THE CLASS PO CERTIFICATES, THE RISK
THAT A SLOWER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS
COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD AND, IN
THE CASE OF ANY OFFERED CERTIFICATES PURCHASED AT A PREMIUM AND PARTICULARLY THE
CLASS X CERTIFICATES, THE RISK THAT A FASTER THAN ANTICIPATED RATE OF PRINCIPAL
PAYMENTS ON THE MORTGAGE LOANS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER
THAN THE ANTICIPATED YIELD. HOLDERS OF THE CLASS X CERTIFICATES SHOULD CAREFULLY
CONSIDER THE RISK THAT A RAPID RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS
COULD RESULT IN THE FAILURE OF SUCH HOLDERS TO RECOVER THEIR INITIAL
INVESTMENTS. THE YIELD TO INVESTORS IN THE CLASS A-6 AND CLASS A-8 CERTIFICATES
WILL BE HIGHLY SENSITIVE TO LIBOR SUCH THAT RELATIVELY SMALL INCREASES IN LIBOR
WILL HAVE A NEGATIVE EFFECT ON THE YIELD TO INVESTORS IN SUCH CERTIFICATES. THE
YIELD TO INVESTORS IN THE OFFERED CERTIFICATES, AND PARTICULARLY THE CLASS M,
CLASS B-1 AND CLASS B-2 CERTIFICATES, ALSO WILL BE ADVERSELY AFFECTED BY NET
INTEREST SHORTFALLS AND BY REALIZED LOSSES. NO REPRESENTATION IS MADE AS TO THE
ANTICIPATED RATE OF PREPAYMENTS ON THE MORTGAGE LOANS, THE AMOUNT AND TIMING OF
NET INTEREST SHORTFALLS OR REALIZED LOSSES, OR AS TO THE RESULTING YIELD TO
MATURITY OF ANY CLASS OF CERTIFICATES.
The Underwriter intends to make a secondary market in the Offered
Certificates, but has no obligation to do so. There is currently no secondary
market for the Offered Certificates and there can be no assurance that such a
market will develop or, if it does develop, that it will continue or that it
will provide Certificateholders with a sufficient level of liquidity of
investment. In addition, the Class A-R, Class B-1 and Class B-2 Certificates are
subject to various transfer restrictions described herein. See 'Description of
the Certificates-Restrictions on Transfer of the Class A-R, Class M and Class B
Certificates' herein and 'Certain Federal Income Tax Consequences--Taxation of
Owners of Residual Securities--Tax-Related Restrictions on Transfers of Residual
Securities' and '--Sale or Exchange of a Residual Security' in the Prospectus.
------------------------
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE OFFERED CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS DATED JULY 28, 1998 (THE 'PROSPECTUS') WHICH ACCOMPANIES THIS
PROSPECTUS SUPPLEMENT AND PROSPECTIVE PURCHASERS ARE URGED TO READ BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE OFFERED
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL OCTOBER 29, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER THE PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS WHEN ACTING AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE OFFERED
CERTIFICATES, INCLUDING STABILIZING AND THE PURCHASE OF OFFERED CERTIFICATES TO
COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
'METHOD OF DISTRIBUTION' HEREIN.
S-2
<PAGE>
FORWARD-LOOKING STATEMENTS
IF AND WHEN INCLUDED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS OR IN DOCUMENTS INCORPORATED HEREIN OR THEREIN BY REFERENCE, THE
WORDS 'EXPECTS,' 'INTENDS,' 'ANTICIPATES,' 'ESTIMATES' AND ANALOGOUS EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. ANY SUCH STATEMENTS, WHICH
MAY INCLUDE STATEMENTS CONTAINED IN 'RISK FACTORS' AND 'PREPAYMENT AND YIELD
CONSIDERATIONS,' INHERENTLY ARE SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. SUCH
RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL ECONOMIC AND BUSINESS
CONDITIONS, COMPETITION, CHANGES IN FOREIGN POLITICAL, SOCIAL AND ECONOMIC
CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS,
CUSTOMER PREFERENCES AND VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND THE
DEPOSITOR'S CONTROL. THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE
OF THIS PROSPECTUS SUPPLEMENT. THE DEPOSITOR EXPRESSLY DISCLAIMS ANY OBLIGATION
OR UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY
FORWARD-LOOKING STATEMENT CONTAINED HEREIN TO REFLECT ANY CHANGE IN THE
DEPOSITOR'S EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS
OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by the
Depositor with the Securities and Exchange Commission (the 'Commission')
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, on or subsequent to the date of this Prospectus Supplement and
prior to the termination of the offering of the Offered Certificates. The
Depositor will provide without charge to each person to whom this Prospectus
Supplement and the Prospectus are delivered, on request of such person, a copy
of any or all of the documents incorporated herein by reference other than the
exhibits to such documents (unless such exhibits are specifically incorporated
by reference in such documents). Requests should be made in writing to
PaineWebber Mortgage Acceptance Corporation IV, at 1285 Avenue of the Americas,
New York, New York 10019, Attention: John Fearey, Esq.
AVAILABLE INFORMATION
In addition to the locations specified under 'Available Information' in the
accompanying Prospectus, the Commission maintains a World Wide Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Depositor, that file
electronically with the Commission.
S-3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FORWARD-LOOKING STATEMENTS................................................................................. S-3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................ S-3
AVAILABLE INFORMATION...................................................................................... S-3
SUMMARY OF TERMS........................................................................................... S-6
RISK FACTORS............................................................................................... S-16
General.................................................................................................. S-16
Subordination............................................................................................ S-16
Limited Experience, Limited Historical Delinquency, Loss and Prepayment Information...................... S-17
Book-Entry System for Certain Classes of Certificates.................................................... S-17
Geographic Concentration of the Mortgaged Properties..................................................... S-17
Distributions in Reduction of the Principal Balance of the Class A-2, Class A-3 and
Class A-4 Certificates................................................................................ S-17
Certificates May Not Be Appropriate For Individual Investors............................................. S-18
Risks Associated with Year 2000 Compliance............................................................... S-18
THE MORTGAGE POOL.......................................................................................... S-19
General.................................................................................................. S-19
Assignment of the Mortgage Loans......................................................................... S-24
UNDERWRITING STANDARDS..................................................................................... S-25
General.................................................................................................. S-25
Standard Underwriting Guidelines......................................................................... S-26
Expanded Underwriting Guidelines......................................................................... S-27
Mortgage Loan Production................................................................................. S-28
SERVICING OF MORTGAGE LOANS................................................................................ S-29
General.................................................................................................. S-29
The Servicer............................................................................................. S-29
Foreclosure and Delinquency Experience................................................................... S-29
Servicing Compensation and Payment of Expenses........................................................... S-30
Adjustment to Servicing Fee in Connection with Certain Prepaid Mortgage Loans............................ S-31
Advances................................................................................................. S-31
Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage Loans............................ S-31
Insurance................................................................................................ S-32
Certain Matters Regarding the Servicer................................................................... S-33
DESCRIPTION OF THE CERTIFICATES............................................................................ S-34
General.................................................................................................. S-34
Book-Entry Certificates.................................................................................. S-34
Payments on Mortgage Loans; Accounts..................................................................... S-35
Distributions............................................................................................ S-35
Priority of Distributions Among Certificates............................................................. S-35
Interest................................................................................................. S-36
Principal................................................................................................ S-38
Allocation of Losses..................................................................................... S-42
Optional Purchase of Defaulted Loans..................................................................... S-43
Optional Termination..................................................................................... S-43
The Trustee.............................................................................................. S-44
Restrictions on Transfer of the Class A-R, Class M and Class B Certificates.............................. S-44
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS.............................................................. S-46
General.................................................................................................. S-46
Prepayment Considerations and Risks...................................................................... S-46
Structuring Assumptions.................................................................................. S-48
Sensitivity of the Class A-6 and Class A-8 Certificates.................................................. S-48
Sensitivity of the Class X Certificates.................................................................. S-50
</TABLE>
S-4
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Sensitivity of the Class PO Certificates................................................................. S-51
Additional Information................................................................................... S-51
Weighted Average Lives of the Offered Certificates....................................................... S-51
Decrement Tables......................................................................................... S-52
Last Scheduled Distribution Date......................................................................... S-58
Subordinated Certificates................................................................................ S-58
CREDIT ENHANCEMENT......................................................................................... S-59
Subordination of Certain Classes......................................................................... S-59
USE OF PROCEEDS............................................................................................ S-60
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................................................... S-60
Regular Certificates..................................................................................... S-61
Residual Certificates.................................................................................... S-61
CERTAIN ERISA CONSIDERATIONS............................................................................... S-62
LEGAL INVESTMENT........................................................................................... S-63
METHOD OF DISTRIBUTION..................................................................................... S-64
LEGAL MATTERS.............................................................................................. S-64
RATINGS.................................................................................................... S-64
INDEX OF DEFINED TERMS..................................................................................... S-66
</TABLE>
S-5
<PAGE>
SUMMARY OF TERMS
This Summary of Terms is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary of
Terms are defined elsewhere in this Prospectus Supplement or in the Prospectus.
<TABLE>
<S> <C>
TITLE OF CERTIFICATES.... Mortgage Pass-Through Certificates, Series 1998-1
(the 'Certificates').
OFFERED CERTIFICATES..... Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5, Class A-6, Class A-7, Class A-8, Class PO,
Class X, Class A-R, Class M, Class B-1 and Class B-2
Certificates. Only the Offered Certificates are
offered hereby. The aggregate initial principal
amount (a 'Class Principal Balance') of the
Certificates will be subject to a permitted variance
in the aggregate of plus or minus 5%. Variances in
the Class Principal Balances may result in variances
in the Notional Amount of the Class X Certificates.
The Notional Amount of the Class X Certificates for
any Distribution Date will be equal to the aggregate
of the Stated Principal Balances of the Non-Discount
Mortgage Loans with respect to such Distribution
Date. The initial Notional Amount of the Class X
Certificates will be equal to the aggregate of the
Stated Principal Balances of the Non-Discount
Mortgage Loans as of July 1, 1998 (the 'Cut-Off
Date').
CERTIFICATES OTHER THAN
THE OFFERED
CERTIFICATES........... In addition to the Offered Certificates, the
following Classes of Certificates will be issued in
the indicated approximate initial Class Principal
Balances and will bear interest at the indicated
Pass-Through Rates, but are not offered hereby:
<CAPTION>
INITIAL CLASS
CERTIFICATE PASS-THROUGH
BALANCE RATE
------------- ------------
<S> <C> <C> <C>
Class B-3(1)............................... $ 751,000 6.75%
Class B-4(1)............................... $ 751,000 6.75%
Class B-5(1)............................... $ 751,363 6.75%
------------------
(1) The Class B-3, Class B-4 and Class B-5 Certificates will provide limited
credit support to the Senior Certificates and the other Subordinated
Certificates, as described herein.
Any information contained herein with respect to the
Class B-3, Class B-4 and Class B-5 Certificates is
provided only to permit a better understanding of
the Offered Certificates.
<CAPTION>
DESIGNATIONS
<S> <C>
Regular Certificates... All Classes of Certificates other than the Class A-R
Certificates.
Residual
Certificates........ The Class A-R Certificates.
Senior Certificates.... The Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5, Class A-6, Class A-7, Class A-8, Class PO, Class
X and Class A-R Certificates.
Class A Certificates... The Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5, Class A-6, Class A-7, Class A-8 and Class A-R
Certificates.
Subordinated
Certificates........ The Class M, Class B-1, Class B-2, Class B-3, Class
B-4 and Class B-5 Certificates.
Fixed Rate
Certificates........ All Classes of Certificates other than the Class A-5,
Class A-6, Class A-7, Class A-8, Class PO and Class X
Certificates.
Variable Rate
Certificates........ The Class A-5, Class A-6, Class A-7, Class A-8 and
Class X Certificates.
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
Physical
Certificates........ The Class PO, Class X, Class A-R, Class B-3, Class
B-4 and Class B-5 Certificates.
Book-Entry
Certificates........ All Classes of Offered Certificates other than the
Physical Certificates.
TRUST FUND............... The Certificates will represent the entire beneficial
ownership interest in the Trust Fund, which will
consist primarily of the Mortgage Pool.
POOLING AND SERVICING
AGREEMENT.............. The Certificates will be issued pursuant to a Pooling
and Servicing Agreement, dated as of July 1, 1998
(the 'Agreement'), among the Depositor, Provident,
as Originator and Servicer, and the Trustee.
DEPOSITOR................ PaineWebber Mortgage Acceptance Corporation IV, a
Delaware corporation (the 'Depositor'). See 'The
Depositor' in the Prospectus.
SELLER................... Paine Webber Real Estate Securities Inc., a Delaware
corporation (the 'Seller'). The Mortgage Loans were
acquired in the normal course of its business by the
Seller and will be acquired by the Depositor in
privately negotiated transactions. See 'The Mortgage
Pool' herein.
ORIGINATOR AND
SERVICER............... Provident Funding Associates, L.P., a California
limited partnership ('Provident' or, in its capacity
as servicer of the Mortgage Loans, the 'Servicer').
See 'Servicing of Mortgage Loans--The Servicer'
herein. The Mortgage Loans were originated or
acquired in the normal course of its business by
Provident and were acquired by the Seller in a
privately negotiated transaction. See 'Underwriting
Standards' herein. The Servicer will be responsible
for the servicing of the Mortgage Loans and will
receive the Servicing Fee from interest collected on
the Mortgage Loans. See 'Servicing of Mortgage
Loans--Servicing Compensation and Payment of
Expenses' herein.
TRUSTEE.................. The Chase Manhattan Bank, a New York banking
corporation (the 'Trustee').
CUT-OFF DATE............. July 1, 1998.
CLOSING DATE............. On or about July 30, 1998.
DETERMINATION DATE....... The 22nd day of each month or, if such day is not a
business day, the preceding business day (each a
'Determination Date'); provided that the
Determination Date in each month will be at least
two business days prior to the related Distribution
Date.
MORTGAGE LOANS........... The Mortgage Pool will consist of 30-year
conventional fixed-rate mortgage loans secured by
first liens on one- to four-family residential
properties. Distributions of principal and interest
on the Certificates will be based solely on payments
received on the Mortgage Loans, as described herein.
See 'The Mortgage Pool' herein. The Depositor
expects the Mortgage Loans to have the
characteristics described below.
References herein to percentages of the Mortgage
Loans refer to the percentage of the aggregate
principal balance of the Mortgage Loans as of the
Cut-Off Date, after giving effect to Monthly
Payments due on or prior to the Cut-Off Date,
whether or not received. See 'The Mortgage Pool'
herein.
</TABLE>
S-7
<PAGE>
SELECTED MORTGAGE LOAN DATA
(APPROXIMATE AS OF THE CUT-OFF DATE)
MORTGAGE POOL (1)
<TABLE>
<S> <C>
Number of Mortgage Loans.................................................. 804
Aggregate Stated Principal Balance........................................ $250,250,536.31
Range of Stated Principal Balances........................................ $40,000 to $1,200,000
Average Stated Principal Balance.......................................... $311,256.89
Range of Mortgage Rates................................................... 6.625%-8.750%
Weighted Average Mortgage Rate............................................ 7.3909%
Range of Remaining Terms to Stated Maturity............................... 346 months-360 months
Weighted Average Remaining Term to Stated Maturity........................ 360 months
Weighted Average Loan Age(2).............................................. 1 month
Range of Original Loan-to-Value Ratios.................................... 20.00%-95.00%
Weighted Average Original Loan-to-Value Ratio............................. 73.84%
Geographic Concentration of Mortgaged Properties Securing
Mortgage Loans in Excess of 5% of the Aggregate Stated
Principal Balance(3).................................................... California 84.99%
Washington 5.23%
</TABLE>
- ------------------
(1) Based on payments actually received (or scheduled to be received) on each
Mortgage Loan as of the Cut-Off Date.
(2) Based on the number of months from and including the first Monthly Payment
to and including the Cut-Off Date.
(3) Approximate
<TABLE>
<S> <C>
UNDERWRITING STANDARDS... Generally all of the Mortgage Loans (by aggregate
Stated Principal Balance as of the Cut-Off Date)
were originated in conformity with the
Underwriting Standards described in 'Underwriting
Standards' herein. In certain instances, exceptions
to the underwriting standards may have been granted
by Provident.
DISTRIBUTION DATE........ The 25th day of each month or, if such day is not a
business day, on the first business day thereafter,
commencing in August 1998 (each, a 'Distribution
Date'). Distributions on each Distribution Date will
be made to Certificateholders of record as of the
related Record Date, except that the final
distribution on the Certificates will be made only
upon presentment and surrender of the Certificates
at the office of the Trustee specified in a notice
to Certificateholders.
RECORD DATE.............. The Record Date for each Distribution Date will be
the last business day of the month preceding the
month of such Distribution Date.
DENOMINATIONS AND
REGISTRATION OF THE
CERTIFICATES........... The Offered Certificates (other than the Class X
Certificates) generally will be issuable in
denominations of $25,000 (or $1,000, in the case of
the Class A-2, Class A-3 and Class A-4 Certificates)
initial principal amount (or, in either case,
integral multiples of $1,000 in excess thereof). The
Class X Certificates will have no principal balance,
but will be issuable in denominations of $25,000
based on their Notional Amount (or integral
multiples thereof). A single Class A-R Certificate
will be issuable in a $100 denomination. The Offered
Certificates (other than the Class A-R, Class X and
Class PO Certificate) initially will be issued in
book-entry form and initially will be represented by
one or more physical certificates registered in the
name of Cede & Co., as the nominee of The Depository
Trust Company ('DTC'). No person acquiring an
interest in any Book-Entry Certificate (each, a
'Beneficial Owner') will be entitled to receive a
Definitive Certificate (defined
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herein) representing such person's interest in the
Trust Fund, except in the event that Definitive
Certificates are issued under the limited
circumstances described herein. The Class A-R, Class
X and Class PO Certificates will be issued in
definitive form. All references herein to holders of
Certificates ('Certificateholders') and their rights
shall mean and include the rights of Beneficial
Owners, as such rights may be exercised through DTC
and its participating organizations, except as
otherwise specified herein. See 'Description of the
Certificates--Book-Entry Certificates' herein and
'Description of the Securities--Book-Entry
Registration of Securities' in the Prospectus.
PRIORITY OF
DISTRIBUTIONS.......... Distributions will be made on each Distribution Date
from funds available for distribution to the formula
amounts of interest and principal payable to each
class on such Distribution Date (as described below)
in the following order of priority: (i) to
distributions of the Interest Distribution Amount on
each interest-bearing Class of Senior Certificates;
(ii) to the formula principal then distributable on
the Classes of Senior Certificates then entitled to
receive distributions of principal set forth under
'Distributions of Principal,' in each case in an
aggregate amount up to the maximum amount of
principal to be distributed on such Classes on such
Distribution Date; (iii) to any Class PO Deferred
Amounts with respect to the Class PO Certificates,
but only from amounts that would otherwise be
distributable on such Distribution Date as principal
of the Subordinated Certificates; and (iv) to
interest on and then principal of each Class of
Subordinated Certificates, in the order of their
numerical Class designations, beginning with the
Class M Certificates, in each case subject to the
limitations set forth under 'Description of the
Certificates--Principal' herein.
Under certain circumstances described herein,
distributions for a Distribution Date that would
otherwise be made on the Subordinated Certificates
may be distributed instead on the Senior
Certificates. See 'Description of the
Certificates--Allocation of Losses' herein.
DISTRIBUTIONS OF
INTEREST............... To the extent funds are available therefor, each
interest-bearing Class of Certificates will be
entitled to receive interest in the amount of the
Interest Distribution Amount for such Class. The
Class PO Certificates are principal-only
certificates and will not bear interest. See
'Description of the Certificates--Interest' herein.
A. INTEREST
DISTRIBUTION
AMOUNT.............. For each interest-bearing Class of Certificates, the
amount of interest accrued during the related
Interest Accrual Period at the applicable
Pass-Through Rate on the related Class Principal
Balance or Notional Amount, as the case may be, as
reduced pro rata by the Net Interest Shortfalls as
described under 'Description of the Certificates--
Interest' herein.
B. PASS-THROUGH RATE... The pass-through rate ('Pass-Through Rate') for each
interest-bearing Class of Offered Certificates for
each Distribution Date will be as set forth or
described on the cover page hereof.
The Pass-Through Rate for the Class A-5 Certificates
for any Distribution Date will be equal to the
lesser of (i) LIBOR plus 0.80% and (ii) 9.00%. The
Pass-Through Rate for the Class A-5 Certificates for
the first Distribution Date is expected to be
approximately 6.45625% per annum.
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The Pass-Through Rate for the Class A-6 Certificates
for any Distribution Date will be equal to (i)
24.60% minus (ii) the product of 3.0 and LIBOR,
subject to a minimum rate of 0% and a maximum rate
of 24.60%. The Pass-Through Rate for the Class A-6
Certificates for the first Distribution Date is
expected to be approximately 7.63125% per annum.
The Pass-Through Rate for the Class A-7 Certificates
for any Distribution Date will be equal to the
lesser of (i) LIBOR for the related Interest Accrual
Period plus 0.75% and (ii) 8.50%. The Pass-Through
Rate for the Class A-7 Certificates for the first
Distribution Date is expected to be approximately
6.40625% per annum.
The Pass-Through Rate for the Class A-8 Certificates
for any Distribution Date will be equal to (i)
29.892856% minus (ii) the product of 3.857143 and
LIBOR, subject to a minimum rate of 0% and a maximum
rate of 29.892856%. The Pass-Through Rate for the
Class A-8 Certificates for the first Distribution
Date is expected to be approximately 8.07589% per
annum.
The Pass-Through Rate for the Class X Certificates
for any Distribution Date will be equal to the
excess of (i) the weighted average of the Net
Mortgage Rates of the Non-Discount Mortgage Loans
over (ii) 6.75% per annum. The Pass-Through Rate for
the Class X Certificates for the first Distribution
Date is expected to be approximately 0.41896% per
annum.
With respect to each Distribution Date, the 'Interest
Accrual Period' for each interest-bearing Class of
Certificates will be the calendar month preceding
the month of such Distribution Date or, in the case
of the Class A-5, Class A-6, Class A-7 and Class A-8
Certificates, during each one-month period
commencing on the 25th day of the month preceding
the month in which each Distribution Date occurs and
ending on the 24th day of the month in which such
Distribution Date occurs, commencing on July 25,
1998. No interest will accrue on the Class A-5,
Class A-6, Class A-7 and Class A-8 Certificates
prior to July 25, 1998.
DISTRIBUTIONS OF
PRINCIPAL.............. All payments and other amounts received in respect of
principal of the Mortgage Loans will be allocated
between (i) the Certificates (other than the Class X
Certificates and the Class PO Certificates) and (ii)
the Class PO Certificates, in each case based on the
applicable Non-PO Percentage and the applicable PO
Percentage, respectively, of such amounts, as
described below and as described more fully under
'Description of the Certificates--Principal' herein.
Senior Principal
Distribution
Amount.............. On each Distribution Date prior to the Senior Credit
Support Depletion Date, to the extent funds are
available therefor, principal distributions in
reduction of the Class Principal Balances of the
Class A Certificates will be made in an aggregate
amount equal to the allocable portion of Non-PO
Formula Principal Amount, up to the amount of the
Senior Principal Distribution Amount for such
Distribution Date: first, pro rata, to the Class A-7
and Class A-8 Certificates, up to the amount of the
Priority Principal Distribution Amount (as defined
herein); second, to the Class A-R Certificates until
the Class Principal Balance thereof is reduced to
zero; third, to the Class A-1 Certificates until the
Class Principal Balance thereof is reduced to zero,
fourth, concurrently, 50.0% to the Class A-2
Certificates and 50.0% to the Class A-3 Certificates
until the Class Principal Balance of the Class A-3
Certificates is reduced to
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zero; fifth, concurrently, 50.0% to the Class A-2
Certificates and 50.0% to the Class A-4 Certificates
until the Class Principal Balances thereof are
reduced to zero; sixth, pro rata, to the Class A-5
and Class A-6 Certificates until the Class Principal
Balances thereof are reduced to zero; and seventh,
pro rata, to the Class A-7 and Class A-8
Certificates until the Class Principal Balances
thereof are reduced to zero.
Notwithstanding the foregoing, on each Distribution
Date on and after the Senior Credit Support
Depletion Date, the Non-PO Formula Principal Amount
will be distributed, concurrently, as principal of
the Classes of Senior Certificates (other than the
Class X Certificates and the Class PO Certificates),
pro rata, in accordance with their respective Class
Principal Balances immediately prior to such
Distribution Date.
Subordinated Principal
Distribution
Amount.............. On each Distribution Date, to the extent funds are
available therefor, the Non-PO Formula Principal
Amount, up to the amount of the Subordinated
Principal Distribution Amount for such Distribution
Date, will be distributed as principal of the
Subordinated Certificates. Except as described in
'Description of the Certificates--Principal' herein,
each Class of Subordinated Certificates will be
entitled to receive its pro rata share of the
Subordinated Principal Distribution Amount (based on
its respective Class Principal Balance), in each
case to the extent of the amount available from
Available Collection Amounts for distribution of
principal. Distributions of principal of the
Subordinated Certificates will be made sequentially
to the Classes of Subordinated Certificates in the
order of their numerical Class designations,
beginning with the Class M Certificates, until the
respective Class Principal Balances thereof are
reduced to zero.
Class PO Principal
Distribution
Amount.............. On each Distribution Date, distributions of principal
of the Class PO Certificates will be made in an
amount equal to the lesser of (x) the PO Formula
Principal Amount for such Distribution Date and (y)
the product of (i) Available Collection Amounts
remaining after distribution of interest on the
Senior Certificates and (ii) a fraction, the
numerator of which is the PO Formula Principal
Amount and the denominator of which is the sum of
the PO Formula Principal Amount and the Senior
Principal Distribution Amount.
The Class X Certificates do not have principal
balances and are not entitled to any distributions
in respect of principal of the Mortgage Loans. See
'Description of the Certificates--Principal' herein.
CREDIT
ENHANCEMENT--GENERAL... Credit enhancement for the Senior Certificates will
be provided by the Subordinated Certificates and
credit enhancement for each Class of Subordinated
Certificates will be provided by the Class or
Classes of Subordinated Certificates with higher
numerical Class designations, as described below.
The aggregate of the initial Class Principal
Balances of the Class B-3, Class B-4 and Class B-5
Certificates, which are the only Certificates
supporting the Class B-2 Certificates, is expected
to be approximately $2,253,363.
SUBORDINATION............ The rights of holders of each Class of Class B
Certificates (other than the Class B-1 Certificates)
to receive distributions with respect to the
Mortgage Loans in the Trust Fund will be
subordinated to the rights of holders of the Class
or Classes of Subordinated Certificates with lower
numerical Class designations, the Class M
Certificates and the Senior
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Certificates, the rights of the holders of the Class
B-1 Certificates to receive such distributions will
be subordinated to the rights of the holders of the
Class M Certificates and the Senior Certificates and
the rights of the holders of the Class M
Certificates to receive such distributions will be
subordinated to the rights of the holder of the
Senior Certificates, in each case only to the extent
described herein.
The subordination of the Subordinated Certificates to
the Senior Certificates, and the further
subordination within the Subordinated Certificates,
is intended to increase the likelihood of timely
receipt by the holders of Certificates with higher
relative payment priority of the maximum amount to
which they are entitled on any Distribution Date and
to provide such holders protection against losses on
the Mortgage Loans to the extent described herein.
Additionally, the Subordinated Certificates will
provide limited protection to the Classes of
Certificates of higher relative priority against (i)
Special Hazard Losses in an initial amount expected
to be up to approximately $5,089,500 (the 'Special
Hazard Loss Coverage Amount'), (ii) Bankruptcy
Losses in an initial amount expected to be up to
approximately $100,000 (the 'Bankruptcy Loss
Coverage Amount') and (iii) Fraud Losses in an
initial amount expected to be up to approximately
$2,503,166 (the 'Fraud Loss Coverage Amount') as
each will be reduced from time to time as described
herein. Excess Losses will be allocated pro rata to
each Class of Certificates. 'Excess Losses' are (i)
Special Hazard Losses in excess of the Special
Hazard Loss Coverage Amount, (ii) Bankruptcy Losses
in excess of the Bankruptcy Loss Coverage Amount and
(iii) Fraud Losses in excess of the Fraud Loss
Coverage Amount. 'Bankruptcy Losses' are losses that
are incurred as a result of Debt Service Reductions
and Deficient Valuations. 'Special Hazard Losses'
are Realized Losses in respect of Special Hazard
Mortgage Loans. 'Fraud Losses' are losses sustained
on a Liquidated Mortgage Loan by reason of a default
arising from fraud, dishonesty or misrepresentation.
See 'Credit Enhancement--Subordination of Certain
Classes' herein. See 'Description of the
Certificates--Allocation of Losses' herein. However,
in certain circumstances the amount of available
subordination (including the limited subordination
provided for certain types of losses) may be
exhausted and shortfalls in distributions on the
Certificates could result. Holders of the Senior
Certificates will bear their proportionate share of
any losses realized on the Mortgage Loans in excess
of the available subordination amount. See
'Description of the Certificates--Priority of
Distributions Among Certificates,' '--Allocation of
Losses' and 'Credit Enhancement--Subordination of
Certain Classes' herein.
ADVANCES................. The Servicer is obligated to make cash advances
('Advances') with respect to delinquent payments of
principal of and interest on any Mortgage Loan to
the extent described herein. In the event the
Trustee assumes the obligations of the Servicer as
successor servicer, the Trustee shall be obligated
to make Advances in accordance with the Agreement.
See 'Servicing of Mortgage Loans--Advances' herein.
YIELD CONSIDERATIONS WITH
RESPECT TO THE CLASS
A-5, CLASS A-6, CLASS
A-7 AND CLASS A-8
CERTIFICATES........... The yield to investors in the Class A-5, Class A-6,
Class A-7 and Class A-8 Certificates will be
dependent on, among other things, the
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level of LIBOR from time to time. The yield to
investors in the Class A-6 and Class A-8
Certificates will be highly sensitive to LIBOR.
Increase in LIBOR will have a negative effect on the
yield to investors in the Class A-6 and Class A-8
Certificates.
PREPAYMENT CONSIDERATIONS
AND RISKS; REINVESTMENT
RISK................... The rate of principal payments on the Offered
Certificates, the aggregate amount of distributions
on the Offered Certificates and the yield to
maturity of the Offered Certificates will be related
to, among other things, the rate and timing of
payments of principal on the Mortgage Loans, and in
the case of the Class A-5, Class A-6, Class A-7 and
Class A-8 Certificates, the level of LIBOR from time
to time.
Since the rate of payment of principal on the
Mortgage Loans will depend on future events and a
variety of factors, no assurance can be given as to
such rate or the rate of principal prepayments. The
extent to which the yield to maturity of a Class of
Offered Certificates may vary from the anticipated
yield may depend upon the degree to which it is
purchased at a discount or premium and the degree to
which the timing of payments thereon is sensitive to
prepayments, liquidations and purchases of the
Mortgage Loans. Further, an investor should consider
the risk that, in the case of the Class PO
Certificates and any other Offered Certificate
purchased at a discount, a slower than anticipated
rate of principal payments (including prepayments)
on the Mortgage Loans could result in an actual
yield to such investor that is lower than the
anticipated yield and, in the case of the Class X
Certificates and any other Offered Certificate
purchased at a premium, a faster than anticipated
rate of principal payments could result in an actual
yield to such investor that is lower than the
anticipated yield. Investors in the Class X
Certificates should carefully consider the risk that
a rapid rate of principal payments on the Mortgage
Loans could result in the failure of such investors
to recover their initial investments.
Because the Mortgage Loans may be prepaid at any
time, it is not possible to predict the rate at
which distributions of principal of the Offered
Certificates will be received. Since prevailing
interest rates are subject to fluctuation, there can
be no assurance that investors in the Offered
Certificates will be able to reinvest the
distributions thereon at yields equaling or
exceeding the yields on such Offered Certificates.
It is possible that yields on any such reinvestments
will be lower, and may be significantly lower, than
the yields on the Offered Certificates. See 'The
Mortgage Pool' and 'Yield, Prepayment and Maturity
Considerations' herein.
OPTIONAL TERMINATION..... On any Distribution Date on which the Pool Principal
Balance is less than 10% of the Cut-Off Date Pool
Principal Balance, the Servicer will have the option
to purchase, in whole, the Mortgage Loans and the
REO Property, if any, remaining in the Trust Fund at
a purchase price equal to the sum of (a) the Stated
Principal Balance of each Mortgage Loan (except for
Mortgage Loans for which the related Mortgaged
Property has become REO Property (an 'REO Loan'),
plus one month's accrued interest thereon at the
applicable Adjusted Mortgage Rate and (b) the lesser
of (i) the appraised value of any REO Property and
(ii) the Stated Principal Balance of each REO Loan
plus accrued and unpaid interest thereon at the
applicable Adjusted Mortgage Rate. (As to each
Mortgage Loan, the 'Adjusted Mortgage Rate' is the
per annum rate
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equal to the Mortgage Rate less the Servicing Fee
Rate). See 'Description of the
Certificates--Optional Termination' herein.
FEDERAL INCOME TAX
CONSIDERATIONS......... An election will be made to treat the Trust Fund as a
'real estate mortgage investment conduit' ('REMIC')
for federal income tax purposes. The Regular
Certificates will constitute 'regular interests' in
the REMIC. The Class A-R Certificates will represent
the sole class of residual interest in the REMIC.
The Regular Certificates generally will be treated as
newly originated debt instruments for federal income
tax purposes. Beneficial owners of the Regular
Certificates (each a 'Beneficial Owner') will be
required to report income thereon in accordance with
the accrual method of accounting. The Class X
Certificates and the Class PO Certificates will, and
certain other Classes of Offered Certificates may,
be issued with original issue discount for federal
income tax purposes. See 'Certain Federal Income Tax
Consequences' herein and in the Prospectus.
The holders of the Class A-R Certificates will be
required to include the taxable income or loss of
the REMIC in determining their federal taxable
income. It is anticipated that all or a substantial
portion of the taxable income of the REMIC
includible by the Class A-R Certificateholders will
be treated as 'excess inclusion' income subject to
special limitations for federal income tax purposes.
AS A RESULT, THE EFFECTIVE AFTER-TAX RETURN OF THE
CLASS A-R CERTIFICATES MAY BE SIGNIFICANTLY LOWER
THAN WOULD BE THE CASE IF THE CLASS A-R CERTIFICATES
WERE TAXED AS DEBT INSTRUMENTS OR MAY BE NEGATIVE.
FURTHER, SIGNIFICANT RESTRICTIONS APPLY TO THE
TRANSFER OF THE CLASS A-R CERTIFICATES. THE CLASS
A-R CERTIFICATES WILL BE CONSIDERED 'NONECONOMIC
RESIDUAL INTERESTS,' CERTAIN TRANSFERS OF WHICH MAY
BE DISREGARDED FOR FEDERAL INCOME TAX PURPOSES.
See 'Description of the Certificates--Restrictions on
Transfer of the Class A-R, Class M and Class B
Certificates' herein and 'Certain Federal Income Tax
Consequences--Taxation of Owners of Residual
Securities--Limitations on Offset or Exemption of
REMIC Income' and '--Tax-Related Restrictions on
Transfer of Residual Securities-- Noneconomic
Residual Interests' in the Prospectus.
ERISA CONSIDERATIONS..... The acquisition of an Offered Certificate by a
pension or other employee benefit plan (a 'Plan')
subject to the Employee Retirement Income Security
Act of 1974, as amended ('ERISA'), could, in some
instances, result in a prohibited transaction or
other violation of the fiduciary responsibility
provisions of ERISA and Section 4975 of the Internal
Revenue Code of 1986, as amended (the 'Code').
Subject to the considerations and conditions
described under 'Certain ERISA Considerations'
herein, it is expected that the Class A (other than
the Class A-R Certificates), Class X and Class PO
Certificates may be purchased by a Plan. BECAUSE THE
CLASS M, CLASS B-1 AND CLASS B-2 CERTIFICATES ARE
SUBORDINATED TO THE SENIOR CERTIFICATES WITH RESPECT
TO CERTAIN LOSSES, THE CLASS M, CLASS B-1 AND CLASS
B-2 CERTIFICATES MAY NOT BE TRANSFERRED UNLESS THE
TRANSFEREE HAS DELIVERED (I) A REPRESENTATION LETTER
TO THE TRUSTEE STATING EITHER (A) THE TRANSFEREE IS
NOT A PLAN AND IS NOT ACTING ON BEHALF OF A PLAN OR
USING THE ASSETS OF A PLAN TO EFFECT SUCH PURCHASE
OR (B) SUBJECT TO CERTAIN CONDITIONS DESCRIBED
HEREIN, THAT THE SOURCE OF FUNDS USED TO
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PURCHASE SUCH CERTIFICATES IS AN 'INSURANCE COMPANY
GENERAL ACCOUNT' OR (II) AN OPINION OF COUNSEL AND
SUCH OTHER DOCUMENTATION DESCRIBED UNDER
'DESCRIPTION OF THE CERTIFICATES-- RESTRICTIONS ON
TRANSFER OF THE CLASS A-R, CLASS M AND CLASS B
CERTIFICATES' HEREIN. THE CLASS A-R CERTIFICATES MAY
NOT BE PURCHASED BY OR TRANSFERRED TO A PLAN OR A
PERSON ACTING ON BEHALF OF OR INVESTING THE ASSETS
OF A PLAN.
Any Plan fiduciary considering whether to purchase
any Offered Certificates on behalf of a Plan should
consult with its counsel regarding the applicability
of the provisions of ERISA and the Code. See
'Description of the Certificates--Restrictions on
Transfer of the Class A-R, Class M and Class B
Certificates' and 'Certain ERISA Considerations'
herein.
LEGAL INVESTMENT......... The Senior Certificates (other than the Class A-R
Certificates) and the Class M Certificates will
constitute 'mortgage related securities' for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended ('SMMEA'), so
long as they are rated in one of the two highest
rating categories by at least one nationally
recognized statistical rating organization, and, as
such, are legal investments for certain entities to
the extent provided for in SMMEA.
It is anticipated that the Class B-1 and Class B-2
Certificates will not be rated in one of the two
highest rating categories by a nationally recognized
statistical rating organization and, therefore, will
NOT constitute 'mortgage related securities' for
purposes of SMMEA.
Institutions whose investment activities are subject
to legal investment laws and regulations, regulatory
capital requirements or review by federal or state
regulatory authorities should consult with their
counsel or the applicable authorities to determine
whether and to what extent the Offered Certificates
constitute a legal investment or are subject to
investment, capital or other restrictions. See
'Legal Investment' herein and in the Prospectus.
RATINGS.................. It is a condition to the issuance of the Senior
Certificates (other than the Class A-R Certificates)
that they be rated AAA by Duff & Phelps Credit
Rating Co. ('DCR') and by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ('S&P'
and, together with DCR, the 'Rating Agencies'), or
in the case of the Class PO and Class X
Certificates, AAAr by S&P. See 'Ratings' herein. It
is a condition to the issuance of the Class M, Class
B-1 and Class B-2 Certificates that they be rated at
least AA, A and BBB respectively, by DCR. The
ratings of the Offered Certificates of any Class
should be evaluated independently from similar
ratings on other types of securities. A rating is
not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any
time by either of the Rating Agencies. See 'Ratings'
herein.
The Depositor has not requested a rating of the
Offered Certificates by any rating agency other than
the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will
rate the Offered Certificates or, if it does, what
rating would be assigned by such other rating
agency. The rating assigned by such other rating
agency to the Offered Certificates could be lower
than the respective ratings assigned by the Rating
Agencies. See 'Ratings' herein.
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RISK FACTORS
GENERAL
The rate of distributions in reduction of the principal balance of any
Class of Offered Certificates, the aggregate amount of distributions of
principal and interest on any Class of Offered Certificates and the yield to
maturity of any Class of Offered Certificates will be directly related to the
rate of payments of principal on the Mortgage Loans and to the amount and timing
of mortgagor defaults resulting in Realized Losses, the occurrence of Net
Interest Shortfalls and, in the case of the Class A-5, Class A-6, Class A-7 and
Class A-8 Certificates, the level of LIBOR from time to time. The rate of
principal payments on the Mortgage Loans will in turn be affected by, among
other things, the amortization schedules of the Mortgage Loans, the rate of
principal prepayments (including partial prepayments and those resulting from
refinancing) thereon by mortgagors, liquidations of defaulted Mortgage Loans,
repurchases of Mortgage Loans by Provident as a result of defective
documentation or breaches of representations and warranties, optional purchase
by the Servicer of defaulted Mortgage Loans and optional purchase by the
Servicer of all of the Mortgage Loans in connection with the termination of the
Trust Fund. See 'Yield Prepayment and Maturity Considerations' and 'Description
of the Certificates--Optional Termination' and '--Interest' herein and
'Description of the Securities--Review of Residential Loans,' '--Assignment of
Trust Fund Assets--Review of Residential Loans' and 'Description of the
Securities-- Termination' in the Prospectus. Borrowers are permitted to prepay
the Mortgage Loans, in whole or in part, at any time without penalty.
The rate of payments (including prepayments, liquidations and defaults) on
pools of mortgage loans is influenced by a variety of economic, geographic,
social and other factors. If prevailing rates for similar mortgage loans fall
below the rates of interest on the Mortgage Loans, the rate of prepayment would
generally be expected to increase. Conversely, if interest rates on similar
mortgage loans rise above the rates of interest on the Mortgage Loans, the rate
of prepayment would generally be expected to decrease.
The particular sensitivity of the Class A-6 and Class A-8 Certificates is
separately displayed in the table appearing under the heading 'Yield, Prepayment
and Maturity Considerations' herein. INVESTORS IN THE CLASS A-6 AND CLASS A-8
CERTIFICATES SHOULD CONSIDER THAT A HIGH RATE OF LIBOR WILL HAVE A NEGATIVE
EFFECT ON THE YIELD TO SUCH INVESTORS. See 'Yield, Prepayment and Maturity
Considerations' herein.
An investor that purchases any Offered Certificates at a discount,
particularly the Class PO Certificates, should consider the risk that a slower
than anticipated rate of principal payments (including prepayments, liquidations
and defaults) on the Mortgage Loans or, in the case of the Class PO
Certificates, on the Discount Mortgage Loans, will result in an actual yield
that is lower than such investor's expected yield. See 'Yield, Prepayment and
Maturity Considerations--Sensitivity of the Class X Certificates' and
'--Sensitivity of the Class PO Certificates' herein. An investor that purchases
any Offered Certificates at a premium, particularly the Class X Certificates,
should consider the risk that a faster than anticipated rate of principal
payments (including prepayments, liquidations and defaults) on the Mortgage
Loans will result in an actual yield that is lower than such investor's expected
yield and, under certain circumstances, could result in the failure of such an
investor to recoup its initial investment.
SUBORDINATION
The rights of the holders of each Class of Class B Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the holders of the Senior Certificates, the Class M Certificates and
the Classes of Class B Certificates with lower numerical designations, and
rights of the holders of the Class M Certificates to receive distributions with
respect to the Mortgage Loans will be subordinated to such rights of the holders
of the Senior Certificates, all to the extent described under 'Description of
the Certificates--Priority of Distributions Among Certificates' herein. In
addition, Realized Losses, other than Excess Losses, which will be allocated to
each class of Certificates pro rata, will be allocated to the Class B
Certificates and Class M Certificates in reverse order in which they are
entitled to distributions of principal before being allocated to the Senior
Certificates. Accordingly, the Class B Certificates and Class M Certificates are
more likely to experience losses as a result of the occurrence of losses or
interest shortfalls on the Mortgage Loans. 'Description of the
Certificates--Allocation of Losses' herein.
S-16
<PAGE>
LIMITED EXPERIENCE, LIMITED HISTORICAL DELINQUENCY, LOSS AND PREPAYMENT
INFORMATION
Historically the Servicer only services mortgage loans similar to the
Mortgage Loans from the origination of such loans to the time of sale to an
investor, which is promptly after origination. The Servicer has recently
increased the size of its servicing department and intends to service the
Mortgage Loans as well as other mortgage loans after sale to third parties. The
Servicer has obtained conditional approval from the Rating Agencies, contingent
upon compliance with specific Rating Agency requirements within the next 30
days. If the Servicer fails to satisfy such requirements in such period, the
Servicer must contract with an approved servicer to subservice the Mortgage
Loans.
The Servicer has limited historical experience with respect to the
performance, including the delinquency and loss experience and the rate of
prepayments, of these various types of loans. Accordingly, neither the
delinquency experience and loan loss and liquidation experience set forth under
'Servicing Of Mortgage Loans--Foreclosure and Delinquency Experience,' herein
nor the prepayment scenarios set forth under 'Yield, Prepayment and Maturity
Considerations--Weighted Average Lives of the Offered Certificates' herein may
be indicative of the performance of the Mortgage Loans included in the Mortgage
Pool. Prospective investors should make their investment determination based on
the Mortgage Loan underwriting criteria, the availability of the credit
enhancement described herein, the characteristics of the Mortgage Loans and
other information provided herein, and not based on any prior delinquency
experience and loan loss and liquidation experience information set forth herein
or on any rate of prepayments assumed herein. For a description of the
underwriting standards applicable to the Mortgage Loans, see 'Underwriting
Standards' herein.
BOOK-ENTRY SYSTEM FOR CERTAIN CLASSES OF CERTIFICATES
Transactions in the Book-Entry Certificates generally can be effected only
through DTC and Financial Intermediaries. The ability of a Certificateholder to
pledge Book-Entry Certificates and the liquidity of the Book-Entry Certificates
in general may be limited due to the lack of a physical certificate for such
Book-Entry Certificates. In addition, Certificateholders may experience delays
in their receipt of payments. See 'Description of the Securities-Book-Entry
Registration of Securities' in the Prospectus.
GEOGRAPHIC CONCENTRATION OF THE MORTGAGED PROPERTIES
Approximately 84.99% and 5.23% of the Mortgage Loans (by aggregate
principal balance as of the Cut-Off Date) are expected to be secured by
Mortgaged Properties located in the states of California and Washington,
respectively. Consequently, losses and prepayments on the Mortgage Loans and
resultant payments on the Offered Certificates may, both generally, and
particularly, be affected significantly by changes in the housing markets and
regional economies of, and the occurrence of natural disasters (such as
earthquakes, fires, floods or hurricanes) in, the states of California and
Washington. The Originator's underwriting standards do not require borrowers to
maintain earthquake insurance.
DISTRIBUTIONS IN REDUCTION OF THE PRINCIPAL BALANCE OF THE CLASS A-2, CLASS A-3
AND CLASS A-4 CERTIFICATES
Although, as described herein, there can be no assurance as to the rate at
which principal distributions will be made on any Class of Offered Certificates,
the Class A-2, Class A-3 and Class A-4 Certificates would be an inappropriate
investment for an investor requiring a distribution of a particular amount of
principal on a specific date or an otherwise predictable stream of
distributions. The rate of distributions in reduction of the principal balance
of any Class of Offered Certificates, the aggregate amount of distributions of
principal and interest on any Class of Offered Certificates and the yield to
maturity of any Class of Offered Certificates will be directly related to the
rate of payments of principal on the Mortgage Loans and to the amount and timing
of mortgagor defaults resulting in Realized Losses. There is no assurance with
respect to the rate of payments of principal on the Mortgage Loans and the
amount and timing of mortgagor defaults.
S-17
<PAGE>
CERTIFICATES MAY NOT BE APPROPRIATE FOR INDIVIDUAL INVESTORS
The Offered Certificates may not be an appropriate investment for
individual investors who do not have sufficient resources or expertise to
evaluate the particular characteristics of the applicable Class of Offered
Certificates. This may be the case because, among other things:
o The yield to maturity of Offered Certificates purchased at a price other
than par will be sensitive to the uncertain rate and timing of principal
prepayments on the Mortgage Loans, and in the case of the Class A-5,
Class A-6, Class A-7 and Class A-8 Certificates, the level of LIBOR from
time to time;
o The rate of principal distributions on, and the weighted average life of,
the Offered Certificates will be sensitive to the uncertain rate and
timing of principal prepayments on the Mortgage Loans and the priority of
principal distributions among the Classes of Certificates, and as such
the Offered Certificates, including the Class A-2, Class A-3 and Class
A-4 Certificates, may be inappropriate investments for an investor
requiring a distribution of a particular amount of principal on a
specific date or an otherwise predictable stream of distributions;
o There can be no assurance that an investor will be able to reinvest
amounts distributed in respect of principal on an Offered Certificate
(which amounts, in general, are expected to be greater during periods of
relatively low interest rates) at a rate at least as high as the
Pass-Through Rate applicable thereto; or
o There can be no assurance that a secondary market for the Offered
Certificate will develop or provide Certificateholders with liquidity of
investment.
Individual investors considering the purchase of an Offered Certificate
should also carefully consider the further risks and other special
considerations discussed above and under the headings 'Yield, Prepayment and
Maturity Considerations' herein and under the heading 'Risk Factors' in the
Prospectus.
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
The Depositor is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The 'year
2000 problem' is pervasive and complex; virtually every computer operation will
be affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Depositor has been advised by each of the Servicer and the Trustee that
they are committed to either (i) implementing modifications to their respective
existing systems (where such systems will be continued to be used on or after
January 1, 2000) to the extent required to cause them to be year 2000 compliant
or (ii) acquiring computer systems that are year 2000 complaint in each case
prior to January 1, 2000. However, neither the Depositor nor any affiliate of
the Depositor has made any independent investigation of the computer systems of
the Servicer or the Trustee. In the event that computer problems arise out of a
failure of such efforts to be completed on time, or in the event that the
computer systems of the Servicer or the Trustee are not fully year 2000
compliant, the resulting disruptions in the collection or distribution of
receipts on the Mortgage Loans could materially adversely affect the holders of
the Offered Certificates.
See 'Risk Factors' in the Prospectus for a description of certain other
risks and special considerations applicable to the Offered Certificates.
S-18
<PAGE>
THE MORTGAGE POOL
GENERAL
The Depositor will purchase the Mortgage Loans from the Seller pursuant to
a Mortgage Loan Purchase Agreement, dated as of the Cut-Off Date (the 'Mortgage
Loan Purchase Agreement'), between Paine Webber Real Estate Securities Inc. and
the Depositor. The Depositor will cause the Mortgage Loans to be assigned to the
Trustee for the benefit of the holders of the Certificates (the
'Certificateholders'), pursuant to the Pooling and Servicing Agreement, dated as
of the Cut-Off Date (the 'Agreement'), among Provident, as originator and as
Servicer, the Depositor and the Trustee.
Under the Agreement, Provident will make certain representations,
warranties and covenants to the Depositor relating to, among other things, the
due execution and enforceability of the Agreement and certain characteristics of
the Mortgage Loans and, subject to the limitations described under '--Assignment
of the Mortgage Loans' below, will be obligated to repurchase or substitute a
similar mortgage loan for any Mortgage Loan as to which there exists deficient
documentation or as to which there has been an uncured breach of any
representation or warranty relating to the characteristics of the Mortgage Loans
that materially and adversely affects the interests of the Certificateholders in
such Mortgage Loan. Provident will represent and warrant to the Depositor in the
Agreement that the Mortgage Loans were selected from among the outstanding one-
to four-family mortgage loans in Provident's portfolio as to which the
representations and warranties set forth in the Agreement can be made. See
'Residential Loan Program--Representations by Unaffiliated Sellers; Repurchases'
in the Prospectus. Under the Agreement, the Depositor will assign all its right,
title and interest in and to such representations, warranties and covenants
(including Provident's repurchase obligation) to the Trustee for the benefit of
Certificateholders. Neither the Depositor nor the Seller will make any
representations or warranties with respect to the Mortgage Loans and will have
no obligation to repurchase or substitute Mortgage Loans with deficient
documentation or which are otherwise defective. Provident, in the capacity as
Originator is selling the Mortgage Loans without recourse and will have no
obligation with respect to the Certificates other than the repurchase obligation
described above.
Certain information with respect to the Mortgage Loans expected to be
included in the Mortgage Pool is set forth below. Prior to the Closing Date,
Mortgage Loans may be removed from the Mortgage Pool and other Mortgage Loans
may be substituted therefor. The Depositor believes that the information set
forth herein with respect to the Mortgage Pool as presently constituted is
representative of the characteristics of the Mortgage Pool as it will be
constituted at the Closing Date, although certain characteristics of the
Mortgage Loans in the Mortgage Pool may vary. Unless otherwise indicated,
information presented herein expressed as a percentage (other than rates of
interest) are approximate percentages based on the Stated Principal Balances of
the Mortgage Loans as of the Cut-Off Date.
As of the Cut-Off Date, the aggregate of the Stated Principal Balances of
the Mortgage Loans is expected to be approximately $250,250,536 (the 'Cut-Off
Date Pool Principal Balance'). The Mortgage Loans provide for the amortization
of the amount financed over a series of substantially equal monthly payments.
All the Mortgage Loans provide for payments due as of the first day of each
month (the 'Due Date'). At origination, all of the Mortgage Loans had stated
terms to maturity of 30 years. Scheduled monthly payments made by the borrowers
on the Mortgage Loans ('Scheduled Payments') either earlier or later than the
scheduled Due Dates thereof will not affect the amortization schedule or the
relative application of such payments to principal and interest. The 'Mortgage
Rate' with respect to each Mortgage Loan is the per annum rate at which interest
accrues on such Mortgage Loan without giving effect to any default rate. Each
Mortgage Loan contains customary due-on-sale provisions. The borrowers may
prepay their Mortgage Loans at any time without penalty.
Each Mortgage Loan was originated on or after April 29, 1997.
The latest stated maturity date of any Mortgage Loan is August 1, 2028. The
earliest stated maturity date of any Mortgage Loan is May 1, 2027.
As of the Cut-Off Date, no Mortgage Loan was delinquent more than 30 days.
No Mortgage Loan had a Loan-to-Value Ratio at origination of more than 95%.
Generally, each Mortgage Loan with a Loan-to-Value Ratio at origination of
greater than 80% is covered by a primary mortgage guaranty
S-19
<PAGE>
insurance policy issued by a mortgage insurance company acceptable to the
Federal National Mortgage Association ('FNMA') or the Federal Home Loan Mortgage
Corporation ('FHLMC'). Such policy provides coverage in an amount equal to a
specified percentage times the sum of the remaining principal balance of the
related Mortgaged Loan, the accrued interest thereon and the related foreclosure
expenses. The specified percentage is either 12% for Loan-to-Value Ratios
between 80.01% and 85.00%, 25% for Loan-to-Value Ratios between 85.01% and
90.00% or 30% for Loan-to-Value Ratios between 90.01% and 95.00%. 8.62% of the
Mortgage Loans had Loan-to-Value Ratios at origination of greater than 80% and
the related borrower was required to obtain primary mortgage guaranty insurance.
No such primary mortgage guaranty insurance policy will be required with respect
to any such Mortgage Loan (i) after the date on which the related Loan-to-Value
Ratio is 80% or less or, based on a new appraisal, the principal balance of such
Mortgage Loan represents 80% or less of the new appraised value or (ii) if
maintaining such policy is prohibited by applicable law.
The 'Loan-to-Value Ratio' of a Mortgage Loan at any given time is a
fraction, expressed as a percentage, the numerator of which is the principal
balance of the related Mortgage Loan at the date of determination and the
denominator of which is (a) in the case of a purchase, the lesser of the selling
price of the Mortgaged Property or its appraised value at the time of sale, or
(b) in the case of a refinance, the appraised value of the Mortgaged Property at
the time of such refinance, except in the case of a Mortgage Loan underwritten
pursuant to Provident's Streamlined Documentation Program as described under
'Underwriting Standards' herein. With respect to Mortgage Loans originated
pursuant to the Streamlined Documentation Program (a) if the loan-to-value ratio
at the time of the origination of the mortgage loan being refinanced was 75% or
less (or 70% or less in the case of mortgage loans relating to properties
located in California), the 'Loan-to-Value Ratio' will be the ratio of the
principal amount of the Mortgage Loan outstanding at the date of determination
divided by the appraised value of the related mortgaged property at the time of
the origination of the mortgage loan being refinanced or (b) if the
loan-to-value ratio at the time of the origination of the mortgage loan being
refinanced was greater than 75% (or greater than 70% in the case of mortgage
loans relating to properties located in California), then the 'Loan-to-Value
Ratio' will be the ratio of the principal amount of the Mortgage Loan
outstanding at the date of determination divided by the appraised value as
determined by a limited appraisal report at the time of the origination of such
Mortgage Loan. See 'Underwriting Standards' herein. No assurance can be given
that the value of any Mortgaged Property has remained or will remain at the
level that existed on the appraisal or sales date. If residential real estate
values generally or in a particular geographic area decline, the Loan-to-Value
Ratios might not be a reliable indicator of the rates of delinquencies,
foreclosures and losses that could occur with respect to such Mortgage Loans.
The following information sets forth in tabular format certain information,
as of the Cut-Off Date, as to the Mortgage Loans (totals may not sum due to
rounding). Percentages (approximate) are stated by Aggregate Principal Balance
Outstanding of the Mortgage Loans as of the Cut-Off Date.
S-20
<PAGE>
MORTGAGE RATES(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF
MORTGAGE RATES (%) MORTGAGE LOANS BALANCE OUTSTANDING MORTGAGE POOL
- ------------------------------------------------------------ -------------- ------------------- -------------
<S> <C> <C> <C>
6.500 to 6.750.............................................. 6 $ 1,917,299 0.77%
6.751 to 7.000.............................................. 59 18,890,268 7.55
7.001 to 7.250.............................................. 239 77,770,414 31.08
7.251 to 7.500.............................................. 292 94,442,300 37.74
7.501 to 7.750.............................................. 133 39,212,827 15.67
7.751 to 8.000.............................................. 60 15,363,719 6.14
8.001 to 8.250.............................................. 8 1,946,228 0.78
8.251 to 8.500.............................................. 6 635,479 0.25
8.501 to 8.750.............................................. 1 72,000 0.03
--- ------------------- -------------
Total.................................................. 804 $ 250,250,536 100.00%
--- ------------------- -------------
--- ------------------- -------------
</TABLE>
- ------------------
(1) As of the Cut-Off Date, the weighted average Mortgage Rate of the Mortgage
Loans is expected to be approximately 7.3909%.
ORIGINAL LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF
LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS BALANCE OUTSTANDING MORTGAGE POOL
- ------------------------------------------------------------ -------------- ------------------- -------------
<S> <C> <C> <C>
15.01 to 20.00.............................................. 1 $ 1,200,000 0.48%
20.01 to 25.00.............................................. 1 298,500 0.12
25.01 to 30.00.............................................. 1 599,532 0.24
30.01 to 35.00.............................................. 2 364,000 0.15
35.01 to 40.00.............................................. 3 872,031 0.35
40.01 to 45.00.............................................. 12 4,081,906 1.63
45.01 to 50.00.............................................. 11 3,337,928 1.33
50.01 to 55.00.............................................. 16 5,306,414 2.12
55.01 to 60.00.............................................. 37 11,454,690 4.58
60.01 to 65.00.............................................. 46 14,697,465 5.87
65.01 to 70.00.............................................. 74 24,844,730 9.93
70.01 to 75.00.............................................. 148 47,030,306 18.79
75.01 to 80.00.............................................. 373 114,601,437 45.79
80.01 to 85.00.............................................. 9 2,794,118 1.12
85.01 to 90.00.............................................. 44 12,444,231 4.97
90.01 to 95.00.............................................. 26 6,323,250 2.53
--- ------------------- -------------
Total.................................................. 804 $ 250,250,536 100.00%
--- ------------------- -------------
--- ------------------- -------------
</TABLE>
- ------------------
(1) The weighted average original Loan-to-Value Ratio of the Mortgage Loans is
expected to be approximately 73.84%.
S-21
<PAGE>
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF
CURRENT MORTGAGE LOAN PRINCIPAL BALANCE MORTGAGE LOANS BALANCE OUTSTANDING MORTGAGE POOL
- ------------------------------------------------------------ -------------- ------------------- -------------
<S> <C> <C> <C>
$30,001--$40,000............................................ 1 $ 40,000 0.02%
$50,001--$100,000........................................... 18 1,475,785 0.59
$100,001--$250,000.......................................... 134 28,034,574 11.20
$250,001--$500,000.......................................... 617 200,193,598 80.00
$500,001--$1,000,000........................................ 33 19,306,580 7.71
$1,000,001--$2,000,000...................................... 1 1,200,000 0.48
--- ------------------- -------------
Total.................................................. 804 $ 250,250,536 100.00%
--- ------------------- -------------
--- ------------------- -------------
</TABLE>
- ------------------
(1) As of the Cut-Off Date, the average current Mortgage Loan principal balance
is expected to be approximately $311,257.
DOCUMENTATION PROGRAM FOR MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF
TYPE OF PROGRAM MORTGAGE LOANS BALANCE OUTSTANDING MORTGAGE POOL
- ------------------------------------------------------------ -------------- ------------------- -------------
<S> <C> <C> <C>
Full........................................................ 719 $ 228,666,805 91.38%
Alternative................................................. 2 547,000 0.22
Reduced..................................................... 65 17,419,273 6.96
No Income No Asset.......................................... 2 666,795 0.27
No Ratio.................................................... 16 2,950,664 1.18
--- ------------------- -------------
Total.................................................. 804 $ 250,250,536 100.00%
--- ------------------- -------------
--- ------------------- -------------
</TABLE>
TYPES OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF
MORTGAGE PROPERTY TYPE MORTGAGE LOANS BALANCE OUTSTANDING MORTGAGE POOL
- ------------------------------------------------------------ -------------- ------------------- -------------
<S> <C> <C> <C>
Single Family............................................... 620 $ 192,822,413 77.05%
Condominium................................................. 23 5,443,121 2.18
Planned Unit Development.................................... 161 51,985,002 20.77
--- ------------------- -------------
Total.................................................. 804 $ 250,250,536 100.00%
--- ------------------- -------------
--- ------------------- -------------
</TABLE>
OCCUPANCY TYPES(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF
OCCUPANCY TYPE MORTGAGE LOANS BALANCE OUTSTANDING MORTGAGE POOL
- ------------------------------------------------------------ -------------- ------------------- -------------
<S> <C> <C> <C>
Primary Residence........................................... 785 $ 247,671,364 98.97%
Second Residence............................................ 19 2,579,173 1.03
--- ------------------- -------------
Total.................................................. 804 $ 250,250,536 100.00%
--- ------------------- -------------
--- ------------------- -------------
</TABLE>
- ------------------
(1) Based upon representations of the related mortgagors at the time of
origination.
S-22
<PAGE>
STATE DISTRIBUTION OF MORTGAGED PROPERTIES(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF
STATE MORTGAGE LOANS BALANCE OUTSTANDING MORTGAGE POOL
- ------------------------------------------------------------ -------------- ------------------- -------------
<S> <C> <C> <C>
California.................................................. 673 $ 212,683,604 84.99%
Washington.................................................. 40 13,081,132 5.23
Utah........................................................ 24 6,074,564 2.43
Arizona..................................................... 14 3,273,931 1.31
Nevada...................................................... 9 2,756,144 1.10
Colorado.................................................... 7 2,151,370 0.86
Oregon...................................................... 6 1,669,231 0.67
Connecticut................................................. 6 1,473,539 0.59
South Carolina.............................................. 4 1,227,688 0.49
Michigan.................................................... 4 1,135,029 0.45
Texas....................................................... 4 1,128,559 0.45
New Mexico.................................................. 3 868,072 0.35
Ohio........................................................ 3 817,685 0.33
North Carolina.............................................. 3 800,200 0.32
Indiana..................................................... 2 532,289 0.21
Idaho....................................................... 1 320,000 0.13
Missouri.................................................... 1 257,500 0.10
--- ------------------- -------------
Total..................................................... 804 $ 250,250,536 100.00%
--- ------------------- -------------
--- ------------------- -------------
</TABLE>
- ------------------
(1) No more than approximately 2.03% of the Mortgage Loans will be secured by
Mortgaged Properties located in any one postal zip code area.
PURPOSE OF MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF
LOAN PURPOSE MORTGAGE LOANS BALANCE OUTSTANDING MORTGAGE POOL
- ------------------------------------------------------------ -------------- ------------------- -------------
<S> <C> <C> <C>
Purchase.................................................... 304 $ 92,669,090 37.03%
Refinance (rate/term)....................................... 321 103,522,937 41.37
Refinance (cash out)........................................ 179 54,058,509 21.60
--- ------------------- -------------
Total..................................................... 804 $ 250,250,536 100.00%
--- ------------------- -------------
--- ------------------- -------------
</TABLE>
REMAINING TERMS TO MATURITY(1)
<TABLE>
<CAPTION>
REMAINING TERM TO NUMBER OF AGGREGATE PRINCIPAL PERCENT OF
MATURITY(MONTHS) MORTGAGE LOANS BALANCE OUTSTANDING MORTGAGE POOL
- ------------------------------------------------------------ -------------- ------------------- -------------
<S> <C> <C> <C>
360......................................................... 507 $ 158,843,520 63.47%
359......................................................... 256 78,600,537 31.41
358......................................................... 38 12,132,873 4.85
357......................................................... 1 235,497 0.09
353......................................................... 1 223,975 0.09
346......................................................... 1 214,134 0.09
--- ------------------- -------------
Total..................................................... 804 $ 250,250,536 100.00%
--- ------------------- -------------
--- ------------------- -------------
</TABLE>
- ------------------
(1) As of the Cut-Off Date, the weighted average remaining term to maturity of
the Mortgage Loans is expected to be approximately 360 months.
S-23
<PAGE>
ASSIGNMENT OF THE MORTGAGE LOANS
Pursuant to the Agreement, the Depositor on the Closing Date will sell,
transfer, assign, set over and otherwise convey without recourse to the Trustee
in trust for the benefit of the Certificateholders all right, title and interest
of the Depositor in and to each Mortgage Loan and all right, title and interest
in and to all other assets included in the Trust Fund, including all principal
and interest received on or with respect to the Mortgage Loans, exclusive of
principal and interest due on or prior to the Cut-Off Date.
In connection with such transfer and assignment, the Depositor will deliver
or cause to be delivered to the Trustee, or a custodian for the Trustee, among
other things, the original promissory note (the 'Mortgage Note') (and any
modification or amendment thereto) endorsed in blank without recourse (except
that the Depositor may deliver or cause to be delivered a lost note affidavit in
lieu of any original Mortgage Note that has been lost), the original instrument
creating a first lien on the related Mortgaged Property (the 'Mortgage') with
evidence of recording indicated thereon, an assignment in recordable form of the
Mortgage, the title policy with respect to the related Mortgaged Property and,
if applicable, all recorded intervening assignments of the Mortgage and any
riders or modifications to such Mortgage Note and Mortgage (except for any such
documents not returned from the public recording office, which will be delivered
to the Trustee as soon as the same is available to the Depositor) (collectively,
the 'Mortgage File'). Assignments of the Mortgage Loans to the Trustee (or its
nominee) will be recorded in the appropriate public office for real property
records, except in states such as California where in the opinion of counsel
such recording is not required to protect the Trustee's interests in the
Mortgage Loan against the claim of any subsequent transferee or any successor to
or creditor of the Depositor, the Seller or Provident.
The Trustee will review each Mortgage File within 90 days of the Closing
Date (or promptly after the Trustee's receipt of any document permitted to be
delivered after the Closing Date) and if any document in a Mortgage File is
found to be missing or defective in a material respect and Provident does not
cure such defect within 90 days of notice thereof from the Trustee (or within
such longer period not to exceed 720 days after the Closing Date as provided in
the Agreement in the case of missing documents not returned from the public
recording office), Provident will be obligated to repurchase the related
Mortgage Loan from the Trust Fund. Rather than repurchase the Mortgage Loan as
provided above, Provident may remove such Mortgage Loan (a 'Deleted Mortgage
Loan') from the Trust Fund and substitute in its place another mortgage loan (a
'Replacement Mortgage Loan'); however, such substitution is permitted only
within two years of the Closing Date. Any Replacement Mortgage Loan generally
will, on the date of substitution, among other characteristics set forth in the
Agreement, (i) have a principal balance, after deduction of all Scheduled
Payments due in the month of substitution, not in excess of, and not more than
10% less than, the Stated Principal Balance of the Deleted Mortgage Loan (the
amount of any shortfall to be deposited by Provident in the Collection Account
and held for distribution to the Certificateholders on the related Distribution
Date (a 'Substitution Adjustment Amount'), (ii) have a Mortgage Rate not lower
than, and not more than 1% per annum higher than, that of the Deleted Mortgage
Loan, (iii) have a Loan-to-Value Ratio not higher than that of the Deleted
Mortgage Loan, (iv) have a remaining term to maturity not greater than (and not
more than one year less than) that of the Deleted Mortgage Loan, and (v) comply
with all of the representations and warranties set forth in the Agreement as of
the date of substitution. This cure, repurchase or substitution obligation
constitutes the sole remedy available to Certificateholders or the Trustee for
omission of, or a material defect in, a Mortgage Loan document.
S-24
<PAGE>
UNDERWRITING STANDARDS
GENERAL
All mortgage loans must meet credit, appraisal and underwriting standards
acceptable to Provident. Provident's underwriting standards are applied in
accordance with applicable federal and state laws and regulations. Except as
otherwise provided herein, the underwriting procedures are consistent with those
identified under 'Residential Loan Program--Underwriting Standards' in the
Prospectus.
In certain cases, including with respect to mortgage loans originated
through a loan correspondent or mortgage broker, the data used by Provident to
complete the underwriting analysis may be obtained by a third party. In such
instances, the determination as to whether a mortgage loan complies with
Provident's underwriting guidelines is made by Provident. After originating
mortgage loans under such circumstances, Provident conducts a quality control
review of a sample of such mortgage loans to verify information obtained from
third parties.
Provident's underwriting standards are applied by or on behalf of Provident
to evaluate the prospective borrower's credit standing and repayment ability and
the value and adequacy of the mortgaged property as collateral. Under such
standards, a prospective borrower must generally demonstrate that the ratio of
the borrower's monthly housing expenses (including principal and interest on the
proposed mortgage loan and, as applicable, the related monthly portion of
property taxes, hazard insurance and mortgage insurance) to the borrower's
monthly gross income and the ratio of total monthly debt to the monthly gross
income (the 'debt-to-income' ratios) are within certain limits. The maximum
acceptable debt-to-income ratio, which is determined on a loan-by-loan basis
varies depending on a number of underwriting criteria, including the
Loan-to-Value Ratio, loan purpose, loan amount and credit history of the
borrower. In addition to meeting the debt-to-income ratio guidelines, each
prospective borrower is required to have sufficient cash resources to pay the
down payment and closing costs. Certain exceptions to Provident's underwriting
guidelines are made in the event that compensating factors are demonstrated by a
prospective borrower.
The nature of the information which a borrower is required to disclose and
whether such information is verified depends, in part, on the documentation
program used in the origination process. In general under Provident's Full
Documentation Loan Program (the 'Full Documentation Program'), each prospective
borrower is required to complete an application which includes information with
respect to the applicant's assets, liabilities, income, credit history,
employment history and other personal information. Self-employed individuals are
generally required to submit their two most recent federal income tax returns.
The underwriter generally verifies the information contained in the application
relating to employment, income, assets or mortgages.
Under certain circumstances, a prospective borrower may be eligible for a
loan approval process which limits or eliminates Provident's standard disclosure
and/or verification requirements. Provident offers the following documentation
programs as alternatives to its Full Documentation Program: an Alternative
Documentation Loan Program (the 'Alternative Documentation Program'), a Reduced
Documentation Loan Program (the 'Reduced Documentation Program'), a No Income/No
Asset Documentation Loan Program (the 'No Income/No Asset Documentation
Program') and a No Ratio Documentation Loan Program (the 'No Ratio Documentation
Program').
Provident obtains a credit report relating to the applicant from a credit
reporting company. The credit report typically contains information relating to
such matters as credit history with local and national merchants and lenders,
installment debt payments and any record of defaults, bankruptcy, dispossession,
suits or judgments. All adverse information in the credit report is required to
be explained by the prospective borrower to the satisfaction of the lending
officer.
Provident obtains appraisals or updates of appraisals from independent
appraisers or appraisal services for properties that are to secure mortgage
loans. Such appraisers inspect and appraise the proposed mortgaged property and
verify that such property is in acceptable condition. Following each appraisal,
the appraiser prepares a report which includes a market data analysis based on
recent sales of comparable homes in the area and, when deemed appropriate, a
replacement cost analysis based on the current cost of constructing a similar
home. All appraisals are required to conform to FNMA or FHLMC appraisal
standards then in effect. Every independent appraisal is reviewed by an
underwriter of Provident before the loan is approved.
S-25
<PAGE>
Provident requires title insurance on all of its mortgage loans secured by
first liens on real property. Provident also requires that fire and extended
coverage casualty insurance be maintained on the mortgaged property in an amount
at least equal to the principal balance of the related single-family mortgage
loan or the replacement cost of the mortgaged property, whichever is less.
In addition to Provident's standard underwriting guidelines (the 'Standard
Underwriting Guidelines'), which are consistent in many respects with the
guidelines applied to mortgage loans purchased by FNMA and FHLMC, Provident uses
underwriting guidelines featuring expanded criteria (the 'Expanded Underwriting
Guidelines'). The Standard Underwriting Guidelines and the Expanded Underwriting
Guidelines are described further below.
STANDARD UNDERWRITING GUIDELINES
Provident's Standard Underwriting Guidelines generally allow Loan-to-Value
Ratios at origination of up to 95% for purchase money or rate and term refinance
mortgage loans with original principal balances of up to $300,000, up to 90% for
mortgage loans with original principal balances of up to $400,000, up to 80% for
mortgage loans with original principal balances of up to $500,000, up to 75% for
mortgage loans with original principal balances of up to $650,000 and up to 70%
for mortgage loans with original principal balances of up to $1,000,000.
For cash out refinance mortgage loans with original principal balances of
up to $650,000, Provident's Standard Underwriting Guidelines generally allow
Loan-to-Value Ratios at origination of up to 75%. The maximum 'cash-out' amount
permitted ranges from $50,000 to $150,000 depending on the original Loan-to-
Value Ratio of the related mortgage loan and other underwriting considerations.
As used herein, a refinance mortgage loan is classified as a cash-out refinance
mortgage loan by Provident if the borrower retains greater than 1.0% of the
entire amount of the proceeds from the refinancing of the existing loan.
Under its Standard Underwriting Guidelines, Provident generally permits a
debt-to-income ratio based on the borrower's monthly housing expenses of up to
33% and a debt-to-income ratio based on the borrower's total monthly debt of up
to 38%. In certain circumstances based in part on the original Loan-to-Value
Ratio and the borrowers assets, Provident permits a debt-to-income ratio based
on the borrower's monthly housing expenses of up to 36% and a debt-to-income
ratio based on the borrower's total monthly debt of up to 43%.
In connection with the Standard Underwriting Guidelines, Provident
originates or acquires mortgage loans under the Full Documentation Program, the
Alternative Documentation Program or the Reduced Documentation Program.
The Alternative Documentation Program permits a borrower to provide W-2
forms instead of tax returns covering the most recent two years, permits bank
statements in lieu of verification of deposits and permits alternative methods
of employment verification. Mortgage loans which have been originated under the
Alternative Documentation Program may be eligible for sale to FNMA or FHLMC.
Under the Reduced Documentation Program, certain underwriting documentation
concerning income verification is waived. Provident obtains from a prospective
borrower either a verification of deposit or bank statements for the two-month
period immediately prior to the date of the mortgage loan application. Since
information relating to a prospective borrower's income is not verified, such
borrower's debt-to-income ratios are calculated based on the information
provided by the borrower in the mortgage loan application. The maximum
Loan-to-Value Ratio (including secondary financing) ranges up to 70% maximum.
Mortgage loans which have been originated under the Reduced Documentation
Program are not eligible for sale to FNMA or FHLMC.
Mortgage Loans comprising approximately 93.01% of the Mortgage Pool were
underwritten pursuant to Provident's Standard Underwriting Guidelines, allocated
among programs as set forth under 'The Mortgage Pool' above.
S-26
<PAGE>
EXPANDED UNDERWRITING GUIDELINES
Mortgage loans which are underwritten pursuant to the Expanded Underwriting
Guidelines may have higher Loan-to-Value Ratios, higher loan amounts and
different documentation requirements than those associated with the Standard
Underwriting Guidelines. The Expanded Underwriting Guidelines also permit higher
debt-to-income ratios than mortgage loans underwritten pursuant to the Standard
Underwriting Guidelines.
Provident's Expanded Underwriting Guidelines generally allow Loan-to-Value
Ratios at origination of up to 95% for purchase money or rate and term refinance
mortgage loans with original principal balances of up to $300,000, up to 90% for
mortgage loans with original principal balances of up to $400,000, up to 80% for
mortgage loans with original principal balances of up to $650,000, up to 70% for
mortgage loans with original principal balances of up to $750,000, up to 65% for
mortgage loans with original principal balances of up to $1,000,000 and up to
60% for mortgage loans with original principal balances of up to $3,000,000.
For cash-out refinance mortgage loans with original principal balances of
up to $3,000,000, Provident's Expanded Underwriting Guidelines generally allow
Loan-to-Value Ratios at origination of up to 55%. The maximum 'cash-out' amount
permitted is $600,000 and is based in part on the original Loan-to-Value Ratio
of the related mortgage loan.
Under its Expanded Underwriting Guidelines, Provident generally permits a
debt-to-income ratio based on the borrower's monthly housing expenses of up to
36% and a debt-to-income ratio based on the borrower's total monthly debt of up
to 40%. In certain circumstances based in part on the original Loan-to-Value
Ratio and the borrowers assets, Provident permits a debt-to-income ratio based
on the borrower's monthly housing expenses of up to 40% and a debt-to-income
ratio based on the borrower's total monthly debt of up to 45%; provided,
however, that if the Loan-to-Value Ratio exceeds 80%, such maximum permitted
debt-to-income ratios are 33% and 38%, respectively.
In connection with the Expanded Underwriting Guidelines, Provident
originates or acquires mortgage loans under the Full Documentation Program, the
Alternative Documentation Program, the Reduced Documentation Loan Program and
the No Income/No Asset Documentation Program and the No Ratio Documentation
Program. The No Income/No Asset Documentation Program and the No Ratio
Documentation Program are not available under the Standard Underwriting
Guidelines.
The same documentation and verification requirements apply to mortgage
loans documented under the Full Documentation Program, Alternative Documentation
Program and Reduced Documentation Program regardless of whether the loan has
been underwritten under the Expanded Underwriting Guidelines or the Standard
Underwriting Guidelines. However, under the Alternative Documentation Program,
mortgage loans that have been underwritten pursuant to the Expanded Underwriting
Guidelines may have higher loan balances and Loan-to-Value Ratios than those
permitted under the Standard Underwriting Guidelines.
Under the No Income/No Asset Documentation Program, no documentation
relating to a prospective borrower's income, employment or assets is required
and therefore debt-to-income ratios are not calculated or included in the
underwriting analysis. This program is limited to borrowers with excellent
credit histories. Under the No Income/No Asset Documentation Program, the
maximum Loan-to-Value Ratio (including secondary financing) ranges up to 75%.
Mortgage loans originated under the No Income/No Asset Documentation Program are
not eligible for sale to FNMA or FHLMC.
Under the No Ratio Documentation Program, the borrower is not required to
disclose any income information, and accordingly debt-to-income ratios are not
calculated or included in the underwriting analysis. Under the No Ratio
Documentation Program, the borrower is required to provide documentation to
verify that they have liquid assets equal to a minimum of 6 months of principal
and interest and taxes and insurance payments required under such mortgage loan.
With respect to such mortgage loans, the maximum Loan-to-Value Ratio (including
secondary financing) ranges up to 80%. Mortgage Loans originated under the No
Ratio Documentation Program are not eligible for sale to FNMA or FHLMC.
Mortgage Loans originated under either the No Income/No Asset Documentation
Program or the No Ratio Documentation Program pursuant to which debt-to-income
ratios are not calculated as described above are expected to comprise
approximately 1.45% of the Mortgage Pool.
S-27
<PAGE>
Under the Expanded Underwriting Guidelines, Provident may also provide
mortgage loans to borrowers who are not U.S. citizens, including permanent and
non-permanent residents. The borrower is required to have a valid U.S. social
security number or a certificate of foreign status (IRS Form W-8). The
borrower's income and assets must be verified under the Full Documentation
Program or the Alternative Documentation Program. The maximum Loan-to-Value
Ratio (including secondary financing) is 90%.
Mortgage Loans comprising 6.99% of the Mortgage Pool were underwritten
pursuant to Provident's Expanded Underwriting Guidelines.
MORTGAGE LOAN PRODUCTION
The following table sets forth, by number and dollar amount of mortgage
loans, Provident's residential mortgage loan production for the periods
indicated.
<TABLE>
<CAPTION>
6 MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1994 1995 1996 1997 1998
------------ ------------ ------------ -------------- --------------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT AVERAGE LOAN BALANCE)
<S> <C> <C> <C> <C> <C>
FHA/VA Loans
Number of Loans......... 0 0 0 650 905
Volume of Loans......... $ 0.00 $ 0.00 $ 0.00 $ 75,605,699 $ 112,603,373
Conventional Loans
Number of Loans......... 1,248 1,266 3,359 13,301 16,985
Volume of Loans......... $222,158,117 $217,311,900 $587,639,838 $2,295,857,397 $2,902,092,802
Other Loans
Number of Loans......... 28 70 153 525 751
Volume of Loans......... $ 5,128,950 $ 10,406,450 $ 23,604,300 $ 79,287,120 $ 106,404,725
Total Loans
Number of Loans......... 1,276 1,336 3,512 14,476 18,641
Volume of Loans......... $227,287,067 $227,718,350 $611,244,138 $2,450,750,216 $3,121,100,900
Average Loan Balance......... $ 178,125 $ 170,448 $ 174,044 $ 169,297 $ 167,432
</TABLE>
S-28
<PAGE>
SERVICING OF MORTGAGE LOANS
GENERAL
The Servicer will service the Mortgage Loans in accordance with the terms
set forth in the Agreement. The Servicer may perform any of its obligations
under the Agreement through one or more subservicers. Notwithstanding any such
subservicing arrangement, the Servicer will remain liable for its servicing
duties and obligations under the Agreement as if the Servicer alone were
servicing the Mortgage Loans. The Servicer has obtained conditional approval
from the Rating Agencies, contingent upon compliance with specific Rating Agency
requirements within the next 30 days. If the Servicer fails to satisfy such
requirements in such period, the Servicer must contract with an approved
servicer to subservice the Mortgage Loans.
THE SERVICER
Provident Funding Associates, L.P., a California limited partnership (the
'Servicer'), will act as Servicer for the Mortgage Loans pursuant to the
Agreement. The Servicer is a California limited partnership that is a mortgage
lender engaged in the business of originating, selling and servicing mortgage
loans secured by one- to four-family residential properties. The Servicer was
organized in California in 1992 and currently is licensed as a mortgage lender
or registered to originate or purchase loans in 33 states. As of June 30, 1998,
it had approximately 402 employees including professionals and support staff.
At June 30, 1998, the Servicer provided servicing for approximately $1,584
million aggregate principal amount of mortgage loans, approximately $1,006
million of which consisted of mortgage loans serviced for unaffiliated third
parties and approximately $578 million of which consisted of newly originated
mortgage loans. The mortgage loans serviced by Provident consisted of
approximately 11,000 mortgage loans with an average principal balance of
approximately $144,000.
Upon written request, Provident will make available its most recent audited
financial statements. Requests should be directed to Provident at 1633 Bayshore
Highway #155, Burlingame, California 94010, Attention: Peter Ho.
Provident generally sells the loans originated on a servicing released
basis (except for loans sold to FHLMC, for which all servicing is retained)
except for the interim period of time from origination to sale to investors.
Servicing includes collecting and remitting loan payments, accounting for
principal and interest, holding escrow (impound) funds for payment of taxes and
insurance, making inspections as required of the mortgaged premises, contacting
delinquent mortgagors, supervising foreclosures in the event of unremedied
defaults and generally administering the loans, for which Provident receives
servicing fees. Provident has not in the past but may in the future sell to
other mortgage bankers a portion of its portfolio of loan servicing rights. In
addition, see 'Description of the Securities--Evidence as to Compliance' in the
Prospectus for a description of the annual servicing report and the report of
the independent public accountants required to be provided by the Servicer in
its capacity as Servicer under the Agreement.
FORECLOSURE AND DELINQUENCY EXPERIENCE
Historically, a variety of factors, including the appreciation of real
estate values, have limited the Servicer's loss and delinquency experience on
its portfolio of serviced mortgage loans. There can be no assurance that factors
beyond the Servicer's control, such as national or local economic conditions or
downturns in the real estate markets of its lending areas, will not result in
increased rates of delinquencies and foreclosure losses in the future.
The likelihood that a mortgagor will become delinquent in the payment of
his or her mortgage loan or the rate of any subsequent foreclosures may be
affected by a number of factors related to a borrower's personal circumstances
including, but not limited to, unemployment or change in employment (or in the
case of self-employed mortgagors or mortgagors relying on commission income,
fluctuations in income), marital separation and the mortgagor's equity in the
related mortgaged property. In addition, delinquency and foreclosure experience
may be sensitive to adverse economic conditions, either nationally or
regionally, may exhibit season variations and may be influenced by the level of
interest rates and servicing decisions on the applicable mortgage loans.
Regional economic conditions (including declining real estate values) may
particularly affect delinquency and foreclosure experience on mortgage loans to
the extent that mortgaged properties are concentrated in certain geographic
areas. Furthermore, the level of foreclosures reported is affected by the length
of time legally required
S-29
<PAGE>
to complete the foreclosure process and take title to the related property,
which varies from jurisdiction to jurisdiction. The delinquency and foreclosure
experience on the Mortgage Loans may be particularly affected to the extent that
the related Mortgage Properties are concentrated in areas which experience
adverse economic conditions or declining real estate values.
The following table summarizes the delinquency and foreclosure experience,
respectively, on the dates indicated, of conventional mortgage loans serviced or
master serviced by the Servicer. The delinquency and foreclosure percentages may
be affected by the size and relative lack of seasoning of the servicing
portfolio which increased from approximately $141 million at December 1996, to
approximately $393 million at December 1997, to approximately $823 million at
May 1998.
DELINQUENCIES AND FORECLOSURES GENERALLY ARE EXPECTED TO OCCUR MORE
FREQUENTLY AFTER THE FIRST FULL YEAR OF THE LIFE OF MORTGAGE LOANS. PROVIDENT
TYPICALLY SELLS MORTGAGE LOANS ORIGINATED BY IT WITHIN 1 TO 2 MONTHS AFTER
ORIGINATION AND GENERALLY ONLY RETAINS SERVICING WITH RESPECT TO MORTGAGE LOANS
SOLD TO FHLMC. ACCORDINGLY, THE FOLLOWING TABLE GENERALLY SETS FORTH PROVIDENT'S
FORECLOSURE AND DELINQUENCY EXPERIENCE ONLY FOR MORTGAGE LOANS SOLD TO FHLMC.
PROVIDENT DOES NOT KEEP RECORDS OF ANY FORECLOSURE AND DELINQUENCY EXPERIENCE
WITH RESPECT TO MORTGAGE LOANS ORIGINATED BY PROVIDENT FOR SALE TO OTHERS, WHEN
SUCH FORECLOSURE AND DELINQUENCY EXPERIENCE WOULD BE EXPECTED TO BE HIGHER, AND
MAY BE SIGNIFICANTLY HIGHER.
THERE CAN BE NO ASSURANCE THAT THE FUTURE DELINQUENCY EXPERIENCE ON THE
MORTGAGE LOANS WILL BE COMPARABLE TO THAT OF THE TOTAL PORTFOLIO OF LOANS
SERVICED BY THE SERVICER AS SET FORTH BELOW. SEE 'RISK FACTORS--LIMITED
HISTORICAL DELINQUENCY, LOSS AND PREPAYMENT INFORMATION' HEREIN. ACCORDINGLY,
THE INFORMATION SHOULD NOT BE CONSIDERED AS A BASIS FOR ASSESSING THE
LIKELIHOOD, AMOUNT OR SEVERITY OF DELINQUENCY OR LOSSES ON THE MORTGAGE LOANS
AND NO ASSURANCES CAN BE GIVEN THAT THE FORECLOSURE AND DELINQUENCY EXPERIENCE
PRESENTED IN THE TABLE BELOW WILL BE INDICATIVE OF SUCH EXPERIENCE ON THE
MORTGAGE LOANS.
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, MAY 31,
-------------- -------
1996 1997 1998
---- ---- -------
<S> <C> <C> <C>
Delinquent Mortgage Loans and Pending Foreclosures at Period End(1):
30-59 days........................................................................ 1.39% 0.99% 1.41%
60-89 days........................................................................ 0.11 0.07 0.29
90 days or more (excluding pending foreclosures).................................. 0.00 0.00 0.00
Total of delinquencies............................................................ 1.50 1.06 1.70
---- ---- -------
Foreclosures pending................................................................ 0.43 0.14 0.15
---- ---- -------
---- ---- -------
Total delinquencies and foreclosures pending........................................ 1.93 1.20 1.85
---- ---- -------
---- ---- -------
</TABLE>
- ------------------
(1) As a percentage of the total number of loans serviced.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Expense Fees with respect to the Mortgage Pool are payable out of the
interest payments on each Mortgage Loan. The Expense Fees will be the sum of the
Servicer Fees and the Trustee Fees. The 'Expense Fees' consist of (a) servicing
compensation payable to the Servicer in respect of its servicing activities (the
'Servicing Fee') and fees payable to the Trustee in respect of its activities as
trustee under the Agreement. The Servicing Fee will be 0.25% per annum (the
'Servicing Fee Rate') of the Stated Principal Balance of each Mortgage Loan. The
'Expense Fee Rate' will be 0.2625% per annum of the Stated Principal Balance of
each Mortgage Loan. The Servicer is obligated to pay certain ongoing expenses
associated with the Trust Fund and incurred by the Servicer in connection with
its responsibilities under the Agreement and such amounts will be paid by the
Servicer out of the Servicing Fee. The amount of the Servicing Fee is subject to
adjustment with respect to prepaid Mortgage Loans, as described herein under
'--Adjustment to Servicing Fee in Connection with Certain Prepaid Mortgage
Loans.' The Servicer is also entitled to receive, as additional servicing
compensation, all late payment fees, assumption fees and other similar charges
and all reinvestment income earned on amounts on deposit in the Collection
Account and Distribution Account. The 'Net Mortgage Rate' of
S-30
<PAGE>
a Mortgage Loan is the Mortgage Rate thereof minus the Expense Fees with respect
to such Mortgage Loan (expressed as a per annum percentage of the Stated
Principal Balance thereof).
ADJUSTMENT TO SERVICING FEE IN CONNECTION WITH CERTAIN PREPAID MORTGAGE LOANS
When a borrower prepays a Mortgage Loan between Due Dates, the borrower is
required to pay interest on the amount prepaid only to the date of prepayment
and not thereafter. Except with respect to the month of the Cut-Off Date,
principal prepayments by borrowers received by the Servicer from the first day
through the fifteenth day of a calendar month will be distributed to
Certificateholders on the Distribution Date in the same month in which such
prepayments are received and, accordingly, no shortfall in the amount of
interest to be distributed to Certificateholders with respect to the prepaid
Mortgage Loans results. Conversely, principal prepayments by borrowers received
by the Servicer from the sixteenth day (or, in the case of the first
Distribution Date, from the Cut-Off Date) through the last day of a calendar
month will be distributed to Certificateholders on the Distribution Date in the
month following the month of receipt and, accordingly, a shortfall in the amount
of interest to be distributed to Certificateholders with respect to such prepaid
Mortgage Loans would result. Pursuant to the Agreement, the Servicing Fee for
any month will be reduced, but not by more than one-half of such Servicing Fee,
by an amount sufficient to pass through to Certificateholders the full amount of
interest to which they would be entitled in respect of each such prepaid
Mortgage Loan on the related Distribution Date. If shortfalls in interest as a
result of prepayments in any Prepayment Period exceed an amount equal to
one-half of the Servicing Fee otherwise payable on the related Distribution
Date, the interest entitlement for each Class of Certificates for such
Distribution Date will be reduced pro rata by the amount of such excess. A
'Prepayment Period' is the period from the 16th day of the calendar month
preceding the month of such Distribution Date (or, in the case of the first
Distribution Date, from the Cut-Off Date) through the 15th of the month of such
Distribution Date. See 'Description of the Certificates--Interest' herein.
ADVANCES
Subject to the following limitations, the Servicer will be required to
advance prior to each Distribution Date, from its own funds or funds in the
Collection Account that do not constitute Available Collection Amounts for such
Distribution Date, an amount equal to the aggregate of payments of principal and
interest on the Mortgage Loans (net of the Servicing Fee with respect to the
related Mortgage Loans) which were due on the related Due Date and which were
delinquent on the related Determination Date, together with an amount equivalent
to interest on each Mortgage Loan as to which the related Mortgaged Property has
been acquired by the Trust Fund through foreclosure or deed-in-lieu of
foreclosure ('REO Property') (any such advance, an 'Advance'). The
'Determination Date' for each Distribution Date is the 22nd day of each month
or, if such day is not a business day, the preceding business day; provided that
the Determination Date in each month will be at least two business days prior to
the related Distribution Date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Certificates rather than to guarantee or insure
against losses. The Servicer is obligated to make Advances with respect to
delinquent payments of principal of or interest on each Mortgage Loan to the
extent that such Advances are, in its reasonable judgment, recoverable from
future payments and collections or insurance payments or proceeds of liquidation
of the related Mortgage Loan. If the Servicer determines on any Determination
Date to make an Advance, such Advance will be included with the distribution to
Certificateholders on the related Distribution Date. Any failure by the Servicer
to make a deposit in the Collection Account as required under the Agreement,
including any failure to make an Advance, will constitute an event of default
under the Agreement if such failure remains unremedied for five days after
written notice thereof. If the Servicer is terminated as a result of the
occurrence of an event of default under the Agreement, the Trustee or the
successor servicer will be obligated to make any such Advance, subject to and in
accordance with the terms of the Agreement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES; REALIZATION UPON DEFAULTED MORTGAGE LOANS
With respect to each Mortgage Loan, the Agreement will generally provide
that, when any Mortgaged Property is about to be conveyed by the mortgagor, the
Servicer will, to the extent it has knowledge of such prospective conveyance,
exercise its rights to accelerate the maturity of such Mortgage Loan under the
'due-on-sale' or 'due-on-encumbrance' clauses applicable thereto, if any, unless
it is not exercisable under applicable
S-31
<PAGE>
law or if such exercise would result in loss of insurance coverage with respect
to such Mortgage Loan or if the conveyance does not require the consent of the
mortgagee and is to a person who satisfies the terms and conditions of the
related Mortgage Note and Mortgage. In certain circumstances, the Servicer is
authorized to take or enter into an assumption and modification agreement from
or with the person to whom such Mortgaged Property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Mortgage Note
and, unless prohibited by applicable state law, the mortgagor remains liable
thereon, provided that the Mortgage Loan will continue to be covered by any pool
insurance policy and any related primary mortgage insurance policy. The Servicer
will also be authorized, with the prior approval of the pool insurer and the
primary mortgage insurer, if any, to enter into a substitution of liability
agreement with such person, pursuant to which the original mortgagor is released
from liability and such person is substituted as mortgagor and becomes liable
under the Mortgage Note.
The Servicer will use reasonable efforts to foreclose upon or otherwise
comparably convert the ownership of properties securing such of the Mortgage
Loans as come into default and as to which no satisfactory arrangements can be
made for collection of delinquent payments. In connection with such foreclosure
or other conversion, the Servicer will follow such practices and procedures as
it deems necessary or advisable and which are normal and usual in its general
mortgage servicing activities, to the extent that such practices are consistent
with the requirements of any applicable required insurance policy. See also
'Description of the Certificates-- Optional Purchase of Defaulted Loans,'
herein, with respect to the Servicer's right, but not obligation, to repurchase
Mortgage Loans that are 91 or more days delinquent.
The Servicer will not be required to expend its own funds to foreclose or
restore any damaged property, unless it reasonably determines (i) that such
foreclosure or restoration will increase the proceeds to Certificateholders of
liquidation of the Mortgage Loan after reimbursement to the Servicer for its
expenses and (ii) that such expenses will be recoverable to it through
Liquidation Proceeds or any applicable insurance policy in respect of such
Mortgage Loan. In the event that the Servicer has expended its own funds for
foreclosure or to restore damaged property, it will be entitled to be reimbursed
from the Collection Account an amount equal to all costs and expenses incurred
by it.
The Servicer will not be obligated to foreclose on any Mortgaged Property
which it believes may be contaminated with or affected by hazardous wastes or
hazardous substances. See 'Certain Legal Aspects of Residential
Loans--Environmental Legislation' in the Prospectus. If the Servicer does not
foreclose on a Mortgaged Property, the Certificateholders may experience a loss
on the related Mortgage Loan.
Since a REMIC election has been made for federal income tax purposes with
respect to the Trust Fund, if the Trustee acquires ownership of any Mortgaged
Property as a result of a default or reasonably foreseeable default of any
Mortgage Loan secured by such Mortgaged Property, the Trustee or Servicer will
be required to dispose of such property prior to the close of the second
calendar year following the year the Trust Fund acquired such property unless
the Trustee receives an opinion of counsel to the effect that the holding of the
Mortgaged Property by the Trust Fund will not cause the Trust Fund to be subject
to the tax on 'prohibited transactions' imposed by Code Section 860F(a)(1) or
cause the Trust Fund to fail to qualify as a REMIC. The Servicer also will be
required to administer the Mortgaged Property in a manner which does not cause
the Mortgaged Property to fail to qualify as 'foreclosure property' within the
meaning of Code Section 860G(a)(8) or result in the receipt by the Trust Fund of
any 'net income from foreclosure property' within the meaning of Code Section
860G(c)(2), respectively. In general, this would preclude the holding of the
Mortgaged Property by a party acting as a dealer in such property or the receipt
of rental income based on the profits of the lessee of such property. See
'Certain Federal Income Tax Consequences' herein and in the Prospectus.
INSURANCE
The Servicer will be required to cause to be maintained, for each Mortgage
Loan, hazard insurance with extended coverage in an amount that is at least
equal to the lesser of (i) the maximum insurable value of the improvements
securing such Mortgage Loan or (ii) the greater of the outstanding principal
balance of the Mortgage Loan and in an amount such that the proceeds of such
policy shall be sufficient to prevent the Mortgagor and/or the mortgagee from
becoming a co-insurer. Each such policy of standard hazard insurance will be
required to contain, or have an accompanying endorsement that contains, a
standard mortgagee clause. No earthquake or other additional insurance is to be
required of any Mortgagor or maintained on Mortgaged Property acquired in
respect of a Mortgage unless required pursuant to such applicable laws and
regulations. The Servicer
S-32
<PAGE>
shall be required to maintain flood issuance for each Mortgaged Property located
at the time of origination of the Mortgage Loan in a federally designated
special flood hazard area (if such area is participating in the national flood
insurance program) in an amount equal to the least of (i) the original principal
balance of the related Mortgage Loan, (ii) the replacement value of the
improvements which are part of such Mortgaged Property, and (iii) the maximum
amount of such insurance available for the related Mortgaged Property under the
national flood insurance program. Any amounts collected by the Servicer under
any such policies (other than the amounts to be applied to the restoration or
repair of the related Mortgaged Property or amounts released to the Mortgagor in
accordance with the Servicer's normal servicing procedures) will be required to
be deposited in the Collection Account and applied as a prepayment. The Servicer
may obtain and maintain a blanket policy insuring against hazard losses on all
of the Mortgage Loans which will be deemed to have satisfied its obligations as
set forth above.
The Servicer may not take any action which would result in non-coverage
under any applicable Primary Insurance Policy of any loss which, but for the
actions of the Servicer, would have been covered thereunder. The Servicer may
not cancel or refuse to renew any such Primary Insurance Policy that is in
effect as of the Closing Date and is required to be kept in force under the
terms of the Agreement unless the replacement Primary Insurance Policy for such
canceled or non-renewed policy is maintained with an insurer meeting the
requirements under the Agreement. The Servicer will be required to present on
behalf of itself, the Trustee and Certificateholders, claims to the insurer
under any Primary Insurance Policies and to take such reasonable action as shall
be necessary to permit recovery under any Primary Insurance Policies with
respect to defaulted Mortgage Loans.
Any cost incurred by the Servicer in maintaining any such insurance as
described above may not be added to the principal balance of the Mortgage Loan
for the purpose of calculating monthly distributions to the Certificateholders
or remittances to the Trustee for their benefit. Such costs will be recoverable
by the Servicer out of late payments by the related Mortgagor or out of
Liquidation Proceeds to the extent permitted by the Agreement.
CERTAIN MATTERS REGARDING THE SERVICER
The Agreement provides that the Servicer may not resign from its
obligations and duties thereunder except (i) upon appointment of a successor
servicer and receipt by the Trustee of a letter from each Rating Agency that
such a resignation and appointment will not result in a downgrading of the
rating of any of the Certificates or (ii) upon determination that its duties
hereunder are no longer permissible under applicable law. Any such determination
under clause (ii) permitting the resignation of the Servicer shall be evidenced
by an Opinion of Counsel to such effect delivered to the Trustee. No such
resignation shall become effective until the Trustee or a successor servicer
shall have assumed the Servicer's responsibilities, duties, liabilities and
obligations hereunder.
In the event that the Servicer for any reason is no longer the Servicer
under the Agreement (including by reason of an event of default under the
Agreement), the Trustee or its successor will be required to assume all of the
rights and obligations of the Servicer under the Agreement arising thereafter
except that the Trustee will not be (i) liable for certain losses of the
Servicer or any acts or omissions of the predecessor Servicer hereunder), (ii)
obligated to make Advances if it is prohibited from doing so by applicable law,
(iii) obligated to effectuate repurchases or substitutions of Mortgage Loans,
(iv) responsible for certain expenses of the Servicer or (v) deemed to have made
any representations and warranties of the Servicer under the Agreement.
The Agreement provides that neither the Servicer nor any of its directors,
officers, employees or agents will have any liability to the Certificateholders
for any action taken, or for refraining from taking any action, in good faith
pursuant to the Agreement or for errors in judgment, unless liability would
otherwise be imposed by reason of a breach of representations or warranties made
by it under the Agreement or would otherwise be imposed willful misfeasance, bad
faith or gross negligence or reckless disregard in performing or failing to
perform the Servicer's duties.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Agreement. Set forth below
are summaries of the specific terms and provisions pursuant to which the
Certificates will be issued. The following summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, the provisions of the Agreement. When particular provisions or terms used in
the Agreement are referred to, the actual provisions (including definitions of
terms) are incorporated by reference.
The Mortgage Pass-Through Certificates, Series 1998-1 will consist of the
Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class A-7,
Class A-8, Class X, Class PO and Class A-R Certificates (collectively, the
'Senior Certificates') and the Class M, Class B-1, Class B-2, Class B-3, Class
B-4 and Class B-5 Certificates (collectively, the 'Subordinated Certificates').
The Senior Certificates and Subordinated Certificates are collectively referred
to as the 'Certificates' herein. Only the Classes of Certificates listed on the
cover page hereof (collectively, the 'Offered Certificates') are offered hereby.
The Classes of Offered Certificates will have the respective initial Class
Principal Balances or initial Notional Amounts (subject to the permitted
variance) and Pass-Through Rates set forth on the cover page hereof or described
herein.
The Class Principal Balance of any Class of Certificates as of any
Distribution Date is the initial Class Principal Balance thereof reduced by the
sum of (i) all amounts previously distributed to holders of Certificates of such
Class as payments of principal, (ii) the amount of Realized Losses (including
Excess Losses) allocated to such Class and (iii) in the case of any Class of
Subordinated Certificates, any amounts allocated to such Class in reduction of
its Class Principal Balance in respect of payments of Class PO Deferred Amounts,
as described under '--Allocation of Losses' below. In addition, the Class
Principal Balance of the Class of Subordinated Certificates then outstanding
with the highest numerical Class designation will be reduced if and to the
extent that the aggregate of the Class Principal Balances of all Classes of
Certificates, following all distributions and the allocation of Realized Losses
on a Distribution Date, exceeds the Pool Principal Balance as of the Due Date
occurring in the month of such Distribution Date. The Class X Certificates do
not have principal balances and are not entitled to any distributions in respect
of principal of the Mortgage Loans.
The Notional Amount of the Class X Certificates for any Distribution Date
will be equal to the aggregate of the Stated Principal Balances of the
Non-Discount Mortgage Loans with respect to such Distribution Date. The initial
Notional Amount of the Class X Certificates will be equal to the aggregate of
the Stated Principal Balances of the Non-Discount Mortgage Loans as of the
Cut-Off Date.
The Senior Certificates will have an initial aggregate principal balance of
approximately $239,614,672 and will evidence in the aggregate an initial
beneficial ownership interest of approximately 95.75% in the Trust Fund. The
Class M, Class B-1, Class B-2, Class B-3, Class B-4 and Class B-5 Certificates
will each evidence in the aggregate an initial beneficial ownership interest of
approximately 1.85%, 0.95%, 0.55%, 0.30%, 0.30% and 0.30%, respectively, in the
Trust Fund.
The Book-Entry Certificates will be issuable in book-entry form only. The
Physical Certificates will be issued in fully registered certificated form. The
Class A-R Certificates will be issued as a single Certificate in a denomination
of $100.
BOOK-ENTRY CERTIFICATES
Each Class of Book-Entry Certificates will be issued in one or more
certificates which equal the aggregate initial Class Principal Balance of each
such Class of Certificates and which will be held by a nominee of The Depository
Trust Company (together with any successor depository selected by the Depositor,
the 'Depository'). Beneficial interests in the Book-Entry Certificates will be
held indirectly by investors through the book-entry facilities of the
Depository, as described herein. Investors may hold such beneficial interests in
the Book-Entry Certificates in minimum denominations representing an original
principal amount of $25,000 (or, in the case of the Class A-2, Class A-3 and
Class A-4 Certificates, $1,000) and integral multiples of $1,000 in excess
thereof. One investor of each Class of Book-Entry Certificates may hold a
beneficial interest therein that is not an integral multiple of $1,000. The
Depositor has been informed by the Depository that its nominee will be
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CEDE & Co. ('CEDE'). Accordingly, CEDE is expected to be the holder of record of
the Book-Entry Certificates. Except as described under 'Description of the
Securities--Book-Entry Registration of Securities' in the Prospectus, no person
acquiring a Book-Entry Certificate (each, a 'Beneficial Owner') will be entitled
to receive a physical certificate representing such Certificate (a 'Definitive
Certificate').
Unless and until Definitive Certificates are issued, it is anticipated that
the only 'Certificateholder' of the Book-Entry Certificates will be CEDE, as
nominee of the Depository. Beneficial Owners of the Book-Entry Certificates will
not be Certificateholders, as that term is used in the Agreement. Beneficial
Owners are only permitted to exercise the rights of Certificateholders
indirectly through Financial Intermediaries and the Depository. Monthly and
annual reports on the Trust Fund provided to CEDE, as nominee of the Depository,
may be made available 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 Depository accounts the Book-Entry
Certificates of such Beneficial Owners are credited.
For a description of the procedures generally applicable to the Book-Entry
Certificates, see 'Description of the Securities--Book-Entry Registration of
Securities' in the Prospectus.
PAYMENTS ON MORTGAGE LOANS; ACCOUNTS
On or prior to the Closing Date, the Servicer will establish an account
(the 'Collection Account'), which will be maintained in trust for the benefit of
the Certificateholders. Funds credited to the Collection Account may be invested
for the benefit and at the risk of the Servicer in Permitted Instruments, that
are generally scheduled to mature on or prior to the second business day
preceding the next Distribution Date. On or prior to the business day
immediately preceding each Distribution Date, the Servicer will withdraw from
the Collection Account the amount of funds available for distribution and will
deposit such funds in an account established and maintained with the Trustee on
behalf of the Certificateholders (the 'Distribution Account').
DISTRIBUTIONS
Distributions on the Certificates will be made by the Trustee on the 25th
day of each month or, if such day is not a business day, on the first business
day thereafter, commencing in August 1998 (each, a 'Distribution Date'), to the
persons in whose names such Certificates are registered at the close of business
on the last business day of the month preceding the month of such Distribution
Date (the 'Record Date').
Distributions on each Distribution Date will be made by check mailed to the
address of the person entitled thereto as it appears on the applicable
certificate register or, in the case of a Certificateholder who holds 100% of a
Class of Certificates or who holds Certificates with an aggregate initial
Principal Balance of $1,000,000 or more or who holds a Class X Certificate and
who has so notified the Trustee in writing in accordance with the Agreement, by
wire transfer in immediately available funds to the account of such
Certificateholder at a bank or other depository institution having appropriate
wire transfer facilities; provided, however, that the final distribution in
retirement of the Certificates will be made only upon presentment and surrender
of such Certificates at the office of the Trustee specified in a notice to
Certificateholders.
PRIORITY OF DISTRIBUTIONS AMONG CERTIFICATES
As more fully described herein, distributions will be made on each
Distribution Date from Available Collection Amounts in the following order of
priority: (i) to interest on each interest-bearing Class of Senior Certificates;
(ii) to principal on the Classes of Senior Certificates then entitled to receive
distributions of principal, in the order and subject to the priorities set forth
under 'Description of the Certificates--Principal' herein, in each case in an
aggregate amount up to the maximum amount of principal to be distributed on such
Classes on such Distribution Date; (iii) to any Class PO Deferred Amounts with
respect to the Class PO Certificates, but only from amounts that would otherwise
be distributed on such Distribution Date as principal of the Subordinated
Certificates; and (iv) to interest on and then principal of each Class of
Subordinated Certificates, in the order of their numerical Class designations,
beginning with the Class M Certificates, in each case subject to the limitations
set forth under 'Description of the Certificates--Principal' herein.
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'Available Collection Amounts' with respect to any Distribution Date will
be equal to the sum of (i) all scheduled installments of interest (net of the
related Expense Fees) and principal due on the Due Date in the month in which
such Distribution Date occurs and received prior to the related Determination
Date, together with any Advances in respect thereof; (ii) all proceeds of any
primary mortgage guaranty insurance policies and any other insurance policies
with respect to the Mortgage Loans, to the extent such proceeds are not applied
to the restoration of the related Mortgaged Property or released to the borrower
in accordance with the Servicer's normal servicing procedures (collectively,
'Insurance Proceeds') and all other cash amounts received and retained in
connection with the liquidation of defaulted Mortgage Loans, by foreclosure or
otherwise ('Liquidation Proceeds') during the calendar month preceding the month
of such Distribution Date (in each case, net of unreimbursed expenses incurred
in connection with a liquidation or foreclosure and unreimbursed Advances, if
any); (iii) all partial or full prepayments received from the 16th day of the
calendar month preceding the month of such Distribution Date (or, in the case of
the first Distribution Date, from the Cut-Off Date) through the 15th of the
month of such Distribution Date; and (iv) amounts received with respect to such
Distribution Date as the Substitution Adjustment Amount or purchase price in
respect of a Deleted Mortgage Loan or a Mortgage Loan repurchased by Provident
or the Servicer as of such Distribution Date, reduced by amounts in
reimbursement for Advances previously made and other amounts as to which the
Servicer is entitled to be reimbursed from the Collection Account pursuant to
the Agreement.
INTEREST
The Classes of Offered Certificates will have the respective Pass-Through
Rates set forth or described on the cover hereof.
The Pass-Through Rate for the Class A-5 Certificates for any Distribution
Date will be equal to the lesser of (i) LIBOR for the related Interest Accrual
Period plus 0.80% and (ii) 9.00%. The Pass-Through Rate for the Class A-5
Certificates for the first Distribution Date is expected to be approximately
6.45625% per annum.
The Pass-Through Rate for the Class A-6 Certificates for any Distribution
Date will be equal to (i) 24.60% minus (ii) the product of 3.0 and LIBOR,
subject to a minimum rate of 0% and a maximum rate of 24.60%. The Pass-Through
Rate for the Class A-6 Certificates for the first Distribution Date is expected
to be approximately 7.63125% per annum.
The Pass-Through Rate for the Class A-7 Certificates for any Distribution
Date will be equal to the lesser of (i) LIBOR for the related Interest Accrual
Period plus 0.75% and (ii) 8.50%. The Pass-Through Rate for the Class A-7
Certificates for the first Distribution Date is expected to be approximately
6.40625% per annum.
The Pass-Through Rate for the Class A-8 Certificates for any Distribution
Date will be equal to (i) 29.892856% minus (ii) the product of 3.857143 and
LIBOR, subject to a minimum rate of 0% and a maximum rate of 29.892856%. The
Pass-Through Rate for the Class A-8 Certificates for the first Distribution Date
is expected to be approximately 8.07589% per annum.
The Pass-Through Rate for the Class X Certificates for any Distribution
Date will be equal to the excess of (a) the average of the Net Mortgage Rates of
the Non-Discount Mortgage Loans, weighted on the basis of the Stated Principal
Balances thereof, over (b) 6.75% per annum. The Pass-Through Rate for the Class
X Certificates for the first Distribution Date is expected to be approximately
0.41896% per annum. The Net Mortgage Rate for each Mortgage Loan is the Mortgage
Rate thereof (net of the interest premium charged by the related lenders with
respect to the Lender PMI Mortgage Loans) less the Expense Fee Rate for such
Mortgage Loan.
'LIBOR' for each Interest Accrual Period (other than the initial Interest
Accrual Period) will be the rate for United States dollar deposits for one month
that appears on Telerate Screen Page 3750 as of 11:00 a.m., London time, on the
second LIBOR Business Day before the first day of such Interest Accrual Period.
If such rate does not appear on such page (or such other page as may replace
that page on that service, or if such service is no longer offered, such other
service for displaying LIBOR or comparable rates as may be reasonably selected
by the Trustee), LIBOR for the applicable Interest Accrual Period will be the
Reference Bank Rate as defined herein. If no such quotations can be obtained and
no Reference Bank Rate is available, LIBOR will be LIBOR applicable to the
preceding Interest Accrual Period. LIBOR for the initial Accrual Period will be
5.65625% per
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annum. A 'LIBOR Business Day' will be any day on which banks are open for
dealing in foreign currency and exchange in London and New York City.
The 'Reference Bank Rate' for any Interest Accrual Period (other than the
initial Interest Accrual Period), will be the arithmetic mean (rounded upwards,
if necessary, to the nearest one sixteenth of a percent) of the offered rates
for United States dollar deposits for one month that are offered by three money
center banks selected by the Trustee (the 'Reference Banks') as of 11:00 a.m.,
New York City time, on the second LIBOR Business Day prior to the first day of
such Interest Accrual Period to prime banks in the London interbank market for a
period of one month in amounts approximately equal to the outstanding Class
Principal Balance of the Class A-5, Class A-6, Class A-7 and Class A-8
Certificates, as applicable, provided that at least two such Reference Banks
provide such rate. If fewer than two offered rates appear, the Reference Bank
Rate will be the arithmetic mean of the rates quoted by one or more major banks
in New York City, selected by the Trustee, as of 11:00 a.m., New York City time,
on such date for loans in U.S. Dollars to leading European Banks for a period of
one month in amounts approximately equal to the outstanding Class Principal
Balance of the Class A-5, Class A-6, Class A-7 and Class A-8 Certificates, as
applicable. If no such quotations can be obtained, the Reference Bank Rate will
be the Reference Bank Rate applicable to the preceding Interest Accrual Period.
On each Distribution Date, to the extent of funds available therefor, each
interest-bearing Class of Certificates will be entitled to receive an amount
allocable to interest (as to each such Class, the 'Interest Distribution
Amount') with respect to the related Interest Accrual Period. The Interest
Distribution Amount for any interest-bearing Class will be equal to the sum of
(i) interest at the applicable Pass-Through Rate on the related Class Principal
Balance or Notional Amount, as the case may be, and (ii) the sum of the amounts,
if any, by which the amount described in clause (i) above on each prior
Distribution Date exceeded the amount actually distributed as interest on such
prior Distribution Dates and not subsequently distributed ('Unpaid Interest
Amounts'). The Class PO Certificates are principal-only certificates and will
not bear interest.
With respect to each Distribution Date, the 'Interest Accrual Period' for
each interest-bearing Class of Certificates will be the calendar month preceding
the month of such Distribution Date, or in the case of the Class A-5, Class A-6,
Class A-7 and Class A-8 Certificates, during each one month period commencing on
the 25th day of the month preceding the month in which each Distribution Date
occurs and ending on the 24th day of the month in which such Distribution Date
occurs, commencing on July 25, 1998. No interest will accrue on the Class A-5,
Class A-6, Class A-7 and Class A-8 Certificates prior to July 25, 1998.
The interest entitlement described above for each Class of Certificates for
any Distribution Date will be reduced by such Class's pro rata share of the
amount of 'Net Interest Shortfalls' for such Distribution Date. With respect to
any Distribution Date, the 'Net Interest Shortfall' is equal to the sum of (i)
the amount of interest that would otherwise have been received with respect to
any Mortgage Loan that was the subject of (x) a Relief Act Reduction or (y) a
Special Hazard Loss, Fraud Loss, Debt Service Reduction or Deficient Valuation,
after the exhaustion of the respective amounts of coverage provided by the
Subordinated Certificates for such types of losses and (ii) any Net Prepayment
Interest Shortfalls with respect to such Distribution Date. A 'Relief Act
Reduction' is a reduction in the amount of monthly interest payment on a
Mortgage Loan pursuant to the Soldiers' and Sailors' Civil Relief Act of 1940.
See 'Certain Legal Aspects of the Residential Loans--Soldiers' and Sailors'
Civil Relief Act of 1940' in the Prospectus. With respect to any Distribution
Date, a 'Net Prepayment Interest Shortfall' is the amount by which the aggregate
of Prepayment Interest Shortfalls during the portion of the Prepayment Period
occurring in the calendar month preceding the month of such Distribution Date
exceeds the aggregate amount payable on such Distribution Date by the Servicer
as described under 'Servicing of Mortgage Loans--Adjustment to Servicing Fee in
Connection with Certain Prepaid Mortgage Loans' herein. A 'Prepayment Interest
Shortfall' is the amount by which interest paid by a borrower in connection with
a prepayment of principal on a Mortgage Loan is less than one month's interest
at the related Mortgage Rate on the Stated Principal Balance of such Mortgage
Loan. Each Class's pro rata share of such Net Interest Shortfalls will be based
on the amount of interest such Class otherwise would have been entitled to
receive on such Distribution Date.
Interest will be calculated and payable on the basis of a 360-day year
divided into twelve 30-day months.
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In the event that, on a particular Distribution Date, Available Collection
Amounts in the Collection Account applied in the order described under
'--Priority of Distributions Among Certificates' above are not sufficient to
make a full distribution of the interest entitlement on the Certificates,
interest will be distributed on each Class of Certificates of equal priority
based on the amount of interest each such Class would otherwise have been
entitled to receive in the absence of such shortfall. Any Unpaid Interest Amount
will be carried forward and added to the amount holders of each such Class of
Certificates will be entitled to receive on the next Distribution Date. Such a
shortfall could occur, for example, if losses realized on the Mortgage Loans
were exceptionally high or were concentrated in a particular month. Any Unpaid
Interest Amount so carried forward will not bear interest.
PRINCIPAL
General. All payments and other amounts received in respect of principal
of the Mortgage Loans will be allocated between (i) the Senior Certificates
(other than the Class X Certificates and the Class PO Certificates) and the
Subordinated Certificates and (ii) the Class PO Certificates, in each case based
on the applicable Non-PO Percentage and the applicable PO Percentage,
respectively, of such amounts.
The 'Non-PO Percentage' with respect to any Mortgage Loan with a Net
Mortgage Rate less than 6.75% (each such Mortgage Loan, a 'Discount Mortgage
Loan') will be the percentage equivalent of a fraction, the numerator of which
is the Net Mortgage Rate and the denominator of which is 6.75%, and 100% with
respect to any Mortgage Loan with a Net Mortgage Rate equal to or greater than
6.75% (each such Mortgage Loan, a 'Non-Discount Mortgage Loan').
The 'PO Percentage' with respect to any Discount Mortgage Loan will be 100%
minus the Non-PO Percentage and with respect to any Non-Discount Mortgage Loan
will be 0%.
Non-PO Formula Principal Amount. On each Distribution Date, the Non-PO
Formula Principal Amount will be distributed as principal of the Senior
Certificates (other than the Class X Certificates and the Class PO Certificates)
in an amount up to the Senior Principal Distribution Amount and as principal of
the Subordinated Certificates, in an amount up to the Subordinated Principal
Distribution Amount.
The 'Non-PO Formula Principal Amount' for any Distribution Date will equal
the sum of the applicable Non-PO Percentage of (a) all monthly payments of
principal due on each Mortgage Loan on the related Due Date, (b) the principal
portion of the purchase price of each Mortgage Loan that was repurchased by
Provident or another person pursuant to the Agreement as of such Distribution
Date, (c) the Substitution Adjustment Amount in connection with any Deleted
Mortgage Loan received with respect to such Distribution Date, (d) any Insurance
Proceeds or Liquidation Proceeds allocable to recoveries of principal of
Mortgage Loans that are not yet Liquidated Mortgage Loans received during the
calendar month preceding the month of such Distribution Date, (e) with respect
to each Mortgage Loan that became a Liquidated Mortgage Loan during the calendar
month preceding the month of such Distribution Date, the amount of the
Liquidation Proceeds allocable to principal received with respect to such
Mortgage Loan and (f) all partial and full principal prepayments by borrowers
received during the related Prepayment Period.
Senior Principal Distribution Amount. On each Distribution Date prior to
the Senior Credit Support Depletion Date, the Non-PO Formula Principal Amount,
up to the amount of the Senior Principal Distribution Amount for such
Distribution Date, will be distributed as principal in the following order of
priority:
first, pro rata,to the Class A-7 and Class A-8 Certificates, up to the
amount of the Priority Principal Distribution Amount;
second, to the Class A-R Certificates until the Class Principal
Balance thereof is reduced to zero;
third, to the Class A-1 Certificates until the Class Principal Balance
thereof is reduced to zero;
fourth, concurrently, 50.0000000000% to the Class A-2 Certificates and
50.0000000000% to the Class A-3 Certificates until the Class Principal
Balance of the Class A-3 Certificates is reduced to zero;
fifth, concurrently, 50.0000000000% to the Class A-2 Certificates and
50.0000000000% to the Class A-4 Certificates until the Class Principal
Balances thereof are reduced to zero;
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sixth, pro rata, to the Class A-5 and Class A-6 Certificates until the
Class Principal Balances thereof are reduced to zero; and
seventh, pro rata, to the Class A-7 and Class A-8 Certificates until
the Class Principal Balances thereof are reduced to zero.
Notwithstanding the foregoing, on each Distribution Date on and after the
Senior Credit Support Depletion Date, the Non-PO Formula Principal Amount will
be distributed, concurrently, as principal of the Classes of Senior Certificates
(other than the Class X Certificates and the Class PO Certificates), pro rata,
in accordance with their respective Class Principal Balances immediately prior
to such Distribution Date.
The 'Senior Credit Support Depletion Date' is the date on which the
aggregate Class PO Deferred Amounts equal or exceed the Class Principal Balance
of all Classes of Subordinated Certificates.
The 'Senior Principal Distribution Amount' for any Distribution Date will
equal the sum of (i) the Senior Percentage of the applicable Non-PO Percentage
of all amounts described in clauses (a) through (c) of the definition of 'Non-PO
Formula Principal Amount' for such Distribution Date, (ii) the Senior Prepayment
Percentage of the applicable Non-PO Percentage of all amounts described in
clause (c) of the definition of 'Non-PO Formula Principal Amount' for such
Distribution Date, (iii) with respect to each Mortgage Loan that became a
Liquidated Mortgage Loan during the calendar month preceding the month of such
Distribution Date, the lesser of (x) the Senior Percentage of the applicable
Non-PO Percentage of the Stated Principal Balance of such Mortgage Loan and (y)
either (A) the Senior Prepayment Percentage or (B) if an Excess Loss was
sustained with respect to such Liquidated Mortgage Loan during such preceding
calendar month, the Senior Percentage of the applicable Non-PO Percentage of the
amount of the Liquidation Proceeds allocable to principal received with respect
to such Mortgage Loan, and (iv) the Senior Prepayment Percentage of the
applicable Non-PO Percentage of amounts described in clause (f) of the
definition of 'Non-PO Formula Principal Amount' for such Distribution Date;
provided, however, that if a Bankruptcy Loss that is an Excess Loss is sustained
with respect to a Mortgage Loan that is not a Liquidated Mortgage Loan, the
Senior Principal Distribution Amount will be reduced on the related Distribution
Date by the Senior Percentage of the applicable Non-PO Percentage of the
principal portion of such Bankruptcy Loss.
The 'Priority Principal Distribution Amount' for any Distribution Date is
the lesser of (i) sum of the Priority Percentage Distribution Amount and the
Priority Prepayment Percentage Distribution Amount and (ii) the sum of the Class
Principal Balance of the Class A-7 and Class A-8 Certificates.
The 'Priority Percentage Distribution Amount' for any Distribution Date is
equal to the product of (i) 0% until and including the Distribution Date in July
2003 and 100% thereafter and (ii) the product of (A) a fraction, the numerator
of which is the Class Principal Balance of the sum of the Class A-7 and Class
A-8 Certificates immediately prior to such Distribution Date and the denominator
of which is the aggregate Class Principal Balance of all Classes of Certificates
immediately prior to such Distribution Date and (B) the applicable Non-PO
Percentage of all amounts described in clauses (a) through (c) of the definition
of 'Non-PO Formula Principal Amount' for such Distribution Date; provided,
however, that if a Bankruptcy Loss that is an Excess Loss is sustained with
respect to a Mortgage Loan that is not a Liquidated Mortgage Loan, such amount
will be reduced on the related Distribution Date by the applicable Non-PO
Percentage of the principal portion of such Bankruptcy Loss.
The 'Priority Prepayment Percentage Distribution Amount' for any
Distribution Date is equal to the product of (A) (i) 0% until and including the
Distribution Date in July 2003, (ii) 30% until and including the Distribution
Date in July 2004, (iii) 40% until and including the Distribution Date in July
2005, (iv) 60% until and including the Distribution Date in July 2006, (v) 80%
until and including the Distribution Date in July 2007 and (vi) 100% thereafter
and (B) the product of (x) a fraction, the numerator of which is the Class
Principal Balance of the sum of the Class A-7 and Class A-8 Certificates
immediately prior to such Distribution Date and the denominator of which is the
aggregate Class Principal Balance of all Classes of Certificates immediately
prior to such Distribution Date and (y) the sum of (1) the applicable Non-PO
Percentage of all amounts described in clause (d) of the definition of 'Non-PO
Formula Principal Amount' for such Distribution Date, (2) with respect to each
Mortgage Loan that became a Liquidated Mortgage Loan during the calendar month
preceding the month of such Distribution Date, the lesser of (a) the applicable
Non-PO Percentage of the Stated Principal Balance of
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such Mortgage Loan and (b) if an Excess Loss was sustained with respect to such
Liquidated Mortgage Loan during such preceding calendar month, the applicable
Non-PO Percentage of the amount of the Liquidation Proceeds allocable to
principal received with respect to such Mortgage Loan, and (3) the applicable
Non-PO Percentage of amounts described in clause (f) of the definition of
'Non-PO Formula Principal Amount' for such Distribution Date.
'Stated Principal Balance' means as to any Mortgage Loan and Due Date, the
unpaid principal balance of such Mortgage Loan as of such Due Date, as specified
in the amortization schedule at the time relating thereto (before any adjustment
to such amortization schedule by reason of any moratorium or similar waiver or
grace period), after giving effect to any previous partial prepayments and
Liquidation Proceeds and Insurance Proceeds received and allocated to principal
and to the payment of principal due on such Due Date and irrespective of any
delinquency in payment by the related borrower. The 'Pool Principal Balance'
with respect to any Distribution Date equals the aggregate of the Stated
Principal Balances of the Mortgage Loans outstanding on the Due Date in the
month preceding the month of such Distribution Date.
The 'Senior Percentage' for any Distribution Date is the percentage
equivalent of a fraction the numerator of which is the aggregate of the Class
Principal Balances of each Class of Senior Certificates (other than the Class X
and Class PO Certificates) immediately prior to such date and the denominator of
which is the aggregate of the Class Principal Balances of all Classes of
Certificates, other than the Class X and Class PO Certificates, immediately
prior to such date. The 'Subordinated Percentage' for any Distribution Date will
be calculated as the difference between 100% and the Senior Percentage for such
date.
The 'Senior Prepayment Percentage' for any Distribution Date occurring
during the five years beginning on the first Distribution Date will equal 100%.
Thereafter, the Senior Prepayment Percentage will, except as described below, be
subject to gradual reduction as described in the following paragraph. This
disproportionate allocation of certain unscheduled payments in respect of
principal will have the effect of accelerating the amortization of the Senior
Certificates (other than Class PO Certificates) which receive these unscheduled
payments of principal while, in the absence of Realized Losses, increasing the
interest in the Pool Principal Balance evidenced by the Subordinated
Certificates. Increasing the respective interest of the Subordinated
Certificates relative to that of the Senior Certificates is intended to preserve
the availability of the subordination provided by the Subordinated Certificates.
The Senior Prepayment Percentage for any Distribution Date occurring on or
after the fifth anniversary of the first Distribution Date will be as follows:
for any Distribution Date in the first year thereafter, the Senior Percentage
plus 70% of the Subordinated Percentage for such Distribution Date; for any
Distribution Date in the second year thereafter, the Senior Percentage plus 60%
of the Subordinated Percentage for such Distribution Date; for any Distribution
Date in the third year thereafter, the Senior Percentage plus 40% of the
Subordinated Percentage for such Distribution Date; for any Distribution Date in
the fourth year thereafter, the Senior Percentage plus 20% of the Subordinated
Percentage for such Distribution Date; and for any Distribution Date thereafter,
the Senior Percentage for such Distribution Date (unless on any Distribution
Date the Senior Percentage exceeds the initial Senior Percentage, in which case
the Senior Prepayment Percentage for such Distribution Date will once again
equal 100%). Notwithstanding the foregoing, no decrease in the Senior Prepayment
Percentage will occur unless both of the following conditions (the 'Step Down
Conditions') are satisfied: (i) the outstanding principal balance of all
Mortgage Loans delinquent 60 days or more (averaged over the preceding six month
period), as a percentage of the aggregate principal balance of the Subordinated
Certificates on such Distribution Date, does not equal or exceed 50%, and (ii)
cumulative Realized Losses with respect to the Mortgage Loans do not exceed (a)
with respect to the Distribution Date on the fifth anniversary of the first
Distribution Date, 30% of the aggregate of the principal balances of the
Subordinated Certificates as of the Cut-Off Date (the 'Original Subordinated
Principal Balance'), (b) with respect to the Distribution Date on the sixth
anniversary of the first Distribution Date, 35% of the Original Subordinated
Principal Balance, (c) with respect to the Distribution Date on the seventh
anniversary of the first Distribution Date, 40% of the Original Subordinated
Principal Balance, (d) with respect to the Distribution Date on the eighth
anniversary of the first Distribution Date, 45% of the Original Subordinated
Principal Balance, and (e) with respect to the Distribution Date on the ninth
anniversary of the first Distribution Date, 50% of the Original Subordinated
Principal Balance.
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The 'Subordinated Prepayment Percentage' as of any Distribution Date will
be calculated as the difference between 100% and the Senior Prepayment
Percentage.
If on any Distribution Date the allocation to the Class or Classes of
Senior Certificates (other than the Class PO Certificates) then entitled to
distributions of principal of full and partial principal prepayments and other
amounts in the percentage required above would reduce the outstanding Class
Principal Balance of such Class or Classes below zero, the distribution to such
Class or Classes of Certificates of the Senior Prepayment Percentage of such
amounts for such Distribution Date will be limited to the percentage necessary
to reduce the related Class Principal Balance(s) to zero.
Subordinated Principal Distribution Amount. On each Distribution Date, to
the extent of Available Collection Amounts therefor, the Non-PO Formula
Principal Amount, up to the amount of the Subordinated Principal Distribution
Amount for such Distribution Date, will be distributed as principal of the
Subordinated Certificates. Except as provided in the next paragraph, each Class
of Subordinated Certificates will be entitled to receive its pro rata share of
the Subordinated Principal Distribution Amount (based on its respective Class
Principal Balance), in each case to the extent of the amount available from
Available Collection Amounts for distribution of principal. Distributions of
principal of the Subordinated Certificates will be made sequentially to the
Classes of Subordinated Certificates in the order of their numerical Class
designations, beginning with the Class M Certificates, until the respective
Class Principal Balances thereof are reduced to zero.
With respect to each Class of Subordinated Certificates, if on any
Distribution Date the sum of the related Class Subordination Percentages of such
Class and all Classes of Subordinated Certificates which have higher numerical
Class designations than such Class (the 'Applicable Credit Support Percentage')
is less than the Applicable Credit Support Percentage for such Class on the date
of issuance of the Certificates (the 'Original Applicable Credit Support
Percentage'), no distribution of partial principal prepayments and principal
prepayments in full will be made to any such Classes (the 'Restricted Classes')
and the amount of partial principal prepayments and principal prepayments in
full otherwise distributable to the Restricted Classes will be allocated among
the remaining Classes of Subordinated Certificates, pro rata, based upon their
respective Class Principal Balances, and distributed in the sequential order
described above.
The 'Class Subordination Percentage' with respect to any Distribution Date
and each Class of Subordinated Certificates, will equal the fraction (expressed
as a percentage) the numerator of which is the Class Principal Balance of such
Class of Subordinated Certificates immediately prior to such Distribution Date
and the denominator of which is the aggregate of the Class Principal Balances of
all Classes of Certificates immediately prior to such Distribution Date.
The approximate Original Applicable Credit Support Percentages for the
Subordinated Certificates on the date of issuance of the Certificates are
expected to be as follows:
<TABLE>
<CAPTION>
<S> <C>
Class M....................................................... 4.25%
Class B-1..................................................... 2.40%
Class B-2..................................................... 1.45%
Class B-3..................................................... 0.90%
Class B-4..................................................... 0.60%
Class B-5..................................................... 0.30%
</TABLE>
For purposes of calculating the Applicable Credit Support Percentages of
the Subordinated Certificates, the Class M Certificates will be deemed to have a
lower numerical Class designation than each other Class of Subordinated
Certificates.
The 'Subordinated Principal Distribution Amount' for any Distribution Date
will equal (A) the sum of (i) the Subordinated Percentage of the applicable
Non-PO Percentage of all amounts described in clauses (a) through (c) of the
definition of 'Non-PO Formula Principal Amount' for such Distribution Date, (ii)
the Subordinated Prepayment Percentage of the applicable Non-PO Percentage of
all amounts described in clause (c) of the definition of 'Non-PO Formula
Principal Amount' for such Distribution Date, (iii) with respect to each
Mortgage Loan that became a Liquidated Mortgage Loan during the calendar month
preceding the month of such Distribution Date, the applicable Non-PO Percentage
of the Liquidation Proceeds allocable to principal received
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with respect to such Mortgage Loan, after application of such amounts pursuant
to clause (ii) of the definition of Senior Principal Distribution Amount up to
the Subordinated Percentage of the applicable Non-PO Percentage of the Stated
Principal Balance of such Mortgage Loan and (iv) the Subordinated Prepayment
Percentage of the applicable Non-PO Percentage of the amounts described in
clause (f) of the definition of 'Non-PO Formula Principal Amount' for such
Distribution Date reduced by (B) the amount of any payments in respect of Class
PO Deferred Amounts on the related Distribution Date.
Residual Certificates. The Class A-R Certificates will remain outstanding
for so long as the Trust Fund shall exist, whether or not they are receiving
current distributions of principal or interest. In addition to distributions of
interest and principal as described above, on each Distribution Date, the
holders of the Class A-R Certificates will be entitled to receive any Available
Collection Amounts remaining after payment of interest and principal on the
Senior Certificates and Class PO Deferred Amounts on the Class PO Certificates
and interest and principal on the Subordinated Certificates, as described above.
It is not anticipated that there will be any significant amounts remaining for
any such distribution.
Class PO Principal Distribution Amount. On each Distribution Date,
distributions of principal of the Class PO Certificates will be made in an
amount (the 'Class PO Principal Distribution Amount') equal to the lesser of (x)
the PO Formula Principal Amount for such Distribution Date and (y) the product
of (i) Available Collection Amounts remaining after distribution of interest on
the Senior Certificates and (ii) a fraction, the numerator of which is the PO
Formula Principal Amount and the denominator of which is the sum of the PO
Formula Principal Amount and the Senior Principal Distribution Amount.
If the Class PO Principal Distribution Amount on a Distribution Date is
calculated as provided in clause (y) above, principal distributions to holders
of the Senior Certificates (other than the Class PO Certificates) will be in an
amount equal to the product of (i) Available Collection Amounts remaining after
distribution of interest on the Senior Certificates and (ii) a fraction, the
numerator of which is the Senior Principal Distribution Amount and the
denominator of which is the sum of the Senior Principal Distribution Amount and
the PO Formula Principal Amount.
The 'PO Formula Principal Amount' for any Distribution Date will equal the
sum of the applicable PO Percentage of (a) all monthly payments of principal due
on each Mortgage Loan on the related Due Date, (b) the principal portion of the
purchase price of each Mortgage Loan that was repurchased by Provident or
another person pursuant to the Agreement as of such Distribution Date, (c) the
Substitution Adjustment Amount in connection with any Deleted Mortgage Loan
received with respect to such Distribution Date, (d) any Insurance Proceeds or
Liquidation Proceeds allocable to recoveries of principal of Mortgage Loans that
are not yet Liquidated Mortgage Loans received during the calendar month
preceding the month of such Distribution Date, (e) with respect to each Mortgage
Loan that became a Liquidated Mortgage Loan during the calendar month preceding
the month of such Distribution Date, the amount of Liquidation Proceeds
allocable to principal received with respect to such Mortgage Loan and (f) all
partial and full principal prepayments by borrowers received during the related
Prepayment Period; provided, however, that if a Bankruptcy Loss that is an
Excess Loss is sustained with respect to a Discount Mortgage Loan that is not a
Liquidated Mortgage Loan, the PO Formula Principal Amount will be reduced on the
related Distribution Date by the applicable PO Percentage of the principal
portion of such Bankruptcy Loss.
ALLOCATION OF LOSSES
On each Distribution Date, the applicable PO Percentage of any Realized
Loss, including any Excess Loss, on a Discount Mortgage Loan will be allocated
to the Class PO Certificates until the Class Principal Balance thereof is
reduced to zero. The amount of any such Realized Loss, other than an Excess
Loss, allocated on or prior to the Senior Credit Support Depletion Date will be
treated as a 'Class PO Deferred Amount'. To the extent funds are available on
such Distribution Date or on any future Distribution Date from amounts that
would otherwise be allocable to the Subordinated Principal Distribution Amount,
Class PO Deferred Amounts will be paid on the Class PO Certificates prior to
distributions of principal on the Subordinated Certificates. Any distribution of
Available Collection Amounts in respect of unpaid Class PO Deferred Amounts will
not further reduce the Class Principal Balance of the Class PO Certificates. The
Class PO Deferred Amounts will not bear interest. The Class Principal Balance of
the Class of Subordinated Certificates then outstanding with the highest
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<PAGE>
numerical Class designation will be reduced by the amount of any payments in
respect of Class PO Deferred Amounts. After the Senior Credit Support Depletion
Date, no new Class PO Deferred Amounts will be created.
For purposes of allocating losses to the Subordinated Certificates, the
Class M Certificates will be deemed to have a lower numerical Class designation
than each other Class of Subordinated Certificates.
On each Distribution Date, the applicable Non-PO Percentage of any Realized
Loss, other than any Excess Loss, will be allocated first to the Subordinated
Certificates, in the reverse order of their numerical Class designations
(beginning with the Class of Subordinated Certificates then outstanding with the
highest numerical Class designation), in each case until the Class Principal
Balance of the respective Class of Certificates has been reduced to zero, and
then to the Senior Certificates (other than the Class X Certificates and the
Class PO Certificates) pro rata, based upon their respective Class Principal
Balances.
On each Distribution Date, the applicable Non-PO Percentage of Excess
Losses will be allocated pro rata among the Classes of Senior Certificates
(other than the Class X Certificates and the Class PO Certificates) and the
Subordinated Certificates based upon their respective Class Principal Balances.
Because principal distributions are paid to certain Classes of Certificates
(other than the Class PO Certificates) before other Classes of Certificates,
holders of such Certificates that are entitled to receive principal later bear a
greater risk of being allocated Realized Losses on the Mortgage Loans than
holders of Classes that are entitled to receive principal earlier.
In general, a 'Realized Loss' means, with respect to a Liquidated Mortgage
Loan, the amount by which the remaining unpaid principal balance of the Mortgage
Loan exceeds the amount of Liquidation Proceeds applied to the principal balance
of the related Mortgage Loan. 'Excess Losses' are (i) Special Hazard Losses in
excess of the Special Hazard Loss Coverage Amount, (ii) Bankruptcy Losses in
excess of the Bankruptcy Loss Coverage Amount and (iii) Fraud Losses in excess
of the Fraud Loss Coverage Amount. 'Bankruptcy Losses' are losses that are
incurred as a result of Debt Service Reductions and Deficient Valuations.
'Special Hazard Losses' are Realized Losses in respect of Special Hazard
Mortgage Loans. 'Fraud Losses' are losses sustained on a Liquidated Mortgage
Loan by reason of a default arising from fraud, dishonesty or misrepresentation.
See 'Credit Enhancement--Subordination of Certain Classes' herein.
A 'Liquidated Mortgage Loan' is a defaulted Mortgage Loan as to which the
Servicer has determined that all recoverable liquidation and insurance proceeds
have been received. A 'Special Hazard Mortgage Loan' is a Liquidated Mortgage
Loan as to which the ability to recover the full amount due thereunder was
substantially impaired by a hazard not insured against under a standard hazard
insurance policy of the type described under 'Description of Primary Insurance
Coverage--Primary Hazard Insurance Policies' in the Prospectus. See 'Credit
Enhancement--Subordination of Certain Classes' herein.
OPTIONAL PURCHASE OF DEFAULTED LOANS
The Servicer may, at its option, purchase from the Trust Fund any Mortgage
Loan which is delinquent in payment by 91 days or more. Any such purchase shall
be at a price equal to 100% of the Stated Principal Balance of such Mortgage
Loan plus accrued interest thereon at the applicable Adjusted Mortgage Rate from
the date through which interest was last paid by the related mortgagor or
advanced (and not reimbursed) to the first day of the month in which such amount
is to be distributed.
OPTIONAL TERMINATION
The Servicer will have the right to repurchase all remaining Mortgage Loans
and REO Properties in the Mortgage Pool and thereby effect early retirement of
the Certificates, subject to the Pool Principal Balance of such Mortgage Loans
and REO Properties at the time of repurchase being less than 10% of the Cut-Off
Date Pool Principal Balance at a purchase price equal to the sum of (a) 100% of
the Stated Principal Balance of each Mortgage Loan (other than an REO Loan),
plus one month's accrued interest thereon at the applicable Adjusted Mortgage
Rate and (b) the lesser of (i) the appraised value of any REO Property as
determined by the higher of two independent appraisals and (ii) the Stated
Principal Balance of each REO Loan plus accrued and unpaid interest thereon at
the applicable Adjusted Mortgage Rate. (As to each Mortgage Loan, the 'Adjusted
Mortgage
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<PAGE>
Rate', is the per annum rate equal to the Mortgage Rate less the Servicing Fee
Rate.). Distributions on the Certificates in respect of any such optional
termination will first be paid to the Senior Certificates and then to the
Subordinated Certificates. The proceeds from any such distribution may not be
sufficient to distribute the full amount to which each Class of Certificates is
entitled if the purchase price is based in part on the appraised value of any
REO Property and such appraised value is less than the Stated Principal Balance
of the related Mortgage Loan.
THE TRUSTEE
The Chase Manhattan Bank will be the Trustee under the Agreement. The
Depositor and the Servicer may maintain other banking relationships in the
ordinary course of business with The Chase Manhattan Bank. Offered Certificates
may be surrendered at the Corporate Trust Office of the Trustee located at 450
West 33rd Street, New York, New York 10001, Attention: Structured Finance
Services or at such other addresses as the Trustee may designate from time to
time.
RESTRICTIONS ON TRANSFER OF THE CLASS A-R, CLASS M AND CLASS B CERTIFICATES
The Class A-R Certificates will be subject to the following restrictions on
transfer, and the Class A-R Certificates will contain a legend describing such
restrictions.
The REMIC provisions of the Code impose certain taxes on (i) transferors of
residual interests to, or agents that acquire residual interests on behalf of,
Disqualified Organizations and (ii) certain Pass-Through Entities (each as
defined in the Prospectus) that have Disqualified Organizations as beneficial
owners. No tax will be imposed on a Pass-Through Entity (other than an 'electing
large partnership,' as defined in the Prospectus), with respect to the Class A-R
Certificates to the extent it has received an affidavit from the owner thereof
that such owner is not a Disqualified Organization or a nominee for a
Disqualified Organization. The Agreement will provide that no legal or
beneficial interest in the Class A-R Certificate may be transferred to or
registered in the name of any person unless (i) the proposed purchaser provides
to the Trustee an affidavit (or, to the extent acceptable to the Trustee, a
representation letter signed under penalty of perjury) to the effect that, among
other items, such transferee is not a Disqualified Organization (as defined in
the Prospectus) and is not purchasing the Class A-R Certificate as an agent for
a Disqualified Organization (i.e., as a broker, nominee, or other middleman
thereof and (ii) the transferor states in writing to the Trustee that it has no
actual knowledge that such affidavit or letter is false. Further, such affidavit
or letter requires the transferee to affirm that it (i) historically has paid
its debts as they have come due and intends to do so in the future, (ii)
understands that it may incur tax liabilities with respect to the Class A-R
Certificate in excess of cash flows generated thereby, (iii) intends to pay
taxes associated with holding the Class A-R Certificate as such taxes become due
and (iv) will not transfer the Class A-R Certificate to any person or entity
that does not provide a similar affidavit or letter. The transferor must certify
in writing to the Trustee that, as of the date of the transfer, it had no
knowledge or reason to know that the affirmations made by the transferee
pursuant to the preceding sentence were false.
In addition, the Class A-R Certificate may not be purchased by or
transferred to any person that is not a 'U.S. Person', unless (i) such person
holds such Class A-R Certificate in connection with the conduct of a trade or
business within the United States and furnishes the transferor and the Trustee
with an effective Internal Revenue Service Form 4224 or (ii) the transferee
delivers to both the transferor and the Trustee an opinion of a nationally
recognized tax counsel to the effect that such transfer is in accordance with
the requirements of the Code and the regulations promulgated thereunder and that
such transfer of the Class A-R Certificate will not be disregarded for federal
income tax purposes. The term 'U.S. Person' means a citizen or resident of the
United States, a corporation, partnership (except to the extent provided in
applicable Treasury regulations) 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 the United States is able to exercise primary
supervision over the administration of such trust, and one or more such U.S.
Persons has 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).
The 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. Any transferor or agent to
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<PAGE>
whom the Trustee provides information as to any applicable tax imposed on such
transferor or agent may be required to bear the cost of computing or providing
such information. See 'Certain Federal Income Tax Consequences--Taxation of
Owners of Residual Certificates--Tax-Related Restrictions on Transfer of
Residual Certificates' in the Prospectus.
The Class A-R Certificate may not be purchased by or transferred to any
person which is a retirement plan or other employee benefit plan or arrangement
subject to Title I of ERISA or Code Section 4975 (an 'ERISA Plan') or which is a
governmental plan, as defined in Section 3(32) of ERISA, subject to any federal,
state or local law ('Similar Law') which is, to a material extent, similar to
the foregoing provisions of ERISA or the Code (collectively, with an ERISA Plan,
a 'Plan'), or any person acting on behalf of or investing the assets of such
Plan. See 'Certain ERISA Considerations' herein and 'ERISA Considerations' in
the Prospectus.
Under current law the purchase and holding of the Class M and Class B
Certificates by or on behalf of a Plan may result in 'prohibited transactions'
within the meaning of ERISA and Code Section 4975 or Similar Law. Transfer of
the Class M and Class B Certificates will not be made unless the transferee (i)
executes a representation letter in form and substance satisfactory to the
Trustee stating that (a) it is not, and is not acting on behalf of, any such
Plan or using the assets of any such Plan to effect such purchase or (b) if it
is an insurance company, that the source of funds used to purchase such
Certificates is an 'insurance company general account' (as such term is defined
in Section V(e) of Prohibited Transaction Class Exemption 95-60 ('PTCE 95-60'),
60 Fed. Reg. 35925 (July 12, 1995)) and there is no Plan with respect to which
the amount of such general account's reserves and liabilities for the
contract(s) held by or on behalf of such Plan and all other Plans maintained by
the same employer (or affiliate thereof as defined in Section V(a)(1) of PTCE
95-60) or by the same employee organization exceeds 10% of the total of all
reserves and liabilities of such general account (as such amounts are determined
under Section I(a) of PTCE 95-60) at the date of acquisition and the purchase
and holding of such Certificates by the transferee are covered by Sections I and
III of PTCE 95-60, or (ii) provides (A) an opinion of counsel in form and
substance satisfactory to the Trustee that the purchase or holding of such
Certificates by or on behalf of such Plan will not result in the assets of the
Trust Fund being deemed to be 'plan assets' and subject to the prohibited
transaction provisions of ERISA, the Code or Similar Law and will not subject
the Trustee to any obligation in addition to those undertaken in the Agreement
and (B) such other opinions of counsel, officers' certificates and agreements as
the Depositor or the Servicer may require in connection with such transfer. The
Class M and Class B Certificates will contain a legend describing such
restrictions on transfer and the 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. See 'Certain ERISA
Considerations' herein and 'ERISA Considerations' in the Prospectus.
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<PAGE>
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
GENERAL
The effective yield to the holders of the interest-bearing Certificates
will be lower than the yield otherwise produced by the applicable rate at which
interest is passed through to such holders and the purchase price of such
Certificates because monthly distributions will not be payable to such holders
until the 25th day (or, if such day is not a business day, the following
business day) of the month following the month in which interest accrues on the
Mortgage Loans (without any additional distribution of interest or earnings
thereon in respect of such delay).
Delinquencies on the Mortgage Loans which are not advanced by or on behalf
of the Servicer (because amounts, if advanced, would be nonrecoverable) will
adversely affect the yield on the Certificates. Because of the priority of
distributions, shortfalls resulting from delinquencies not so advanced will be
borne first by the Subordinated Certificates, in the reverse order of their
numerical Class designations, and then by the Senior Certificates. If, as a
result of such shortfalls, the aggregate of the Class Principal Balances of all
Classes of Certificates exceeds the Pool Principal Balance, the Class Principal
Balance of the Class of Subordinated Certificates then outstanding with the
highest numerical Class designation will be reduced by the amount of such
excess.
The yield to maturity of the Class A-5, Class A-6, Class A-7 and Class A-8
Certificates will be affected by the level of LIBOR from time to time, and will
be subject to maximum rates as set forth on the cover of this Prospectus
Supplement.
Net Interest Shortfalls will adversely affect the yields on the Classes of
Offered Certificates. In addition, although all losses initially will be borne
by the Subordinated Certificates in the reverse order of their numerical Class
designations (either directly or through distributions in respect of Class PO
Deferred Amounts on the Class PO Certificates), Excess Losses will be borne by
all Classes of Certificates (other than the Class X Certificates) on a pro rata
basis. Moreover, since the Subordinated Principal Distribution Amount for each
Distribution Date will be reduced by the amount of any distributions on such
Distribution Date in respect of Class PO Deferred Amounts, the amount
distributable as principal on each such Distribution Date to each Class of
Subordinated Certificates then entitled to a distribution of principal will be
less than it otherwise would be in the absence of such Class PO Deferred
Amounts. As a result, the yields on the Offered Certificates will depend on the
rate and timing of Realized Losses, including Excess Losses. Excess Losses could
occur at a time when one or more Classes of Subordinated Certificates are still
outstanding and otherwise available to absorb other types of Realized Losses.
For purposes of allocating losses and shortfalls resulting from
delinquencies to the Subordinated Certificates, the Class M Certificates will be
deemed to have a lower numerical Class designation than each other Class of
Subordinated Certificates.
PREPAYMENT CONSIDERATIONS AND RISKS
The rate of principal payments on the Offered Certificates, the aggregate
amount of distributions on the Offered Certificates and the yield to maturity of
the Offered Certificates will be related to the rate and timing of payments of
principal on the Mortgage Loans. The rate of principal payments on the Mortgage
Loans will in turn be affected by the amortization schedules of the Mortgage
Loans and by the rate of principal prepayments (including for this purpose
prepayments resulting from refinancing, liquidations of the Mortgage Loans due
to defaults, casualties, condemnations and repurchases by Provident or the
Servicer). The Mortgage Loans may be prepaid by the borrowers at any time
without a prepayment penalty. The Mortgage Loans are subject to the 'due-
on-sale' provisions included therein. See 'The Mortgage Pool' herein.
Prepayments, liquidations and purchases of the Mortgage Loans (including
any optional purchase by the Servicer of a defaulted Mortgage Loan and any
optional repurchase of the remaining Mortgage Loans in connection with the
termination of the Trust Fund, in each case as described herein) will result in
distributions on the Offered Certificates of principal amounts which would
otherwise be distributed over the remaining terms of the Mortgage Loans. Since
the rate of payment of principal of the Mortgage Loans will depend on future
events and a variety of factors, no assurance can be given as to such rate or
the rate of principal prepayments. The extent
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<PAGE>
to which the yield to maturity of a Class of Offered Certificates may vary from
the anticipated yield will depend upon the degree to which such Offered
Certificate is purchased at a discount or premium, and the degree to which the
timing of payments thereon is sensitive to prepayments, liquidations and
purchases of the Mortgage Loans. Further, an investor should consider the risk
that, in the case of the Class PO Certificates and any other Offered Certificate
purchased at a discount, a slower than anticipated rate of principal payments
(including prepayments) on the Mortgage Loans could result in an actual yield to
such investor that is lower than the anticipated yield and, in the case of the
Class X Certificates and any other Offered Certificate purchased at a premium, a
faster than anticipated rate of principal payments could result in an actual
yield to such investor that is lower than the anticipated yield. Investors in
the Class X Certificates should carefully consider the risk that a rapid rate of
principal payments on the Mortgage Loans could result in the failure of such
investors to recover their initial investments.
The rate of principal payments (including prepayments) on pools of mortgage
loans may vary significantly over time and may be influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties, servicing decisions, as well as the characteristics of the
Mortgage Loans included in the Mortgage Pool as described under 'The Mortgage
Pool--General' and 'Underwriting Standards' herein. In general, if prevailing
interest rates were to fall significantly below the Mortgage Rates on the
Mortgage Loans, the Mortgage Loans could be subject to higher prepayment rates
than if prevailing interest rates were to remain at or above the Mortgage Rates
on the Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on the Mortgage Loans would generally be
expected to decrease. No assurances can be given as to the rate of prepayments
on the Mortgage Loans in stable or changing interest rate environments.
As described under 'Description of the Certificates--Principal' herein, the
Senior Prepayment Percentage of the applicable Non-PO Percentage of all
principal prepayments will be initially distributed to the Classes of Senior
Certificates (other than the Class PO Certificates) then entitled to receive
principal prepayment distributions. This may result in all (or a
disproportionate percentage) of such principal prepayments being distributed to
holders of such Classes of Senior Certificates and none (or less than their pro
rata share) of such principal prepayments being distributed to holders of the
Subordinated Certificates during the periods of time described in the definition
of 'Senior Prepayment Percentage.'
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 is consistent with an investor's expectation. In
general, the earlier a prepayment of principal on the Mortgage Loans, the
greater the effect on an investor's yield to maturity. The effect on an
investor's yield as a result 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 Offered Certificates may not be offset
by a subsequent like decrease (or increase) in the rate of principal payments.
The tables below indicate the sensitivity of the pre-tax corporate bond
equivalent yields to maturity of certain Classes of Certificates to various
constant percentages of SPA. The yields set forth in the tables were calculated
by determining the monthly discount rates that, when applied to the assumed
streams of cash flows to be paid on the applicable Classes of Certificates,
would cause the discounted present value of such assumed streams of cash flows
to equal the assumed aggregate purchase prices of such Classes and converting
such monthly rates to corporate bond equivalent rates. Such calculations do 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
such Certificates and consequently do not purport to reflect the return on any
investment in any such Class of Certificate when such reinvestment rates are
considered.
S-47
<PAGE>
STRUCTURING ASSUMPTIONS
Unless otherwise specified, the information in the tables in this
Prospectus Supplement has been prepared on the basis of the following assumed
characteristics of the Mortgage Loans and the following additional assumptions
(collectively, the 'Structuring Assumptions'): (i) the Mortgage Pool consists of
two Mortgage Loans with the following characteristics:
<TABLE>
<CAPTION>
ORIGINAL TERM REMAINING TERM
NET TO MATURITY TO MATURITY
PRINCIPAL BALANCE MORTGAGE RATE MORTGAGE RATE (IN MONTHS) (IN MONTHS)
- ----------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
$ 20,807,567.79 6.9432168641% 6.6807168641% 360 360
$ 229,442,968.52 7.4314555285% 7.1689555285% 360 360
</TABLE>
(ii) the Mortgage Loans prepay at the specified constant percentages of SPA,
(iii) no defaults in the payment by borrowers of principal of and interest on
the Mortgage Loans are experienced, (iv) scheduled payments on the Mortgage
Loans are received on the first day of each month commencing in the calendar
month following the Closing Date and are computed prior to giving effect to
prepayments received on the last day of the prior month, (v) prepayments are
allocated as described herein without giving effect to loss and delinquency
tests, (vi) there are no Net Interest Shortfalls and prepayments represent
prepayments in full of individual Mortgage Loans and are received on the last
day of each month, commencing in the calendar month of the Closing Date, (vii)
the scheduled monthly payment for each Mortgage Loan has been calculated such
that each Mortgage Loan will amortize in amounts sufficient to repay the current
balance of such Mortgage Loan by its respective remaining term to maturity,
(viii) the initial Class Principal Balance or Notional Amount, as applicable, of
each Class of Certificates is as set forth on the cover page hereof and under
'Summary of Terms--Certificates other than the Offered Certificates' herein,
(ix) interest accrues on each interest-bearing Class of Certificates at the
applicable interest rate set forth or described on the cover hereof and as
described herein, (x) distributions in respect of the Certificates are received
in cash on the 25th day of each month commencing in the calendar month following
the Closing Date, (xi) the closing date of the sale of the Offered Certificates
is the date set forth under 'Summary of Terms--Closing Date' herein, (xii)
Provident is not required to repurchase or substitute for any Mortgage Loan,
(xiii) the Servicer does not exercise the option to repurchase the Mortgage
Loans described herein under '--Optional Purchase of Defaulted Loans' and
'--Optional Termination' herein and (xiv) no Class of Certificates becomes a
Restricted Class. While it is assumed that each of the Mortgage Loans prepays at
the specified constant percentages of the Standard Prepayment Assumption, this
is not likely to be the case. Moreover, discrepancies may exist between the
characteristics of the actual Mortgage Loans which will be delivered to the
Trustee and characteristics of the Mortgage Loans used in preparing the tables
herein.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The prepayment model used in this Prospectus
Supplement is the Standard Prepayment Assumption ('SPA'), which represents an
assumed rate of prepayment each month of the then outstanding principal balance
of a pool of new mortgage loans. SPA 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. 100% SPA assumes prepayment rates of 0.2% per
annum of the then unpaid principal balance of such pool of mortgage loans in the
first month of the life of such mortgage loans and an additional 0.2% per annum
in each month thereafter (for example, 0.4% per annum in the second month) until
the 30th month. Beginning in the 30th month and in each month thereafter during
the life of such mortgage loans, 100% SPA assumes a constant prepayment rate of
6% per annum. Multiples may be calculated from this prepayment rate sequence.
For example, 250% SPA assumes prepayment rates will be 0.5% per annum in month
one, 1.0% per annum in month two, and increasing by 0.5% in each succeeding
month until reaching a rate of 15.0% per annum in month 30 and remaining
constant at 15.0% per annum thereafter. 0% SPA assumes no prepayments. There is
no assurance that prepayments will occur at any SPA rate or at any other
constant rate.
SENSITIVITY OF THE CLASS A-6 AND CLASS A-8 CERTIFICATES
THE YIELD TO INVESTORS IN THE CLASS A-6 AND CLASS A-8 CERTIFICATES WILL BE
HIGHLY SENSITIVE TO LIBOR. INCREASES IN LIBOR WILL HAVE A NEGATIVE EFFECT ON THE
YIELD TO INVESTORS IN THE CLASS A-6 AND CLASS A-8 CERTIFICATES.
S-48
<PAGE>
Since there can be no assurance that LIBOR will correlate with the levels
of prevailing mortgage interest rates, it is possible that lower prevailing
mortgage rates, which might be expected to result in faster prepayments, could
occur concurrently with an increase in LIBOR. However, if, as generally
expected, higher mortgage rates and, accordingly, lower prepayment rates, were
to occur concurrently with an increase in LIBOR, the Pass-Through Rate of the
Class A-6 and Class A-8 Certificates would be reduced at the same time that the
rate of distributions in reduction of the Class Principal Balance to such Class
may be reduced. In such circumstances, investors in the Class A-6 and Class A-8
Certificates could have significantly lower yielding instruments with longer
weighted average lives than anticipated.
To illustrate the significance of changes in LIBOR and prepayments on the
Class A-6 and Class A-8 Certificates, the following tables indicate the pre-tax
yield to maturity on a corporate bond equivalent ('CBE') basis under assumptions
specified in the following paragraph at the different constant percentages of
SPA until maturity and the constant levels of LIBOR indicated. It is not likely
that the Mortgage Loans will prepay at a constant level of SPA until maturity,
that all of the Mortgage Loans will prepay at the same rate or that LIBOR will
remain constant. As discussed above, the timing of changes in the rate of
prepayments may significantly affect the total distributions received, the date
of receipt of such distributions and the actual yield to maturity to an investor
in the Class A-6 or Class A-8 Certificate even if the average level is
consistent with such investor's expectations.
The following table has been prepared on the basis of the Structuring
Assumptions, and the additional assumptions that (i) the aggregate purchase
price for the Class A-6 and Class A-8 Certificates is approximately 93.0% and
99.5%, respectively, of the initial Class Principal Balance of the Class A-6 and
Class A-8 Certificates, respectively, plus accrued interest thereon from July
25, 1998 to (but not including) July 30, 1998, (ii) such purchase price is paid
on July 30, 1998 and (iii) beginning with the Distribution Date in August 1998
and for each Distribution Date thereafter, LIBOR is at the level specified. The
Mortgage Loans included in the Trust Fund may differ from those currently
expected to be included therein, and thereafter may be changed as a result of
permitted substitutions. In addition, there can be no assurance that the
Mortgage Loans will prepay at any of the specified constant rates shown in the
tables or at any other particular rate, that the pre-tax yield to maturity on
the Class A-6 and Class A-8 Certificates will correspond to any of the yields
shown herein, that the level of LIBOR will correspond to the levels shown herein
or that the aggregate purchase prince of the Class A-6 and Class A-8
Certificates will be as assumed. The table does not constitute a representation
as to the correlation of any level of LIBOR with any rate of prepayments on the
Mortgage Loans. Each investor must make an independent decision as to the
appropriate combinations of prepayment and LIBOR assumptions to be used in
deciding whether or not to purchase a Class A-6 or Class A-8 Certificate.
The pre-tax yields to maturity set forth in the following table were
calculated by (i) determining the monthly discount rates which, when applied to
the assumed stream of cash flows to be paid on the Class A-6 and Class A-8
Certificates, respectively, would cause the discounted present value of such
assumed stream of cash flows to equal an assumed aggregate purchase price for
the Class A-6 and Class A-8 Certificates set forth above and (ii) converting
such monthly rate to CBE rates. Such calculations do not take into account the
interest rates at which investors may be able to reinvest funds received by them
as distributions on the Class A-6 and Class A-8 Certificates and consequently do
not purport to reflect the return on any investment on the Class A-6 or Class
A-8 Certificates when such reinvestment rates are considered.
SENSITIVITY OF THE PRE-TAX YIELD TO MATURITY ON THE CLASS A-6 CERTIFICATES
TO PREPAYMENTS AND LIBOR
<TABLE>
<CAPTION>
PERCENTAGES OF SPA
-----------------------------------------------
LEVEL OF LIBOR 0% 100% 275% 400% 500%
- ---------------------------------------------------------------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
4.65625......................................................... 11.712% 11.719% 11.826% 12.063% 12.431%
5.65625......................................................... 8.409% 8.420% 8.551% 8.809% 9.203%
6.65625......................................................... 5.158% 5.173% 5.324% 5.598% 6.015%
7.65625......................................................... 1.969% 1.986% 2.149% 2.431% 2.868%
8.65625......................................................... 0.264% 0.281% 0.445% 0.728% 1.174%
</TABLE>
S-49
<PAGE>
SENSITIVITY OF THE PRE-TAX YIELD TO MATURITY ON THE CLASS A-8 CERTIFICATES
TO PREPAYMENTS AND LIBOR
<TABLE>
<CAPTION>
PERCENTAGES OF SPA
-----------------------------------------------
LEVEL OF LIBOR 0% 100% 275% 400% 500%
- ---------------------------------------------------------------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
4.65625......................................................... 12.267% 12.271% 12.275% 12.278% 12.280%
5.65625......................................................... 8.266% 8.275% 8.286% 8.292% 8.296%
6.65625......................................................... 4.314% 4.327% 4.346% 4.355% 4.363%
7.65625......................................................... 0.413% 0.431% 0.456% 0.469% 0.481%
8.65625......................................................... 0.050% 0.068% 0.094% 0.108% 0.119%
</TABLE>
SENSITIVITY OF THE CLASS X CERTIFICATES
AS INDICATED IN THE TABLE BELOW, THE YIELD TO INVESTORS IN THE CLASS X
CERTIFICATES WILL BE SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS) OF THE NON-DISCOUNT MORTGAGE LOANS (PARTICULARLY THOSE WITH HIGH
NET MORTGAGE RATES), WHICH GENERALLY CAN BE PREPAID AT ANY TIME. ON THE BASIS OF
THE ASSUMPTIONS DESCRIBED BELOW, THE YIELD TO MATURITY ON THE CLASS X
CERTIFICATES WOULD BE APPROXIMATELY 0% IF PREPAYMENTS WERE TO OCCUR AT A
CONSTANT RATE OF APPROXIMATELY 682% SPA. IF THE ACTUAL PREPAYMENT RATE OF THE
NON-DISCOUNT MORTGAGE LOANS WERE TO EXCEED THE FOREGOING LEVEL FOR AS LITTLE AS
ONE MONTH WHILE EQUALING SUCH LEVEL FOR THE REMAINING MONTHS, THE INVESTORS IN
THE CLASS X CERTIFICATES WOULD NOT FULLY RECOUP THEIR INITIAL INVESTMENTS.
As described under 'Description of the Certificates--General' above, the
Pass-Through Rate of the Class X Certificates in effect from time to time is
calculated by reference to the Net Mortgage Rates of the Non-Discount Mortgage
Loans. The Non-Discount Mortgage Loans will have higher Net Mortgage Rates (and
higher Mortgage Rates) than the other Mortgage Loans. In general, mortgage loans
with higher mortgage rates tend to prepay at higher rates than mortgage loans
with relatively lower mortgage rates in response to a given change in market
interest rates. As a result, the Non-Discount Mortgage Loans may prepay at
higher rates, thereby reducing the Pass-Through Rate and Notional Amount of the
Class X Certificates.
The information set forth in the following table has been prepared on the
basis of the Structuring Assumptions and on the assumption that the purchase
price of the Class X Certificates (expressed as a percentage of initial Notional
Amount) is as follows:
<TABLE>
<CAPTION>
CLASS PRICE*
- ------------------------------------------------------------------ ------
<S> <C>
Class X........................................................... 1.25%
</TABLE>
- ------------------
* The price does not include accrued interest. Accrued interest has been added
to such price in calculating the yields set forth in the table below.
SENSITIVITY OF THE CLASS X CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
PERCENTAGES OF SPA
--------------------------------------------------
CLASS 0% 100% 275% 400% 500%
- ---------------------------------------------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Class X....................................... 33.699% 28.935% 20.448% 14.274% 9.270%
</TABLE>
It is unlikely that the Non-Discount Mortgage Loans will have the precise
characteristics described herein or that the Non-Discount Mortgage Loans will
all prepay at the same rate until maturity or that all of the Non-Discount
Mortgage Loans will prepay at the same rate or time. As a result of these
factors, the pre-tax yields on the Class X Certificates are likely to differ
from those shown in the table above, even if all of the Non-Discount Mortgage
Loans prepay at the indicated percentages of SPA. No representation is made as
to the actual rate of principal payments on the Non-Discount Mortgage Loans for
any period or over the life of the Class X Certificates or as to the yield on
the Class X Certificates. Investors must make their own decisions as to the
appropriate prepayment assumptions to be used in deciding whether to purchase
the Class X Certificates.
S-50
<PAGE>
SENSITIVITY OF THE CLASS PO CERTIFICATES
THE CLASS PO CERTIFICATES WILL BE 'PRINCIPAL ONLY' CERTIFICATES AND WILL
NOT BEAR INTEREST. AS INDICATED IN THE TABLE BELOW, A LOWER THAN ANTICIPATED
RATE OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) ON THE DISCOUNT MORTGAGE
LOANS WILL HAVE A NEGATIVE EFFECT ON THE YIELD TO INVESTORS IN THE CLASS PO
CERTIFICATES.
As described under 'Description of the Certificates--Principal' above, the
Class PO Principal Distribution Amount is calculated by reference to the
principal payments (including prepayments) on the Discount Mortgage Loans. The
Discount Mortgage Loans will have lower Net Mortgage Rates (and lower Mortgage
Rates) than the other Mortgage Loans. In general, mortgage loans with higher
mortgage rates tend to prepay at higher rates than mortgage loans with
relatively lower mortgage rates in response to a given change in market interest
rates. As a result, the Discount Mortgage Loans may prepay at lower rates,
thereby reducing the rate of payment of principal and the resulting yield of the
Class PO Certificates.
The information set forth in the following table has been prepared on the
basis of the Structuring Assumptions and on the assumption that the aggregate
purchase price of the Class PO Certificates (expressed as a percentage of
initial Class Principal Balance) is as follows:
<TABLE>
<CAPTION>
CLASS PRICE
- ---------------------------------------------------------------- ------
<S> <C>
Class PO........................................................ 68.00%
</TABLE>
SENSITIVITY OF THE CLASS PO CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
PERCENTAGES OF SPA
------------------------------------------
CLASS 0% 100% 275% 400% 500%
- -------------------------------------------------- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Class PO.......................................... 2.014% 3.696% 7.148% 9.500% 11.255%
</TABLE>
It is unlikely that the Discount Mortgage Loans will have the precise
characteristics described herein or that the Discount Mortgage Loans will all
prepay at the same rate until maturity or that all of the Discount Mortgage
Loans will prepay at the same rate or time. As a result of these factors, the
pre-tax yield on the Class PO Certificates is likely to differ from those shown
in the table above, even if all of the Discount Mortgage Loans prepay at the
indicated percentages of SPA. No representation is made as to the actual rate of
principal payments on the Discount Mortgage Loans for any period or over the
life of the Class PO Certificates or as to the yield on the Class PO
Certificates. Investors must make their own decisions as to the appropriate
prepayment assumptions to be used in deciding whether to purchase the Class PO
Certificates.
ADDITIONAL INFORMATION
The Depositor intends to file certain additional yield tables and other
computational materials with respect to one or more Classes of Offered
Certificates with the Commission in a report on Form 8-K. Such tables and
materials were prepared by the Underwriter at the request of certain prospective
investors, based on assumptions provided by, and satisfying the special
requirements of, such prospective investors. Such tables and assumptions may be
based on assumptions that differ from the Structuring Assumptions. Accordingly,
such tables and other materials may not be relevant to or appropriate for
investors other than those specifically requesting them.
WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES
The weighted average life of an Offered Certificate is determined by (a)
multiplying the amount of the net reduction, if any, of the Class Principal
Balance of such Certificate on each Distribution Date by the number of years
from the date of issuance to such Distribution Date, (b) summing the results and
(c) dividing the sum by the aggregate amount of the net reductions in Class
Principal Balance of such Certificate referred to in clause (a).
For a discussion of the factors which may influence the rate of payments
(including prepayments) of the Mortgage Loans, see '--Prepayment Considerations
and Risks' herein and 'Yield Considerations' and 'Maturity and Prepayment
Considerations' in the Prospectus.
In general, the weighted average lives of the Offered Certificates will be
shortened if the level of prepayments of principal of the Mortgage Loans
increases. However, the weighted average lives of the Offered
S-51
<PAGE>
Certificates will depend upon a variety of other factors, including the timing
of changes in such rate of principal payments and the priority sequence of
distributions of principal of the Classes of Certificates. See 'Description of
the Certificates--Principal' herein.
The interaction of the foregoing factors may have different effects on
various Classes of Offered Certificates and the effects on any Class may vary at
different times during the life of such Class. Accordingly, no assurance can be
given as to the weighted average life of any Class of Offered Certificates.
Further, to the extent the prices of the Offered Certificates represent
discounts or premiums to their respective original Class Principal Balances,
variability in the weighted average lives of such Classes of Offered
Certificates will result in variability in the related yields to maturity. For
an example of how the weighted average lives of the Classes of Offered
Certificates may be affected at various constant percentages of SPA, see the
Decrement Tables below.
DECREMENT TABLES
The following tables indicate the percentages of the initial Class
Principal Balances of the Classes of Offered Certificates (other than the Class
X Certificates) that would be outstanding after each of the dates shown at
various constant percentages of SPA and the corresponding weighted average lives
of such Classes. The tables have been prepared on the basis of the Structuring
Assumptions. It is not likely that (i) the Mortgage Loans will have the precise
characteristics described herein or (ii) all of the Mortgage Loans will prepay
at the constant percentages of SPA specified in the tables or at any other
constant rate. Moreover, the diverse remaining terms to maturity of the Mortgage
Loans could produce slower or faster principal distributions than indicated in
the tables, which have been prepared using the specified constant percentages of
SPA, even if the remaining term to maturity of the Mortgage Loans is consistent
with the remaining terms to maturity of the Mortgage Loans specified in the
Structuring Assumptions.
S-52
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCES OUTSTANDING**
<TABLE>
<CAPTION>
CLASS A-R CLASS A-1
-------------------------------- ---------------------------------
PERCENTAGES OF SPA PERCENTAGES OF SPA
-------------------------------- ---------------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ------------------------------------------- ---- ---- ---- ---- ---- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial.................................... 100 100 100 100 100 100 100 100 100 100
July 1999.................................. 0 0 0 0 0 99 97 93 91 89
July 2000.................................. 0 0 0 0 0 97 90 78 69 62
July 2001.................................. 0 0 0 0 0 96 81 57 41 30
July 2002.................................. 0 0 0 0 0 94 72 38 19 6
July 2003.................................. 0 0 0 0 0 92 63 23 2 0
July 2004.................................. 0 0 0 0 0 90 56 12 0 0
July 2005.................................. 0 0 0 0 0 89 49 3 0 0
July 2006.................................. 0 0 0 0 0 87 42 0 0 0
July 2007.................................. 0 0 0 0 0 85 37 0 0 0
July 2008.................................. 0 0 0 0 0 82 32 0 0 0
July 2009.................................. 0 0 0 0 0 80 27 0 0 0
July 2010.................................. 0 0 0 0 0 77 22 0 0 0
July 2011.................................. 0 0 0 0 0 74 18 0 0 0
July 2012.................................. 0 0 0 0 0 71 14 0 0 0
July 2013.................................. 0 0 0 0 0 68 10 0 0 0
July 2014.................................. 0 0 0 0 0 64 7 0 0 0
July 2015.................................. 0 0 0 0 0 60 3 0 0 0
July 2016.................................. 0 0 0 0 0 56 * 0 0 0
July 2017.................................. 0 0 0 0 0 52 0 0 0 0
July 2018.................................. 0 0 0 0 0 47 0 0 0 0
July 2019.................................. 0 0 0 0 0 42 0 0 0 0
July 2020.................................. 0 0 0 0 0 36 0 0 0 0
July 2021.................................. 0 0 0 0 0 30 0 0 0 0
July 2022.................................. 0 0 0 0 0 24 0 0 0 0
July 2023.................................. 0 0 0 0 0 17 0 0 0 0
July 2024.................................. 0 0 0 0 0 9 0 0 0 0
July 2025.................................. 0 0 0 0 0 1 0 0 0 0
July 2026.................................. 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in years)***........ 0.07 0.07 0.07 0.07 0.07 17.70 7.73 3.57 2.76 2.39
</TABLE>
- ------------------
* Indicates an amount above zero and less than 0.5% of the Original Class
Principal Balance is outstanding.
** Rounded to the nearest whole percentage.
*** Determined as specified under 'Weighted Average Lives of the Offered
Certificates' herein.
S-53
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCES OUTSTANDING**
<TABLE>
<CAPTION>
CLASS A-2 CLASS A-3
---------------------------------- ----------------------------------
PERCENTAGES OF SPA PERCENTAGES OF SPA
---------------------------------- ----------------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------------------------------- ----- ----- ---- ---- ---- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial.................................. 100 100 100 100 100 100 100 100 100 100
July 1999................................ 100 100 100 100 100 100 100 100 100 100
July 2000................................ 100 100 100 100 100 100 100 100 100 100
July 2001................................ 100 100 100 100 100 100 100 100 100 100
July 2002................................ 100 100 100 100 100 100 100 100 100 100
July 2003................................ 100 100 100 100 45 100 100 100 100 0
July 2004................................ 100 100 100 57 0 100 100 100 0 0
July 2005................................ 100 100 100 20 0 100 100 100 0 0
July 2006................................ 100 100 83 0 0 100 100 48 0 0
July 2007................................ 100 100 58 0 0 100 100 0 0 0
July 2008................................ 100 100 41 0 0 100 100 0 0 0
July 2009................................ 100 100 26 0 0 100 100 0 0 0
July 2010................................ 100 100 14 0 0 100 100 0 0 0
July 2011................................ 100 100 4 0 0 100 100 0 0 0
July 2012................................ 100 100 0 0 0 100 100 0 0 0
July 2013................................ 100 100 0 0 0 100 100 0 0 0
July 2014................................ 100 100 0 0 0 100 100 0 0 0
July 2015................................ 100 100 0 0 0 100 100 0 0 0
July 2016................................ 100 100 0 0 0 100 100 0 0 0
July 2017................................ 100 85 0 0 0 100 55 0 0 0
July 2018................................ 100 71 0 0 0 100 10 0 0 0
July 2019................................ 100 57 0 0 0 100 0 0 0 0
July 2020................................ 100 44 0 0 0 100 0 0 0 0
July 2021................................ 100 31 0 0 0 100 0 0 0 0
July 2022................................ 100 19 0 0 0 100 0 0 0 0
July 2023................................ 100 8 0 0 0 100 0 0 0 0
July 2024................................ 100 0 0 0 0 100 0 0 0 0
July 2025................................ 100 0 0 0 0 100 0 0 0 0
July 2026................................ 60 0 0 0 0 0 0 0 0 0
July 2027................................ 12 0 0 0 0 0 0 0 0 0
July 2028................................ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in years)***...... 28.24 21.67 9.79 6.30 5.03 27.52 19.16 8.03 5.51 4.53
</TABLE>
- ------------------
* Indicates an amount above zero and less than 0.5% of the original Class
Principal Balance is outstanding.
** Rounded to the nearest whole percentage.
*** Determined as specified under 'Weighted Average Lives of the Offered
Certificates' herein.
S-54
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCES OUTSTANDING**
<TABLE>
<CAPTION>
CLASS A-4 CLASS A-5 AND A-6
----------------------------------------- -----------------------------------------
PERCENTAGES OF SPA PERCENTAGES OF SPA
----------------------------------------- -----------------------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial...................... 100 100 100 100 100 100 100 100 100 100
July 1999.................... 100 100 100 100 100 100 100 100 100 100
July 2000.................... 100 100 100 100 100 100 100 100 100 100
July 2001.................... 100 100 100 100 100 100 100 100 100 100
July 2002.................... 100 100 100 100 100 100 100 100 100 100
July 2003.................... 100 100 100 100 67 100 100 100 100 100
July 2004.................... 100 100 100 85 0 100 100 100 100 94
July 2005.................... 100 100 100 29 0 100 100 100 100 25
July 2006.................... 100 100 100 0 0 100 100 100 93 0
July 2007.................... 100 100 87 0 0 100 100 100 61 0
July 2008.................... 100 100 60 0 0 100 100 100 46 0
July 2009.................... 100 100 38 0 0 100 100 100 34 0
July 2010.................... 100 100 20 0 0 100 100 100 25 0
July 2011.................... 100 100 5 0 0 100 100 100 19 0
July 2012.................... 100 100 0 0 0 100 100 88 14 0
July 2013.................... 100 100 0 0 0 100 100 71 10 0
July 2014.................... 100 100 0 0 0 100 100 57 7 0
July 2015.................... 100 100 0 0 0 100 100 46 5 0
July 2016.................... 100 100 0 0 0 100 100 36 4 0
July 2017.................... 100 100 0 0 0 100 100 29 3 0
July 2018.................... 100 100 0 0 0 100 100 23 2 0
July 2019.................... 100 84 0 0 0 100 100 17 1 0
July 2020.................... 100 65 0 0 0 100 100 13 1 0
July 2021.................... 100 46 0 0 0 100 100 10 1 0
July 2022.................... 100 29 0 0 0 100 100 8 * 0
July 2023.................... 100 12 0 0 0 100 100 5 * 0
July 2024.................... 100 0 0 0 0 100 94 4 * 0
July 2025.................... 100 0 0 0 0 100 69 2 * 0
July 2026.................... 90 0 0 0 0 100 45 1 * 0
July 2027.................... 18 0 0 0 0 100 22 1 * 0
July 2028.................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in
years)***.................. 28.58 22.89 10.65 6.68 5.27 29.65 27.83 17.66 10.80 6.69
</TABLE>
- ------------------
* Indicates an amount above zero and less than 0.5% of the original Class
Principal Balance is outstanding.
** Rounded to the nearest whole percentage.
*** Determined as specified under 'Weighted Average Lives of the Offered
Certificates' herein.
S-55
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCES OUTSTANDING**
<TABLE>
<CAPTION>
CLASS A-7 AND CLASS A-8 CLASS PO
----------------------------------------- -----------------------------------------
PERCENTAGES OF SPA PERCENTAGES OF SPA
----------------------------------------- -----------------------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial...................... 100 100 100 100 100 100 100 100 100 100
July 1999.................... 100 100 100 100 100 99 98 95 94 92
July 2000.................... 100 100 100 100 100 98 93 85 79 74
July 2001.................... 100 100 100 100 100 97 87 70 60 52
July 2002.................... 100 100 100 100 100 95 80 58 45 36
July 2003.................... 100 100 100 100 100 94 74 48 34 25
July 2004.................... 99 97 93 91 89 93 69 39 25 17
July 2005.................... 97 93 86 80 76 91 64 32 19 12
July 2006.................... 95 88 75 67 58 89 59 26 14 8
July 2007.................... 94 82 64 53 39 88 54 22 10 6
July 2008.................... 92 76 52 39 26 86 50 18 8 4
July 2009.................... 90 69 43 29 18 84 46 14 6 3
July 2010.................... 87 64 35 22 12 81 42 12 4 2
July 2011.................... 85 58 28 16 8 79 38 9 3 1
July 2012.................... 82 53 23 12 6 77 35 8 2 1
July 2013.................... 79 48 18 9 4 74 31 6 2 1
July 2014.................... 76 44 15 6 3 71 28 5 1 *
July 2015.................... 73 39 12 5 2 68 26 4 1 *
July 2016.................... 70 35 9 3 1 65 23 3 1 *
July 2017.................... 66 31 7 2 1 61 20 2 * *
July 2018.................... 62 28 6 2 1 57 18 2 * *
July 2019.................... 58 24 5 1 * 53 16 2 * *
July 2020.................... 53 21 3 1 * 49 13 1 * *
July 2021.................... 48 18 3 1 * 44 11 1 * *
July 2022.................... 42 15 2 * * 39 9 1 * *
July 2023.................... 37 12 1 * * 33 8 * * *
July 2024.................... 30 9 1 * * 28 6 * * *
July 2025.................... 24 7 1 * * 21 4 * * *
July 2026.................... 16 4 * * * 15 3 * * *
July 2027.................... 8 2 * * * 8 1 * * *
July 2028.................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in
years)***.................. 21.16 15.69 11.35 9.90 8.94 19.88 11.59 6.18 4.62 3.88
</TABLE>
- ------------------
* Indicates an amount above zero and less than 0.5% of the original Class
Principal Balance is outstanding.
** Rounded to the nearest whole percentage.
*** Determined as specified under 'Weighted Average Lives of the Offered
Certificates' herein.
S-56
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCES OUTSTANDING**
<TABLE>
<CAPTION>
CLASS M, B-1 AND B-2
-----------------------------------------
PERCENTAGES OF SPA
-----------------------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500%
- ------------------------------------------------------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Initial............................................... 100 100 100 100 100
July 1999............................................. 99 99 99 99 99
July 2000............................................. 98 98 98 98 98
July 2001............................................. 97 97 97 97 97
July 2002............................................. 96 96 96 96 96
July 2003............................................. 95 95 95 95 95
July 2004............................................. 93 91 88 86 84
July 2005............................................. 92 88 81 76 72
July 2006............................................. 90 83 71 63 57
July 2007............................................. 88 78 61 50 42
July 2008............................................. 87 71 50 37 29
July 2009............................................. 85 66 40 28 20
July 2010............................................. 82 60 33 20 13
July 2011............................................. 80 55 27 15 9
July 2012............................................. 78 50 22 11 6
July 2013............................................. 75 46 17 8 4
July 2014............................................. 72 41 14 6 3
July 2015............................................. 69 37 11 4 2
July 2016............................................. 66 33 9 3 1
July 2017............................................. 62 30 7 2 1
July 2018............................................. 59 26 6 2 1
July 2019............................................. 54 23 4 1 *
July 2020............................................. 50 20 3 1 *
July 2021............................................. 45 17 2 1 *
July 2022............................................. 40 14 2 * *
July 2023............................................. 35 11 1 * *
July 2024............................................. 29 9 1 * *
July 2025............................................. 22 6 1 * *
July 2026............................................. 15 4 * * *
July 2027............................................. 8 2 * * *
July 2028............................................. 0 0 0 0 0
Weighted Average Life (in years)***................... 20.15 14.98 10.88 9.50 8.79
</TABLE>
- ------------------
* Indicates an amount above zero and less than 0.5% of the original Class
Principal Balance is outstanding.
** Rounded to the nearest whole percentage.
*** Determined as specified under 'Weighted Average Lives of the Offered
Certificates' herein.
S-57
<PAGE>
LAST SCHEDULED DISTRIBUTION DATE
The 'Last Scheduled Distribution Date' for each Class of Offered
Certificates is the Distribution Date in September 25, 2028, which is the
Distribution Date in the month following the month of the latest scheduled
maturity date for any of the Mortgage Loans. Since the rate of distributions in
reduction of the Class Principal Balance or Notional Amount of each Class of
Offered Certificates will depend on the rate of payment (including prepayments)
of the Mortgage Loans, the Class Principal Balance or Notional Amount of any
such Class could be reduced to zero significantly earlier or later than the Last
Scheduled Distribution Date. The rate of payments on the Mortgage Loans will
depend on their particular characteristics, as well as on prevailing interest
rates from time to time and other economic factors, and no assurance can be
given as to the actual payment experience of the Mortgage Loans. See 'Yield,
Prepayment and Maturity Considerations--Prepayment Considerations and Risks' and
'--Weighted Average Lives of the Offered Certificates' herein and 'Yield
Considerations' and 'Maturity and Prepayment Considerations' in the Prospectus.
SUBORDINATED CERTIFICATES
The weighted average life of, and the yield to maturity on, the
Subordinated Certificates, in increasing order of their numerical Class
designation, will be progressively more sensitive to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the Mortgage Loans. In
particular, the rate and timing of mortgagor defaults and the severity of
ensuing losses on the Mortgage Loans may be affected by the characteristics of
the Mortgage Loans included in the Mortgage Pool as described under 'The
Mortgage Pool--General' and 'Underwriting Standards' herein. If the actual rate
and severity of losses on the Mortgage Loans is higher than those assumed by a
holder of a Subordinated Certificate, the actual yield to maturity of such
Certificate may be lower than the yield expected by such holder based on such
assumption. The timing of losses on Mortgage Loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the Mortgage Pool are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity. Realized Losses on the Mortgage Loans will
reduce the Class Principal Balances of the applicable Class of Subordinated
Certificates to the extent of any losses allocated thereto (as described under
'Description of the Certificates--Allocation of Losses'), without the receipt of
cash attributable to such reduction. In addition, shortfalls in cash available
for distributions on the Subordinated Certificates will result in a reduction in
the Class Principal Balance of the Class of Subordinated Certificates then
outstanding with the highest numerical Class designation if and to the extent
that the aggregate of the Class Principal Balances of all Classes of
Certificates, following all distributions and the allocation of Realized Losses
on a Distribution Date, exceeds the Pool Principal Balance as of the Due Date
occurring in the month of such Distribution Date. As a result of such
reductions, less interest will accrue on such Class of Subordinated Certificates
than otherwise would be the case. The yield to maturity of the Subordinated
Certificates will also be affected by the disproportionate allocation of
principal prepayments to the Senior Certificates, Net Interest Shortfalls, other
cash shortfalls in Available Collection Amounts and distribution of funds to
Class PO Certificateholders otherwise available for distribution on the
Subordinated Certificates to the extent of reimbursement for Class PO Deferred
Amounts. See 'Description of the Certificates--Allocation of Losses' herein.
If on any Distribution Date, the Applicable Credit Support Percentage for
any Class of Subordinated Certificates is less than its Original Applicable
Credit Support Percentage, all partial principal prepayments and principal
prepayments in full available for distribution on the Subordinated Certificates
will be allocated solely to such Class and all other Classes of Subordinated
Certificates with lower numerical Class designations, thereby accelerating the
amortization thereof relative to that of the Restricted Classes and reducing the
weighted average lives of such Classes of Subordinated Certificates receiving
such distributions. Accelerating the amortization of the Classes of Subordinated
Certificates with lower numerical Class designations relative to the other
Classes of Subordinated Certificates is intended to preserve the availability of
the subordination provided by such other Classes.
For purposes of allocating losses and prepayments to the Subordinated
Certificates, the Class M Certificates will be deemed to have a lower numerical
Class designation than each other Class of Subordinated Certificates.
S-58
<PAGE>
CREDIT ENHANCEMENT
SUBORDINATION OF CERTAIN CLASSES
The rights of the Class M Certificateholders to receive distributions with
respect to the Mortgage Loans will be subordinated to the rights of the Senior
Certificateholders, the rights of the holders of each Class of Class B
Certificates to receive distributions with respect to the Mortgage Loans will be
subordinated to the rights of the holders of the Senior Certificates, the Class
M Certificates, and each Class of Class B Certificates having a lower numerical
class designation than such Class of Class B Certificates, each to the extent
described below. The subordination provided by the Class M and Class B
Certificates is intended to enhance the likelihood of regular receipt by the
Senior Certificateholders of the full amount of monthly distributions due them
and to protect the Senior Certificateholders against losses. The subordination
provided by each Class of Class B Certificates is intended to enhance the
likelihood of regular receipt by the holders of the Senior Certificates, the
Class M Certificates, and each Class of Class B Certificates having a lower
numerical class designation than such Class of Class B Certificates of the full
amount of monthly distributions due them and to protect such Certificateholders
against losses.
On each Distribution Date payments to the Senior Certificateholders will be
made prior to payments to the Class M and Class B Certificateholders, payments
to the Class M Certificateholders will be made prior to payments to the Class B
Certificateholders, payments to the Class B-1 Certificateholders will be made
prior to payments to the Class B-2 Certificateholders and the Non-Offered Class
B Certificateholders and payments to the Class B-2 Certificateholders will be
made prior to payments to the Non-Offered Class B Certificateholders.
The subordination of the Subordinated Certificates to the Senior
Certificates and the subordination of the Classes of Subordinated Certificates
with higher numerical Class designations to those with lower numerical Class
designations is intended to increase the likelihood of receipt, respectively, by
the Senior Certificateholders and the holders of Subordinated Certificates with
lower numerical Class designations of the maximum amount to which they are
entitled on any Distribution Date and to provide such holders protection against
Realized Losses, other than Excess Losses. In addition, the Subordinated
Certificates will provide limited protection against Special Hazard Losses,
Bankruptcy Losses and Fraud Losses up to the Special Hazard Loss Coverage
Amount, Bankruptcy Loss Coverage Amount and Fraud Loss Coverage Amount,
respectively, as described below. The applicable Non-PO Percentage of Realized
Losses, other than Excess Losses, will be allocated to the Class of Subordinated
Certificates then outstanding with the highest numerical Class designation. In
addition, the Class Principal Balance of such Class of Subordinated Certificates
will be reduced by the amount of distributions on the Class PO Certificates in
reimbursement for Class PO Deferred Amounts.
For purposes of allocating losses to the Subordinated Certificates, the
Class M Certificates will be deemed to have a lower numerical Class designation
than each other Class of Subordinated Certificates.
The Subordinated Certificates will provide limited protection to the
Classes of Certificates of higher relative priority against (i) Special Hazard
Losses in an initial amount expected to be up to approximately $5,089,500 (the
'Special Hazard Loss Coverage Amount'), (ii) Bankruptcy Losses in an initial
amount expected to be up to approximately $100,000 (the 'Bankruptcy Loss
Coverage Amount') and (iii) Fraud Losses in an initial amount expected to be up
to approximately $2,503,166 (the 'Fraud Loss Coverage Amount').
The Special Hazard Loss Coverage Amount will be reduced, from time to time,
to be an amount equal on any Distribution Date to the lesser of (a) the greatest
of (i) 1% of the aggregate of the principal balances of the Mortgage Loans, (ii)
twice the principal balance of the largest Mortgage Loan and (iii) the aggregate
principal balances of the Mortgage Loans secured by Mortgaged Properties located
in the single California postal zip code area having the highest aggregate
principal balance of any such zip code area and (b) the Special Hazard Loss
Coverage Amount as of the Closing Date less the amount, if any, of losses
attributable to Special Hazard Mortgage Loans incurred since the Closing Date.
All principal balances for the purpose of this definition will be calculated as
of the first day of the month preceding such Distribution Date after giving
effect to scheduled installments of principal and interest on the Mortgage Loans
then due, whether or not paid.
The Fraud Loss Coverage Amount will be reduced, from time to time, by the
amount of Fraud Losses allocated to the Certificates. In addition, on each
anniversary of the Cut-Off Date, the Fraud Loss Coverage
S-59
<PAGE>
Amount will be reduced as follows: (a) on the first, second, third and fourth
anniversaries of the Cut-Off Date, to an amount equal to the lesser of (i) 1% of
the then current Pool Principal Balance and (ii) the excess of the Fraud Loss
Coverage Amount as of the preceding anniversary of the Cut-Off Date over the
cumulative amount of Fraud Losses allocated to the Certificates since such
preceding anniversary and (b) on the fifth anniversary of the Cut-Off Date, to
zero.
The Bankruptcy Loss Coverage Amount will be reduced, from time to time, by
the amount of Bankruptcy Losses allocated to the Certificates.
The amount of coverage provided by the Subordinated Certificates for
Special Hazard Losses, Bankruptcy Losses and Fraud Losses may be canceled or
reduced from time to time for each of the risks covered, provided that the then
current ratings of the Certificates assigned by the Rating Agencies are not
adversely affected thereby without regard to the guaranty provided by the
Policy. In addition, a reserve fund or other form of credit enhancement may be
substituted for the protection provided by the Subordinated Certificates for
Special Hazard Losses, Bankruptcy Losses and Fraud Losses.
As used herein, a 'Deficient Valuation' is a bankruptcy proceeding whereby
the bankruptcy court may establish the value of the Mortgaged Property at an
amount less than the then outstanding principal balance of the Mortgage Loan
secured by such Mortgaged Property or may reduce the outstanding principal
balance of a Mortgage Loan. In the case of a reduction in the value of the
related Mortgaged Property, the amount of the secured debt could be reduced to
such value, and the holder of such Mortgage Loan thus would become an unsecured
creditor to the extent the outstanding principal balance of such Mortgage Loan
exceeds the value so assigned to the Mortgaged Property by the bankruptcy court.
In addition, certain other modifications of the terms of a Mortgage Loan can
result from a bankruptcy proceeding, including the reduction (a 'Debt Service
Reduction') of the amount of the monthly payment on the related Mortgage Loan.
Notwithstanding the foregoing, no such occurrence shall be considered a Debt
Service Reduction or Deficient Valuation so long as the Servicer is pursuing any
other remedies that may be available with respect to the related Mortgage Loan
and (i) such Mortgage Loan is not in default with respect to payment due
thereunder or (ii) scheduled monthly payments of principal and interest are
being advanced by the Servicer without giving effect to any Debt Service
Reduction or Deficient Valuation.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Certificates
against the purchase price of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion represents the opinion of Cadwalader, Wickersham &
Taft as to the anticipated material federal income tax consequences of the
purchase, ownership and disposition of the Offered Certificates.
An election will be made to treat the Trust Fund, and the Trust Fund will
qualify, as a REMIC for federal income tax purposes. Each Class of Offered
Certificates (other than the Class A-R Certificates) (collectively, the 'Regular
Certificates'), together with each Class of Certificates not offered hereby,
will be designated as the regular interests in the REMIC, and the Class A-R
Certificates will be designated as the residual interest in the REMIC. The Class
A-R Certificates are 'Residual Certificates' for purposes of the Prospectus
Supplement. The assets of the REMIC will include the Mortgage Loans, together
with the amounts held by the Servicer in the Collection Account, the hazard
insurance policies and primary mortgage insurance policies, if any, relating to
the Mortgage Loans and any property that secured a Mortgage Loan that is
acquired by foreclosure or deed in lieu of foreclosure.
The Offered Certificates will be treated as 'loans . . . secured by an
interest in real property which is . . . residential real property' for a
domestic building and loan association, 'real estate assets for a real estate
investment trust' and, other than the Class A-R Certificates,'qualified
mortgages' for a REMIC and 'permitted assets' for a financial asset
securitization investment trust, to the extent described in the Prospectus.
S-60
<PAGE>
REGULAR CERTIFICATES
The Regular Certificates generally will be treated as newly originated debt
instruments for federal income tax purposes. Beneficial Owners (or, in the case
of Definitive Certificates, holders) of the Regular Certificates will be
required to report income on such Certificates in accordance with the accrual
method of accounting.
The Class PO Certificates will be issued with original issue discount in an
amount equal to their Initial Class Principal Balance over their issue price. It
is anticipated that the Class A-2, Class A-6 and Class B-2 Certificates also
will be issued with original issue discount in an amount equal to the excess of
their Initial Class Principal Balances (plus five days of interest at the
Pass-Through Rates thereon) over their respective issue prices (including
accrued interest). It is also anticipated that the Class A-1, Class A-5 and
Class A-7 Certificates will be issued at a premium and that the Class A-3, Class
A-4, Class A-8, Class M and Class B-1 Certificates will be issued with de
minimis original issue discount for federal income tax purposes. Finally, it is
anticipated that the Class B-3, Class B-4 and Class B-5 Certificates, which are
not offered hereby, will be issued with original issue discount for federal
income tax purposes.
Although unclear for federal income tax purposes, it is anticipated that
the Class X Certificates will be treated as issued with original issue discount
in an amount equal to the excess of all distributions of interest expected to be
received thereon over their respective issue prices (including accrued
interest). Any 'negative' amounts of original issue discount on the Class X
Certificates attributable to rapid prepayment with respect to the Mortgage Loans
will not be deductible currently, but may be offset against future positive
accruals of original issue discount, if any. Finally, a holder of a Class X
Certificate may be entitled to a loss deduction to the extent it becomes certain
that such holder will not recover a portion of its basis in such Certificate,
assuming no further prepayments. In the alternative, it is possible that rules
similar to the 'noncontingent bond method' of the contingent interest rules in
the OID Regulations, as amended on June 12, 1996, may be promulgated with
respect to the Class X Certificates. Under the noncontingent bond method, if the
interest payable for any period is greater or less than the amount projected,
the amount of income included for that period would be either increased or
decreased accordingly. Any net reduction in the income accrual for the taxable
year below zero (a 'Negative Adjustment') would be treated by a
Certificateholder as ordinary loss to the extent of prior income accruals and
would be carried forward to offset future interest accruals. At maturity, any
remaining Negative Adjustment would be treated as a loss on retirement of the
Certificate. The legislative history of relevant Code provisions indicates,
however, that negative amounts of original issue discount on an instrument such
as a REMIC regular interest may not give rise to taxable losses in any accrual
period prior to the instrument's disposition or retirement. Thus, it is not
clear whether any losses resulting from a Negative Adjustment would be
recognized currently or be carried forward until disposition or retirement of
the debt obligation. However, unless and until otherwise required under
applicable regulations, it is anticipated that the Trustee will not treat the
payments of interest on the Class X Certificates as contingent interest.
The Prepayment Assumption (as defined in the Prospectus) that the Servicer
intends to use in determining the rate of accrual of original issue discount and
whether the original issue discount is considered de minimis, and that may be
used by Beneficial Owners (or holders) to amortize premium, will be calculated
using 275% of SPA. No representation is made as to the actual rate at which the
Mortgage Loans will prepay.
RESIDUAL CERTIFICATES
The holders of the Class A-R Certificates must include their pro rata
shares of the taxable income or loss of the REMIC in determining their federal
taxable income. The Class A-R Certificates will remain outstanding for federal
income tax purposes until there are no Certificates of any other Class
outstanding. PROSPECTIVE INVESTORS ARE CAUTIONED THAT THE CLASS A-R
CERTIFICATEHOLDERS' REMIC TAXABLE INCOME AND THE TAX LIABILITY THEREON MAY
EXCEED, AND MAY SUBSTANTIALLY EXCEED, CASH DISTRIBUTIONS TO SUCH HOLDERS DURING
CERTAIN PERIODS, IN WHICH EVENT, HOLDERS MUST HAVE SUFFICIENT ALTERNATIVE
SOURCES OF FUNDS TO PAY SUCH TAX LIABILITY. Furthermore, it is anticipated that
all or a substantial portion of the taxable income of the REMIC includible by
holders of the Class A-R Certificates will be treated as 'excess inclusion'
income, resulting in (i) the inability of such holders to use net operating
losses to offset such income from the REMIC, (ii) the treatment of such income
as 'unrelated business taxable income' to certain holders who are otherwise
tax-exempt, and (iii) the treatment of such income as subject to 30% withholding
tax to certain non-U.S. investors, with no exemption or treaty reduction.
S-61
<PAGE>
The Class A-R Certificates will be considered 'noneconomic residual
interests,' with the result that transfers thereof would be disregarded for
federal income tax purposes if any significant purpose of the transferor was to
impede the assessment or collection of tax. Accordingly, the Class A-R
Certificates are subject to certain restrictions on transfer and any prospective
transferee thereof will be required to furnish to the Trustee an affidavit as
described herein under 'Description of the Certificates--Restrictions on
Transfer of the Class A-R, Class M and Class B Certificates'. See 'Certain
Federal Income Tax Consequences--Taxation of Owners of Residual Securities--
Limitations on Offset or Exemption of REMIC Income' and '-- Tax-Related
Restrictions on Transfer of Residual Securities--Noneconomic Residual Interests'
in the Prospectus.
An individual, trust or estate that holds a Class A-R Certificate (whether
such Certificate is held directly or indirectly through certain pass-through
entities) also may have additional gross income with respect to, but may be
subject to limitations on the deductibility of, its pro rata share of Servicing
Fees on the Mortgage Loans and other administrative expenses of the REMIC in
computing such holder's regular tax liability, and may not be able to deduct
such fees or expenses to any extent in computing such holder's alternative
minimum tax liability. In addition, some portion of a purchaser's basis, if any,
in a Class A-R Certificate may not be recovered until termination of the REMIC.
Furthermore, the federal income tax consequences of any consideration paid to a
transferee on a transfer of a Class A-R Certificate are unclear. The preamble to
the REMIC Regulations indicates that the Internal Revenue Service anticipates
providing guidance with respect to the federal tax treatment of such
consideration. Any transferee receiving consideration with respect to a Class
A-R Certificate should consult its tax advisors.
DUE TO THE SPECIAL TAX TREATMENT OF RESIDUAL INTERESTS, THE EFFECTIVE
AFTER-TAX RETURN OF THE CLASS A-R CERTIFICATES MAY BE SIGNIFICANTLY LOWER THAN
WOULD BE THE CASE IF THE CLASS A-R CERTIFICATES WERE TAXED AS DEBT INSTRUMENTS,
OR MAY BE NEGATIVE.
See 'Certain Federal Income Tax Consequences' in the Prospectus.
CERTAIN ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan (as defined below) to
acquire any of the Offered Certificates should consult with its counsel with
respect to the potential consequences under the Employee Retirement Income
Security Act of 1974, as amended ('ERISA'), and/or the Code, of the Plan's
acquisition and ownership of such Certificates. See 'ERISA Considerations' in
the Prospectus. Section 406 of ERISA prohibits 'parties in interest' with
respect to an employee benefit plan subject to ERISA and/or an employee benefit
plan or other arrangement (including, but not limited to, individual retirement
accounts) subject to the excise tax provisions set forth under Section 4975 of
the Code (a 'Plan') from engaging in certain transactions involving such Plan
and its assets unless a statutory, regulatory or administrative exemption
applies to the transaction. Section 4975 of the Code imposes certain excise
taxes on prohibited transactions involving Plans described under that Section;
ERISA authorizes the imposition of civil penalties for prohibited transactions
involving Plans not subject to the requirements of Section 4975 of the Code.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in the Offered Certificates without regard to the
ERISA considerations described herein and in the Prospectus, subject to the
provisions of other applicable federal and state law. Any such plan that is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
may nonetheless be subject to the prohibited transaction rules set forth in
Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary that decides to
invest the assets of a Plan in the Offered Certificates should consider, among
other factors, the extreme sensitivity of the investment to the rate of
principal payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor has granted an individual administrative
exemption to PaineWebber Incorporated (Prohibited Transaction Exemption 90-36,
Exemption Application No. D-8069, 55 Fed. Reg. 25903 (1990) (the 'Exemption'))
from certain of the prohibited transaction rules of ERISA and the related excise
tax provisions of Section 4975 of the Code with respect to the initial purchase,
the holding and the subsequent resale
S-62
<PAGE>
by Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Exemption. The Exemption applies to mortgage loans such as
the Mortgage Loans in the Trust Fund.
For a general description of the Exemption and the conditions that must be
satisfied for the Exemption to apply, including the requirement that the Plan 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, see 'ERISA
Considerations' in the Prospectus.
It is expected that the Exemption will apply to the acquisition and holding
by Plans of the Class A (other than the Class A-R Certificates), Class PO and
Class X Certificates and that all conditions of the Exemption other than those
within the control of the investors will be met. In addition, as of the date
hereof, there is no single borrower that is the obligor on five percent (5%) of
the aggregate unamortized principal balance of the Mortgage Loans included in
the Trust Fund.
BECAUSE THE CHARACTERISTICS OF THE CLASS M, CLASS B-1, CLASS B-2 AND CLASS
A-R CERTIFICATES MAY NOT MEET THE REQUIREMENTS OF PROHIBITED TRANSACTION CLASS
EXEMPTION 83-1 ('PTCE 83-1'), THE EXEMPTION OR ANY OTHER ISSUED EXEMPTION UNDER
ERISA, THE PURCHASE AND HOLDING OF THE CLASS M, CLASS B-1, CLASS B-2 AND CLASS
A-R CERTIFICATES BY A PLAN SUBJECT TO SECTION 4975 OF THE CODE OR SECTION 406 OF
ERISA MAY RESULT IN PROHIBITED TRANSACTIONS OR THE IMPOSITION OF EXCISE TAXES OR
CIVIL PENALTIES. CONSEQUENTLY, TRANSFERS OF THE CLASS M, CLASS B-1, CLASS B-2
AND CLASS A-R CERTIFICATES WILL NOT BE REGISTERED BY THE TRUSTEE UNLESS THE
TRUSTEE RECEIVES: (I) A REPRESENTATION FROM THE TRANSFEREE OF SUCH CERTIFICATE,
ACCEPTABLE TO AND IN FORM AND SUBSTANCE SATISFACTORY TO THE TRUSTEE, TO THE
EFFECT THAT SUCH TRANSFEREE IS NOT AN EMPLOYEE BENEFIT PLAN SUBJECT TO SECTION
406 OF ERISA OR A PLAN OR ARRANGEMENT SUBJECT TO SECTION 4975 OF THE CODE, NOR A
PERSON ACTING ON BEHALF OF ANY SUCH PLAN OR ARRANGEMENT OR USING THE ASSETS OF
ANY SUCH PLAN OR ARRANGEMENT TO EFFECT SUCH TRANSFER; (II) IF THE PURCHASER IS
AN INSURANCE COMPANY, AND THE CERTIFICATES ARE NOT CLASS A-R CERTIFICATES, A
REPRESENTATION THAT THE PURCHASER IS AN INSURANCE COMPANY WHICH IS PURCHASING
SUCH CERTIFICATES WITH FUNDS CONTAINED IN AN 'INSURANCE COMPANY GENERAL ACCOUNT'
(AS SUCH TERM IS DEFINED IN SECTION V(E) OF PROHIBITED TRANSACTION CLASS
EXEMPTION 95-60 ('PTCE 95-60')) AND THAT THE PURCHASE AND HOLDING OF SUCH
CERTIFICATES ARE COVERED UNDER SECTIONS I AND III OF PTCE 95-60; OR (III) AN
OPINION OF COUNSEL SATISFACTORY TO THE TRUSTEE THAT THE PURCHASE OR HOLDING OF
SUCH CERTIFICATE BY A PLAN, ANY PERSON ACTING ON BEHALF OF A PLAN OR USING A
PLAN'S ASSETS, WILL NOT RESULT IN THE ASSETS OF THE TRUST FUND BEING DEEMED TO
BE 'PLAN ASSETS' AND SUBJECT TO THE PROHIBITED TRANSACTION REQUIREMENTS OF ERISA
AND THE CODE AND WILL NOT SUBJECT THE TRUSTEE TO ANY OBLIGATION IN ADDITION TO
THOSE UNDERTAKEN IN THE AGREEMENT. SUCH REPRESENTATION AS DESCRIBED ABOVE SHALL
BE DEEMED TO HAVE BEEN MADE TO THE TRUSTEE BY THE TRANSFEREE'S ACCEPTANCE OF A
CLASS M, CLASS B-1, CLASS B-2 OR CLASS A-R CERTIFICATE. IN THE EVENT THAT SUCH
REPRESENTATION IS VIOLATED, OR ANY ATTEMPT TO TRANSFER TO A PLAN OR PERSON
ACTING ON BEHALF OF A PLAN OR USING A PLAN'S ASSETS IS ATTEMPTED WITHOUT SUCH
OPINION OF COUNSEL, SUCH ATTEMPTED TRANSFER OR ACQUISITION SHALL BE VOID AND OF
NO EFFECT.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1 and
the Exemption described in the Prospectus, and the potential consequences in
their specific circumstances, prior to making an investment in any of the
Offered Certificates. Moreover, each Plan fiduciary should determine whether
under the general fiduciary standards of investment prudence and
diversification, an investment in any of the Offered Certificates is appropriate
for the Plan, taking into account the overall investment policy of the Plan and
the composition of the Plan's investment portfolio.
LEGAL INVESTMENT
The Senior Certificates (other than the Class A-R Certificates) and the
Class M Certificates will constitute 'mortgage related securities' for purposes
of the Secondary Mortgage Market Enhancement Act of 1984, as amended ('SMMEA'),
so long as they are rated in one of the two highest rating categories by at
least one nationally recognized statistical rating organization, and, as such,
are legal investments for certain entities to the extent provided for in SMMEA.
S-63
<PAGE>
It is anticipated that the Class B-1 and Class B-2 Certificates will not be
rated in one of the two highest rating categories by a nationally recognized
statistical rating organization and, therefore, will NOT constitute 'mortgage
related securities' for purposes of SMMEA.
Institutions whose investment activities are subject to legal investment
laws and regulations, regulatory capital requirements or review by federal or
state regulatory authorities should consult with their counsel or the applicable
authorities to determine whether and to what extent the Offered Certificates
constitute a legal investment or are subject to investment, capital or other
restrictions. See 'Legal Investment' in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Depositor and PaineWebber Incorporated (the 'Underwriter'), the
Depositor has agreed to sell to the Underwriter, and the Underwriter has agreed
to purchase from the Depositor, the Offered Certificates. Distribution of the
Offered Certificates will be made by the Underwriter from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. In connection with the sale of the Offered Certificates, the
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting discounts.
Until the distribution of the Offered Certificates is completed, rules of
the Commission may limit the ability of the Underwriter and certain selling
group members to bid for and purchase the Offered Certificates. As an exception
to these rules, the Underwriter is permitted to engage in certain transactions
that stabilize the price of the Offered Certificates. Such transactions consist
of bids or purchases for the purpose of pegging, fixing or maintaining the price
of the Offered Certificates.
If the Underwriter creates a short position in the Offered Certificates in
connection with the offering, i.e., if it sells more Offered Certificates than
are set forth on the cover page of this Prospectus Supplement, the Underwriter
may reduce that short position by purchasing Offered Securities in the open
market.
In general, purchase of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Depositor nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Offered Certificates. In addition,
neither the Depositor nor the Underwriter makes any representation that the
Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
There is currently no secondary market for the Offered Certificates. There
can be no assurance that a secondary market for the Offered Certificates will
develop or, if it does develop, that it will continue.
LEGAL MATTERS
The validity of the Certificates and certain federal income tax matters
will be passed upon for the Depositor and for the Underwriter by Cadwalader,
Wickersham & Taft, New York, New York.
RATINGS
It is a condition to the issuance of the Senior Certificates (other than
the Class A-R Certificates) that they be rated AAA by Duff & Phelps Credit
Rating Co. ('DCR') and by Standard & Poor's, a division of the McGraw-Hill
Companies, Inc. ('S&P' and, together with DCR, the 'Rating Agencies'), or in the
case of the Class PO and Class X Certificates, AAAr by S&P. It is a condition to
the issuance of the Class M, Class B-1 and Class B-2 Certificates that they be
rated at least AA, A and BBB, respectively, by DCR.
The ratings assigned by DCR to mortgage pass-through certificates address
the likelihood of the receipt by certificateholders of all distributions to
which they are entitled under the transaction structure. DCR's ratings reflected
its analysis of the riskiness of the mortgage loans and its analysis of the
structure of the transaction as set forth in the operative documents. DCR's
ratings do not address the effect on the certificates' yield attributable to
prepayments or recoveries on the underlying mortgage loans. In addition, the
ratings of the Class A-R
S-64
<PAGE>
Certificate do not assess the likelihood of return to an investor in the Class
A-R Certificate, except to the extent of the Principal Balance thereof and
interest thereon.
The ratings assigned by S&P to mortgage pass-through certificates address
the likelihood of the receipt of all distributions on the mortgage loans by the
related Certificateholders under the agreements pursuant to which such
certificates are issued. S&P's ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with such certificates, and the extent
to which the payment stream on such mortgage pool is adequate to make payments
required by such certificates. S&P's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. The 'r' symbol is appended to the rating by S&P of the
Class PO and Class X Certificates because they are principal only or interest
only mortgage securities that S&P believes may experience high volatility or
high variability in expected returns due to non-credit risks created by the
terms of such Certificates. The absence of an 'r' symbol in the ratings of the
other Offered Certificates should not be taken as an indication such
Certificates will exhibit no volatility or variability in total return.
The ratings of the Rating Agencies do not address the possibility that, as
a result of principal prepayments, Certificateholders may receive a lower than
anticipated yield.
The security ratings assigned to the Offered Certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the Rating Agencies.
The ratings of DCR and S&P also do not address the possibility that, as a
result of principal prepayments, a holder of Class X Certificates may not fully
recover their initial investment.
The Depositor has not requested a rating of the Offered Certificates by any
rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by such other rating
agency. The rating assigned by such other rating agency to the Offered
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
S-65
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
A
Adjusted Mortgage Rate.................................................... S-13, 43
Advance................................................................... S-31
Advances.................................................................. S-12
Agreement................................................................. S-7, 19
Alternative Documentation Program......................................... S-25
Applicable Credit Support Percentage...................................... S-41
Available Collection Amounts.............................................. S-36
B
Bankruptcy Loss Coverage Amount........................................... S-12, 59
Bankruptcy Losses......................................................... S-12, 43
Beneficial Owner.......................................................... S-8, 14, 35
Book-Entry Certificates................................................... S-7
C
CBE....................................................................... S-49
CEDE...................................................................... S-35
Certificateholders........................................................ S-9, 19
Certificates.............................................................. S-1, 6, 34
Class..................................................................... S-1
Class A Certificates...................................................... S-1, 6
Class B Certificates...................................................... S-1
Class PO Deferred Amount.................................................. S-42
Class PO Principal Distribution Amount.................................... S-42
Class Principal Balance................................................... S-6
Class Subordination Percentage............................................ S-41
Closing Date.............................................................. S-1
Code...................................................................... S-14
Collection Account........................................................ S-35
Commission................................................................ S-3
Cut-Off Date.............................................................. S-6
Cut-Off Date Pool Principal Balance....................................... S-19
D
DCR....................................................................... S-15, 64
Debt Service Reduction.................................................... S-60
debt-to-income............................................................ S-25
Deficient Valuation....................................................... S-60
Definitive Certificate.................................................... S-35
Deleted Mortgage Loan..................................................... S-24
Depositor................................................................. S-7
Depository................................................................ S-34
Determination Date........................................................ S-7, 31
Discount Mortgage Loan.................................................... S-38
Distribution Account...................................................... S-35
Distribution Date......................................................... S-8, 35
DTC....................................................................... S-8
Due Date.................................................................. S-19
</TABLE>
S-66
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
E
ERISA..................................................................... S-14, 62
ERISA Plan................................................................ S-45
Excess Losses............................................................. S-12, 43
Exemption................................................................. S-62
Expanded Underwriting Guidelines.......................................... S-26
Expense Fee Rate.......................................................... S-30
Expense Fees.............................................................. S-30
F
FHLMC..................................................................... S-20
Fixed Rate Certificates................................................... S-6
FNMA...................................................................... S-20
Fraud Loss Coverage Amount................................................ S-12, 59
Fraud Losses.............................................................. S-12, 43
Full Documentation Program................................................ S-25
I
Insurance Proceeds........................................................ S-36
Interest Accrual Period................................................... S-10, 37
Interest Distribution Amount.............................................. S-37
L
Last Scheduled Distribution Date.......................................... S-58
LIBOR..................................................................... S-1, 36
LIBOR Business Day........................................................ S-37
Liquidated Mortgage Loan.................................................. S-43
Liquidation Proceeds...................................................... S-36
Loan-to-Value Ratio....................................................... S-20
M
Mortgage.................................................................. S-24
Mortgage File............................................................. S-24
Mortgage Loan Purchase Agreement.......................................... S-19
Mortgage Loans............................................................ S-1
Mortgage Note............................................................. S-24
Mortgage Pool............................................................. S-1
Mortgage Rate............................................................. S-19
Mortgaged Property........................................................ S-1
N
Net Interest Shortfall.................................................... S-37
Net Mortgage Rate......................................................... S-30
Net Prepayment Interest Shortfall......................................... S-37
Negative Adjustment....................................................... S-61
No Income/No Asset Documentation Program.................................. S-25
No Ratio Documentation Program............................................ S-25
Non-Discount Mortgage Loan................................................ S-38
Non-PO Formula Principal Amount........................................... S-38
Non-PO Percentage......................................................... S-38
Notional Amount........................................................... S-1
O
Offered Certificates...................................................... S-1, 34
Original Applicable Credit Support Percentage............................. S-41
</TABLE>
S-67
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Original Subordinated Principal Balance................................... S-40
P
Pass-Through Rate......................................................... S-9
Physical Certificates..................................................... S-7
Plan...................................................................... S-14, 45, 62
PO Formula Principal Amount............................................... S-42
PO Percentage............................................................. S-38
Pool Principal Balance.................................................... S-40
Prepayment Interest Shortfall............................................. S-37
Prepayment Period......................................................... S-31
Priority Percentage Distribution Amount................................... S-39
Priority Prepayment Percentage Distribution Amount........................ S-39
Priority Principal Distribution Amount.................................... S-39
Prospectus................................................................ S-2
Provident................................................................. S-2, 7
PTCE 83-1................................................................. S-63
PTCE 95-60................................................................ S-45, 63
PWRES..................................................................... S-2
R
Rating Agencies........................................................... S-15, 64
Realized Loss............................................................. S-43
Record Date............................................................... S-35
Reduced Documentation Program............................................. S-25
Reference Bank Rate....................................................... S-37
Reference Banks........................................................... S-37
Regular Certificates...................................................... S-6, 60
Relief Act Reduction...................................................... S-37
REMIC..................................................................... S-2, 14
REO Loan.................................................................. S-13
REO Property.............................................................. S-31
Replacement Mortgage Loan................................................. S-24
Residual Certificates..................................................... S-6, 60
Restricted Classes........................................................ S-41
S
S&P....................................................................... S-15, 64
Scheduled Payments........................................................ S-19
Seller.................................................................... S-7
Senior Certificates....................................................... S-1, 6, 34
Senior Credit Support Depletion Date...................................... S-39
Senior Percentage......................................................... S-40
Senior Prepayment Percentage.............................................. S-40
Senior Principal Distribution Amount...................................... S-39
Servicer.................................................................. S-7, 29
Servicing Fee............................................................. S-30
Servicing Fee Rate........................................................ S-30
Similar Law............................................................... S-45
SMMEA..................................................................... S-15, 63
SPA....................................................................... S-48
Special Hazard Loss Coverage Amount....................................... S-12, 59
Special Hazard Losses..................................................... S-12, 43
Special Hazard Mortgage Loan.............................................. S-43
</TABLE>
S-68
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Standard Underwriting Guidelines.......................................... S-26
Stated Principal Balance.................................................. S-40
Step Down Conditions...................................................... S-40
Structuring Assumptions................................................... S-48
Subordinated Certificates................................................. S-1, 6, 34
Subordinated Percentage................................................... S-40
Subordinated Prepayment Percentage........................................ S-41
Subordinated Principal Distribution Amount................................ S-41
Substitution Adjustment Amount............................................ S-24
T
Trust Fund................................................................ S-1
Trustee................................................................... S-7
Underwriter............................................................... S-1, 64
Unpaid Interest Amounts................................................... S-37
U.S. Person............................................................... S-44
V
Variable Rate Certificates................................................ S-6
</TABLE>
S-69
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
S-70
<PAGE>
PROSPECTUS
JULY 28, 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 13.
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.
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
2
<PAGE>
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,
3
<PAGE>
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.
4
<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.
<TABLE>
<S> <C>
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
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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
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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
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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
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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
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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
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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 an employee benefit plan or other retirement plan or
arrangement, including an individual retirement account or annuity
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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.'
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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.'
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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
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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.'
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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
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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.
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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.
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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;
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(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 minimus 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
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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.'
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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
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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
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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
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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.
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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.
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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.
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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.
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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 (unless otherwise provided in 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.
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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 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
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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.
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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
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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
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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
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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.
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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
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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.
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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.
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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.
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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,
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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;
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(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
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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.'
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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.
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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
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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
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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
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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.
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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
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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,
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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.
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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
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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.
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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
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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
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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
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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.
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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
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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.
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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
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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
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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.
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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 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.
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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.
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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.
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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
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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
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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 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
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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 United
States 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 United States
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.' 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
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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
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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. A few states
have enacted legislation which requires that the debtor be given an opportunity
to cure its default (typically 30 days to bring the account current) before
repossession can commence. 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 states where the debtor must receive notice of his
right to cure his default, 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
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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.
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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 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 laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon collateral and/or enforce a deficiency
judgment. For example, with respect to federal bankruptcy law, the filing of a
petition acts as a stay against virtually all actions against the debtor,
including the enforcement of remedies of collection of a debt and, often, no
interest or principal payments are made during the bankruptcy proceeding.
Moreover, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 13 or Chapter 11 rehabilitative plan to cure a
monetary default with respect to a mortgage loan on a debtor's residence by
paying arrearages within a reasonable time period and reinstating the original
mortgage loan payment schedule even though the lender accelerated the mortgage
loan and final judgment of foreclosure had been entered in state court (provided
no sale of the property had yet occurred) prior to the filing of the debtor's
petition. Some courts with federal bankruptcy jurisdiction have approved plans,
based on the particular facts of the reorganization case, that effected the
curing of a mortgage loan default by paying arrearages over a number of years.
Except with respect to arrearages and the right to judicial sale, with rare
exception courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured only by property of the debtor that is the
debtor's principal residence may not be modified if the borrower has filed a
petition under Chapter 11 or 13. Courts may be able to modify the terms of a
cooperative loan, but no case law exists on this point. In all cases, the
secured creditor is entitled to the amount of its debt plus post-petition
interest, attorney's fees and costs to the extent the value of the security
equals or exceeds the debt.
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, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting 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.
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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, Regulation 'Z', the Equal Credit Opportunity Act,
Regulation 'B', the Fair Credit Reporting Act, and related statutes. 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 of subjecting a seller (and certain related
creditors and their assignees) 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.
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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 five '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.
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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
eight specific 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 and the creation of a junior encumbrance. The Garn-St. Germain Act also
grants the Director of the Office of Thrift Supervision (successor to the
Federal Home Loan Bank Board) authority to prescribe by regulation further
instances in which a due-on-sale clause may not be enforced upon the transfer of
the property. To date no such regulations have been issued. Regulations
promulgated under the Garn-St. Germain Act also prohibit the imposition of a
prepayment penalty upon the acceleration of a loan pursuant to a due-on-sale
clause.
The inability to enforce a due-on-sale clause may result in a Mortgage 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.
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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.
Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan which is secured by a first lien
on certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels has been included
in the Trust Fund.
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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.
The Depositor has been advised by its counsel that it is their opinion that
a court interpreting Title VIII would hold that ARM Loans which were originated
by state-chartered lenders before the date of enactment of any state law or
constitutional provision rejecting applicability of Title VIII would not be
subject to state laws imposing restrictions or prohibitions on the ability of
state-chartered lenders to originate alternative mortgage instruments.
All of the ARM Loans which were originated by a state-chartered lender
after the enactment of a state law or constitutional provision rejecting the
applicability of Title VIII complied with applicable state law. All of the ARM
Loans which were originated by federally chartered lenders or which were
originated by state-chartered lenders prior to enactment of a state law or
constitutional provision rejecting the applicability of Title VIII were
originated in compliance with all applicable federal regulations.
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 substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate 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
only 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
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Conservation Act also provides that a lender will 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.'
FORMALDEHYDE LITIGATION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including such components of manufactured housing as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. The Depositor is aware of a limited number
of cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under 'Consumer Protection
Laws', the holder of any Contract secured by a Manufactured Home with respect to
which a formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Contract and may be
unable to collect amounts still due under the Contract. The successful assertion
of such claim constitutes a breach of a representation or warranty of the
Unaffiliated Seller, and the Securityholders would suffer a loss only to the
extent that (i) the Unaffiliated Seller breached its obligation to repurchase
the Contract in the event an obligor is successful in asserting such a claim,
and (ii) the Unaffiliated Seller, the Depositor or the Trustee were unsuccessful
in asserting any claim of contribution or subrogation on behalf of the
Securityholders against the manufacturer or other persons who were directly
liable to the plaintiff for the damages. Typical products liability insurance
policies held by manufacturers and component suppliers of manufactured homes may
not cover liabilities arising from formaldehyde in manufactured housing, with
the result that recoveries from such manufacturers, suppliers or other persons
may be limited to their corporate assets without the benefit of insurance.
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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.
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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 (the '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
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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 interest 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
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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 interest
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 fianancial 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
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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)(4)(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
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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
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(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,
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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
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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 premiums do not by their terms
apply to obligations, such as the Regular Securities, which are prepayable as
described in Code Secion 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.
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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.
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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
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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 any 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,
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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
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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
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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 for 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
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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
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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 mortgage 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.
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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.
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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 witholding 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
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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
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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
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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(a) 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.
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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 mininis, 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.
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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 mininis, 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 mininis, 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
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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
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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 mininis, 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
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'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
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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
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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.
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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
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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.
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.
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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 employee
benefit plans and on certain other retirement plans and arrangements (including
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 the 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. Section2510.3-101 (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.
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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 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 pools and the
purchase, sale and holding of mortgage 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 mortgagor 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
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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) a mortgagor 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 Plan Asset investor
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
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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
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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.
Section24 (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 in 12 C.F.R. Section1.5 concerning
'safety and soundness' and retention of credit information), certain 'Type IV
securities,' defined in 12 C.F.R. Section1.2(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. Section703.140.
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 (the '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 the 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 their own legal advisors in
122
<PAGE>
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.
123
<PAGE>
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.
124
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INDEX OF DEFINED TERMS
PAGE
----
-1-
1992 Policy Statement........................................................122
1998 Policy Statement........................................................122
-4-
401(c) Regulations...........................................................121
-A-
Accrual Securities.........................................................7, 36
Accrued Security Interest.....................................................43
Administration Fee Rate.......................................................55
Advance...................................................................11, 48
Agency Securities..............................................................1
Agreement..................................................................5, 36
ARM Loans.....................................................................19
Assumed Reinvestment Rate.....................................................44
Available Distribution Amount.................................................45
Available Subordination Amount................................................46
-B-
BIF...........................................................................33
Book-Entry Securities.........................................................50
Buydown Funds.................................................................90
Buydown Loans.................................................................22
Buydown Period................................................................22
-C-
CEDEL Participants............................................................51
CERCLA....................................................................15, 85
Certificates................................................................1, 5
Charter Act...................................................................25
Class Exemptions.............................................................120
Code.......................................................................7, 88
Collateral Value..............................................................23
Commission.....................................................................2
Conservation Act..............................................................85
Consumer Protection Laws......................................................86
Cooperative................................................................9, 19
Cooperative Loans..........................................................9, 19
Cooperative Notes.............................................................22
Cooperative Unit..............................................................19
Corporate Trust Office........................................................36
Credit Insurance Instrument...................................................53
Cumulative Subordination Payments.............................................46
Cut-off Date...................................................................8
-D-
Debt Securities...............................................................88
Defective Obligation..........................................................89
Deficiency Event..............................................................58
Definitive Security...........................................................50
Deposit Period................................................................47
Depositor......................................................................5
125
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PAGE
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Disqualified Organization....................................................101
Disqualified Persons.........................................................118
Distribution Date..........................................................7, 42
DOL..........................................................................118
DOL Regulations..............................................................118
DTC.......................................................................17, 50
Due Period....................................................................44
due-on-sale provision.........................................................31
due-on-sale encumbrance.......................................................31
-E-
EDGAR..........................................................................3
Environmental Lien............................................................86
Equity Certificates........................................................5, 36
equity interest..............................................................118
equity of redemption..........................................................79
ERISA....................................................................12, 118
Euroclear Cooperative.........................................................51
Euroclear Participants........................................................51
European Depositaries.........................................................50
Events of Default.............................................................59
excess inclusion.........................................................99, 105
excess servicing.............................................................109
Excluded Plan................................................................120
Exemption....................................................................119
Exemption Rating Agencies....................................................119
-F-
FDIC..........................................................................33
FFIEC........................................................................122
FHA...........................................................................10
FHA Loans.....................................................................20
FHLMC......................................................................1, 10
FHLMC Act.....................................................................26
FHLMC Certificate Group.......................................................26
FHLMC Certificates........................................................10, 24
Final Distribution Date...................................................42, 43
Financial Intermediary........................................................50
FNMA.......................................................................1, 10
FNMA Certificates.........................................................10, 24
FTC Rule......................................................................81
Funding Period................................................................18
-G-
Garn-St. Germain Act..........................................................81
GNMA.......................................................................1, 10
GNMA Certificates.........................................................10, 24
Grantor Trust Certificates....................................................11
Grantor Trust Fund............................................................88
Grantor Trust Securities......................................................88
-H-
Hazard Insurance Instrument...................................................53
holder........................................................................88
126
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PAGE
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Holder in Due Course Rules....................................................16
Home Equity Loans..............................................................9
Home Improvement Contracts.................................................8, 19
Housing Act...................................................................22
HUD...........................................................................64
-I-
Indenture......................................................................5
Initial Deposit...............................................................47
insurability representation...................................................40
Insurance Instrument..........................................................53
Insurance Proceeds............................................................41
Interest Rate..............................................................9, 19
issue price...................................................................91
Issuer.........................................................................5
-L-
L/C Bank......................................................................71
Land Contracts.............................................................9, 19
Liquidation Proceeds..........................................................41
Loan-to-Value Ratio...........................................................23
Lockout Period................................................................20
-M-
Manager.......................................................................20
manufactured home.............................................................22
Manufactured Housing Contracts.............................................9, 19
Manufacturer's Invoice Price..................................................23
Mark to Market Regulations...................................................103
market discount...........................................................94, 95
Master Servicer................................................................5
Maximum Subordination Amount..................................................47
Morgan........................................................................50
Mortgage Loans.........................................................8, 19, 88
Mortgage Notes................................................................20
mortgage related securities.........................................12, 121, 122
Mortgage Securities.......................................................10, 20
Mortgaged Properties.......................................................8, 19
Mortgaged Property..................................................8, 9, 19, 72
Mortgages.....................................................................20
Multifamily Loans..........................................................8, 19
-N-
NCUA.........................................................................122
Net Interest Rate.............................................................37
new partnership..............................................................115
New Regulations..............................................................105
non-conforming credit.....................................................18, 33
Non-Pro Rata Security.........................................................91
Nonrecoverable Advance........................................................48
Non-SMMEA Securities.........................................................121
Non-U.S. Person..............................................................105
Notes.......................................................................1, 5
127
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PAGE
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-O-
Obligor.......................................................................17
OCC..........................................................................122
OID Regulations...........................................................88, 91
old partnership..............................................................115
Optional Termination..........................................................11
Owner Trust Agreement......................................................5, 36
Owner Trustee..................................................................5
-P-
PaineWebber..................................................................123
Participants..............................................................17, 50
Parties in Interest..........................................................118
Partnership Securities........................................................88
Partnership Trust Fund........................................................88
Pass-Through Entity..........................................................101
Percentage Interest...........................................................36
Permitted Instruments.........................................................40
Plans........................................................................118
Pooling and Servicing Agreement................................................5
Pre-Funded Amount.............................................................18
Pre-Funding Account............................................................8
Prepayment Assumption.........................................................92
Prepayment Period.............................................................29
Primary Hazard Insurance Policy...............................................65
PTCE.........................................................................120
Purchase Price................................................................34
-R-
Rating Agency................................................................124
real estate assets.........................................90, 91, 107, 111, 113
real estate mortgage investment conduit.................................1, 7, 37
Realized Loss.................................................................45
reasonably equivalent value...................................................76
Record Date...................................................................42
regular interests.....................................................11, 37, 88
Regular Securities.......................................................88, 105
Regular Securityholder........................................................91
Relevant Depositary...........................................................50
Relief Act....................................................................87
REMIC...............................................................1, 7, 37, 88
REMIC Pool....................................................................88
REMIC Provisions..............................................................88
REMIC Regular Certificates....................................................11
REMIC Regulations.............................................................88
REMIC Residual Certificates...................................................11
REMIC Securities..............................................................88
Reserve Fund..............................................................47, 70
Residential Loans......................................................1, 20, 90
Residential Properties.....................................................9, 19
Residual Holders..............................................................97
residual interests.................................................7, 11, 37, 88
Residual Securities...........................................................88
128
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PAGE
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Restricted Group.............................................................119
Retained Interest.............................................................36
Retained Interest Rate........................................................37
Riegle Act....................................................................16
Rules.........................................................................50
-S-
SAIF..........................................................................33
SBJPA of 1996.................................................................90
Scheduled Principal Balance...................................................46
Securities..................................................................1, 5
Security Interest Rate.........................................................6
Security Owners...............................................................50
Security Principal Balance.................................................6, 44
Securityholder................................................................88
Securityholders...............................................................50
Senior Liens..................................................................20
Senior Percentage.............................................................46
Senior Securities..........................................................6, 36
Senior/Subordinate Series.....................................................31
Series.........................................................................1
Servicemen's Readjustment Act.................................................23
Servicing Agreement...........................................................28
SMMEA....................................................................12, 121
Servicing Default........................................................12, 121
Special Hazard Amount.........................................................68
Special Hazard Insurer........................................................68
Special Hazard Losses.........................................................46
Special Hazard Subordination Amount...........................................46
Specified Reserve Fund Balance................................................47
Standard Securities..........................................................107
Startup Day...................................................................88
Stated Principal Balance......................................................34
Strip Securities...........................................................6, 36
Stripped Agency Securities....................................................27
Stripped Interest.............................................................29
Stripped Securities.....................................................110, 111
Subordinate Securities.....................................................6, 36
Subordination.................................................................41
Subsequent Loans..............................................................18
Sub-Servicer..................................................................28
Sub-Servicing Account.........................................................40
Sub-Servicing Agreement.......................................................35
-T-
Terms and Conditions..........................................................52
thrift institutions..........................................................100
Tiered REMICs.................................................................91
Title V.......................................................................84
Title VIII....................................................................85
Trust Account.................................................................10
Trust Agreement............................................................5, 36
Trust Fund.....................................................................6
129
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PAGE
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Trust Fund Asset...............................................................6
Trustee........................................................................5
-U-
U.S. Person..................................................................102
Unaffiliated Sellers..........................................................19
Underwriter..................................................................119
Unrecovered Senior Portion....................................................46
-V-
VA............................................................................10
VA Guaranty Policy............................................................65
VA Loans......................................................................20
-W-
Window Period Loans...........................................................82
130
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131
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132
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133
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
OFFERED HEREBY, NOR AN OFFER OF THE SECURITIES IN ANY STATE OR JURISDICTION IN
WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
Page
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PROSPECTUS SUPPLEMENT
Forward-Looking Statements............................ S-3
Incorporation of Certain Documents by Reference....... S-3
Available Information................................. S-3
Summary of Terms...................................... S-6
Risk Factors.......................................... S-16
The Mortgage Pool..................................... S-19
Underwriting Standards................................ S-25
Servicing of Mortgage Loans........................... S-29
Description of the Certificates....................... S-34
Yield, Prepayment and Maturity Considerations......... S-46
Credit Enhancement.................................... S-58
Use of Proceeds....................................... S-60
Certain Federal Income Tax Consequences............... S-60
Certain ERISA Considerations.......................... S-62
Legal Investment...................................... S-63
Method of Distribution................................ S-64
Legal Matters......................................... S-64
Ratings............................................... S-64
Index of Defined Terms................................ S-66
PROSPECTUS
Available Information................................. 2
Reports to Certificateholders......................... 3
Incorporation of Certain Information by Reference..... 3
Prospectus Supplement or Current Report on Form 8-K... 3
Summary of Terms...................................... 5
Risk Factors.......................................... 13
The Trust Funds....................................... 19
Use of Proceeds....................................... 28
Yield Considerations.................................. 29
Maturity and Prepayment Considerations................ 30
The Depositor......................................... 32
Residential Loan Program.............................. 32
Description of the Securities......................... 36
Description of Primary Insurance Coverage............. 63
Description of Credit Support......................... 66
Certain Legal Aspects of Residential Loans............ 72
Certain Federal Income Tax Consequences............... 88
State and Other Tax Consequences...................... 117
ERISA Considerations.................................. 118
Legal Investment...................................... 121
Plans of Distribution................................. 123
Legal Matters......................................... 124
Financial Information................................. 124
Rating................................................ 124
Index of Significant Definitions...................... 125
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$247,997,172
(APPROXIMATE)
PAINEWEBBER MORTGAGE
ACCEPTANCE CORPORATION IV
(DEPOSITOR)
PROVIDENT FUNDING ASSOCIATES, L.P.
(ORIGINATOR AND SERVICER)
MORTGAGE PASS-THROUGH
CERTIFICATES,
SERIES 1998-1
------------------
PROSPECTUS SUPPLEMENT
------------------
PAINEWEBBER INCORPORATED
------------------
July 28, 1998
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