Pursuant to Rule 424(b)(5)
File No. 333-15685
PROSPECTUS SUPPLEMENT DATED JULY 21, 2000
(To Prospectus dated July 21, 2000)
$168,829,357 (Approximate)
PaineWebber Mortgage Acceptance Corporation IV
(Depositor)
Provident Funding Associates, L.P.
(Originator and Servicer)
Mortgage Pass-Through Certificates, Series 2000-1
The Mortgage Pass-Through Certificates, Series 2000-1 will be issued in 14
classes. Only the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class
PO, Class A-R, Class M, Class B-1 and Class B-2 certificates are being offered
by this prospectus supplement.
o The main source of funds for making distributions on the certificates
will be collections on a pool of closed-end, fixed-rate loans secured
primarily by first mortgages or deeds of trust on residential one- to
four-family properties.
o Credit enhancement will be provided by the subordination of other
classes of certificates in respect of the right to receive interest and
principal.
--------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-11 OF
THIS PROSPECTUS SUPPLEMENT AND PAGE 17 IN THE PROSPECTUS.
The certificates will not represent obligations of PaineWebber Mortgage
Acceptance Corporation IV or any other person or entity. No governmental agency
or any other person will insure the certificates or the loans backing the
certificates. The certificates are not obligations of a bank and are not insured
or guaranteed by the FDIC.
We suggest you consult with your own advisors to determine if the offered
certificates are appropriate investments for you and to determine the applicable
legal, tax, regulatory and accounting treatment of the offered certificates.
--------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE CERTIFICATES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
We will not list the offered certificates on any securities exchange or on
any automated quotation system.
The underwriter, PaineWebber Incorporated, will purchase the Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5, Class PO, Class A-R, Class M, Class
B-1 and Class B-2 certificates from PaineWebber Mortgage Acceptance Corporation
IV and offer them to the public from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. See
"Underwriting" in this prospectus supplement.
The proceeds to depositor are expected to be approximately $168,743,697,
plus accrued interest before deducting expenses, estimated at $315,000. See
"Underwriting" in this prospectus supplement.
The offered certificates will be available for delivery to investors on or
about July 26, 2000.
PaineWebber Incorporated
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED
IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
Information about the offered certificates is provided in two separate
documents that progressively include more detail:
o the accompanying prospectus dated July 21, 2000, which provides general
information, some of which may not apply to the offered certificates; and
o this prospectus supplement, which describes the specific terms of the
offered certificates.
Sales of the offered certificates may not be completed unless you have
received both this prospectus supplement and the prospectus. Please read this
prospectus supplement and the prospectus in full.
IF THE TERMS OF THE OFFERED CERTIFICATES VARY BETWEEN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, THEN YOU SHOULD RELY ON THE
INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
Cross-references in this prospectus supplement and the accompanying
prospectus to captions in these materials are included to assist in locating
further related discussions. The following table of contents and the table of
contents in the accompanying prospectus provide the pages on which these
captions are located.
All statistical data with respect to the loans are approximate, and are
based on the scheduled principal balances of the loans as of July 1, 2000,
except where otherwise noted.
S-2
<PAGE>
THE SERIES 2000-1 CERTIFICATES
<TABLE>
<CAPTION>
Initial Rating
of Offered
Certificates (2)
----------------
Initial
Principal Pass-Through
Class Balance (1) Rate Principal Types Interest Types Fitch S&P
----- ----------- ---- ---------------- --------------- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Offered
Certificates
Class A-1........ $ 82,721,000 7.750% Senior, Sequential Pay Fixed Rate AAA AAA
Class A-2........ $ 30,000,000 7.750% Senior, Sequential Fixed Rate AAA AAA
Pay, Retail
Class A-3........ $ 23,444,000 7.750% Senior, Sequential Fixed Rate AAA AAA
Pay, Retail
Class A-4........ $ 10,000,000 7.750% Senior, Sequential Pay Fixed Rate AAA AAA
Class A-5........ $ 17,000,000 7.75% Senior, Lockout Pay Fixed Rate AAA AAA
Class PO......... $ 388,257 (3) Senior, Ratio Strip Principal-Only AAA AAA
Class A-R........ $ 100 7.750% Senior, Sequential Pay Fixed Rate AAA AAA
Class M.......... $ 3,234,000 7.750% Junior Fixed Rate AA N/A
Class B-1........ $ 1,276,000 7.750% Junior Fixed Rate A N/A
Class B-2........ $ 766,000 7.750% Junior Fixed Rate BBB N/A
Non-Offered
Certificates
Class X.......... (4) (5) Senior, Notional Variable Rate, N/A N/A
Amount Interest-Only
Class B-3........ $ 596,000 7.750% Junior Fixed Rate N/A N/A
Class B-4........ $ 340,000 7.750% Junior Fixed Rate N/A N/A
Class B-5........ $ 426,055 7.750% Junior Fixed Rate N/A N/A
------------------------------------
</TABLE>
(1) Approximate, subject to adjustment as described in this prospectus
supplement.
(2) A description of the ratings of the offered certificates is set forth
under the heading "Ratings" in this prospectus supplement.
(3) The Class PO certificates are principal-only certificates and will not
be entitled to distributions in respect of interest.
(4) The Class X certificates are interest-only certificates and will not be
entitled to distributions in respect of principal.
(5) The Class X certificates will receive distributions in respect of
interest as described under "Description of the Offered
Certificates--Interest" in this prospectus supplement.
S-3
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY.............................................................S-5
RISK FACTORS.......................................................S-11
Certificates May Not Be Appropriate for Individual Investors....S-11
Credit Enhancement May Not Be Adequate..........................S-11
Inadequacy of Value of Properties Could Affect Severity of
Losses......................................................S-12
Bankruptcy of Borrowers May Adversely Affect Distributions on
Certificates............................................... S-12
There are Risks Involving Unpredictability of Prepayments and
the Effect of Prepayments on Yields.........................S-12
Originator May Not Be Able to Repurchase or Replace
Defective Loans.............................................S-13
There Are Risks in Holding Subordinate Certificates.............S-14
Geographic Concentration Could Increase Losses on the Loans.....S-14
Failure of Servicer to Perform May Adversely Affect
Distributions on Certificates...............................S-14
Limited Liquidity May Adversely Affect Market Value of
Certificates................................................S-15
Rights of Beneficial Owners May Be Limited By Book-Entry
System......................................................S-15
FORWARD-LOOKING STATEMENTS.........................................S-15
DEFINED TERMS......................................................S-16
DESCRIPTION OF THE LOANS...........................................S-16
General.........................................................S-16
Statistical Information.........................................S-17
UNDERWRITING GUIDELINES............................................S-23
General.........................................................S-23
Standard Underwriting Guidelines................................S-24
Expanded Underwriting Guidelines................................S-26
Loan Production.................................................S-28
THE SERVICER.......................................................S-29
Foreclosure and Delinquency Experience..........................S-29
DESCRIPTION OF THE OFFERED CERTIFICATES............................S-31
General.........................................................S-31
Book-Entry Certificates.........................................S-32
Physical Certificates...........................................S-34
Allocation of Available Funds...................................S-35
Interest........................................................S-37
Principal.......................................................S-39
Allocation of Losses............................................S-40
Subordination...................................................S-42
Priority of Senior Certificates..............................S-42
Priority Among Junior Certificates...........................S-43
Restrictions on Transfer of the Class A-R, Class M and
Class B Certificates.........................................S-44
Reports to Certificateholders...................................S-45
PREPAYMENT AND YIELD CONSIDERATIONS................................S-46
General.........................................................S-46
Prepayments.....................................................S-46
The Class M, Class B-1 and Class B-2 Certificates...............S-48
Modeling Assumptions............................................S-49
Sensitivity of the Class PO Certificates........................S-51
Weighted Average Lives of the Offered Certificates..............S-52
THE POOLING AND SERVICING AGREEMENT................................S-57
General.........................................................S-57
Assignment of the Loans.........................................S-57
The Servicer....................................................S-59
Pledge and Assignment of Servicer's Rights......................S-59
Payments on Loans; Deposits to Collection Account
and Distribution Account....................................S-59
Collection and Other Servicing Procedures; Loan Modifications...S-61
Advances........................................................S-61
Servicing Fees and Other Compensation and Payment of Expenses...S-62
Realization on or Sale of Defaulted Loans.......................S-63
Enforcement of Due-on-Sale Clauses..............................S-64
Maintenance of Insurance Policies and Errors and
Omissions and Fidelity Coverage.............................S-64
Servicer Reports................................................S-65
Resignation of Servicer.........................................S-66
Events of Servicing Termination.................................S-67
Rights upon Event of Servicing Termination......................S-67
Termination.....................................................S-67
Optional Purchase of Defaulted Loans............................S-68
Voting Rights...................................................S-68
Amendment.......................................................S-68
The Trustee.....................................................S-69
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............................S-70
General.........................................................S-70
Regular Certificates............................................S-70
Residual Certificates...........................................S-70
REMIC Taxes and Reporting.......................................S-71
STATE TAXES........................................................S-71
ERISA CONSIDERATIONS...............................................S-72
LEGAL INVESTMENT...................................................S-75
USE OF PROCEEDS....................................................S-75
UNDERWRITING.......................................................S-76
RATINGS............................................................S-77
LEGAL MATTERS......................................................S-78
GLOSSARY OF TERMS..................................................S-79
S-4
<PAGE>
SUMMARY
This summary highlights selected information from this document and does not
contain all of the information that you need to consider in making an investment
decision. To understand all of the terms of the offering of the offered
certificates, you should read carefully this entire document and the
accompanying prospectus.
RELEVANT PARTIES
Trust....................The trust will be established under a pooling and
servicing agreement among PaineWebber Mortgage
Acceptance Corporation IV, as depositor, The Chase
Manhattan Bank, as trustee and Provident Funding
Associates, L.P., as originator and servicer.
Depositor................PaineWebber Mortgage Acceptance Corporation IV, a
Delaware corporation. The depositor's address is
1285 Avenue of the Americas, New York, New York
10019, telephone number (212) 713-2000. See "The
Depositor" in the accompanying prospectus.
Originator and Servicer..Provident Funding Associates, L.P., a California
limited partnership. Provident's address is 1633
Bayshore Highway, Suite 155, Burlingame,
California 94010, telephone number (650) 652-1300.
See "The Servicer" and "Underwriting Guidelines"
in this prospectus supplement.
Trustee..................The Chase Manhattan Bank, a New York banking
corporation. The trustee's address is 450 West
33rd Street, New York, New York 10001-2697,
telephone number (212) 946-3200. See "The Pooling
and Servicing Agreement--The Trustee" in this
prospectus supplement.
RELEVANT DATES
Cut-Off Date.............July 1, 2000.
Closing Date.............On or about July 26, 2000.
Distribution Date........The 25th day of each month or, if that day is not
a business day, the next business day, beginning
in August 2000.
Determination Date.......The 21st calendar day of each month or, if that
day is not a business day, then the immediately
preceding business day, provided that the
determination date will be at least 4 days prior
to the distribution date.
S-5
<PAGE>
Interest Accrual Period..The calendar month immediately prior to the month
in which the relevant distribution date occurs.
OFFERED CERTIFICATES..........We are offering the Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5, Class PO, Class
A-R, Class M, Class B-1 and Class B-2. Each class
will be issued with the following approximate
original principal balance, subject to a permitted
variance of plus or minus 5%:
o Class A-1 $ 82,721,000
o Class A-2 $ 30,000,000
o Class A-3 $ 23,444,000
o Class A-4 $ 10,000,000
o Class A-5 $ 17,000,000
o Class PO $ 388,257
o Class A-R $ 100
o Class M $ 3,234,000
o Class B-1 $ 1,276,000
o Class B-2 $ 766,000
The certificates will consist of a total of 14
classes. The Class X, Class B-3, Class B-4 and
Class B-5 certificates are not being offered
through this prospectus supplement and the
accompanying prospectus.
Interest Distributions...The offered certificates, other than the Class PO
certificates, will bear interest at the rates per
annum set forth on page 3 of this prospectus
supplement.
The actual amount of interest you receive on your
certificates on each distribution date will depend
on:
o the amount of interest accrued on your
certificates;
o the total amount of funds available for
distribution; and
o the amount of any accrued interest not paid on
your certificates on earlier distribution
dates.
The trustee will calculate interest on the basis
of a 360-day year consisting of twelve 30-day
months.
S-6
<PAGE>
The Class PO certificates are principal-only
certificates and will not be entitled to
distributions in respect of interest.
See "Description of the Offered Certificates" in
this prospectus supplement.
Principal Distributions..On each distribution date, one or more classes of
the offered certificates will be entitled to
distributions of principal. See "Description of
the Offered Certificates--Principal" in this
prospectus supplement for a detailed discussion of
the amount and timing of principal distributions.
ASSETS OF THE POOL............The loans will consist primarily of fixed rate,
closed-end loans secured by first priority liens
secured by mortgages or deeds of trust on
properties and having original terms to maturity
of not greater than 30 years.
The loans are expected to have the following
characteristics as of July 1, 2000:
Number of Loans:...........................................................484
Aggregate Scheduled Principal Balance (1):........................$170,191,412
Range of Scheduled Principal Balances (1):.................$60,000 to $704,209
Average Scheduled Principal Balance (1):..............................$351,635
Range of Mortgage Interest Rates:...............................7.00% to 9.50%
Weighted Average Mortgage Interest Rate (1):.............................8.39%
Range of Remaining Scheduled Terms to Maturity:.......348 months to 360 months
Weighted Average Remaining Scheduled
Term to Maturity (1):...............................................359 months
Range of Original Loan-to-Value Ratios (1):.........................28% to 95%
Weighted Average Original Loan-to-Value Ratio (1):.......................74.8%
Geographic Concentration of Mortgaged Properties
Securing Loans in Excess of 5% of the
Aggregate Scheduled Principal Balance (1):...................California 54.08%
Texas 9.30%
Washington 5.24%
Maximum Five-Digit Zip Code Concentration (1):...........................1.73%
------------------------------------
(1) Approximate.
Unless the context indicates otherwise, any
numerical or statistical information with respect
to the loans presented in this prospectus
supplement is based upon the characteristics of
the loans as of July 1, 2000.
See "Description of the Loans" in this prospectus
supplement.
S-7
<PAGE>
SERVICING OF THE LOANS........The servicer will:
o provide customary servicing functions with
respect to the loans pursuant to the pooling
and servicing agreement;
o provide certain reports to the trustee; and
o make certain advances.
See "The Pooling and Servicing Agreement" in this
prospectus supplement.
OPTIONAL TERMINATION..........The servicer may, at its option, repurchase all
but not less than all of the loans in the trust on
any distribution date on or after the first date
on which the current aggregate principal balance
of the loans, as of that date of determination, is
less than 10% of the aggregate principal balance
of the loans as of the cut-off date. See "The
Pooling and Servicing Agreement--Termination" in
this prospectus supplement.
CREDIT ENHANCEMENT............Credit enhancements may reduce the harm caused to
holders of certificates by shortfalls in payments
collected on the loans. Credit enhancements can
reduce the effect of shortfalls on all classes of
certificates, or they can allocate shortfalls so
they affect some classes before others. On each
distribution date, the classes of certificates
that are lower in order of payment priority will
not receive payments until the classes that are
higher in order of payment priority have been
paid. If there are insufficient funds on a
distribution date to pay all classes, the most
subordinate class is the first to forego payment.
Additionally, the most subordinate classes of
certificates will absorb losses, other than
certain excess losses, on the loans up to the
level described in this prospectus supplement.
See "Description of the Offered Certificates" in
this prospectus supplement.
REGISTRATION AND DENOMINATIONS
OF THE CERTIFICATES...........The offered certificates, other than the Class A-R
certificates, initially will be issued in
book-entry form. The offered certificates will be
issued in the minimum denominations set forth in
"Description of the Offered Certificates--General"
in this prospectus supplement. The Class A-R
certificates are expected to be issued in fully
registered, certificated form with a denomination
of $100. No person acquiring an interest in the
book-entry
S-8
<PAGE>
certificates will be entitled to receive a
definitive certificate representing that person's
interest in the trust fund, except under limited
circumstances as described in this prospectus
supplement. Beneficial owners may elect to hold
their interests through DTC. Transfers within DTC,
will be in accordance with the usual rules and
operating procedures of DTC. See "Description of
the Offered Certificates--General" in this
prospectus supplement.
LAST SCHEDULED
DISTRIBUTION DATE.............September 25, 2030. This date represents the
distribution date occurring in the month after the
maturity date of the latest maturing loan in the
trust. It is possible that the principal of the
certificates may not be fully paid by this date.
TAX STATUS....................The trustee will elect to treat the assets of the
trust as a real estate mortgage investment conduit
or REMIC for federal income tax purposes.
See "Certain Federal Income Tax Consequences" in
this prospectus supplement and "Federal Income Tax
Consequences" in the accompanying prospectus.
ERISA CONSIDERATIONS..........If you are a fiduciary of any retirement plan or
other employee benefit arrangement subject to the
Employee Retirement Income Security Act of 1974,
as amended, or Section 4975 of the Internal
Revenue Code of 1986, you should consult with
counsel as to whether you can buy or hold an
offered certificate. See "ERISA Considerations" in
this prospectus supplement.
LEGAL INVESTMENT..............The Class A-1, Class A-2, Class A-3, Class A-4,
Class A-5, Class PO, Class A-R and Class M
certificates will constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as amended.
The Class B-1 and Class B-2 certificates will not
constitute "mortgage related securities." See
"Legal Investment" in this prospectus supplement.
S-9
<PAGE>
CERTIFICATE RATINGS...........On the closing date, the offered certificates must
have the following ratings by each of Fitch and
Standard & Poor's Ratings Services:
Class Fitch S&P
----- ----- ---
A-1 AAA AAA
A-2 AAA AAA
A-3 AAA AAA
A-4 AAA AAA
A-5 AAA AAA
A-R AAA AAA
PO AAA AAA
M AA N/A
B-1 A N/A
B-2 BBB N/A
A security rating is not a recommendation to buy,
sell or hold securities and the assigning rating
organization may revise or withdraw a rating at
any time. The ratings do not address the
possibility that holders of the offered
certificates may suffer a lower than anticipated
yield.
See "Ratings" in this prospectus supplement for a
discussion of the primary factors on which the
ratings are based.
S-10
<PAGE>
RISK FACTORS
Before making an investment decision, you should carefully consider the
following risks which we believe describe the principal factors that make an
investment in the certificates speculative or risky. In particular, payments on
your certificates will depend on payments received on, and other recoveries with
respect to, the loans. Therefore, you should carefully consider the risk factors
relating to the loans.
Certificates May Not Be Appropriate for Individual Investors
The offered certificates are not suitable investments for all investors. In
particular, you should not purchase any class of offered certificates unless you
understand the prepayment, credit, liquidity and market risks associated with
that class because:
o The amounts you receive on your certificates will depend on the amount
of the payments borrowers make on the loans. Because we cannot predict
the rate at which borrowers will repay their loans, you may receive
distributions on your certificates in amounts that are larger or
smaller than you expect. In addition, the life of your certificates may
be longer or shorter than anticipated. Because of this, we cannot
guarantee that you will receive distributions at any specific future
date or in any specific amount.
o The yield to maturity on your certificates will depend primarily on the
purchase price of your certificates and the rate of principal payments
on the loans in the trust.
o Rapid prepayment rates on the loans are likely to coincide with periods
of low prevailing interest rates. During these periods, the yield at
which you may be able to reinvest amounts received as payments on your
certificates may be lower than the yield on your certificates.
Conversely, slow prepayment rates on the loans are likely to coincide
with periods of high interest rates. During these periods, the amount
of payments available to you for reinvestment at high rates may be
relatively low.
The certificates are complex securities. You should possess, either alone
or together with an investment advisor, the expertise necessary to evaluate the
information contained in this prospectus supplement and the accompanying
prospectus in the context of your financial situation and tolerance for risk.
You should carefully consider, among other things, the factors described
below and under "Prepayment and Yield Considerations" in this prospectus
supplement and "Risk Factors" in the prospectus before purchasing the
certificates.
Credit Enhancement May Not Be Adequate
Loan Delinquencies, Defaults and Losses. A decline in real estate values or
in economic conditions generally could increase the rates of delinquencies,
foreclosures and losses on the loans to a level that is significantly higher
than those experienced currently. This in turn will reduce the yield on your
certificates, particularly if the credit enhancement described in this
prospectus supplement, is not enough to protect your certificates from these
losses.
S-11
<PAGE>
As described in "Description of the Offered Certificates--Allocation of
Losses" in this prospectus supplement, losses will be allocated first to the
subordinate certificates, in inverse order of priority. Losses may be severe
enough, however, to reduce the aggregate principal balance of the subordinate
certificates to zero. If this occurs, the senior certificates will bear their
pro rata share of losses thereafter.
In addition, certain types of losses - referred to in this prospectus
supplement as "Excess Losses" - will be borne pro rata by the senior
certificates and the subordinate certificates after a specified amount of these
losses are borne solely by the subordinate certificates.
If the protection afforded by the credit enhancement is insufficient, you
could experience a loss on your investment.
Inadequacy of Value of Properties Could Affect Severity of Losses
Assuming that the properties provide adequate security for the loans,
substantial delays in recoveries may occur from the foreclosure or liquidation
of defaulted loans. We cannot assure you that the values of the properties have
remained or will remain at the levels in effect on the dates of origination of
the related loans. Further, liquidation expenses, including legal fees, real
estate taxes, and maintenance and preservation expenses will reduce the proceeds
payable on the loans and thereby reduce the security for the loans. As a result,
the risk that you will suffer losses could increase. If any of the properties
fail to provide adequate security for the related loan, you may experience a
loss. See "The Pooling and Servicing Agreement--Realization on or Sale of
Defaulted Loans" in this prospectus supplement, and "Certain Legal Aspects of
Residential Loans--Foreclosure on Mortgages" in the prospectus.
Bankruptcy of Borrowers May Adversely Affect Distributions on Certificates
The application of Federal and state laws, including bankruptcy and debtor
relief laws, may interfere with or adversely affect the ability to realize on
the properties, enforce deficiency judgments or pursue collection litigation
with respect to defaulted loans. As a consequence, borrowers who have defaulted
on their loans and sought, or are considering seeking, relief under bankruptcy
or debtor relief laws will have substantially less incentive to repay their
loans. As a result, these loans will likely experience more severe losses, which
may be total losses and could therefore increase the risk that you will suffer
losses. See "--Credit Enhancement May Not Be Adequate" above.
There are Risks Involving Unpredictability of Prepayments and the Effect of
Prepayments on Yields
Borrowers may prepay their loans in whole or in part at any time without
penalty. We cannot predict the rate at which borrowers will repay their loans. A
prepayment of a loan generally will result in a prepayment on the certificates.
o If you purchase your certificates at a discount and principal is repaid
more slowly than you anticipate, particularly in the case of the Class
PO certificates, then your yield may be lower than you anticipate.
S-12
<PAGE>
o If you purchase your certificates at a premium and principal is repaid
faster than you anticipate, then your yield may be lower than you
anticipate.
o The rate of prepayments on the loans will be sensitive to prevailing
interest rates. Generally, if prevailing interest rates decline
significantly below the interest rates on the loans, the loans are more
likely to prepay than if prevailing rates remain above the interest
rates on the loans. Conversely, if prevailing interest rates rise
significantly, the prepayments on the loans are likely to decrease.
o The effective interest rate on your certificates may be less than the
interest rate stated in this prospectus supplement. Your certificates
will be allocated any interest shortfalls that are not compensated for
as described in this prospectus supplement. The circumstances under
which interest shortfalls will occur are described in "Description of
the Offered Certificates--Interest" and "--Allocation of Available
Funds" in this prospectus supplement.
o The originator may be required to purchase loans from the trust in the
event certain breaches of representations and warranties have not been
cured. These purchases will have the same effect on the holders of the
offered certificates as a prepayment of the loans.
o If the rate of default and the amount of losses on the loans is higher
than you expect, then your yield may be lower than you expect.
See "Prepayment and Yield Considerations" in this prospectus supplement for
a description of factors that may influence the rate and timing of prepayments
on the loans.
Originator May Not Be Able to Repurchase or Replace Defective Loans
Provident Funding Associates, L.P., the originator of the loans, will make
various representations and warranties related to the loans. Those
representations are summarized in "The Pooling and Servicing
Agreement--Assignment of the Loans" in this prospectus supplement.
If Provident Funding Associates, L.P. fails to cure a material breach of
its representations and warranties with respect to any loan in a timely manner,
then Provident Funding Associates, L.P. would be required to repurchase or
replace the defective loan. See "The Pooling and Servicing Agreement--Assignment
of the Loans" in this prospectus supplement. It is possible that Provident
Funding Associates, L.P. may not be capable of repurchasing or replacing any
defective loans, for financial or other reasons. This company is a highly
leveraged specialty finance company. It funds its operations, including its loan
production, from borrowings under its lending arrangements with third parties,
including an affiliate of the depositor. In the event this funding source is or
becomes inadequate, its financial condition would be adversely affected, which
would adversely affect its ability to repurchase or replace defective loans. The
inability of Provident Funding Associates, L.P. to repurchase or replace
defective loans would likely cause the loans to experience higher rates of
delinquencies, defaults and losses. As a result, shortfalls in the distributions
due on your certificates could occur. See "--Credit Enhancement May Not Be
Adequate" above.
S-13
<PAGE>
There Are Risks in Holding Subordinate Certificates
The protections afforded the senior certificates create risks for the
subordinate certificates. Prior to any purchase of any subordinate certificates,
consider the following factors that may adversely impact your yield:
o Because the subordinate certificates receive interest and principal
distributions after the related senior certificates receive those
distributions, there is a greater likelihood that the subordinate
certificates will not receive the distributions to which they are
entitled on any distribution date.
o If the servicer determines not to advance a delinquent payment on a
loan because the servicer determines the amount is not recoverable from
a borrower, there may be a shortfall in distributions on the
certificates which will impact the subordinate certificates.
Losses resulting from the liquidation of defaulted loans will be allocated
to the subordinate certificates. A loss allocation results in a reduction in a
certificate balance without a corresponding distribution of cash to the holder.
A lower certificate balance will result in less interest accruing on the
certificate.
o The earlier in the transaction that a loss on a loan occurs, the
greater the impact on yield.
See "Description of the Offered Certificates" and "Prepayment and Yield
Considerations" in this prospectus supplement.
Geographic Concentration Could Increase Losses on the Loans
Mortgaged properties located in California, Texas and Washington secure
approximately 54.08%, 9.30% and 5.24%, respectively, of the loans by principal
balance of the cut-off date. This geographic concentration might magnify the
effect on the pool of loans of adverse economic conditions or of special hazards
in these areas, such as earthquakes or tornadoes, and might increase the rate of
delinquencies, defaults and losses on the loans. Consequently, the geographic
concentration could result in shortfalls in distributions due on your
certificates more than would be the case if the mortgaged properties were more
geographically diversified. See "Description of the Loans" in this prospectus
supplement.
Failure of Servicer to Perform May Adversely Affect Distributions on
Certificates
The amount and timing of distributions on the certificates generally will
be dependent on the servicer to perform its servicing obligations in an adequate
and timely manner. See "The Pooling and Servicing Agreement--Payments on Loans;
Deposits to Collection Account and Distribution Account" in this prospectus
supplement. If the servicer fails to perform its servicing obligations, this
failure may result in the termination of the servicer. That termination with its
transfer of daily collection activities will likely increase the rates of
delinquencies, defaults and losses on the loans. As a result, shortfalls in the
distributions due on your certificates could occur.
S-14
<PAGE>
Limited Liquidity May Adversely Affect Market Value of Certificates
A secondary market for the offered certificates may not develop or, if it
does develop, it may not provide you with liquidity of investment or continue
while your certificates are outstanding. Lack of liquidity could result in a
substantial decrease in the market value of your certificates. See "Risk
Factors--Limited Liquidity of Securities May Adversely Affect Market Value of
Securities" in the accompanying prospectus.
Because the Class M, Class B-1 and Class B-2 certificates are subordinated
to the senior certificates, the requirements of certain prohibited transaction
exemptions will not be satisfied. As a result, the purchase or holding of any of
the Class M, Class B-1 and Class B-2 certificates by a plan investor may
constitute a non-exempt prohibited transaction or result in the imposition of
excise taxes or civil penalties. Additionally, the Class A-R certificates are
not offered to or transferable to plan investors. Accordingly, the Class M,
Class B-1 and Class B-2 certificates are not offered to or transferable to plan
investors unless the plan investor meets certain requirements. See "ERISA
Considerations" in this prospectus supplement and in the accompanying
prospectus.
Rights of Beneficial Owners May Be Limited By Book-Entry System
Unless you are the purchaser of the Class A-R certificates, your ownership
of the offered certificates will be registered electronically with DTC. The lack
of physical certificates could:
o result in payment delays on your certificates because the trustee will
be sending distributions on the certificates to DTC instead of directly
to you;
o make it difficult for you to pledge your certificates if physical
certificates are required by the party demanding the pledge; and
o hinder your ability to resell your certificates because some investors
may be unwilling to buy certificates that are not in physical form. See
"Description of the Offered Certificates--Book-Entry Certificates" in
this prospectus supplement and "Description of the
Securities--Book-Entry Registration of Securities" in the prospectus.
FORWARD-LOOKING STATEMENTS
In this prospectus supplement and the accompanying prospectus, we use
certain forward-looking statements. These forward-looking statements are found
in the material, including each of the tables set forth under "Risk Factors" and
"Prepayment and Yield Considerations" in this prospectus supplement.
Forward-looking statements are also found elsewhere in this prospectus
supplement and the prospectus and include words like "expects," "intends,"
"anticipates," "estimates" and other similar words. These statements are
intended to convey our projections or expectations as of the date of this
prospectus supplement. These statements are inherently subject to a variety of
risks and uncertainties. Actual results could differ materially from those we
anticipate due to changes in, among other things:
S-15
<PAGE>
(1) economic conditions and industry competition;
(2) political and/or social conditions; and
(3) the law and government regulatory initiatives.
We will not update or revise any forward-looking statement to reflect
changes in our expectations or changes in the conditions or circumstances on
which these statements were originally based.
DEFINED TERMS
We define and use capitalized terms in this prospectus supplement and the
prospectus to assist you in understanding the terms of the offered certificates
and this offering. We define the capitalized terms we use in this prospectus
supplement under the caption "Glossary of Terms" beginning on page S-79 in this
prospectus supplement. We define capitalized terms we use in the accompanying
prospectus under the caption "Glossary of Terms" beginning on page 182 in the
prospectus.
DESCRIPTION OF THE LOANS
General
On or about July 26, 2000, PaineWebber Mortgage Acceptance Corporation IV,
the depositor, will acquire a pool of Loans, having an aggregate unpaid
principal balance as of the Cut-Off Date of approximately $170,191,412 from
Paine Webber Real Estate Securities Inc., who will have previously acquired them
from Provident Funding Associates, L.P. The depositor will then transfer the
Loans to the trust pursuant to the Pooling and Servicing Agreement. The trust
will be entitled to all scheduled payments of principal and interest in respect
of the Loans due after July 1, 2000, the Cut-Off Date.
Unless otherwise stated, the statistical information presented in this
prospectus supplement relates to the Loans as of July 1, 2000.
As of the close of business on June 30, 2000, no Loan was 30 days past due.
The Loans are evidenced by Mortgage Notes, secured by mortgages or deeds of
trust on the Mortgaged Properties. As of the Cut-Off Date, all of the Loans were
secured by first liens on Mortgaged Properties.
The Loans have original terms to stated maturity of no more than 30 years.
As of the Cut-Off Date, the average unpaid principal balance of the Loans was
approximately $351,635. The scheduled monthly payment on each Loan includes
substantially equal payment consisting of interest plus principal in an amount
that will amortize the outstanding principal balance of the Loan over its
remaining term. All of the Loans provide for payments due as of the first day of
each month. As of the Cut-Off Date, the weighted average loan interest rate of
the Loans was approximately 8.39% per annum.
S-16
<PAGE>
Each Loan was originated during or after June 1999. As of the Cut-Off Date,
the weighted average remaining term to maturity of the Loans was approximately
359 months and the latest scheduled maturity date of any Loan is August 1, 2030.
However the actual date on which any Loan is paid in full may be earlier than
the stated maturity date due to unscheduled payments of principal. The borrowers
may prepay their Loans at any time without penalty. Each of the Loans is subject
to a due-on-sale clause. See "Certain Legal Aspects of Residential Loans" in the
prospectus.
As of the Cut-Off Date, the weighted average LTV Ratio of the Loans was
approximately 74.8%. No Loan had an LTV Ratio at origination of more than 95%.
Generally, each Loan with an LTV Ratio at origination of more than 80% is
covered by a primary mortgage guaranty insurance policy issued by a mortgage
insurance corporation acceptable to Freddie Mac or Fannie Mae. The policy
provides coverage in an amount equal to a specified percentage times the sum of
the remaining principal balance of the Loan, the accrued interest on the Loan
and the related foreclosure expenses. The specified percentages are generally as
follows:
LTV Ratios Specified Percentage
---------- --------------------
80.01% -85.00% 12%
85.01-90.00% 25%
90.01%-95.00% 30%
Approximately 9.94% of the Loans had LTV Ratios at origination of greater
than 80% and the related borrower was required to obtain primary mortgage
guaranty insurance. No primary mortgage guaranty insurance policy will be
required on any Loan:
o after the date on which the LTV Ratio is 80% or less, or, based on a
new appraisal, the principal balance of the Loan represents 80% or less
of the new appraised value;
o if maintaining the policy is prohibited by law; or
o 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 decline generally or in a
particular geographic area decline, the LTV Ratios might not be a
reliable indicator of the rates of delinquencies, foreclosures and
losses that could occur with respect to the Loans.
Statistical Information
Set forth below is statistical information regarding characteristics of the
Loans as of the Cut-Off Date.
Before the closing date, the depositor may remove any of the Loans
identified as of the date of this prospectus supplement or may substitute
comparable loans for any of the Loans identified as of the date of this
prospectus supplement. However, the aggregate principal balance of the
substituted Loans will not exceed 5% of the Loans, by Cut-Off Date Pool Balance.
As a result, the statistical information presented below regarding the
characteristics of the Loans identified
S-17
<PAGE>
for inclusion in the trust may vary in some respects from comparable information
based on the actual composition of the Loans included in the trust on the
closing date. In addition, after the Cut-Off Date, the characteristics of the
Loans may materially vary from the information below due to a number of factors.
These factors include prepayments of the Loans after the Cut-Off Date and the
substitution or repurchase of Loans after the closing date.
Loan Interest Rates
<TABLE>
<CAPTION>
Aggregate
Number of Principal % of Cut-Off Date
Range of Loan Interest Rates (%) Loans Balance Pool Balance
----------------------------------------------- ------------------ --------------------- ---------------------
<S> <C> <C> <C>
7.000 to 7.500................................. 2 $ 821,034.80 0.48%
7.510 to 7.750................................. 14 4,977,428.21 2.92
7.751 to 8.000................................. 45 16,514,638.86 9.70
8.010 to 8.250................................. 119 42,469,671.30 24.95
8.251 to 8.500................................. 182 63,900,522.40 37.55
8.501 to 8.750................................. 76 25,534,679.36 15.00
8.751 to 9.000................................. 34 12,374,221.89 7.27
9.010 to 9.250................................. 6 1,788,192.92 1.05
9.251 to 9.500................................. 6 1,811,022.29 1.06
--- --------------- ------
Total................................... 484 $170,191,412.03 100.00%
=== =============== ======
</TABLE>
As of the Cut-Off Date, the weighted average interest rate of the Loans, by
Cut-Off Date Pool Balance, was approximately 8.39% per annum.
S-18
<PAGE>
Original LTV Ratios
<TABLE>
<CAPTION>
Aggregate
Number of Principal % of Cut-Off Date
Range of LTV Ratio (%) Loans Balance Pool Balance
------------------------------------------ ---------- ----------------- ---------------
<S> <C> <C> <C> <C>
25.001 - 30.000...................... 1 $ 499,650.00 0.29%
30.001 - 35.000...................... 1 498,986.82 0.29
35.001 - 40.000...................... 3 929,451.07 0.55
40.001 - 45.000...................... 3 1,153,379.09 0.68
45.001 - 50.000...................... 7 2,551,374.72 1.50
50.001 - 55.000...................... 20 7,504,483.75 4.41
55.001 - 60.000...................... 24 8,321,600.00 4.89
60.001 - 65.000...................... 23 8,695,013.89 5.11
65.001 - 70.000...................... 42 14,815,546.95 8.71
70.001 - 75.000...................... 46 15,615,772.71 9.18
75.001 - 80.000...................... 260 92,682,336.16 54.46
80.001 - 85.000...................... 4 1,295,369.62 0.76
85.001 - 90.000...................... 38 12,283,822.25 7.22
90.001 - 95.000...................... 12 3,344,625.00 1.97
--- --------------- ------
Total..................................... 484 $170,191,412.03 100.00%
=== =============== ======
</TABLE>
--------------------------------------------------------------------------------
As of the Cut-Off Date, the weighted average LTV Ratio of the Loans, by
Cut-Off Date Pool Balance, was approximately 74.8%.
Current Principal Balances
<TABLE>
<CAPTION>
Aggregate
Number of Principal % of Cut-Off Date
Range of Principal Balances Loans Balance Pool Balance
---------------------------------------------- ----------- ---------------------- -----------------
<S> <C> <C> <C> <C>
$50,001--$100,000............................. 3 $ 210,750.00 0.12%
$100,001--$250,000............................ 3 401,750.00 0.24
$250,001--$500,000............................ 460 159,110,080.56 93.49
$500,001--$750,000............................ 18 10,468,831.47 6.15
--- --------------- ------
Total..................................... 484 $170,191,412.03 100.00%
=== =============== ======
</TABLE>
--------------------------------------------------------------------------------
As of the Cut-Off Date, the average unpaid principal balance of the Loans
was approximately $351,635.
S-19
<PAGE>
Documentation Program
<TABLE>
<CAPTION>
Aggregate
Number of Principal % of Cut-Off
Type of Program Loans Balance Date Pool Balance
-------------------------------------------- --------- -------------------- -----------------
<S> <C> <C> <C>
Full........................................ 463 $162,621,901.00 95.55%
Reduced or Stated........................... 20 7,183,911.03 4.22
No Ratio.................................... 1 385,600.00 0.23
--- --------------- ------
Total.................................... 484 $170,191,412.03 100.00%
=== =============== ======
</TABLE>
Property Types
<TABLE>
<CAPTION>
Aggregate
Number of Principal % of Cut-Off
Property Type Loans Balance Date Pool Balance
-------------------------------------------- --------- -------------------- -----------------
<S> <C> <C> <C>
Single Family............................... 308 $108,454,724.30 63.73%
Two to Four Family.......................... 9 2,484,183.79 1.46
Planned Unit Development.................... 150 53,832,787.80 31.63
Condominium................................. 16 5,106,238.05 3.00
Manufactured Housing........................ 1 313,478.09 0.18
--- --------------- ------
Total.................................... 484 $170,191,412.03 100.00%
=== =============== ======
</TABLE>
Occupancy Status
<TABLE>
<CAPTION>
Aggregate
Number of Principal % of Cut-Off
Occupancy Status Loans Balance Date Pool Balance
------------------------------------------------ ------------ ------------------ -----------------
<S> <C> <C> <C>
Owner Occupied.................................. 470 $166,744,951.62 97.97%
Investor Owned.................................. 6 612,500.00 0.36
Second Home..................................... 8 2,833,960.41 1.67
--- --------------- ------
Total........................................ 484 $170,191,412.03 100.00%
=== =============== ======
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
S-20
<PAGE>
Geographic Distribution of Loans
Aggregate % of Cut-Off
Number of Principal Date Pool
Jurisdiction Loans Balance Balance
------------ ----- ------- -------
California.......... 261 $ 92,032,673.46 54.08%
Texas............... 44 15,822,407.38 9.30
Washington.......... 25 8,915,877.89 5.24
Colorado............ 20 6,734,523.64 3.96
Utah................ 12 4,620,404.94 2.71
Illinois............ 12 4,380,206.68 2.57
Oregon.............. 12 4,233,399.03 2.49
Georgia............. 9 3,327,828.16 1.96
Arizona............. 9 3,205,774.16 1.88
Connecticut......... 9 3,163,051.33 1.86
Massachusetts....... 9 2,915,247.32 1.71
South Carolina...... 7 2,559,057.10 1.50
Minnesota........... 7 2,542,871.49 1.49
North Carolina...... 7 2,328,164.52 1.37
Virginia............ 6 1,944,208.13 1.14
Nevada.............. 7 1,939,533.86 1.14
Florida............. 4 1,473,463.81 0.87
Maryland............ 4 1,450,851.98 0.85
New Mexico.......... 3 987,251.16 0.58
Alabama............. 2 849,900.00 0.50
New Jersey.......... 2 685,810.14 0.40
Indiana............. 2 672,500.00 0.40
Louisiana........... 3 600,723.53 0.35
New York............ 1 499,672.93 0.29
District of Columbia 1 488,000.00 0.29
Rhode Island........ 1 419,000.00 0.25
Ohio................ 2 394,500.00 0.23
Tennessee........... 1 374,918.59 0.22
Kentucky............ 1 319,590.80 0.19
Missouri............ 1 310,000.00 0.18
--- --------------- ------
Total............. 484 $170,191,412.03 100.00%
=== =============== ======
No more than approximately 1.73% of the Loans, by Cut-Off Date Pool
Balance, will be secured by properties located in any one zip code.
S-21
<PAGE>
Loan Purpose
<TABLE>
<CAPTION>
Number of Aggregate Principal % of Cut-Off Date
Loan Purpose Loans Balance Pool Balance
------------------------------------------------------ --------- ------------------- -----------------
<S> <C> <C> <C>
Purchase.............................................. 406 $142,940,180.54 83.99%
Refinance (Rate/Term)................................. 47 17,382,945.29 10.21
Refinance (cash out).................................. 31 9,868,286.20 5.80
--- --------------- ------
Total.................................................. 484 $170,191,412.03 100.00%
=== =============== ======
</TABLE>
Remaining Terms to Maturity
<TABLE>
<CAPTION>
% of Cut-Off
Range of Remaining Terms Number of Aggregate Principal Date Pool
to Maturity (in months) Loans Balance Balance
---------------------------------------------------------- --------- ------------------- ------------
<S> <C> <C> <C>
345 - 350 ................................................ 1 $ 288,000.00 0.17%
351 - 355 ................................................ 16 5,417,741.08 3.18
356 - 360 ................................................ 467 164,485,670.95 96.65
--- --------------- ------
Total.................................................. 484 $170,191,412.03 100.00%
=== =============== ======
</TABLE>
As of the Cut-Off Date, the weighted average remaining term to maturity of
the Loans, by Cut-Off Date Pool Balance, was approximately 359 months.
The information set forth in this section "Description of the Loans" has
been based on information provided by the originator and tabulated by the
depositor. None of the depositor, the servicer, the underwriter or the trustee
make any representation as to the accuracy or completeness of that information.
S-22
<PAGE>
UNDERWRITING GUIDELINES
General
All 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 described below,
the underwriting procedures are consistent with those identified under
"Residential Loans--Underwriting Standards" in the prospectus.
In certain cases, including 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 that case, Provident determines
whether a loan complies with its underwriting guidelines. After originating
loans in this manner, Provident conducts a quality control review of a sample of
those loans to verify the information that was obtained from the third parties.
Provident's underwriting standards are applied:
o to evaluate the prospective borrower's credit standing;
o to evaluate the prospective borrower's repayment ability; and
o to evaluate the value and adequacy of the mortgaged property as
collateral.
A prospective borrower must generally demonstrate that its Debt-to-Income
Ratios are within certain limits. The maximum acceptable Debt-to-Income Ratio is
determined on a loan-by-loan basis and varies depending on a number of
underwriting criteria, including the LTV 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.
Documentation Programs. The nature of the information which a borrower is
required to disclose and whether the information is verified depends, in part,
on the documentation program used in the origination process. In general under
Provident's Full Documentation Loan Program:
o 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;
o self-employed individuals are generally required to submit their two
most recent federal income tax returns; and
o the underwriter generally verifies the information contained in the
application relating to employment, income, assets or mortgages.
S-23
<PAGE>
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:
o an Alternative Documentation Loan Program;
o a Reduced or Stated Documentation Loan Program;
o a No Income/No Asset Documentation Loan Program; and
o a No Ratio Documentation Loan Program.
Credit Reports. 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:
o credit history with local and national merchants and lenders;
o installment debt payments; and
o 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.
Appraisals. Provident obtains appraisals or updates of appraisals from
independent appraisers or appraisal services for properties that are to secure
loans. The appraisers inspect and appraise the proposed mortgaged property and
verify that the property is in acceptable condition. Following the 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 Freddie Mac or Fannie Mae
appraisal standards then in effect. Every independent appraisal is reviewed by
an underwriter retained by Provident before the loan is approved.
Insurance. Provident requires title insurance on all of its 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.
Standard Underwriting Guidelines
Loans comprising approximately 91.76% of the Loans, by Cut-Off Date Pool
Balance, were underwritten pursuant to Provident's standard underwriting
guidelines, allocated among programs as set forth under "Description of the
Loans" above. Provident's standard underwriting guidelines are generally
consistent in many respects with the guidelines applied to mortgage loans
purchased by Freddie Mac and Fannie Mae and provide as follows.
S-24
<PAGE>
LTV Ratio's. Provident's standard underwriting guidelines generally allow
LTV Ratios at origination for purchase money or rate and term refinance loans as
follows:
Maximum Loan Principal Balance Permitted LTV Ratio
-------------------------------------------- -------------------
$300,000.................................... 95%
$400,000.................................... 90%
$500,000.................................... 80%
$750,000.................................... 75%
For cash out refinance loans with original principal balances of up to $650,000,
Provident's standard underwriting guidelines generally allow LTV Ratios at
origination of up to 75%. The maximum "cash-out" amount permitted ranges from
$50,000 to $100,000 depending on the original LTV Ratio of the related loan and
other underwriting considerations. A refinance 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.
Debt-to-Income Ratios. Generally the standard underwriting guidelines
permit the following Debt-to Income Ratios:
Expense Debt-to Income Ratio
---------------------------------------------------- --------------------
Generally
o monthly housing expenses 33%
o total monthly debt 38%
or, based in part on the original LTV Ratio and the
borrower's assets
o monthly housing expenses 36%
o total monthly debt 43%
Documentation Programs. 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.
Alternative Documentation Program:
o permits a borrower to provide W-2 forms instead of tax returns covering
the most recent two years
o permits bank statements in lieu of verification of deposits
o permits alternative methods of employment verification
S-25
<PAGE>
The loans which have been originated under the Alternative Documentation Program
may be eligible for sale to Freddie Mac or Fannie Mae.
Reduced or Stated Documentation Program:
o waives certain underwriting documentation concerning income
verification
o calculates Debt-to Income Ratios based on the information provided by
the borrower in the mortgage loan application
o requires verification of deposit or bank statements for only the
two-month period immediately prior to the date of the
mortgage loan application
o permits maximum LTV Ratios (including secondary financing) up to 70%
The loans which have been originated under the Reduced Documentation
Program are not eligible for sale to Freddie Mac or Fannie Mae.
Expanded Underwriting Guidelines
Loans comprising approximately 8.24% of the Loans, by Cut-Off Date Pool
Balance, were underwritten pursuant to Provident's Expanded Underwriting
Guidelines. In addition to Provident's standard underwriting guidelines,
Provident uses underwriting guidelines featuring expanded criteria which permit:
o higher LTV Ratios,
o higher loan amounts,
o different documentation requirements than those associated with the
standard underwriting guidelines
o higher Debt-to Income Ratios.
LTV Ratios. Provident's expanded underwriting guidelines generally allow
LTV Ratios at origination for purchase money or rate and term refinance loans as
follows:
Maximum Loan Principal Balance Permitted LTV Ratio
------------------------------ -------------------
$300,000..................................... 95%
$400,000..................................... 90%
$650,000..................................... 80%
S-26
<PAGE>
Debt-to-Income Ratios. Generally the expanded underwriting guidelines
permit the following Debt-to Income Ratios:
Expense Debt-to Income Ratio
---------------------------------------------------- --------------------
Generally
o monthly housing expenses 33%
o total monthly debt 38%
or, if LTV Ratio does not exceed 80%, and based in
part on the borrower's assets
o monthly housing expenses 40%
o total monthly debt 45%
Documentation Programs. In connection with the expanded underwriting
guidelines, Provident originates or acquires mortgage loans under the Full
Documentation Program, the Alternative Documentation Program or the Reduced or
Stated Documentation Program, 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 or Stated 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 LTV Ratios than those
permitted under the standard underwriting guidelines.
Loans comprising approximately 4.27% of the Loans, by Cut-Off Date Pool
Balance, were originated under either the No Income/No Asset Documentation
Program or the No Ratio Documentation Program under which Debt-to-Income Ratios
are calculated as described below.
No Income/No Asset Documentation Program:
o permits a borrower to obtain a loan without Debt-to-Income Ratios being
calculated or included in the underwriting analysis because no
documentation relating to a prospective borrower's income, employment
or assets is required
o requires borrowers with excellent credit histories
o permits maximum LTV Ratios (including secondary financing) up to 85%
Mortgage loans originated under the No Income/No Asset Documentation
Program are not eligible for sale to Freddie Mac or Fannie Mae.
S-27
<PAGE>
No Ratio Documentation Program:
o permits a borrower to obtain a loan without Debt-to-Income Ratios being
calculated or included in the underwriting analysis because no
documentation relating to a prospective borrower's income, employment
or assets is required;
o requires a borrower 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 the loan; and
o permits maximum LTV Ratios (including secondary financing) up to 80%
Loans originated under the No Ratio Documentation Program are not eligible for
sale to Freddie Mac or Fannie Mae.
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,
---------------------------------------------------------------------- ------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(Dollar amounts in millions, except average loan balance)
FHA/VA Loans
Number of Loans..... 0 650 1,604 129 5
Volume of Loans..... $ 0.00 $ 75,605,699 $ 202,034,364 $ 17,193,282 $ 657,669
Conventional Loans
Number of Loans..... 3,359 13,301 42,300 57,302 20,848
Volume of Loans..... $ 587,639,838 $ 2,295,857,397 $ 7,216,215,920 $ 9,006,556,842 $ 3,252,873,335
Other Loans
Number of Loans..... 153 525 1,977 1,124 201
Volume of Loans..... $ 23,604,300 $ 79,287,120 $ 265,803,665 $ 139,661,595 $ 23,151,550
Total Loans
Number of Loans..... 3,512 14,476 45,881 58,555 21,054
Volume of Loans..... $ 611,244,138 $ 2,450,750,216 $ 7,684,053,949 $ 9,163,411,719 $ 3,276,682,554
Average Loan Balance...... $ 174,044 $ 169,297 $ 167,478 $ 156,492 $ 155,632
</TABLE>
S-28
<PAGE>
THE SERVICER
The information set forth in this section has been provided by Provident.
None of the depositor, the trustee, the underwriter nor any of their respective
affiliates have made or will make any representation as to the accuracy or
completeness of this information.
Provident, 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. Provident
was organized in California in 1992 and currently is licensed as a mortgage
lender or registered to originate or purchase loans in 48 States and the
District of Columbia. The servicer currently employs approximately 28
individuals, including professionals and support staff. The main office of the
servicer is located at 1633 Bayshore Highway, Suite 155, Burlingame, California
94010.
As of June 30, 2000, Provident serviced approximately 32,400 mortgage loans
with an aggregate principal amount of approximately $4.433 billion and an
average principal balance of approximately $136,800.
Provident is an approved residential loan servicer by Standard & Poor's as
of December 1999.
Provident typically sells the majority of the loans it originates on a
servicing-released basis and retains servicing on only a small percent.
Provident generally services the loans during the interim period of time from
origination to sale to investors. 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.
Upon written request, Provident will make available its most recent audited
financial statements. Requests should be directed to Provident at 1633 Bayshore
Highway, Suite 155, Burlingame, California 94010, Attention: Michelle C. Blake.
In addition, see "The Pooling and Servicing Agreement--Servicer Reports" in this
prospectus supplement 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 Pooling and Servicing Agreement.
Foreclosure and Delinquency Experience
The following table sets forth the delinquency and foreclosure experience
of the mortgage loans serviced by the servicer as of the dates indicated. The
servicer's portfolio of mortgage loans may differ significantly from the Loans
in terms of interest rates, principal balances, geographic distribution, types
of properties and other possibly relevant characteristics. There can be no
assurance, and no representation is made, that the delinquency and foreclosure
experience with respect to the Loans will be similar to that reflected in the
table below, nor is any representation made as to the rate at which losses may
be experienced on liquidation of defaulted Loans. The actual delinquency
experience on the Loans will depend, among other things, upon the value of the
real estate securing those Loans and the ability of the related borrower to make
required payments.
S-29
<PAGE>
DELINQUENCIES AND FORECLOSURES GENERALLY ARE EXPECTED TO OCCUR MORE
FREQUENTLY AFTER THE FIRST FULL YEAR OF THE LIFE OF MORTGAGE LOANS. PROVIDENT
TYPICALLY SELLS THE MORTGAGE LOANS IT ORIGINATES WITHIN 1 TO 2 MONTHS AFTER
ORIGINATION AND GENERALLY ONLY RETAINS SERVICING ON A PORTION OF THE MORTGAGE
LOANS IT ORIGINATES. ACCORDINGLY, THE FOLLOWING TABLE GENERALLY SETS FORTH
PROVIDENT'S FORECLOSURE AND DELINQUENCY EXPERIENCE ONLY FOR MORTGAGE LOANS IT
HAS RETAINED. PROVIDENT DOES NOT KEEP RECORDS OF ANY FORECLOSURE AND DELINQUENCY
EXPERIENCE WITH RESPECT TO MORTGAGE LOANS ORIGINATED BY PROVIDENT AND SOLD, ON A
SERVICING-RELEASED BASIS, TO THIRD PARTIES.
The following table summarizes the delinquency and foreclosure experience
of mortgage loans serviced by the servicer.
Delinquency and Foreclosure Experience(1)
<TABLE>
<CAPTION>
As of March 31, 2000 As of December 31, 1999
-------------------- -----------------------
% by % by
Principal Principal Principal Principal
No. of Loans Balance (2) Balance No. of Loans Balance(2) Balance
------------ ----------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Current Loans 30,737 $4,194,205,480 99.75% 29,658 $4,101,981,873 99.76%
Period of
Delinquency(3)
30 Days 55 $ 6,463,747 .15% 49 $ 6,678,043 .16%
60-89 9 $ 1,282,996 .03% 8 $ 982,557 .02%
90 Days or more 3 $ 336,520 .01% 7 $ 857,096 .02%
------ -------------- ------ ------ -------------- ------
Total Delinquency 67 $ 8,083,263 .19% 69 $ 8,517,696 .20%
Foreclosures(4) 15 $ 2,311,559 .06% 12 $ 1,818,971 .04%
Bankruptcy(5) 16 $ 1,840,975 .04% 15 $ 1,919,492 .05%
Total Portfolio 30,819 $4,204,600,302 100.00% 29,734 $4,112,318,540 100.00%
</TABLE>
TABLE (CONTINUED)
As of December 31, 1998
-----------------------
% by
Principal Principal
No. of Loans Balance(2) Balance
------------ ---------- -------
Current Loans 14,331 $2,139,555,302 99.18%
Period of
Delinquency(3)
30 Days 111 $ 16,450,609 .76%
60-89 5 $ 620,299 .03%
90 Days or more -- -- --
------ -------------- ------
Total Delinquency 116 $ 17,070,908 .79%
Foreclosures(4) 4 $ 582,190 .03%
Bankruptcy(5) 5 $ 695,382 .03%
Total Portfolio 14,451 $2,157,208,400 100.00%
------------------------------------
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated.
(2) For the REO Properties, the principal balance is at the time of
foreclosure.
(3) No mortgage loan is included in this section of the table as delinquent
until it is 30 days past due.
(4) Exclusive of the number of loans and principal balance shown in period of
delinquency.
(5) Bankruptcy includes loans that are current, delinquent or in foreclosure
and are included in the appropriate category in this table.
The statistics shown above represent the delinquency experience for the
servicer's mortgage servicing portfolio only for the periods presented, whereas
the aggregate delinquency experience on the Loans will depend on the results
obtained over the lives of the Loans. The servicer does not have significant
historical delinquency, bankruptcy, foreclosure or default experience that may
be referred to for purposes of estimating the future delinquency and loss
experience of the Loans. There can be no assurance that the Loans will perform
consistent with the delinquency or foreclosure experience described in this
prospectus supplement. It should be noted that if the residential real estate
market should experience an overall decline in property values, the actual rates
of delinquencies and foreclosures could be higher than those previously
experienced by the servicer. In addition, adverse economic conditions may affect
the timely payment by mortgagors of scheduled payments of principal and interest
on the Loans and, accordingly, the actual rates of delinquencies and
foreclosures with respect to the Loans.
S-30
<PAGE>
Description of the Offered Certificates
General
The certificates will be issued pursuant to the Pooling and Servicing
Agreement. Set forth below are summaries of the specific terms and provisions
pursuant to which the offered certificates will be issued. The following
summaries do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, the provisions of the Pooling and Servicing
Agreement.
The trust will issue the Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5, Class A-R, Class PO, Class X, Class M, Class B-1, Class B-2, Class B-3,
Class B-4, and Class B-5 certificates. Only the Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5, Class A-R, Class PO, Class M, Class B-1 and Class B-2
certificates are offered hereby.
The offered certificates will have the respective initial Certificate
Principal Balances specified in the table below, subject to a permitted variance
of plus or minus five percent:
Initial Certificate
Class Principal Balance
----- -------------------
A-1 $ 82,721,000
A-2 $ 30,000,000
A-3 $ 23,444,000
A-4 $ 10,000,000
A-5 $ 17,000,000
A-R $ 100
PO $ 388,257
M $ 3,234,000
B-1 $ 1,276,000
B-2 $ 766,000
The offered certificates, other than the Class A-R certificates, will be
issued in book-entry form as described below. The offered certificates will be
issued in minimum dollar denominations described in the table below, except that
one certificate of each class may be issued in a denomination which is not an
integral multiple thereof.
Forms and Denominations of Offered Certificates
<TABLE>
<CAPTION>
Original Certificate Incremental
Class Form Minimum Denomination Denomination
----- -------------------- -------------------- ------------
<S> <C> <C> <C>
Classes A-1, A-4, A-5 and PO........ Book-Entry $25,000 $1,000
Classes A-2 and A-3................... Book-Entry $1,000 $1,000
Classes M, B-1 and B-2................ Book-Entry $25,000 $1,000
Class A-R............................. Physical $100 N/A
</TABLE>
S-31
<PAGE>
Distributions on the offered certificates will be made by the trustee on
the 25th day of each month, or if that day is not a business day, on the first
business day after the 25th day, commencing in August 2000, to the persons in
whose names the certificates are registered at the close of business on the
Record Date.
Book-Entry Certificates
The offered certificates of each class other than the Class A-R
certificates will be book-entry certificates. Persons acquiring beneficial
ownership interests in the offered certificates will hold certificates through
DTC, or indirectly through organizations which are participants in that system.
The book-entry certificates of each class will be issued in one or more
certificates which equal the aggregate Certificate Principal Balance of that
class and will initially be registered in the name of Cede & Co., the nominee of
DTC. Except as described below, no person acquiring a book-entry certificate
will be entitled to receive a physical certificate. Unless and until Definitive
Certificates are issued, it is anticipated that the only certificateholder of
the offered certificates will be Cede & Co., as nominee of DTC. Beneficial
owners will not be certificateholders as that term is used in the Pooling and
Servicing Agreement. Beneficial owners are only permitted to exercise their
rights indirectly through DTC and participants of DTC.
The beneficial owner's ownership of a book-entry certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary that maintains the beneficial owner's account for that
purpose. In turn, the financial intermediary's ownership of the book-entry
certificate will be recorded on the records of DTC or of a participating firm
that acts as agent for the financial intermediary, whose interest will in turn
be recorded on the records of DTC, if the beneficial owner's financial
intermediary is not a DTC participant.
Beneficial owners will receive all distributions of principal of and
interest on the book-entry certificates from the trustee through DTC and the
participants of DTC. While the book-entry certificates are outstanding, except
under the circumstances described below, under the rules, regulations and
procedures creating and affecting DTC and its operations, DTC is required to
make book-entry transfers among the DTC participants on whose behalf it acts
with respect to the book-entry certificates and is required to receive and
transmit distributions of principal of, and interest on, the book-entry
certificates. Participants and indirect participants of DTC with whom beneficial
owners have accounts with respect to book-entry certificates are similarly
required to make book-entry transfers and receive and transmit the distributions
on behalf of their respective beneficial owners. Accordingly, although
beneficial owners will not possess certificates representing their respective
interests in the book-entry certificates, the rules of DTC provide a mechanism
by which beneficial owners will receive distributions and will be able to
transfer their interest.
Certificateholders will not receive or be entitled to receive certificates
representing their respective interests in the book-entry certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, certificateholders who are not participants of DTC may
transfer ownership of book-entry certificates only through participants of DTC
and indirect participants of DTC by instructing the participants and indirect
participants to transfer book-entry certificates, by book-entry transfer,
through DTC for the account of the purchasers of the book-entry certificates,
which account is maintained with their
S-32
<PAGE>
respective participants of DTC. Under the rules of DTC and in accordance with
DTC's normal procedures, transfers of ownership of book-entry certificates will
be executed through DTC and the accounts of the respective participants at DTC
will be debited and credited. Similarly, the participants and indirect
participants of DTC will make debits or credits, as the case may be, on their
records on behalf of the selling and purchasing certificateholders.
For information with respect to tax documentation procedures relating to
the certificates, see "Federal Income Tax Consequences--REMICs--Taxation of
Certain Foreign Investors--Regular Securities" and "--Backup Withholding" in the
prospectus.
Transfers between participants of DTC will occur in accordance with DTC
rules.
In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the book-entry certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of book-entry certificates will be subject to the rules of
DTC, as in effect from time to time.
Distributions on the book-entry certificates will be made on each
Distribution Date by the trustee to Cede & Co., as nominee of DTC. DTC will be
responsible for crediting the amount of such payments to the accounts of the
applicable DTC participants in accordance with DTC's normal procedures. Each DTC
participant will be responsible for disbursing such payments to the beneficial
owners of the book-entry certificates that it represents and to each financial
intermediary for which it acts as agent. Each financial intermediary will be
responsible for disbursing funds to the beneficial owners of the book-entry
certificates that it represents.
Under a book-entry format, beneficial owners of the book-entry certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the trustee to Cede & Co. Because DTC can only act on behalf of
DTC participants, the ability of a beneficial owner to pledge book-entry
certificates to persons or entities that do not participate in the depository
system, or otherwise take actions in respect of the book-entry certificates, may
be limited due to the lack of physical certificates for the book-entry
certificates. In addition, issuance of the book-entry certificates in book-entry
form may reduce the liquidity of those certificates in the secondary market
since certain potential investors may be unwilling to purchase certificates for
which they cannot obtain physical certificates.
Monthly and annual reports relating to the trust will be provided to Cede &
Co., as nominee of DTC. These reports may be made available by Cede & Co. to
beneficial owners upon request, in accordance with the rules, regulations and
procedures creating and affecting the DTC participants to whose DTC accounts the
book-entry certificates of such beneficial owners are credited.
DTC has advised the trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
book-entry certificates under the Pooling and Servicing Agreement only at the
direction of one or more financial intermediaries to whose DTC accounts the
book-entry certificates are credited, to the extent that such actions are taken
on behalf of financial intermediaries whose holdings include the book-entry
certificates. DTC may take actions, at the direction of the related participants
of DTC, with respect to some
S-33
<PAGE>
book-entry certificates which conflict with actions taken with respect to other
book-entry certificates.
Definitive Certificates will be issued to beneficial owners of the
book-entry certificates, or their nominees, rather than to DTC, only if:
(1) DTC or the depositor advises the trustee in writing that DTC is no
longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the book-entry
certificates and the depositor or the trustee is unable to locate a
qualified successor;
(2) the depositor, at its sole option, with the consent of the
trustee, elects to terminate a book-entry system through DTC; or
(3) beneficial owners having percentage interests aggregating not less
than 51% of the book-entry certificates advise the trustee and DTC through
the financial intermediaries and the DTC participants in writing that the
continuation of a book-entry system through DTC, or a successor thereto, is
no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all beneficial
owners of the occurrence of the event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the certificates representing
the book-entry certificates and instructions for re-registration, the trustee
will issue Definitive Certificates. The trustee will then recognize the holders
of the Definitive Certificates as certificateholders under the Pooling and
Servicing Agreement.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of book-entry certificates among participants of DTC, it is under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued at any time.
Neither the depositor, the servicer nor the trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Physical Certificates
The Class A-R certificates will be issued in fully-registered, certificated
form. The Class A-R certificates will be transferable and exchangeable on a
certificate register to be maintained at the corporate trust office of the
trustee. Under the Pooling and Servicing Agreement, the trustee will initially
be appointed as the certificate registrar. No service charge will be made for
any registration of transfer or exchange of the residual certificates, but
payment of a sum sufficient to cover any tax or other governmental charge may be
required by the trustee. The residual certificates will be subject to certain
restrictions on transfer. See "--Restrictions on Transfer of the Class A-R,
Class M and Class B Certificates" below.
Distributions of principal and interest, if any, on each Distribution Date
on the Class A-R certificates will be made to the persons in whose names such
certificates are registered at the close of business the Record Date.
Distributions will be made by check or money order mailed
S-34
<PAGE>
to the person entitled thereto at the address appearing in the certificate
register or, to the extent permitted in the Pooling and Servicing Agreement,
upon written request by the certificateholder to the trustee, by wire transfer
to a United States depository institution designated by such certificateholder
and acceptable to the trustee or by such other means of payment as such
certificateholder and the trustee may agree; provided, however, that the final
distribution in retirement of the Class A-R certificates will be made only upon
presentation and surrender of such certificates at the office or agency of the
trustee specified in the notice to the holders thereof of such final
distribution.
Allocation of Available Funds
Distributions to holders of each class of offered certificates will be made
on each Distribution Date from Available Funds. Available Funds will be equal to
the sum of the following amounts net of amounts reimbursable or payable to the
servicer or the trustee:
(A) With respect to the Loans all amounts on deposit in the Collection Account
at the close of business on the related Determination Date:
(1) all payments on account of principal of the Loans, including
unscheduled principal prepayments on the Loans;
(2) all payments on account of interest on the Loans adjusted to the
Net Mortgage Rate;
(3) all net insurance proceeds and net proceeds from the liquidation
of Loans, including condemnation proceeds, to the extent those proceeds are
not to be applied to the restoration of the related Mortgaged Property or
released to the related borrower in accordance with the servicer's normal
servicing procedures;
(4) any amounts deposited in the Collection Account by the servicer in
connection with any losses on the investments permitted by the Pooling and
Servicing Agreement;
(5) any amounts deposited in the Collection Account by the servicer in
connection with a deductible clause in any blanket hazard insurance policy;
(6) all proceeds of a primary mortgage guaranty insurance policy;
(7) the net monthly rental income from the REO Properties; plus
(B) Advance amounts; plus
(C) any amounts payable in connection with the purchase of any Loan and any
Substitution Adjustment Amounts; plus
(D) Compensating Interest payments; less
(E) amounts required to be held in the Collection Account in respect of future
Distribution Dates.
S-35
<PAGE>
On each Distribution Date, the Available Funds will be distributed in the
following order of priority among the certificates to the extent available:
first, concurrently, to the Class A-1, Class A-2, Class A-3, Class A-4,
Class A-5, Class A-R and Class X certificates, pro rata, the applicable
Accrued Certificate Interest for that Distribution Date;
second, concurrently, to the Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5, Class A-R and Class PO certificates as follows:
(1) to the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and
Class A-R certificates, the Senior Optimal Principal Amount for that
Distribution Date, in the order of priority set forth below; and
(2) to the Class PO certificates, the Class PO Principal Distribution
Amount for that Distribution Date;
third, to the Class PO certificates, the Class PO Deferred Amount for
that Distribution Date; provided that, (1) on any Distribution Date,
distributions pursuant to this priority third will not exceed the Junior
Optimal Principal Amount for that Distribution Date, (2) such distributions
will not reduce the Certificate Principal Balance of the Class PO
certificates and (3) no distribution will be made in respect of the Class
PO Deferred Amount after the Cross-Over Date;
fourth, to the Class M certificates in the following order: (1) the
Accrued Certificate Interest on the Class M certificates for that
Distribution Date and (2) the Class M certificate's Allocable Share for
that Distribution Date;
fifth, to the Class B-1 certificates in the following order: (1) the
Accrued Certificate Interest on the Class B-1 certificates for that
Distribution Date and (2) the Class B-1 certificate's Allocable Share for
that Distribution Date;
sixth, to the Class B-2 certificates in the following order: (1) the
Accrued Certificate Interest on the Class B-2 certificates for that
Distribution Date and (2) the Class B-2 certificate's Allocable Share for
that Distribution Date;
seventh, to the Class B-3 certificates in the following order: (1) the
Accrued Certificate Interest on the Class B-3 certificates for that
Distribution Date and (2) the Class B-3 certificate's Allocable Share for
that Distribution Date;
eighth, to the Class B-4 certificates in the following order: (1) the
Accrued Certificate Interest on the Class B-4 certificates for that
Distribution Date and (2) the Class B-4 certificate's Allocable Share for
that Distribution Date;
ninth, to the Class B-5 certificates in the following order: (1) the
Accrued Certificate Interest on the Class B-5 certificates for that
Distribution Date and (2) the Class B-5 certificate's Allocable Share for
that Distribution Date; and
tenth, to the Class A-R certificates, the remaining portion (which is
expected to be zero) of the Available Funds for that Distribution Date.
S-36
<PAGE>
Amounts allocated to the Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5 and Class A-R certificates pursuant to priority second above will be
distributed sequentially as follows:
(1) to the Class A-5 certificates, in an amount equal to the Class A-5
Principal Distribution Amount for that Distribution Date, until the
Certificate Principal Balance of the Class A-5 certificates has been
reduced to zero; and
(2) to the Class A-R, Class A-1, Class A-3, Class A-2, Class A-4 and
Class A-5 certificates, in that order, until their respective Certificate
Principal Balances have been reduced to zero.
On each Distribution Date after the Cross-Over Date, distributions of
principal on the Class A-R, Class A-1, Class A-2, Class A-3, Class A-4 and Class
A-5 certificates outstanding entitled to principal distributions will be made
pro rata among all such certificates, regardless of the allocation, or
sequential nature, of principal payments described above.
Pro rata distributions among classes of certificates will be made in
proportion to the then-current Certificate Principal Balances of the classes or,
in the case of priority second above, in proportion to the Senior Optimal
Principal Amount and the Class PO Principal Distribution Amount.
Interest
Interest will accrue on the certificates, other than the Class X and Class
PO certificates, at the respective interest rates set forth in the table on page
S-3 during each Interest Accrual Period. Interest will be calculated on the
basis of a 360-day year consisting of twelve 30-day months.
Interest will accrue on the Notional Principal Balance of the Class X
certificates during each Interest Accrual Period at a variable per annum rate
equal to the excess of (1) the weighted average (by Scheduled Principal Balance)
of the Net Mortgage Rates of the Non-Discount Mortgage Loans as of the first day
of that Interest Accrual Period (or as of the Cut-Off Date, in the case of the
first Interest Accrual Period) over (2) 7.75%. However, this calculation will
not include any mortgage loan that was the subject of a voluntary prepayment in
full received by the servicer on or after the first day but on or before the
fifteenth day of such Interest Accrual Period. The per annum interest rate on
the Class X certificates for the first Interest Accrual Period is expected to be
approximately 0.460458%.
The Class PO certificates are principal-only certificates and will not
accrue interest.
The Accrued Certificate Interest for each class of certificates and each
Distribution Date will equal an amount equal to (1) the interest accrued at such
class's interest rate during the related Interest Accrual Period on the
Certificate Principal Balance (or, in the case of the Class X certificates, the
Notional Principal Balance) of such class of certificates, minus each class's
pro rata share of any Net Interest Shortfalls, the interest portion of any
Excess Losses through the Cross-Over Date and, after the Cross-Over Date, the
interest portion of Realized Losses, including Excess Losses plus (2) any
Accrued Certificate Interest for that class remaining undistributed from
previous Distribution Dates.
S-37
<PAGE>
For any Distribution Date, the Net Interest Shortfall will equal the
aggregate Interest Shortfalls with respect to that Distribution Date less any
Compensating Interest for the Distribution Date. See "The Pooling and Servicing
Agreement--Servicing Fees and Other Compensation and Payment of Expenses" in
this prospectus supplement.
With respect to any Distribution Date, an Interest Shortfall in respect of
a Loan will result from:
(1) any voluntary prepayment of principal in full on the Loan received
from the sixteenth day (or, in the case of the first Distribution Date,
from the Cut-Off Date) through the last day of the month preceding the
Distribution Date;
(2) any partial prepayment of principal on the Loan by the mortgagor
during the month preceding the Distribution Date; or
(3) a reduction in the interest rate on such Loan due to the
application of the Soldiers' and Sailors' Civil Relief Act of 1940 whereby,
in general, members of the Armed Forces who entered into mortgages prior to
the commencement of military service may have the interest rates on those
mortgage loans reduced for the duration of their active military service.
See "Certain Legal Aspects of Residential Loans--Soldiers' and Sailors'
Civil Relief Act of 1940" in the prospectus.
As to any Distribution Date and any Loan with respect to which a prepayment
in full has occurred as described above, the resulting Prepayment Interest
Shortfall generally will equal the difference between (a) one month's interest
at the Net Mortgage Rate on the Scheduled Principal Balance of the Loan, and (b)
the amount of interest at the Net Mortgage Rate actually received with respect
to the Loan. In the case of a partial prepayment, the resulting Prepayment
Interest Shortfall will equal one month's interest at the applicable Net
Mortgage Rate on the amount of such prepayment.
Any Net Interest Shortfall, the interest portion of any Excess Losses
through the Cross-Over Date and, after the Cross-Over Date, the interest portion
of any Realized Losses will, on each Distribution Date, be allocated among all
the outstanding certificates entitled to distributions of interest in proportion
to the amount of Accrued Certificate Interest that would have been allocated to
the applicable certificate in the absence of the shortfall and losses. See
"--Allocation of Losses" below and "The Pooling and Servicing
Agreement--Servicing Fees and Other Compensation and Payment of Expenses" in
this prospectus supplement.
The interest portion of any Realized Losses (other than Excess Losses)
occurring prior to the Cross-Over Date will not be allocated among any
certificates, but will reduce the amount of Available Funds on the related
Distribution Date. As a result of the subordination of the Junior Certificates,
such losses will be borne first by the outstanding Junior Certificates in
inverse order of priority.
If Available Funds are insufficient on any Distribution Date to distribute
the aggregate Accrued Certificate Interest on the Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5, Class A-R and Class X certificates entitled to
distributions of interest to their certificateholders, any shortfall in
available amounts will be allocated among the classes in proportion to the
amounts of Accrued Certificate Interest otherwise distributable on the Class
A-1, Class A-2,
S-38
<PAGE>
Class A-3, Class A-4, Class A-5, Class A-R and Class X certificates. The amount
of any such undistributed Accrued Certificate Interest will be added to the
amount of interest to be distributed on those certificates entitled to
distributions of interest on subsequent Distribution Dates in accordance with
the definition of Accrued Certificate Interest in this prospectus supplement. No
interest will accrue on any Accrued Certificate Interest remaining undistributed
from previous Distribution Dates.
Principal
Distributions in reduction of the Certificate Principal Balance of each
certificate entitled to principal distributions will be made on each
Distribution Date.
All payments and other amounts received in respect of principal of the
mortgage loans will be allocated between (1) the Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5 and Class A-R certificates entitled to principal
distributions and the Class M, Class B-1, Class B-2, Class B-3, Class B-4 and
Class B-5 certificates, on the one hand, and (2) the Class PO certificates, on
the other, in each case based on the applicable Non-PO Percentage and the
applicable PO Percentage, respectively, of the amounts.
Distributions in reduction of the Certificate Principal Balance of each
class of the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and Class A-R
certificates entitled to principal distributions will be made on each
Distribution Date as described under "--Allocation of Available Funds" above in
accordance with priority second. The Available Funds remaining after the
distribution of interest will be allocated to the Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5, Class A-R and Class PO certificates in an aggregate
amount not to exceed the sum of the Senior Optimal Principal Amount and the
Class PO Principal Distribution Amount for the respective Distribution Date.
Distributions in reduction of the Certificate Principal Balances of the
Class M, Class B-1 and Class B-2 certificates will be made on each Distribution
Date as described under "--Allocation of Available Funds" above in accordance
with priorities fourth, fifth and sixth, respectively. The Available Funds, if
any, allocable to principal that are remaining after distributions of principal
and interest on the Senior Certificates and payments in respect of the Class PO
Deferred Amount on such Distribution Date will be allocated to the Class M,
Class B-1 and Class B-2 certificates in an amount equal to the respective
class's Allocable Share for that Distribution Date, provided that no
distribution of principal will be made on any class until any class with a
higher payment priority has received distributions of interest and principal,
and the class has received distributions of interest, on such Distribution Date.
If, on any Distribution Date, the Certificate Principal Balance of the
Class M certificates or of any class of Class B Certificates for which the
related Class Prepayment Distribution Trigger was satisfied on that Distribution
Date is reduced to zero, any partial or full principal prepayments and, in
certain circumstances, net liquidation proceeds otherwise distributable to such
class, to the extent of such class's remaining Allocable Share, shall be
distributed to the remaining classes of Junior Certificates in reduction of
their respective class Certificate Principal Balances in order of priority.
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If the Class Prepayment Distribution Trigger is not satisfied for any class
of Class B Certificates on any Distribution Date, this may have the effect of
accelerating the amortization of more senior ranking classes of Junior
Certificates because the amount of partial or full principal prepayments and, in
certain circumstances, net liquidation proceeds otherwise distributable to such
class will be distributable among the outstanding Junior Certificates as to
which the related Class Prepayment Distribution Trigger has been satisfied, on a
pro rata basis subject to the priority of payments described in this prospectus
supplement. On any Distribution Date, any reduction in funds available for
distribution to the classes of Junior Certificates resulting from a distribution
of the Class PO Deferred Amount to the Class PO certificates will be allocated
to the classes of Junior Certificates, in reduction of their Allocable Shares,
in inverse order of priority.
We do not expect that the Class A-5 certificates will receive any
distributions in respect of scheduled payments, prepayments or certain other
unscheduled recoveries of principal on the Loans during the first five years
after the date of initial issuance of the certificates, except as otherwise
described in this prospectus supplement on or following the Cross-Over Date. On
and after the Distribution Date in August 2005, the Class A-5 certificates will
be entitled to receive distributions in respect of principal generally equal to
their pro rata share (based on the percentage the Certificate Principal Balance
of the Class A-5 certificates bears to the aggregate Certificate Principal
Balances of all other classes of certificates other than the Class PO) of (1)
all scheduled principal payments and (2) an increasing percentage (starting at
30% in year 6 and going to 100% in year 10 and thereafter) of prepayments of
principal and, in certain circumstances, net liquidation proceeds from
Liquidated Loans, as more fully described in the definition of Class A-5
Principal Distribution Amount.
Allocation of Losses
On each Distribution Date, the applicable PO Percentage of the principal
portion of any Realized Loss (including any Excess Loss) on a Discount Mortgage
Loan will be allocated to the Class PO certificates until the Certificate
Principal Balance of the Class PO certificates is reduced to zero.
With respect to any Distribution Date on or prior to the Cross-Over Date,
the sum of (1) the applicable PO Percentage of the principal portion of
Non-Excess Realized Losses on a Discount Mortgage Loan allocated to the Class PO
certificates on such date and (2) all amounts previously allocated to the Class
PO certificates in respect of such losses and not distributed to the Class PO
certificates on prior Distribution Dates will be the Class PO Deferred Amount.
On each Distribution Date prior to the Cross-Over Date, distributions in
respect of the Class PO Deferred Amount will be made on the Class PO
certificates in accordance with priority third of the second paragraph under
"--Allocation of Available Funds" to the extent of Available Funds. Any
distribution of Available Funds in respect of the Class PO Deferred Amount will
not reduce the Certificate Principal Balance of the Class PO certificates. No
interest will accrue on the Class PO Deferred Amount. On each Distribution Date
prior to the Cross-Over Date, the Certificate Principal Balance of the lowest
ranking class of the Class M, Class B-1, Class B-2, Class B-3, Class B-4 and
Class B-5 certificates then outstanding will be reduced by the amount of any
distributions made to the Class PO certificates in respect of the Class PO
Deferred Amount on the Distribution Date, through the operation of the Class PO
Deferred Payment Writedown Amount. After the Cross-Over Date, no distributions
will be made in respect of the
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Class PO Deferred Amount and Realized Losses will be allocated to the Class PO
certificates without a right of reimbursement from any other class of
certificates.
The Class PO Deferred Payment Writedown Amount and the Junior Certificate
Writedown Amount will be allocated to the Class M, Class B-1, Class B-2, Class
B-3, Class B-4 and Class B-5 certificates in inverse order of priority, until
the Certificate Principal Balance of each such class has been reduced to zero.
Prior to the Cross-Over Date (and on the Cross-Over Date under certain
circumstances), the applicable Non-PO Percentage of the principal portion of any
Non-Excess Realized Loss will be allocated among the outstanding classes of
Class M, Class B-1, Class B-2, Class B-3, Class B-4 and Class B-5 certificates,
in inverse order of priority, until the Certificate Principal Balance of each
class has been reduced to zero (i.e., Non-Excess Realized Losses will be
allocated first to the Class B-5 certificates while they are outstanding, second
to the Class B-4 certificates, and so on). Fraud Losses, Special Hazard Losses
and Deficient Valuations occurring prior to the reduction of the Fraud Loss
Coverage Amount, the Special Hazard Loss Coverage Amount and the Bankruptcy Loss
Coverage Amount, respectively, to zero will also be allocated to the Class M,
Class B-1, Class B-2, Class B-3, Class B-4 and Class B-5 certificates in the
same manner.
Commencing on the Cross-Over Date, the applicable Non-PO Percentage of the
principal portion of any Realized Loss will be allocated among the outstanding
classes of the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and Class
A-R certificates pro rata based upon their Certificate Principal Balances.
Fraud Losses, Special Hazard Losses and Deficient Valuations occurring
after the Fraud Loss Coverage, Amount, Special Hazard Loss Coverage Amount and
the Bankruptcy Loss Coverage Amount, respectively, have been reduced to zero
will be Excess Losses. The applicable Non-PO Percentage of the principal portion
of any Excess Loss on a Loan for any Distribution Date (whether occurring
before, on or after the Cross-Over Date) will be allocated pro rata among all
outstanding classes of certificates entitled to principal distributions (other
than the Class PO certificates) based on their Certificate Principal Balances.
A Deficient Valuation may result from the personal bankruptcy of a
mortgagor if the bankruptcy court establishes 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 and reduces the secured debt to
such value. In such case, the trust, as the holder of such mortgage loan, would
become an unsecured creditor to the extent of the difference between the
outstanding principal balance of such mortgage loan and such reduced secured
debt.
All allocations of Realized Losses to a class of certificates will be
accomplished on a Distribution Date by reducing the Certificate Principal
Balance of the class by the appropriate share of any such losses occurring
during the month preceding the month of such Distribution Date and, accordingly,
will be taken into account in determining the distributions of principal and
interest on the certificates commencing on the following Distribution Date. The
aggregate amount of the principal portion of any Non-Excess Realized Losses to
be allocated to the Class PO certificates on any Distribution Date through the
Cross-Over Date will also be taken into account in determining distributions in
respect of the Class PO Deferred Amount for that Distribution Date.
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The interest portion of all Realized Losses will be allocated among the
outstanding classes of certificates entitled to distributions of interest to the
extent described under "--Interest" above.
No reduction of the Certificate Principal Balance of any class will be made
on any Distribution Date on account of any Realized Loss to the extent that the
reduction would have the effect of reducing the aggregate Certificate Principal
Balance of all of the certificates as of that Distribution Date to an amount
less than the Pool Scheduled Principal Balance as of the first day of the month
of that Distribution Date, less any Deficient Valuations occurring before the
Bankruptcy Loss Coverage Amount has been reduced to zero.
Debt Service Reductions are not Realized Losses, and the principal portion
of Debt Service Reductions will not be allocated in reduction of the Certificate
Principal Balance of any certificate. However, after the Bankruptcy Loss
Coverage Amount has been reduced to zero, the portion of the Senior Optimal
Principal Amount, Class PO Principal Distribution Amount, Class A-5 Principal
Distribution Amount and Junior Optimal Principal Amount representing scheduled
principal payments will be reduced by the amount of the principal portion of any
Debt Service Reductions. Regardless of when they occur, Debt Service Reductions
may reduce the amount of Available Funds otherwise available for distribution on
a Distribution Date. As a result of the subordination of the Junior
Certificates, the reduction in Available Funds resulting from any Debt Service
Reductions before the Bankruptcy Loss Coverage Amount has been reduced to zero
will be borne by the Junior Certificates (to the extent then outstanding) in
inverse order of priority.
Subordination
Priority of Senior Certificates
As of the date of the initial issuance of the certificates, the aggregate
Certificate Principal Balance of the Junior Certificates will equal
approximately 3.9% of the aggregate Certificate Principal Balance of all the
classes of certificates. The rights of the holders of the Junior Certificates to
receive distributions with respect to the Loans will be subordinate to such
rights of the holders of the Senior Certificates, to the extent described above.
The subordination of the Junior Certificates is intended:
(1) to enhance the likelihood of timely receipt by the holders of the
Senior Certificates (to the extent of the subordination of the Junior
Certificates) of the full amount of the scheduled monthly distributions of
principal and interest allocable to the senior certificates; and
(2) to afford the holders of the Senior Certificates (to the extent of
the subordination of the Junior Certificates) protection against Realized
Losses, to the extent described above.
If Realized Losses exceed the credit support provided to the Senior
Certificates through subordination, or if Excess Losses occur, all or a portion
of such losses will be borne by the Senior Certificates.
The protection afforded to the holders of Senior Certificates by means of
the subordination feature will be accomplished by:
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(1) the preferential right of such holders to receive, prior to any
distribution being made on a Distribution Date in respect of the Junior
Certificates, in accordance with the paydown rules specified under
"--Allocation of Available Funds" above, the amounts due to the senior
certificateholders on each Distribution Date out of the Available Funds on
that Distribution Date and, if necessary, by the right of holders to
receive future distributions on the mortgage loans that would otherwise
have been payable to the holders of the Junior Certificates;
(2) the allocation to the Junior Certificates of the applicable Non-PO
Percentage of the principal portion of any Non-Excess Realized Loss to the
extent set forth in this prospectus supplement; and
(3) the allocation to the Junior Certificates of the applicable PO
Percentage of the principal portion of any Non-Excess Realized Loss to the
extent set forth in this prospectus supplement through the operation of the
Class PO Deferred Payment Writedown Amount.
The allocation of the principal portion of Realized Losses described in
this prospectus supplement to the Junior Certificates on any Distribution Date
will decrease the protection provided to the Senior Certificates then
outstanding on future Distribution Dates by reducing the aggregate Certificate
Principal Balance of the Junior Certificates then outstanding.
In addition, in order to extend the period during which the Junior
Certificates remain available as credit enhancement for the Senior Certificates,
the entire amount of the applicable Non-PO Percentage of any prepayment or other
unscheduled recovery of principal with respect to a mortgage loan will be
allocated to the Senior Certificates as a whole entitled to principal
distributions (other than the Class PO certificates) during at least the first
five years after the date of initial issuance of the certificates, with such
allocation being subject to reduction thereafter as described in this prospectus
supplement. This allocation has the effect of accelerating the amortization of
the Senior Certificates as a group while, in the absence of losses in respect of
the mortgage loans, increasing the percentage interest in the principal balance
of the mortgage loans evidenced by the Junior Certificates. These amounts will
be allocated pro rata among all of the outstanding Senior Certificates entitled
to principal distributions (other than the Class PO certificates) on each
Distribution Date after the Cross-Over Date.
After the payment of amounts distributable in respect of the Senior
Certificates on each Distribution Date, the Junior Certificates will be entitled
to the remaining portion, if any, of the Available Funds in an aggregate amount
equal to the Accrued Certificate Interest on the Junior Certificates for that
Distribution Date, any remaining undistributed Accrued Certificate Interest from
previous Distribution Dates and the sum of the Allocable Shares of the classes
of Junior Certificates. These amounts distributed to junior certificateholders
will not be available to cover any delinquencies or any Realized Losses in
respect of subsequent Distribution Dates.
Priority Among Junior Certificates
As of the date of the initial issuance of the certificates, the aggregate
Certificate Principal Balance of the Class B-3, Class B-4 and Class B-5
certificates, all of which are subordinate in right of distribution to the Class
M, Class B-1 and Class B-2 certificates offered under this prospectus
supplement, will equal approximately 0.80% of the initial aggregate Certificate
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Principal Balance of all of the certificates and approximately 20.52% of the
initial aggregate Certificate Principal Balance of all of the Junior
Certificates. On each Distribution Date, the holders of any particular class of
Junior Certificates, other than the Class B-5 certificates, will have a
preferential right to receive the amounts due them on such Distribution Date out
of Available Funds, prior to any distribution being made on such date on each
class of certificates ranking junior to such class. In addition, except as
described in this prospectus supplement, the applicable Non-PO Percentage of the
principal portion of any Non-Excess Realized Loss with respect to a mortgage
loan and any Class PO Deferred Payment Writedown Amount will be allocated, to
the extent set forth herein, in reduction of the Certificate Principal Balances
of the Junior Certificates in inverse order of priority of such certificates.
The effect of the allocation of such Realized Losses and of the Class PO
Deferred Payment Writedown Amount to a class of Junior Certificates will be to
reduce future distributions allocable to such class and increase the relative
portion of distributions allocable to more senior classes of certificates.
In order to maintain the relative levels of subordination among the Junior
Certificates, the applicable Non-PO Percentage of prepayments and certain other
unscheduled recoveries of principal in respect of the mortgage loans (which will
not be distributable to those certificates for at least the first five years
after the date of initial issuance of the certificates, except as otherwise
described in this prospectus supplement on or following the Senior Final
Distribution Date) will not be distributable to the holders of any class of
Class B Certificates on any Distribution Date for which the related Class
Prepayment Distribution Trigger is not satisfied, except as described above. See
"--Principal" above. If the Class Prepayment Distribution Trigger is not
satisfied with respect to any class of Class B Certificates, the amortization of
more senior ranking classes of Junior Certificates may occur more rapidly than
would otherwise have been the case and, in the absence of losses in respect of
the mortgage loans, the percentage interest in the principal balance of the
mortgage loans evidenced by the Class B Certificates may increase.
As a result of the subordination of any class of certificates, the class of
certificates will be more sensitive than more senior ranking classes of
certificates to the rate of delinquencies and defaults on the Loans, and under
certain circumstances investors in such certificates may not recover their
initial investment.
Restrictions on Transfer of the Class A-R, Class M and Class B Certificates
The residual certificates will be subject to the restrictions on transfer
described under "Federal Income Tax Consequences--REMICs--Taxation of Owners of
Residual Certificates--Tax-Related Restrictions on Transfers of Residual
Securities" in the prospectus.
The Class A-R certificates may not be purchased by or transferred to any
person which is a Plan. See "ERISA Considerations" in this prospectus supplement
and in the prospectus.
The Class A-R certificates will contain a legend describing the foregoing
restrictions.
The Class M, Class B-1 and Class B-2 certificates may not be transferred
unless the trustee has received (1) a certificate to the effect that the
proposed transferee is not an Plan or that the transferee is an insurance
company investing assets of its general account and the exemption provided by
Section III(a) of the Department of Labor Prohibited Transaction Class Exemption
95-60, 60 Fed. Reg. 35925 (July 12, 1995), applies to such transferee's
acquisition and holding
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of the certificate or (2) an opinion of counsel relating to such transfer in
form and substance satisfactory to the trustee. The Class M, Class B-1 and Class
B-2 certificates will bear a legend describing these restrictions on transfer
and 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 the purported transferee. Each purchaser of a
Class M, Class B-1 or Class B-2 certificate delivered in book-entry form will be
deemed to have made on of the representations in clause (1) above. See "ERISA
Considerations" in this prospectus supplement and in the prospectus.
Reports to Certificateholders
Under the Pooling and Servicing Agreement, on each Distribution Date the
trustee will be required to post on its website at "www.chase.com/SFA", a report
containing information including without limitation:
(1) the amount of the distribution on the Distribution Date made to
the holders of each class of certificates allocable to principal;
(2) the amount of the distribution on the Distribution Date made to
the holders of each class of certificates allocable to interest;
(3) any unpaid interest shortfalls included in such distribution and
the aggregate interest shortfalls remaining unpaid as of such Distribution
Date;
(4) the Certificate Principal Balance of each class of certificates
after giving effect to distribution of principal on that Distribution Date;
(5) the Pool Balance on the Distribution Date;
(6) the Senior Percentage and the Junior Percentage for the following
Distribution Date;
(7) the aggregate amount of Servicing Fees and Trustee Fees paid to or
retained by servicer or the trustee, as applicable with respect to the
related Distribution Date;
(8) the rate of interest on each class of certificates for that
Distribution Date;
(9) the aggregate amount of Advances included in the distribution for
the applicable Distribution Date and the aggregate amount of Advances
outstanding as of the Distribution Date;
(10) (a) the number and aggregate unpaid principal balance of Loans
(exclusive of Loans in foreclosure) delinquent:
(i) 1 to 30 days;
(ii) 31 to 60 days;
(iii) 61 to 90 days; and
(iv) 91 or more days; and
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(b) the number and aggregate unpaid principal balance of Loans
in foreclosure and delinquent:
(i) 1 to 30 days;
(ii) 31 to 60 days;
(iii) 61 to 90 days; and
(iv) 91 or more days.
(1) with respect to any Loan that became an REO Property during the
preceding calendar month, the loan number of the related Loan, the unpaid
principal balance of the related Loan and the principal balance of the
related Loan as of the date it became an REO Property;
(2) the book value of any REO Property as of the close of business on
the last business day of the calendar month preceding the Distribution
Date, and, cumulatively, the total number and cumulative principal balance
of all REO Properties as of the close of business of the related
Determination Date;
(3) the Senior Prepayment Percentage for the Distribution Date;
(4) the aggregate Realized Losses incurred during the prior calendar
month; and
(5) the Special Hazard Loss Coverage Amount, the Fraud Loss Coverage
Amount and the Bankruptcy Loss Coverage Amount, in each case as of the
related Determination Date and the Subordinated Percentage as of the
Distribution Date.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The effective yield on the certificates will depend upon, among other
things, the price at which the certificates are purchased and the rate and
timing of payments of principal (including both scheduled and unscheduled
payments) on the Loans underlying the certificates. If significant principal
distributions are made on your certificates, you may not be able to reinvest
those distributions in a comparable alternative investment having a comparable
yield. No prediction can be made as to the rate of prepayments on the Loans in
either stable or changing interest rate environments. The final distribution of
principal on your certificates could occur significantly earlier than you
anticipated. You will bear entirely any reinvestment risk resulting from the
rate of prepayments on the Loans.
Prepayments
The rate of principal distributions on each class of offered certificates,
the aggregate amount of each interest distribution on each class and the yield
to maturity on each class will be directly related to and affected by:
(1) the amortization schedules of the Loans;
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(2) the prepayment experience of the Loans; and
(3) under some circumstances, the rates or delinquencies, defaults or
losses experienced on the Loans.
The borrowers may prepay their Loans at any time without penalty. Each of
the Loans is subject to a due-on-sale clause. See "Certain Legal Aspects of
Residential Loans" in the prospectus. Additionally, repurchases by Provident of
any Loan as to which there has been a material breach of warranty or defect in
documentation (or deposit of certain amounts in respect of delivery of a
substitute mortgage loan therefor) and from an exercise by the servicer of its
option to repurchase a defaulted Loan or any optional repurchase of the Loans in
connection with a termination of the trust will have the same effect as a
prepayment and result in distributions on the offered certificate which would
otherwise be distributed over the remaining terms of the Loans.
The rate of principal prepayments on the Loans will be influenced by a
variety of economic, tax, geographic, demographic, social, legal and other
factors, and has fluctuated considerably in recent years. In addition, the rate
of principal prepayments may differ among the Loans at any time because of
specific factors relating to the Loans. These factors include:
(1) the age of the Loans;
(2) the geographic location of the related properties and the extent
of the related borrowers' equity in those properties; and
(3) changes in the borrowers' housing needs, job transfers and
employment.
In general, if prevailing interest rates fall significantly below the
interest rates at the time of origination, Loans may be subject to higher
prepayment rates than if prevailing interest rates remain at or above those at
the time those loans were originated. Conversely, if prevailing interest rates
rise appreciably above the interest rates at the time of origination, Loans may
experience a lower prepayment rate than if prevailing interest rates remained at
or below those existing at the time those Loans were originated. We cannot make
assurances as to the prepayment rate of the Loans. In addition, we cannot make
assurances that the Loans will conform to the prepayment experience of other
loans or to any past prepayment experience or any published prepayment forecast.
In general, if an offered certificate is purchased at a premium over its
face amount and payments of principal of the offered certificate occur at a rate
faster than that assumed at the time of purchase, the investor's actual yield to
maturity will be lower than that anticipated at the time of purchase.
Conversely, if an offered certificate, particularly a Class PO certificate, is
purchased at a discount from its face amount and payments of principal of the
offered certificate occur at a rate that is slower than that assumed at the time
of purchase, the purchaser's actual yield to maturity will be lower than
originally anticipated.
As described under "Description of the Offered Certificates--Principal" in
this prospectus supplement, 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
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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 Junior Certificates during the periods of time described in
the definition of "Senior Prepayment Percentage."
The rate and timing of defaults on the Loans will also affect the rate and
timing of principal payments on the Loans and thus the yield on the offered
certificates. We cannot make assurances as to the rate of losses or
delinquencies on any of the Loans. To the extent that any losses are incurred on
any of the Loans that are not covered by excess interest, the certificateholders
of the offered certificates will bear the risk of losses resulting from default
by borrowers. See "Risk Factors" in this prospectus supplement and in the
prospectus.
The weighted average life of the offered certificates will be influenced
by, among other factors, the rate of principal payments on the Loans.
The last scheduled Distribution Date for the certificates is September 25,
2030. This date represents the Distribution Date occurring in the month after
the maturity date of the latest maturing Loan expected to be in the trust on the
closing date. It is possible that the principal of the certificates may not be
fully paid by this date.
The primary source of information available to investors concerning the
offered certificates will be the monthly statements discussed under "Description
of the Offered Certificates--Reports to Certificateholders" in this prospectus
supplement. These statements will include information as to the outstanding
certificate principal balance of the certificates. We cannot assure that any
additional information regarding the offered certificates will be available
through any other source. In addition, the depositor is not aware of any source
through which price information about the offered certificates will be generally
available on an ongoing basis. The limited nature of the information regarding
the offered certificates may adversely affect the liquidity of the offered
certificates, even if a secondary market for the offered certificates becomes
available.
The Class M, Class B-1 and Class B-2 Certificates
The rate of payment of principal, the aggregate amount of distributions and
the yield to maturity of the Class M, Class B-1 and Class B-2 certificates will
be affected by the rate of prepayments on the mortgage loans, as well as the
rate of borrower defaults resulting in Realized Losses, by the severity of those
losses and by the timing thereof. See "Description of the Offered
Certificates--Allocation of Losses" in this prospectus supplement for a
description of the manner in which such losses are borne by the holders of the
certificates. If the purchaser of a Class M, Class B-1 or Class B-2 certificate
calculates its anticipated yield based on an assumed rate of default and amount
of Realized Losses that is lower than the default rate and the amount of losses
actually incurred, its actual yield to maturity may be lower than that so
calculated and could be negative. The timing of defaults and losses will also
affect an investor's actual yield to maturity, even if the average rate of
defaults and severity of losses 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.
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The yields to maturity on the classes of Class B Certificates with higher
numerical designations will be more sensitive to losses due to liquidations of
defaulted mortgage loans than will the yields on such classes with lower
numerical designations, and the yields to maturity on all of the Class B
Certificates will be more sensitive to such losses than will the yields on the
other classes of certificates. The yields to maturity on the Class M
certificates will be more sensitive to such losses than will the yields on the
Senior Certificates and less sensitive than the yields on the Class B
Certificates. The Junior Certificates will be more sensitive to losses due to
liquidations of defaulted Loans because the entire amount of such losses will be
allocable to such certificates in inverse order of priority, either directly or
through the allocation of the Class PO Deferred Payment Writedown Amount, except
as provided in this prospectus supplement. To the extent not covered by the
servicer's advances of delinquent monthly payments of principal and interest,
delinquencies on the mortgage loans may also have a relatively greater effect:
(1) on the yields to investors in the Class B Certificates with higher
numerical designations than on the yields to investors in those Class B
Certificates with lower numerical designations;
(2) on the yields to investors in the Class B Certificates than on the
yields to investors in the other classes of the certificates; and
(3) on the yields to investors in the Class M certificates than on the
yields to investors in the Senior Certificates.
As described above under "Description of the Offered Certificates--
Interest," "--Principal," "--Allocation of Losses" and "--Subordination,"
amounts otherwise distributable to holders of any class of Class B Certificates
will be made available to protect the holders of the more senior ranking classes
of the certificates against interruptions in distributions due to certain
borrower delinquencies. Amounts otherwise distributable to holders of the Class
M certificates will be made available to protect the holders of the Senior
Certificates against interruptions in distributions due to certain borrower
delinquencies. Such delinquencies, even if subsequently cured, may affect the
timing of the receipt of distributions by the holders of the Junior
Certificates.
To the extent that the Class M, Class B-1 or Class B-2 certificates are
being purchased at discounts from their initial Certificate Principal Balances,
if the purchaser of such a certificate calculates its yield to maturity based on
an assumed rate of payment of principal faster than that actually received on
such certificate, its actual yield to maturity may be lower than that so
calculated.
Modeling Assumptions
For purposes of preparing the tables below, the following modeling
assumptions have been made:
(1) no delinquencies or losses occur on the Loans and all scheduled
principal payments on the Loans are timely received on the due date;
(2) the scheduled payments on the Loans have been calculated on the
outstanding principal balance, prior to giving effect to prepayments, the
loan interest rate, and the
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remaining term to stated maturity such that the Loans will fully amortize
by their remaining term to stated maturity;
(3) all Loans prepay monthly at the specified percentages of the
Standard Prepayment Assumption,
(a) no optional or other early termination of the offered
certificates occurs;
(b) prepayments are allocated as described in this prospectus
supplement without giving effect to loss and delinquency
tests; and
(c) no substitutions or repurchases of the Loans occur;
(4) all prepayments in respect of the Loans include 30 days' accrued
interest and are received on the last day of each month;
(5) the closing date for the offered certificates is July 26, 2000;
(6) each year will consist of twelve 30-day months; (7) cash
distributions are received by the holders of the offered certificates on
the 25th day of each month, commencing in August 2000;
(8) the pass-through rate for each class of offered certificates is as
described in this prospectus supplement;
(9) all Servicing Fees and Trustee Fees assumed to be deducted from
the interest collections in respect of the Loans equal in the aggregate
0.255% of the principal balances of the Loans; and
(10) the mortgage pool consists of 2 Loans with the following
characteristics:
ASSUMED LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
June 30, 2000 Principal Remaining Amortization
Balance Loan Rate % Net Loan Rate % Term (Months) Seasoning (Months)
----------------------- ----------- --------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
$ 22,313,101.87 7.8701469636% 7.6151469636% 358 2
$ 147,878,310.16 8.4654582903% 8.2104582903% 359 1
</TABLE>
Prepayments on loans are commonly measured relative to a prepayment
standard or model. The model used in this prospectus supplement is the Standard
Prepayment Assumption model. A 100% Standard Prepayment Assumption assumes a CPR
of 0.2% per annum of the outstanding principal balance of the loans in the first
month of the life of the loans and an additional approximate 0.2% (for example,
0.4% per annum in the second month) per annum in each month thereafter until the
thirtieth month. Beginning in the thirtieth month and in each month thereafter
during the life of the loans, 100% Standard Prepayment Assumption assumes a CPR
of 6% per annum each month is assumed. Multiples may be calculated from this
S-50
<PAGE>
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.
The Standard Prepayment Assumption does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of loans, including the Loans. Neither the servicer, the
depositor, the trustee nor the underwriter makes any representations about the
appropriateness of the Standard Prepayment Assumption or the CPR.
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.
The table below indicates the sensitivity of the pre-tax corporate bond
equivalent yields to maturity of the Class PO certificates to various constant
percentages of SPA. The yields set forth in the table were calculated by
determining the monthly discount rates that, when applied to the assumed streams
of cash flows to be paid on the Class PO certificates, would cause the
discounted present value of such assumed streams of cash flows to equal the
assumed aggregate purchase price of the Class PO certificate and converting such
monthly rates to corporate bond equivalent rates. These 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.
As described under "Description of the Offered Certificates--Principal" in
this prospectus supplement, 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 Interest Rates) than the other 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 modeling assumptions and on the assumption that the aggregate
purchase price of the Class PO certificates (expressed as a percentage of the
initial Certificate Principal Balance of all certificates) is 58%:
S-51
<PAGE>
Sensitivity of the Class PO Certificates to Prepayments
(Pre-Tax Yields to Maturity)
<TABLE>
<CAPTION>
Percentages of SPA
---------------------------------------------------
Class 0% 100% 250% 400% 500%
----- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Class PO................................. 2.820% 5.443% 10.148 14.670% 17.488%
</TABLE>
It is unlikely that the Discount Mortgage Loans will have the precise
characteristics described in this prospectus supplement 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 Standard Prepayment Assumption. 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. You must make your
own decision as to the appropriate prepayment assumptions to be used in deciding
whether to purchase the Class PO certificates.
Weighted Average Lives of the Offered Certificates
The following tables indicate at the specified percentages of the Standard
Prepayment Assumption the corresponding weighted average lives of each class of
certificates. The tables were prepared based on the modeling assumptions and all
percentages are rounded to the nearest 1%. As used in the following tables, the
weighted average life of a class is determined by:
(1) multiplying the amount of each distribution of principal thereof
by the number of years from the date of issuance to the related
Distribution Date;
(2) summing the results; and
(3) dividing the sum by the aggregate distributions of principal
referred to in clause (1) and rounding to two decimal places.
S-52
<PAGE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE AT
THE FOLLOWING PERCENTAGES OF STANDARD PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
Class A-R Class A-1
--------- ---------
Percentages of SPA Percentages of SPA
------------------ ------------------
Distribution Date 0% 100% 250% 400% 500% 0% 100% 250% 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 2001.................... 0 0 0 0 0 98 95 91 86 83
July 2002.................... 0 0 0 0 0 97 86 70 55 45
July 2003.................... 0 0 0 0 0 95 73 43 16 0
July 2004.................... 0 0 0 0 0 93 61 20 0 0
July 2005.................... 0 0 0 0 0 91 49 0 0 0
July 2006.................... 0 0 0 0 0 89 39 0 0 0
July 2007.................... 0 0 0 0 0 86 30 0 0 0
July 2008.................... 0 0 0 0 0 84 21 0 0 0
July 2009.................... 0 0 0 0 0 81 13 0 0 0
July 2010.................... 0 0 0 0 0 78 6 0 0 0
July 2011.................... 0 0 0 0 0 75 0 0 0 0
July 2012.................... 0 0 0 0 0 72 0 0 0 0
July 2013.................... 0 0 0 0 0 68 0 0 0 0
July 2014.................... 0 0 0 0 0 64 0 0 0 0
July 2015.................... 0 0 0 0 0 60 0 0 0 0
July 2016.................... 0 0 0 0 0 55 0 0 0 0
July 2017.................... 0 0 0 0 0 50 0 0 0 0
July 2018.................... 0 0 0 0 0 44 0 0 0 0
July 2019.................... 0 0 0 0 0 38 0 0 0 0
July 2020.................... 0 0 0 0 0 31 0 0 0 0
July 2021.................... 0 0 0 0 0 24 0 0 0 0
July 2022.................... 0 0 0 0 0 16 0 0 0 0
July 2023.................... 0 0 0 0 0 7 0 0 0 0
July 2024.................... 0 0 0 0 0 0 0 0 0 0
July 2025.................... 0 0 0 0 0 0 0 0 0 0
July 2026.................... 0 0 0 0 0 0 0 0 0 0
July 2027.................... 0 0 0 0 0 0 0 0 0 0
July 2028.................... 0 0 0 0 0 0 0 0 0 0
July 2029.................... 0 0 0 0 0 0 0 0 0 0
July 2030.................... 0 0 0 0 0 0 0 0 0 0
July 2031.................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in
years).................... 0.08 0.08 0.08 0.08 0.08 15.50 5.28 2.78 2.09 1.84
</TABLE>
--------------
* Indicates an amount above zero and less than 0.5% of the original
Certificate Principal Balance is outstanding.
S-53
<PAGE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE AT
THE FOLLOWING PERCENTAGES OF STANDARD PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
Class A-2 Class A-3
--------- ---------
Percentages of SPA Percentages of SPA
------------------ ------------------
Distribution Date 0% 100% 250% 400% 500% 0% 100% 250% 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 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.................... 100 100 100 100 100 100 100 100 100 100
July 2004.................... 100 100 100 100 89 100 100 100 51 0
July 2005.................... 100 100 100 78 28 100 100 99 0 0
July 2006.................... 100 100 100 38 0 100 100 46 0 0
July 2007.................... 100 100 100 10 0 100 100 3 0 0
July 2008.................... 100 100 76 0 0 100 100 0 0 0
July 2009.................... 100 100 57 0 0 100 100 0 0 0
July 2010.................... 100 100 42 0 0 100 100 0 0 0
July 2011.................... 100 100 29 0 0 100 100 0 0 0
July 2012.................... 100 100 19 0 0 100 78 0 0 0
July 2013.................... 100 100 10 0 0 100 57 0 0 0
July 2014.................... 100 100 2 0 0 100 37 0 0 0
July 2015.................... 100 100 0 0 0 100 19 0 0 0
July 2016.................... 100 100 0 0 0 100 1 0 0 0
July 2017.................... 100 88 0 0 0 100 0 0 0 0
July 2018.................... 100 75 0 0 0 100 0 0 0 0
July 2019.................... 100 64 0 0 0 100 0 0 0 0
July 2020.................... 100 52 0 0 0 100 0 0 0 0
July 2021.................... 100 42 0 0 0 100 0 0 0 0
July 2022.................... 100 32 0 0 0 100 0 0 0 0
July 2023.................... 100 22 0 0 0 100 0 0 0 0
July 2024.................... 100 13 0 0 0 93 0 0 0 0
July 2025.................... 100 4 0 0 0 57 0 0 0 0
July 2026.................... 100 0 0 0 0 18 0 0 0 0
July 2027.................... 81 0 0 0 0 0 0 0 0 0
July 2028.................... 44 0 0 0 0 0 0 0 0 0
July 2029.................... 5 0 0 0 0 0 0 0 0 0
July 2030.................... 0 0 0 0 0 0 0 0 0 0
July 2031.................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in
years).................... 27.86 20.45 9.87 5.82 4.70 25.19 13.44 6.00 4.07 3.44
</TABLE>
--------------
* Indicates an amount above zero and less than 0.5% of the original
Certificate Principal Balance is outstanding.
S-54
<PAGE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE AT
THE FOLLOWING PERCENTAGES OF STANDARD PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
Class A-4 Class A-5
--------- ---------
Percentages of SPA Percentages of SPA
------------------ ------------------
Distribution Date 0% 100% 250% 400% 500% 0% 100% 250% 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 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.................... 100 100 100 100 100 100 100 100 100 100
July 2004.................... 100 100 100 100 100 100 100 100 100 100
July 2005.................... 100 100 100 100 100 100 100 100 100 100
July 2006.................... 100 100 100 100 80 99 97 94 91 89
July 2007.................... 100 100 100 100 21 97 93 87 80 76
July 2008.................... 100 100 100 82 0 96 89 78 67 58
July 2009.................... 100 100 100 54 0 94 83 67 53 39
July 2010.................... 100 100 100 41 0 93 76 56 40 27
July 2011.................... 100 100 100 30 0 91 70 47 30 18
July 2012.................... 100 100 100 22 0 89 65 39 22 13
July 2013.................... 100 100 100 17 0 86 59 32 16 9
July 2014.................... 100 100 100 12 0 84 54 27 12 6
July 2015.................... 100 100 88 9 0 81 49 22 9 4
July 2016.................... 100 100 72 7 0 79 45 18 6 3
July 2017.................... 100 100 59 5 0 75 40 15 5 2
July 2018.................... 100 100 48 4 0 72 36 12 3 1
July 2019.................... 100 100 39 3 0 68 32 10 2 1
July 2020.................... 100 100 31 2 0 64 29 8 2 1
July 2021.................... 100 100 24 1 0 60 25 6 1 *
July 2022.................... 100 100 19 1 0 55 22 5 1 *
July 2023.................... 100 100 15 1 0 50 19 4 1 *
July 2024.................... 100 100 11 * 0 45 15 3 * *
July 2025.................... 100 100 8 * 0 38 13 2 * *
July 2026.................... 100 88 6 * 0 32 10 1 * *
July 2027.................... 100 64 4 * 0 25 7 1 * *
July 2028.................... 100 41 2 * 0 17 5 1 * *
July 2029.................... 100 19 1 * 0 8 2 * * *
July 2030.................... 0 0 0 0 0 0 0 0 0 0
July 2031.................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in
years).................... 29.56 27.68 18.80 10.47 6.58 21.53 15.88 11.84 9.95 8.98
</TABLE>
--------------
* Indicates an amount above zero and less than 0.5% of the original
Certificate Principal Balance is outstanding.
S-55
<PAGE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE AT
THE FOLLOWING PERCENTAGES OF STANDARD PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
Class PO Class M, B-1 and B-2
--------- --------------------
Percentages of SPA Percentages of SPA
------------------ ------------------
Distribution Date 0% 100% 250% 400% 500% 0% 100% 250% 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 2001.................... 99 97 95 92 91 99 99 99 99 99
July 2002.................... 98 93 84 76 71 98 98 98 98 98
July 2003.................... 97 86 71 58 50 97 97 97 97 97
July 2004.................... 96 80 60 43 34 96 96 96 96 96
July 2005.................... 95 74 50 33 24 95 95 95 95 95
July 2006.................... 94 69 42 24 16 94 92 90 87 85
July 2007.................... 92 64 35 18 11 93 89 83 77 73
July 2008.................... 91 59 29 14 8 91 84 74 64 58
July 2009.................... 89 55 25 10 5 90 79 64 51 43
July 2010.................... 87 50 20 8 4 88 73 53 38 29
July 2011.................... 85 46 17 6 3 87 67 44 28 20
July 2012.................... 83 42 14 4 2 85 62 37 21 14
July 2013.................... 81 39 12 3 1 82 57 31 15 9
July 2014.................... 79 35 10 2 1 80 52 25 11 6
July 2015.................... 76 32 8 2 1 78 47 21 8 4
July 2016.................... 73 29 6 1 * 75 43 17 6 3
July 2017.................... 70 26 5 1 * 72 38 14 5 2
July 2018.................... 67 23 4 1 * 69 35 11 3 1
July 2019.................... 63 21 3 * * 65 31 9 2 1
July 2020.................... 59 18 3 * * 61 27 7 2 1
July 2021.................... 55 16 2 * * 57 24 6 1 *
July 2022.................... 51 14 2 * * 53 21 5 1 *
July 2023.................... 46 12 1 * * 48 18 3 1 *
July 2024.................... 41 10 1 * * 42 15 3 * *
July 2025.................... 35 8 1 * * 37 12 2 * *
July 2026.................... 29 6 1 * * 30 9 1 * *
July 2027.................... 22 4 * * * 23 7 1 * *
July 2028.................... 15 3 * * * 16 4 1 * *
July 2029.................... 7 1 * * * 8 2 * * *
July 2030.................... * * * * * 0 0 0 0 0
July 2031.................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in
years).................... 20.30 11.68 6.57 4.52 3.76 20.66 15.27 11.42 9.61 8.88
</TABLE>
--------------
* Indicates an amount above zero and less than 0.5% of the original
Certificate Principal Balance is outstanding.
The above tables have been prepared based on the enumerated modeling
assumptions and should be read in conjunction with these modeling assumptions.
The modeling assumptions include the characteristics and performance of the
loans which may differ from their actual characteristics and performance.
S-56
<PAGE>
THE POOLING AND SERVICING AGREEMENT
General
The certificates will be issued pursuant to the Pooling and Servicing
Agreement, among the depositor, the servicer, the originator and the trustee.
The trust created under the Pooling and Servicing Agreement will consist of:
(1) all of the depositor's right, title and interest in the Loans, the
related Mortgage Notes, mortgages and other related documents,
(2) all payments on or collections in respect of the Loans due after
the Cut-Off Date, together with any proceeds thereof,
(3) any Mortgaged Properties acquired on behalf of certificateholders
by foreclosure or by deed in lieu of foreclosure, and any revenues received
from those properties, and
(4) the rights of the trustee under all insurance policies required to
be maintained pursuant to the Pooling and Servicing Agreement.
The offered certificates will be transferable and exchangeable at the
corporate trust offices of the trustee.
Assignment of the Loans
On the closing date the depositor will transfer to the trust all of its
right, title and interest in and to each Loan, the related Mortgage Notes,
mortgages and other related documents, including all scheduled payments with
respect to each Loan due after the Cut-Off Date. The trustee, concurrently with
this transfer, will deliver the certificates to the depositor. Each Loan
transferred to the trust will be identified on a mortgage loan schedule
delivered to the trustee pursuant to the Pooling and Servicing Agreement. The
mortgage loan schedule will include information such as the principal balance of
each Loan as of the Cut-Off Date, its Mortgage Interest Rate as well as other
information.
The Pooling and Servicing Agreement will require that, on or prior to the
closing date, the depositor will deliver or cause to be delivered to the
trustee, the Mortgage Notes endorsed to the trustee on behalf of the
certificateholders, the mortgages and other related documents.
The originator will represent and warrant on the closing date, with respect
to each Loan, among other things:
(1) any and all requirements of any Federal, state or local law have
been complied with;
(2) the mortgage has not been satisfied, canceled, subordinated or
rescinded, in whole or in part, and the Mortgaged Property has not been
released from the lien of the mortgage, in whole or in part;
S-57
<PAGE>
(3) the Mortgage Note and the mortgage are genuine, and each is the
legal, valid and binding obligation of the maker of those agreements
enforceable in accordance with its terms;
(4) at the time of the sale to the mortgagee, the originator was the
sole owner of the Mortgage Note and mortgage;
(5) the mortgage contains customary and enforceable provisions so as
to render the rights and remedies of the holder of the mortgage adequate
for the realization against the Mortgaged Property of the benefits of the
security provided by the Mortgaged Property;
(6) each Loan provides for payment of interest at a fixed rate;
(7) the mortgage contains a provision for the acceleration of the
payment of the unpaid principal balance of the Loan in the event that the
Mortgaged Property is sold or transferred without the prior written consent
of the mortgagee;
(8) the Loan is not subject to any right of rescission, set-off,
counterclaim or defense, including the defense of usury; and
(9) the proceeds of the Loan have been fully disbursed and there is no
requirement for future advances thereunder.
Upon discovery of a breach of any such representation and warranty which
materially and adversely affects the interests of the certificateholders in the
related Loan and related loan documents, the originator will have a period of 90
days after the earlier of discovery or notice of the breach to effect a cure. If
the breach cannot be cured within the 90-day period, the breaching originator
will be obligated to:
(1) substitute for the defective Loan an Eligible Substitute Mortgage
Loan. However, the substitution is permitted only within two years of the
closing date; or
(2) purchase the Loan at the Purchase Price. The Purchase Price is
generally equal to the outstanding principal balance of the defective Loan
as of the date of purchase, plus all accrued and unpaid interest, computed
at the Mortgage Interest Rate (net of servicing fees) through the first day
of the month in which the amount is to be distributed.
The Purchase Price will be deposited in the Collection Account on or prior
to the date the servicer is required to remit amounts on deposit in the
Collection Account to the trustee for deposit into the Distribution Account in
the month after the purchase obligation arises. The obligation of the originator
to purchase or substitute for a defective Loan is the sole remedy regarding
breaches of representations and warranties relating to the Loans available to
the trustee or the certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the originator will be required to remit the Substitution Adjustment
Amount plus an amount equal to the aggregate of any unreimbursed Advances with
respect to the related defective Loan on or prior to the business day
immediately prior to the next succeeding Distribution Date after the purchase
S-58
<PAGE>
obligation arises. This amount is equal to the excess of the principal balance
of the related defective Loan over the principal balance of the Eligible
Substitute Mortgage Loan.
Within 90 days following the closing date, the trustee will review the
Loans and the related documents pursuant to the Pooling and Servicing Agreement
and if any Loan or related loan document is found to be defective in any
material respect notice will be provided to the depositor and the servicer. If
the defect results from the failure by the originator in its obligations to
deliver documents to Paine Webber Real Estate Securities Inc., the originator
will generally be required to purchase the defective Loan or substitute for the
defective Loan an Eligible Substitute Mortgage Loan.
The same procedure and limitations that are set forth above for the
purchase or substitution of defective Loans as a result of a breach of a
representation or warranty that materially and adversely affects the interests
of the certificateholders will apply to the purchase substitution of defective
Loans as a result of deficient documentation.
The Servicer
Provident Funding Associates, L.P. will act as the servicer of the Loans in
the trust. See "The Servicer" in this prospectus supplement. All references in
this prospectus supplement to the "servicer" shall mean "master servicer" for
purposes of the accompanying prospectus.
The Pooling and Servicing Agreement will provide that the servicer and any
director, officer, employee or agent of the servicer will be indemnified by the
trust and held harmless against any loss, liability or expense incurred by the
servicer arising out of or in connection with any audit, controversy or judicial
proceeding relating to a governmental taxing authority or legal action relating
to the Pooling and Servicing Agreement or the certificates. However, the
servicer will not be indemnified for any loss, liability or expense related to
any specific Loan or Loans, except as otherwise reimbursable pursuant to the
Pooling and Servicing Agreement, or incurred by reason of its willful
misfeasance, bad faith or gross negligence in the performance of its duties
under the Pooling and Servicing Agreement or by reason of its reckless disregard
of its obligations and duties under the Pooling and Servicing Agreement.
Pledge and Assignment of Servicer's Rights
On the closing date, the servicer will pledge and assign all of its right,
title and interest in, to and under the Pooling and Servicing Agreement to
Residential Funding Corporation and certain lenders. In the event that an Event
of Servicing Termination occurs, the trustee and the depositor have agreed to
the appointment of Residential Funding Corporation or its designee as the
successor servicer, provided that at the time of such appointment Residential
Funding Corporation or such designee meets the requirements of a successor
servicer described in the Pooling and Servicing Agreement (including being
acceptable to the Rating Agencies) and that such designee agrees to be subject
to the terms of the Pooling and Servicing Agreement.
Payments on Loans; Deposits to Collection Account and Distribution Account
The servicer will establish and maintain or cause to be maintained the
Collection Account which will be a separate trust account for the benefit of the
holders of the certificates. The Collection Account will be an account meeting
the eligibility requirements of the Pooling and
S-59
<PAGE>
Servicing Agreement. Within one business day of receipt by the servicer of
amounts in respect of the Loans, the servicer will deposit the amounts in the
Collection Account. However, amounts representing the Servicing Fee, insurance
proceeds to be applied to the restoration or repair of a Mortgaged Property or
similar items are not required to be deposited in the Collection Account.
Amounts deposited in the Collection Account may be invested in the investments
permitted by the Pooling and Servicing Agreement maturing no later than two
business days prior to the date on which the amount on deposit in the Collection
Account is required to be deposited in the Distribution Account. Investment
earnings on funds on deposit in the Collection Account will be for the benefit
of the servicer.
The servicer is obligated to deposit in the Collection Account on a daily
basis within one business day of receipt, amounts representing the following
payments received and collections made by it on or after the Cut-Off Date:
(1) all payments on account of principal of the Loans, including
unscheduled principal prepayments, on the Loans;
(2) all payments on account of interest on the Loans less the
Servicing Fee;
(3) all insurance proceeds and net proceeds from the liquidation of
Loans, including condemnation proceeds to the extent those proceeds are not
to be applied to the restoration of the related mortgaged property or
released to the related borrower in accordance with the servicer's normal
servicing procedures;
(4) any amounts the servicer must deposit in connection with any
losses on in the investments permitted by the Pooling and Servicing
Agreement;
(5) any amounts the servicer must deposit in connection with a
deductible clause in any blanket hazard insurance policy, which must be
made from the servicer's own funds and is not reimbursable to the servicer;
(6) all proceeds of a primary mortgage guaranty insurance policy;
(7) the net monthly rental income from the REO Property;
(8) any amounts payable in connection with the purchase of any Loan
and the Substitution Adjustment Amount, if any;
(9) all Advances required to be made by the servicer; and
(10) any other amounts required to be deposited under the Pooling and
Servicing Agreement.
The servicer will not be required to deposit into the Collection Account
any payments in the nature of late payment charges, prepayment penalties, and
assumption fees collected.
The trustee will establish the Distribution Account which will be an
account into which will be deposited amounts withdrawn from the Collection
Account for distribution to certificateholders on a Distribution Date, any
amounts the servicer must deposit in connection with any losses on in the
investments permitted by the Pooling and Servicing Agreement and any
S-60
<PAGE>
other amounts required to be deposited under the Pooling and Servicing
Agreement. The Distribution Account will be an account meeting the eligibility
requirements of the Pooling and Servicing Agreement. Amounts on deposit in the
Distribution Account may be invested in the investments permitted by the Pooling
and Servicing Agreement maturing on or before the business day prior to the
related Distribution Date unless the investments are invested in obligations of
the institution that maintains the Distribution Account, in which case the
investments may mature on the related Distribution Date.
Collection and Other Servicing Procedures; Loan Modifications
The servicer will be obligated under the Pooling and Servicing Agreement to
service and administer the Loans, on behalf of the trust, for the benefit of the
certificateholders in accordance with the terms of the Pooling and Servicing
Agreement and customary and usual practices of prudent mortgage loan servicers.
Subject to the terms of the Pooling and Servicing Agreement, the servicer will
have full power and authority, acting alone and/or through subservicers, to do
or cause to be done any and all things in connection with the servicing and
administration which it may deem necessary or desirable.
The servicer will be obligated under the Pooling and Servicing Agreement to
make reasonable efforts in accordance with customary and usual standards of
practices of prudent mortgage loan servicers to collect all payments called for
under the terms and provisions of the Loans to the extent these procedures are
consistent with the requirements set forth under the Pooling and Servicing
Agreement and the terms and conditions of any related insurance policies.
Consistent with the terms of the Pooling and Servicing Agreement, the
servicer may:
(1) waive any late payment charge or any prepayment charge or penalty
interest in connection with the prepayment of a Loan;
(2) extend the due dates for payments due on a Loan for a period not
greater than 180 days; provided, however, that the servicer cannot extend
the maturity of any Loan past the date on which the final payment is due on
the latest maturing Loan as of the Cut-Off Date.
Advances
Subject to the following limitations, the servicer will be obligated to
make Advances or cause to be made Advances at least one business day prior to
each Distribution Date from its own funds, or funds in the Collection Account
that are not included in the Available Funds for the related Distribution Date.
The Advances will be in an amount equal to the aggregate of all payments of
principal and interest, net of the Servicing Fee that were due on the related
due date on the Loans and any net income in the case of REO Properties, and that
were not received by the related Determination Date. The Servicer will continue
to make Advances of principal and interest with respect to REO Properties.
Advances are required to be made only to the extent they are deemed in the
good faith judgement of the servicer to be recoverable from related liquidation
proceeds or otherwise. The purpose of making Advances is to maintain a regular
cash flow to the certificateholders, rather than to guarantee or insure against
losses. Subject to the recoverability standard, the servicer's
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obligation to make Advances will continue if the Loan has been foreclosed or
otherwise terminated and the related REO Property has not been liquidated.
All Advances will be reimbursable to the servicer from amounts received on
the Loan as to which the unreimbursed Advance was made. In addition, any
Advances previously made in respect of any Loan that are deemed in the good
faith judgement of the servicer to be nonrecoverable from related liquidation
proceeds or otherwise may be reimbursed to the servicer out of any funds in the
Collection Account prior to the distributions on the certificates. Any failure
by the servicer to make an Advance as required under the Pooling and Servicing
Agreement will constitute an event of default under the Pooling and Servicing
Agreement if such failure remains unremedied for five days after written notice.
If the servicer is terminated as a result of the occurrence of an event of
default under the Pooling and Servicing Agreement, the trustee or the successor
servicer will be obligated to make any the Advance, subject to and in accordance
with the terms of the Pooling and Servicing Agreement.
In the course of performing its servicing obligations, the servicer will be
required to make Servicing Advances. This requires the servicer to pay all
customary, reasonable and necessary "out-of-pocket" costs and expenses incurred
in the performance of its servicing obligations, including, but not limited to,
the cost of:
(1) the preservation, restoration and protection of the Mortgaged
Properties;
(2) the cost of maintaining hazard insurance on the Mortgaged
Properties, to the extent permitted in the Pooling and Servicing Agreement;
(3) any enforcement or judicial proceedings, including foreclosures;
and
(4) the management and liquidation of REO Properties.
The servicer's right to reimbursement for Servicing Advances is limited to
late collections, liquidation proceeds, released mortgaged property proceeds,
insurance proceeds and such other amounts as may be collected by the servicer
from the related mortgagor or otherwise relating to the Loan in respect of which
the unreimbursed amounts are owed.
Servicing Fees and Other Compensation and Payment of Expenses
The principal compensation to be paid to the servicer in respect of its
servicing activities for the certificates will be the Servicing Fee. As
additional servicing compensation, the servicer is entitled to retain all late
payment fees, assumption fees and other similar charges and all reinvestment
income earned on amounts on deposit in the Collection Account. The servicer is
obligated to pay certain ongoing expenses associated with its servicing
activities and incurred by the servicer in connection with its responsibilities
under the Pooling and Servicing Agreement out of the Servicing Fee. The servicer
is obligated to offset any Prepayment Interest Shortfall on any Distribution
Date by paying Compensating Interest with respect to prepayments, in an amount
not in excess of 50% of its Servicing Fee for that Distribution Date. The
servicer is obligated to pay certain insurance premiums and certain ongoing
expenses associated with the Loans and incurred by the servicer in connection
with its responsibilities under the Pooling and Servicing Agreement and is
entitled to reimbursement as provided in the Pooling and Servicing Agreement.
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Realization on or Sale of Defaulted Loans
The servicer will use reasonable efforts to foreclose upon or otherwise
comparably convert the ownership Mortgaged Properties securing such of the 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:
o as it deems necessary or advisable; and
o 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.
The servicer will not be required to expend its own funds to foreclose or
restore any property, unless it reasonably determines:
(1) that foreclosure or restoration will increase the proceeds to
certificateholders of liquidation of the Loan after reimbursement to the
servicer for its expenses; and
(2) that such expenses will be recoverable to it through liquidation
proceeds, including insurance proceeds in respect of the 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 to
the extent such amounts were received on the related mortgage loans.
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 Loan.
Since a REMIC election has been made for federal income tax purposes with
respect to the trust, if the trustee acquires ownership of any Mortgaged
Property as a result of a default or reasonably foreseeable default of any Loan
secured by such Mortgaged Property, the servicer will be required to dispose of
such property prior to the close of the third calendar year following the year
the trust acquired such property unless an extension of that period has been
applied for and received from the Internal Revenue Service.
No REO Property acquired by the trust may be rented, or allowed to continue
to be rented, or otherwise be used by or on behalf of the trust in this manner
or otherwise so that:
(1) the REO Property fails to qualify as "foreclosure property" within
the meaning of Section 860G(a)(8) of the Code; and
(2) the REO Property subjects any REMIC constituting part of the trust
to the imposition of any federal income taxes on the income earned from the
REO Property, including any taxes imposed by reason of Sections 860F or
860G(c) of the Code;
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unless the servicer has agreed to indemnify the trust with respect to the
imposition of any taxes described above. The servicer may, at its option,
purchase from the trust any Loan which is delinquent in payment by 91 days or
more at the Purchase Price generally equal to par plus accrued interest at the
applicable Mortgage Interest Rate (less servicing fees) 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 the amount is to be
distributed.
Enforcement of Due-on-Sale Clauses
The servicer will exercise its rights to accelerate the maturity of the
related Loan under any "due-on-sale" clause contained in the related mortgage or
Mortgage Note, if the servicer has knowledge of the borrower's conveyance or
prospective conveyance of the Mortgaged Property. However, the servicer may not
exercise any of these rights if the "due-on-sale" clause, in the reasonable
belief of the servicer, is not enforceable under applicable law or if such
exercise would result in loss of insurance coverage with respect to such 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 with the person to whom the
Mortgaged Property has been or is about to be conveyed, pursuant to which the
person becomes liable under the Mortgage Note. The borrower will remain liable
on the Mortgage Note, unless prohibited by applicable law, provided that the
Loan will continue to be covered by any pool insurance policy and any related
primary mortgage insurance policy. The servicer is also 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 the person to whom the
Mortgaged Property is conveyed. Pursuant to this substitution of liability
agreement the original borrower is released from liability and the person to
whom the Mortgaged Property is conveyed is substituted as borrower and becomes
liable under the Mortgage Note.
Maintenance of Insurance Policies and Errors and Omissions and Fidelity Coverage
The servicer will cause to be maintained, as and to the extent required
under each Loan, for each Loan fire and hazard insurance with extended coverage
as is customary. The amount of the coverage must be at least equal to the lesser
of:
(1) the maximum insurable value of the improvements securing the Loan;
or
(2) greater of (a) the principal balance of the Loan or (b) the amount
of coverage must not be less than the amount as is necessary to prevent the
borrower and/or the mortgagee from becoming a co-insurer.
If the Mortgaged Property is in a federally designated special flood hazard
area and the area is participating in the national flood insurance program, the
servicer will cause to be maintained flood insurance in an amount of this
coverage equal to the least of:
(1) the principal balance of the Loan;
(2) the replacement value of the improvements which are part of the
Mortgaged Property securing the Loan; or
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(3) the maximum amount of insurance which is available for the related
Mortgaged Property under the national flood insurance program.
It is understood and agreed that no earthquake or other additional
insurance is required to be maintained by the servicer or the borrower or
maintained on any Mortgaged Property acquired in respect of the Loan, other than
under applicable regulations as may at any time be in force and as may require
additional insurance. All insurance policies must be endorsed with standard
mortgagee clauses.
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 borrower in accordance with the servicer's
normal servicing procedures) will be required to be deposited in the Collection
Account. The servicer may obtain and maintain a blanket policy insuring against
hazard losses on all of the 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 mortgage guaranty insurance of any loss which, but
for the actions of the servicer, would have been covered. The servicer may not
cancel or refuse to renew any such primary mortgage guaranty insurance that is
in effect as of the closing date and is required to be kept in force under the
terms of the Pooling and Servicing Agreement unless the replacement primary
mortgage guaranty insurance for such canceled or non-renewed policy is
maintained with an insurer meeting the requirements under the Pooling and
Servicing Agreement. The servicer will be required to present on behalf of
itself, the trustee and certificateholders, claims to the insurer under any
primary mortgage guaranty insurance and to take such reasonable action as are
necessary to permit recovery under any primary mortgage guaranty insurance with
respect to defaulted Loans.
Any cost incurred by the servicer in maintaining any insurance described
above may not be added to the principal balance of the Loan for the purpose of
calculating monthly distributions to the certificateholders or remittances to
the trustee for their benefit, however, the costs will be recoverable by the
servicer out of late payments or liquidation proceeds to the extent permitted by
the Pooling and Servicing Agreement.
The servicer must maintain a blanket fidelity bond and an errors and
omissions insurance policy at its own expense. The policy (or policies together)
must comply with the requirements from time to time of Freddie Mac and Fannie
Mae for persons performing servicing for mortgage loans purchased by Freddie Mac
or Fannie Mae.
Servicer Reports
The servicer, at its own expense, is required to deliver an officer's
certificate to the trustee and the depositor, not later than 120 days following
the end of the servicer's fiscal year, stating that:
(1) a review of the activities of the servicer during the preceding
calendar year and of performance under the Pooling and Servicing Agreement
has been made under the officers' supervision; and
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(2) to the best of the officers' knowledge, based on the review, the
servicer has fulfilled all its obligations under the Pooling and Servicing
Agreement for that year.
If there has been a default in the fulfillment of any obligation, the
certificate will specify each default known to the officers and the nature and
status of the default.
The servicer, at its own expense, will deliver a statement to the depositor
and the trustee from a nationally recognized firm of independent certified
public accountants not later than 120 days following the end of the servicer's
fiscal year stating that:
(1) it has examined certain documents and records relating to the
servicing of the Loans under the Pooling and Servicing Agreement or of
mortgage loans under pooling and servicing agreements substantially similar
to the Pooling and Servicing Agreement; and
(2) on the basis of an examination conducted by the firm in accordance
with standards established by in either the Uniform Single Attestation
Program for Mortgage Bankers established by the Mortgage Bankers
Association of America or the Audit Program for Mortgages serviced by
Freddie Mac and Fannie Mae, such servicing has been conducted in compliance
with the Pooling and Servicing Agreement, subject to any exceptions and
other qualifications that may be appropriate.
Copies of the statement must be provided by the trustee to any
certificateholder upon request at the servicer's expense, provided that the
statement is delivered by the servicer to the trustee.
Resignation of Servicer
The servicer may not resign from the obligations and duties imposed on it
under the Pooling and Servicing Agreement except:
(1) if determined that the servicer's duties under the Pooling and
Servicing Agreement are no longer permissible under applicable law; or
(2) upon appointment of a successor servicer and each Rating Agency
has delivered a letter to the trustee stating that the appointment of the
successor servicer as servicer pursuant to the Pooling and Servicing
Agreement will not result in the downgrading of the then current rating of
the offered certificates, with regard to any guaranty provided by any
insurance policy.
No resignation will become effective until a successor servicer or the
trustee has assumed the servicer's responsibilities and obligations in
accordance with the Pooling and Servicing Agreement.
If the servicer is removed, the trustee has agreed to be the successor
servicer. If, however, the trustee is unwilling or unable to act as successor
servicer, the trustee must appoint or petition a court of competent jurisdiction
to appoint a successor servicer. This appointment must be made in accordance
with the provisions of the Pooling and Servicing Agreement. The successor
servicer must be an institution which is a Freddie Mac and Fannie Mae approved
seller/servicer in good standing having a net worth of at least $15,000,000.
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The trustee and any other successor servicer in that capacity is entitled
to the same reimbursement for advances and no more than the same servicing
compensation as the servicer. See "--Servicing Fees and Other Compensation and
Payment of Expenses" above.
Events of Servicing Termination
Events of Servicing Termination will consist, among other things, of:
(1) any failure by the servicer to deposit in the Collection Account
the required amounts or remit to the trustee any payment which continues
unremedied for five business days following written notice to the servicer;
(2) any failure by the servicer to observe or perform in any material
respect any other of its covenants or agreements in the Pooling and
Servicing Agreement, which continues unremedied for 60 days after the first
date on which written notice of such failure is given to the servicer; or
(3) insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, and certain actions by or on behalf of
the servicer indicating its insolvency or inability to pay its obligations.
Rights upon Event of Servicing Termination
So long as an Event of Servicing Termination under the Pooling and
Servicing Agreement remains unremedied, the trustee may, and at the direction of
the holders of the offered certificates evidencing not less than 25% of the
voting rights described below under "--Voting Rights" is required to, terminate
all of the rights and obligations of the servicer in its capacity as servicer
with respect to the Loans. The trustee will succeed to all of the
responsibilities and duties of the servicer under the Pooling and Servicing
Agreement, including the obligation to make any required Advances. No assurance
can be given that termination of the rights and obligations of the servicer
under the Pooling and Servicing Agreement would not adversely affect the
servicing of the related Loans, including the delinquency experience of the
Loans.
No holder of an offered certificate, solely by virtue of the holder's
status as a holder of an offered certificate, will have any right under the
Pooling and Servicing Agreement to institute any proceeding with respect to the
Pooling and Servicing Agreement, unless:
(1) the holder previously has given to the trustee written notice of
default and
(2) the holders of offered certificates having not less than 25% of
the voting rights described below under "--Voting Rights" evidenced by the
offered certificates so agree in writing and have offered indemnity
satisfactory to the trustee.
Termination
The obligations created by the Pooling and Servicing Agreement will
terminate upon the earlier to occur of:
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(1) the later of (a) the final payment or other liquidation of the
last Loan included in the trust and (b) the distribution of all amounts
required to be distributed to certificateholders under the Pooling and
Servicing Agreement; and
(2) the exercise by the servicer of its right to terminate the trust
as described below.
Written notice of termination will be given to holders of certificates, and
the final distribution will be made only upon surrender and cancellation of the
certificates at the office of the trustee designated in the notice.
The servicer will have the right to purchase all of the Loans and REO
Properties in the trust and thereby effect the early retirement of the
certificates, on any Distribution Date on which the aggregate outstanding
principal balance of the Loans and REO Properties is less than 10% of the
aggregate principal balance of the Loans as of the Cut-Off Date. In the event
that the option is exercised, the purchase will be made at the Termination Price
generally equal to par plus one month's accrued interest for each Loan at the
related Mortgage Interest Rate. Proceeds from the purchase will be included in
Available Funds and will be distributed to the holders of the certificates in
accordance with the Pooling and Servicing Agreement. Any purchase of Loans and
REO Properties will result in the early retirement of the certificates.
Optional Purchase of Defaulted Loans
As to any Loan which is delinquent in payment by 91 days or more, the
servicer may, at its option, purchase the Loan from the trust at the Purchase
Price for that Loan.
Voting Rights
With respect to any date of determination, the percentage of all the voting
rights allocated among holders of the offered certificates will be 99% and will
be allocated among the classes of the offered certificates in the proportion
that the aggregate Certificate Principal Balance of a class then outstanding
bear to the aggregate Certificate Principal Balance of all certificates then
outstanding. With respect to any date of determination, the percentage of all
the voting rights allocated among holders of the Class X certificates will be
1%. The voting rights allocated to a class of certificates will be allocated
among all holders of that class in proportion to the outstanding certificate
balances, or percentage interest, of those certificates.
Amendment
The Pooling and Servicing Agreement may be amended without the consent of
the holders of the certificates, for any of the following purposes:
(1) to cure any ambiguity or mistake;
(2) to correct or supplement any provisions which may be defective or
inconsistent with any other provisions;
(3) to add to the duties of the depositor, the seller, the originator
or the servicer;
(4) to make any other provisions with respect to matters or questions
arising under the Pooling and Servicing Agreement; or
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(5) to modify alter, amend or add to or rescind any of the terms or
provisions contained in the Pooling and Servicing Agreement.
However, any of the actions listed in clause (4) and (5) above may not
adversely affect in any material respect the interests of any certificateholder,
as evidenced by:
(1) notice from the Rating Agencies that the action will not result in
the reduction or withdrawal of the rating of any outstanding class of
certificates; or
(2) an opinion of counsel delivered to the trustee.
In addition, the Pooling and Servicing Agreement may be amended with the
consent of the holders of a majority in interest of each class of offered
certificates affected by the amendment for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of the Pooling
and Servicing Agreement or of modifying in any manner the rights of the holders
of any class of offered certificates. However, no amendment of this type may:
(1) reduce in any manner the amount of, or delay the timing of,
distributions required to be made on any class of offered certificates
without the consent of the holders of those certificates;
(2) adversely affect in any material respect the interests of the
holders of any class of offered certificates in a manner other than as
described in clause (1) above, without the consent of the holders of that
class evidencing percentage interests aggregating at least 66%; or
(3) reduce the percentage of aggregate outstanding principal amounts
of offered certificates, the holders of which are required to consent to an
amendment, without the consent of the holders of all certificates then
outstanding.
The Trustee
The Chase Manhattan Bank, a New York banking corporation, will act as
trustee for the certificates pursuant to the Pooling and Servicing Agreement.
The trustee's offices for notices under the Pooling and Servicing Agreement are
located at 450 West 33rd Street, 14th Floor, New York, New York 10001-2697,
Attention: Capital Markets Fiduciary Services, PMAC IV 2000-1, and its telephone
number is (212) 946-3200. The principal compensation to be paid to the trustee
in respect of its obligations under the Pooling and Servicing Agreement will be
the Trustee Fee and any investment income from funds or deposits in the
Distribution Account. The Pooling and Servicing Agreement will provide that the
trustee and any director, officer, employee or agent of the trustee will be
indemnified by the servicer and will be held harmless against any loss,
liability or expense incurred by the trustee arising out of or in connection
with the acceptance or administration of its obligations and duties under the
Pooling and Servicing Agreement, other than any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence in the
performance of the trustee's duties under the Pooling and Servicing Agreement or
incurred by reason of any action of the trustee taken at the direction of the
holders of the certificates.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following discussion, insofar as it states conclusions of law,
represents the opinion of Cadwalader, Wickersham & Taft, special counsel to the
depositor.
An election will be made to treat the trust as a single REMIC for federal
income tax purposes.
The Regular Certificates will be designated as "regular interests" in the
REMIC. The Class A-R certificates will be designated as the "residual interest"
in the REMIC.
Regular Certificates
The Regular Certificates generally will be treated as debt instruments
issued by the REMIC for federal income tax purposes. Income on Regular
Certificates must be reported under an accrual method of accounting. Certain
classes of Regular Certificates may be issued with original issue discount in an
amount equal to the excess of their initial respective Certificate Principal
Balances (plus accrued interest from the last day preceding the issue date
corresponding to a Distribution Date through the issue date), over their issue
prices (including all accrued interest). The prepayment assumption that is to be
used 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 a
holder of a Regular Certificate to amortize premium, will be 250% of the
Standard Prepayment Assumption. No representation is made as to the actual rate
at which the mortgage loans will prepay. See "Federal Income Tax
Consequences--REMICs--General--Characterization of Investments in REMIC
Securities" in the accompanying prospectus.
The requirement to report income on a Regular Certificate under an accrual
method may result in the inclusion of amounts in income that are not currently
distributed in cash. In the case of a junior certificate, accrued income may
exceed cash distributions as a result of the preferential right of classes of
senior certificates to receive cash distributions in the event of losses or
delinquencies on mortgage loans. Prospective purchasers of Junior Certificates
should consult their tax advisors regarding the timing of income from those
certificates and the timing and character of any deductions that may be
available with respect to principal or accrued interest that is not paid. See
"Federal Income Tax Consequences--REMICs--Taxation of Owners of Regular
Securities" in the accompanying prospectus.
Residual Certificates
The holders of the Class A-R certificates must include the taxable income
of the REMIC in their federal taxable income. The resulting tax liability of the
holders may exceed cash distributions to such holders during certain periods.
All or a portion of the taxable income from a residual certificate recognized by
a holder may be treated as "excess inclusion" income, which with limited
exceptions is subject to U.S. federal income tax in all events.
Under Treasury regulations, the residual certificates may be considered to
be "noneconomic residual interests" at the time they are issued, in which event
certain transfers thereof would be
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disregarded for federal income tax purposes. In addition, the IRS has proposed
regulations pursuant to which, in order to meet the "safe harbor" for the
transfer of a noneconomic residual interest, the transferor would be required to
pay the transferee an amount not less than the excess of the present value of
the tax on expected future income over the sum of any expected cash flows and
the tax benefit of expected future losses with respect to the Class A-R
certificates, generally using the applicable Federal rate under Section 1274(d)
of the Code as the discount rate. This proposed regulation has a proposed
effective date of February 4, 2000 if adopted. Prospective investors should
consult their own tax advisors as to the applicability and effect of the
proposed regulations.
Prospective purchasers of the residual certificates should consider
carefully the tax consequences of an investment in residual certificates
discussed in the prospectus and should consult their own tax advisors with
respect to those consequences. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of Residual Securities" in the
prospectus.
REMIC Taxes and Reporting
It is not anticipated that the trust will engage in any transactions that
would subject it to the prohibited transactions tax as defined in Section
860F(a)(2) of the Code, the contributions tax as defined in Section 860G(d) of
the Code or the tax on net income from foreclosure property as defined in
Section 860G(c) of the Code. However, in the event that any such tax is imposed
on the trust, such tax will be borne:
(1) by the trustee, if the trustee has breached its obligations with
respect to REMIC compliance under the Pooling and Servicing Agreement;
(2) the servicer, if the servicer has breached its obligations with
respect to REMIC compliance under the Pooling and Servicing Agreement; and
(3) otherwise by the trust, with a resulting reduction in amounts
otherwise distributable to holders of the offered certificates.
See "Federal Income Tax Consequences--REMICs--Taxes That May Be Imposed on
the REMIC Pool--Prohibited Transactions" in the prospectus.
The responsibility for filing annual federal information returns and other
reports will be borne by the trustee. See "Federal Income Tax
Consequences--REMICs--Administrative Matters" in the prospectus.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Federal Income Tax
Consequences--REMICs" in the prospectus.
STATE TAXES
The depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the offered certificates under the tax
laws of any state. Investors considering an investment in the offered
certificates should consult their own tax advisors regarding such tax
consequences.
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All investors should consult their own tax advisors regarding the federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the offered certificates.
ERISA Considerations
The Employee Retirement Income Security Act of 1974, as amended, and the
Code impose certain restrictions on:
(1) employee benefit plans as defined in Section 3(3) of ERISA;
(2) plans described in section 4975(e)(1) of the Code, including
individual retirement accounts or Keogh plans;
(3) any entities whose underlying assets include plan assets by reason
of a plan's investment in the entities set forth in clauses (1) and (2)
above; and
(4) persons who have certain specified relationships to Plans, i.e.,
"Parties in Interest" under ERISA and "Disqualified Persons" under the
Code.
Moreover, based on the reasoning of the United States Supreme Court in John
Hancock Life Ins. Co. v. Harris Trust and Savings Bank, 114 S. Ct. 517 (1993),
an insurance company's general account may be deemed to include assets of the
Plans investing in the general account, e.g., through the purchase of an annuity
contract. As a result, the insurance company might be treated as a fiduciary or
other Party in Interest with respect to a Plan by virtue of the investment.
ERISA imposes certain duties on persons who are fiduciaries of Plans subject to
ERISA and prohibits certain transactions between a Plan and Parties-in-Interest
or Disqualified Persons with respect to the Plan. There are certain exemptions
issued by the United States Department of Labor that may be applicable to an
investment by a Plan in the certificates, including Prohibited Transaction Class
Exemption 83-1. For further discussion of PTE 83-1, including the necessary
conditions to its applicability and other important factors to be considered by
a Plan contemplating investing in the offered certificates, see "ERISA
Considerations" in the prospectus.
The Class A-R certificates may not be purchased by or transferred to a Plan
or any other person investing "plan assets" of any Plan. Accordingly, the
following discussion does not purport to discuss any considerations under ERISA
with respect to the purchase, acquisition or resale of the Class A-R
certificates and for purposes of the following discussion all references to the
offered certificates are deemed to exclude the Class A-R certificates.
The U.S. Department of Labor has granted PaineWebber Incorporated
Prohibited Transaction Exemption 90-36, 55 Fed. Reg. 25903 (1990). This
Prohibited Transaction Exemption 90-36 exempts from certain of the prohibited
transaction rules of ERISA transactions with respect to the initial purchase,
the holding and the subsequent resale by a Plan of certificates in pass-through
trusts that meet the conditions and requirements of the exemption. Among the
conditions that must be satisfied for the exemption to apply are the following:
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(1) The acquisition of the offered certificates by a Plan is on terms
including the price for the offered certificates that are at least as
favorable to the Plan as they would be in an arm's length transaction with
an unrelated party;
(2) The rights and interests evidenced by the offered certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust;
(3) The offered certificates acquired by the Plan have received a
rating at the time of the acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's Ratings Services,
Fitch or Moody's Investors Service, Inc.;
(4) The sum of all payments made to the underwriter in connection with
the distribution of the offered certificates represents not more than
reasonable compensation for underwriting the offered certificates. The sum
of all payments made to and retained by the servicer represents not more
than reasonable compensation for the servicer's services under the Pooling
and Servicing Agreement and reimbursement of the servicer's reasonable
expenses in connection with its services;
(5) The trustee must not be an affiliate of any other member deemed to
be a "sponsor" of the trust; and (6) The Plan investing in the offered
certificates is an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the Securities Act of 1933, as amended.
The trust also must meet the following requirements:
(1) The corpus of the trust must consist solely of assets of the type
which have been included in other investment pools;
(2) certificates in the other investment pools must have been rated in
one of the three highest rating categories of Standard & Poor's, Fitch or
Moody's Investors Services, Inc. for at least one year prior to the Plan's
acquisition of certificates; and
(3) certificates evidencing interests in the other investment pools
must have been purchased by investors other than plans for at least one
year prior to any Plan's acquisition of the offered certificates.
In order for the exemption to apply to certain self-dealing/conflict of
interest prohibited transactions that may occur when a Plan fiduciary causes the
Plan to acquire offered certificates, the exemption requires, among other
matters, that:
(1) in the case of an acquisition in connection with the initial
issuance of offered certificates, at least fifty percent of each class of
offered certificates in which Plans have invested is acquired by persons
independent of the "restricted group" and at least fifty percent of the
aggregate interest in the trust fund is acquired by persons independent of
the "restricted group." "Restricted group" means any underwriter of the
offered certificates, the trustee, the servicer, any obligor with respect
to the loans included in the trust, any entity deemed to be a "sponsor" of
the trust as that term is defined in the exemptions, or any affiliate of
that party;
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(2) the fiduciary, or its affiliate, is an obligor but only with
respect to 5 percent or less of the fair market value of the obligations
contained in the trust;
(3) the Plan's investment in offered certificates does not exceed 25%
of all of the certificates outstanding at the time of the acquisition; and
(4) immediately after the acquisition, no more than 25% of the assets
of the Plan are invested in certificates representing an interest in one or
more trusts containing assets sold or serviced by the same entity.
Subject to the foregoing, the depositor believes that the exemption will
apply to the acquisition and holding of the Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5 and Class PO certificates, but not the Class A-R, Class M,
Class B-1, and Class B-2 certificates, by Plans and that all conditions of that
exemption other than those within the control of the investors have been met.
Before purchasing a Class A-1, Class A-2, Class A-3, Class A-4, Class A-5
or Class PO certificate, a fiduciary of a Plan should make its own determination
as to the availability of the exemptive relief provided in Prohibited
Transaction Class Exemption 90-36 or the availability of any other prohibited
transaction exemptions, including Prohibited Transaction Class Exemption 83-1,
and whether the conditions of any exemption will be applicable to the senior
certificates. Any fiduciary of a Plan considering whether to purchase a Class
A-1, Class A-2, Class A-3, Class A-4, Class A-5 or Class PO certificate should
also carefully review with its own legal advisors the applicability of the
fiduciary duty and prohibited transaction provisions of ERISA and the Code to
the investment. See "ERISA Considerations" in the prospectus.
A governmental plan as defined in Section 3(32) of ERISA is not subject to
ERISA, or Code Section 4975. However, a governmental plan may be subject to a
federal, state or local law, which is, to a material extent, similar to the
provisions of ERISA or Code Section 4975. A fiduciary of a governmental plan
should make its own determination as to the need for and the availability of any
exemptive relief under a law similar to ERISA.
Because the Class M, Class B-1 and Class B-2 certificates are subordinated
to the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and Class PO
certificates with respect to certain losses, the purchase and holding of the
Class M, Class B-1 and Class B-2 certificates by or on behalf of a Plan may
result in unexempt "prohibited transactions" within the meaning of ERISA and
Code Section 4975. Any transferee of the Class M, Class B-1 and Class B-2
certificates will be deemed to represent that (a) it is not a Plan and is not
acting on behalf of a Plan or using the assets of a Plan to effect the purchase
or (b) if it is an insurance company, that the source of funds used to purchase
the Class M, Class B-1 and Class B-2 certificates is an "insurance company
general account," as that term is defined in Section V(e) of Prohibited
Transaction Class Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995), there is
no Plan with respect to which the amount of the general account's reserves and
liabilities for the contracts held by or on behalf of that Plan and all other
Plans maintained by the same employer or affiliate thereof or by the same
employee organization exceeds 10 percent of the total of all reserves and
liabilities of that general account at the date of acquisition and the purchase
and holding of the Class M, Class B-1 and Class B-2 certificates by the
transferee are covered by Sections I and III of Prohibited Transaction Class
Exemption 95-60. The Pooling and Servicing Agreement will provide that
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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.
The sale of certificates to a Plan is not a representation by the depositor
or the underwriter, that this investment meets all relevant legal requirements
with respect to investments by Plans generally or any particular Plan, or that
this investment is appropriate for Plans generally or any particular Plan.
LEGAL INVESTMENT
The Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class PO, Class
A-R and Class M certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended.
The Class B-1 and Class B-2 certificates will not constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended.
Institutions subject to the jurisdiction of the following agencies should
review applicable rules, supervisory policies and guidelines of these agencies
before purchasing any of the offered certificates:
(1) the Office of the Comptroller of the Currency;
(2) the Board of Governors of the Federal Reserve System;
(3) the Federal Deposit Insurance Corporation;
(4) the Office of Thrift Supervision;
(5) the National Credit Union Administration; or
(6) state banking or insurance authorities.
The offered certificates may be deemed to be unsuitable investments under
one or more of these rules, policies and guidelines and certain restrictions may
apply to those investments. It should also be noted that certain states have
enacted legislation limiting to varying extents the ability of some entities, in
particular, insurance companies, to invest in mortgage related securities.
Investors should consult with their own legal advisors in determining whether
and to what extent the offered certificates constitute legal investments for
those investors. See "Legal Investment" in the prospectus.
USE OF PROCEEDS
The depositor intends to use the net proceeds to be received from the sale
of the offered certificates to acquire the Loans and to pay other expenses
associated with the pooling of the Loans and the issuance of the certificates.
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UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
among the depositor and PaineWebber Incorporated, an affiliate of the depositor,
the depositor has agreed to sell to the underwriter, and the underwriter has
agreed to purchase from the depositor the offered certificates.
The depositor has been advised by the underwriter that it proposes to offer
the offered certificates to the public 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 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 Securities and Exchange 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. Those 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, the underwriter may reduce that short position by
purchasing offered certificates in the open market. A short position will result
if the underwriter sells more offered certificates than are set forth on the
cover of this prospectus supplement.
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 those 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 the transactions or that those transactions, once
commenced, will not be discontinued without notice.
There is currently no secondary market for the offered certificates. We
cannot assure you that a secondary market for the offered certificates will
develop or, if it does develop, that it will continue.
The depositor has agreed to indemnify the underwriter against, or make
contributions to the underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
The underwriter is an affiliate of the depositor and Paine Webber Real
Estate Securities Inc.
The underwriter and certain of its affiliates have certain financing
arrangements with Provident Funding Associates, L.P. An affiliate of the
underwriter provides warehouse financing to Provident Funding Associates, L.P.
for its mortgage loans, including the Loans, and may
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provide other term financing arrangements to Provident Funding Associates, L.P.
for certificates it purchases.
Each of PaineWebber Incorporated, PaineWebber Mortgage Acceptance
Corporation IV and Paine Webber Real Estate Securities Inc. is a wholly owned
subsidiary of Paine Webber Group Inc. On July 12, 2000, Paine Webber Group Inc.,
UBS AG and Neptune Merger Subsidiary, Inc., a wholly owned subsidiary of UBS AG,
entered into an Agreement and Plan of Merger which provides for the merger of
Paine Webber Group Inc. into Neptune Merger Subsidiary, Inc. upon the receipt of
shareholder approval, other required consents and approvals and the payment of
the merger consideration.
RATINGS
It is a condition to the original issuance of the offered certificates that
they receive the following ratings by Fitch and Standard & Poor's Ratings
Services:
Class Fitch S&P
----- ----- ---
A-1 AAA AAA
A-2 AAA AAA
A-3 AAA AAA
A-4 AAA AAA
A-5 AAA AAA
PO AAA AAA
A-R AAA AAA
M AA N/A
B-1 A N/A
B-2 BBB N/A
Explanations of the significance of the ratings may be obtained from Fitch,
One State Street Plaza, 32nd Floor, New York, New York 10004 and Standard &
Poor's Ratings Services, 55 Water Street, New York, New York 10041. The ratings
will be the views only of the rating agencies. We cannot assure that any ratings
will continue for any period of time or that the ratings will not be revised or
withdrawn. Any revision or withdrawal of the ratings may have an adverse effect
on the market price of the offered certificates.
A securities rating addresses the likelihood of the receipt by the
certificateholders of distributions on the offered certificates. The ratings on
the offered certificates do not constitute statements regarding the possibility
that the certificateholders might realize a lower than anticipated yield. A
securities rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
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LEGAL MATTERS
The validity of the offered certificates and certain federal income tax
matters will be passed on for the depositor and the underwriter by Cadwalader,
Wickersham & Taft, New York, New York.
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GLOSSARY OF TERMS
"Accrued Certificate Interest" means for each class of certificates and
each Distribution Date, an amount equal to (1) the interest accrued at such
class's interest rate during the related Interest Accrual Period on the
Certificate Principal Balance (or, in the case of the Class X certificates, the
Notional Principal Balance) of such class of certificates, minus each class's
pro rata share of any Net Interest Shortfalls, the interest portion of any
Excess Losses through the Cross-Over Date and, after the Cross-Over Date, the
interest portion of Realized Losses, including Excess Losses plus (2) any
Accrued Certificate Interest for that class remaining undistributed from
previous Distribution Dates.
"Adjustment Amount" means with respect to each anniversary of the Cut-off
Date, the amount, if any, by which the Special Hazard Loss Coverage Amount
(without giving effect to the deduction of the Adjustment Amount for such
anniversary) exceeds the lesser of:
(1) an amount calculated by the servicer and approved by each of Fitch
and S&P, which amount shall not be less than $500,000; and
(2) the greater of (x) 1% (or if greater than 1%, the highest
percentage of Loans by principal balance secured by Mortgaged Properties in
any California zip code) of the outstanding principal balance of all the
Loans on the Distribution Date immediately preceding such anniversary and
(y) twice the outstanding principal balance of the Loan which has the
largest outstanding principal balance on the Distribution Date immediately
preceding such anniversary.
"Advance" means any of the advances required to be made by the servicer for
any Distribution Date in an amount equal to the aggregate of all payments of
principal and interest on the Loans, net of the Servicing Fee that were due on
the related due date, and that were not received by the related Determination
Date.
"Allocable Share" means with respect to any class of Junior Certificates on
any Distribution Date, such class's pro rata share (based on the Certificate
Principal Balance of each class of Junior Certificates) of each of the
components of the Junior Optimal Principal Amount described in the definition
thereof; provided, that, unless the Certificate Principal Balances of the Class
A-1, Class A-2, Class A-3, Class A-4, Class A-5 and Class A-R certificates have
been reduced to zero, no class of Class B Certificates will be entitled on any
Distribution Date to receive distributions pursuant to clauses 5(b)(A) and (6)
of the definition of Junior Optimal Principal Amount unless the Class Prepayment
Distribution Trigger for that class is satisfied for that Distribution Date.
"Available Funds" means with respect to any Distribution Date, an amount
equal to the sum of the following amounts net of amounts reimbursable or payable
to the servicer or the trustee on deposit in the Collection Account at the close
of business on the related Determination Date with respect to the Loans:
(A) (1) all payments on account of principal of the Loans, including unscheduled
principal prepayments, on the Loans;
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(2) all payments on account of interest on the Loans adjusted to the
Net Mortgage Rate;
(3) all net insurance proceeds and net proceeds from the liquidation
of Loans, including condemnation proceeds, to the extent those proceeds are
not to be applied to the restoration of the related mortgaged property o
released to the related borrower in accordance with the servicer's normal
servicing procedures;
(4) any amounts deposited in the Collection Account by the servicer in
connection with any losses on in the investments permitted by the Pooling
and Servicing Agreement;
(5) any amounts deposited in the Collection Account by the servicer in
connection with a deductible clause in any blanket hazard insurance policy;
(6) all proceeds of a primary mortgage guaranty insurance policy; and
(7) the net monthly rental income from the REO Properties; plus
(B) Advance amounts; plus
(C) any amounts payable in connection with the purchase of any Loan and any
Substitution Adjustment Amounts; plus
(D) Compensating Interest payments; less
(E) amounts required to be held in the Collection Account in respect of future
Distribution Dates.
"Bankruptcy Loss Coverage Amount" means with respect to any Distribution
Date, an amount equal to approximately $100,000 (approximately .059% of the
Loans by Cut-Off Date Pool Balance), minus the aggregate amount of previous
Deficient Valuations and Debt Service Reductions. As of any Distribution Date on
or after the Cross-Over Date, the Bankruptcy Loss Coverage Amount will be zero.
The Bankruptcy Loss Coverage Amount may be reduced or modified upon written
confirmation from Fitch and S&P that the reduction or modification will not
adversely affect the then current ratings of the Senior Certificates by Fitch
and S&P. Such reduction may adversely affect the coverage provided by
subordination with respect to Deficient Valuations and Debt Service Reductions.
"Certificate Principal Balance" means with respect to any class of
certificates and any Distribution Date, the principal balance of that class on
the date of the initial issuance of the certificates as reduced, but not below
zero, by:
(1) all amounts distributed on previous Distribution Dates on that
class on account of principal;
(2) a principal portion of all Realized Losses allocated to that class
on previous Distribution Dates; and
(3) in the case of a class of Junior Certificates, the portion if any
of the Junior Certificate Writedown Amount and the Class PO Deferred
Payment Writedown Amount allocated to that class for previous Distribution
Dates.
"Class A-5 Percentage" means, with respect to any Distribution Date, the
percentage obtained by dividing (1) the aggregate Certificate Principal Balance
of the Class A-5 certificates
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immediately preceding such Distribution Date by (2) the aggregate Certificate
Principal Balance of all the certificates other than the Class PO certificates
immediately preceding such Distribution Date. The initial Class A-5 Percentage
is expected to be approximately 10.01%.
"Class A-5 Prepayment Distribution Percentage" means, with respect to any
Distribution Date, the Class A-5 Percentage multiplied by the percentage set
forth in the following chart:
Distribution Date Occurring %
--------------------------- -
August 2000 through July 2005 0
August 2005 through July 2006 30
August 2006 through July 2007 40
August 2007 through July 2008 60
August 2008 through July 2009 80
after July 2009 100
"Class A-5 Principal Distribution Amount" means for any Distribution Date, the
sum of:
(1) the Class A-5 Scheduled Distribution Percentage of the applicable
Non-PO Percentage of all scheduled monthly payments of principal due on
each Loan on the related due date without giving effect to any Deficient
Valuation or Debt Service Reduction that occurred prior to the reduction of
the Bankruptcy Loss Coverage Amount to zero;
(2) the Class A-5 Scheduled Distribution Percentage of the applicable
Non-PO Percentage of the principal portion of the Purchase Price of each
Loan that was repurchased by Provident or another person pursuant to the
Pooling and Servicing Agreement as of that Distribution Date;
(3) the Class A-5 Scheduled Distribution Percentage of the applicable
Non-PO Percentage of any Substitution Adjustment Amounts received with
respect to that Distribution Date;
(4) the Class A-5 Scheduled Distribution Percentage of the applicable
Non-PO Percentage of the amount of net insurance proceeds allocable to
principal and interest received in the prior calendar month with respect to
a Loan that is not a Liquidated Loan;
(5) with respect to each Loan that became a Liquidated Loan during the
calendar month preceding the month of that Distribution Date, the lesser
of:
(a) the Class A-5 Scheduled Distribution Percentage of the
applicable Non-PO Percentage of the Scheduled Principal Balance of that
Loan, and
(b) either (A) the Class A-5 Prepayment Distribution
Percentage or (B) if an Excess Loss was sustained with respect to any
Liquidated Loan during the preceding calendar month, the Class A-5
Scheduled Distribution Percentage, of the applicable Non-PO Percentage
of the amount of the net insurance or net liquidation proceeds
allocable to principal received with respect to that Loan; and
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(6) the Class A-5 Prepayment Distribution Percentage of the
applicable Non-PO Percentage of:
(a) principal prepayments in full received during the related
Prepayment Period, and
(b) partial principal prepayments applied during the related
Prepayment Period;
provided, however, that if a Deficient Valuation or Debt Service Reduction that
is an Excess Loss is sustained with respect to a Loan that is not a Liquidated
Loan, the Class A-5 Scheduled Distribution Principal Distribution Amount will be
reduced on the related Distribution Date by the Class A-5 Scheduled Distribution
Percentage of the applicable Non-PO Percentage of the principal portion of the
Deficient Valuation or Debt Service Reduction.
"Class A-5 Scheduled Distribution Percentage" means with respect to:
(1) any Distribution Date prior to the Distribution Date in August
2005, 0%, and
(2) any Distribution Date after the Distribution Date in July 2005,
the Class A-5 Percentage for that Distribution Date.
"Class B Certificates" means the Class B-1, Class B-2, Class B-3, Class B-4
and Class B-5 certificates.
"Class PO Deferred Amount" means, with respect to any Distribution Date on
or prior to the Cross-Over Date, the sum of (1) the applicable PO Percentage of
the principal portion of Non-Excess Realized Losses on a Discount Mortgage Loan
allocated to the Class PO certificates on such date and (2) all amounts
previously allocated to the Class PO certificates in respect of such losses and
not distributed to the Class PO certificates on prior Distribution Dates.
"Class PO Deferred Payment Writedown Amount" means, with respect to any
Distribution Date, the amount, if any, distributed on that Distribution Date in
respect of the Class PO Deferred Amount pursuant to priority third of the second
paragraph under "Description of the Offered Certificates--Allocation of
Available Funds" in this prospectus supplement.
"Class PO Principal Distribution Amount" means for any Distribution Date,
the sum of:
(1) the applicable PO Percentage of all scheduled monthly payments of
principal due on each Loan on the related due date without giving effect to
any Deficient Valuation or Debt Service Reduction that occurred prior to
the reduction of the Bankruptcy Loss Coverage Amount to zero;
(2) the applicable PO Percentage of the principal portion of the
Purchase Price of each Loan that was repurchased by Provident or another
person pursuant to the Pooling and Servicing Agreement as of that
Distribution Date;
(3) the applicable PO Percentage of any Substitution Adjustment
Amounts received with respect to that Distribution Date;
(4) the applicable PO Percentage of the amount of net insurance
proceeds or net liquidation proceeds allocable to principal and interest
received in the prior calendar month with respect to a Loan that is not a
Liquidated Loan;
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(5) with respect to each Loan that became a Liquidated Loan during the
calendar month preceding the month of that Distribution Date, the lesser
of:
(a) the applicable PO Percentage of the Scheduled Principal
Balance of that Loan, and
(b) the applicable PO Percentage of the amount of the net
insurance or net liquidation proceeds allocable to principal received
with respect to that Loan; and
(6) the applicable PO Percentage of:
(a) principal prepayments in full received during the related
Prepayment Period, and
(b) partial principal prepayments applied during the related
Prepayment Period;
provided, however, that if a Deficient Valuation or Debt Service Reduction that
is an Excess Loss is sustained with respect to a Loan that is not a Liquidated
Loan, the Class PO Principal Distribution Amount will be reduced on the related
Distribution Date by the applicable PO Percentage of the principal portion of
the Deficient Valuation or Debt Service Reduction.
"Class Prepayment Distribution Trigger" means with respect to a class of
Class B Certificates and any Distribution Date, if the fraction (expressed as a
percentage), the numerator of which is the aggregate Certificate Principal
Balance of such class and each class subordinate thereto, if any, and the
denominator of which is the Pool Scheduled Principal Balance with respect to
that Distribution Date, equals or exceeds such percentage calculated as of the
date of issuance of the certificates.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collection Account" means the account established and maintained by the
servicer for the benefit of the certificateholders.
"Compensating Interest" for any Distribution Date is an amount equal to the
lesser of: (1) the aggregate of the Prepayment Interest Shortfalls for the
related Distribution Date; and (2) 50% of the servicer's aggregate Servicing
Fees due to the servicer for such Distribution Date.
"CPR" means constant prepayment rate.
"Cross-Over Date" means the Distribution Date on which the Certificate
Principal Balances of the Junior Certificates have been reduced to zero.
"Cut-Off Date" means July 1, 2000.
"Cut-Off Date Pool Balance" means the Pool Balance as of the Cut-Off Date.
"Debt Service Reduction" means a reduction in the amount of the monthly
payment due on a mortgage loan as established by a bankruptcy court in a
personal bankruptcy of a mortgagor.
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"Debt-to-Income Ratio" means the ratio of the borrower's monthly housing
expenses (including principal and interest on the proposed 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.
"Deficient Valuation" means difference between the outstanding principal
balance of a Loan and a reduced secured debt as a result of a bankruptcy court
establishing the value of the mortgaged property at an amount less than the then
outstanding principal balance of the Loan in connection with a bankruptcy of the
related borrower.
"Definitive Certificate" means any certificate represented by a physical
certificate and not a book-entry certificate.
"Determination Date" means with respect to any Distribution Date, the 21st
day of the calendar month in which the Distribution Date occurs or, if that day
is not a business day, the business day immediately preceding the 21st day;
provided that the Determination Date is required to be at least 4 days prior to
the Distribution Date.
"Discount Mortgage Loan" means any Loan having a Net Mortgage Rate less
than 7.75%.
"Distribution Account" means the account established and maintained by the
trustee for the benefit of the certificateholders.
"Distribution Date" means the 25th day of each month, or if that day is not
a business day, the first business day after that 25th day, commencing in August
2000.
"Eligible Substitute Mortgage Loan" means a mortgage loan substituted for a
defective Loan which must, on the date of such substitution:
(1) have an outstanding principal balance, or in the case of a
substitution of more than one Eligible Substitute Mortgage Loans for a
defective Loan, an aggregate principal balance, not in excess of, and
not more than 10% less than, the principal balance of the defective
Loan;
(2) have a Mortgage Interest Rate not less than the Mortgage
Interest Rate of the defective Loan and not more than 1% in excess of
the Mortgage Interest Rate of the defective Loan;
(3) have an LTV Ratio no higher than the defective Loan; and
(4) have a remaining term to maturity no greater than (and no
more than one year less than) the remaining term to maturity of the
defective Loan;
(5) comply with each representation and warranty as to the Loans
set forth in the Pooling and Servicing Agreement, which will be deemed
to be made as of the date of substitution.
"Events of Servicing Termination" means, among other things:
(1) any failure by the servicer to deposit in the Collection
Account the required amounts or remit to the trustee any payment which
continues unremedied for five business days following written notice
to the servicer;
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(2) any failure by the servicer to observe or perform in any
material respect any other of its covenants or agreements in the
Pooling and Servicing Agreement, which continues unremedied for 60
days after the first date on which written notice of such failure is
given to the servicer; or
(3) insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, and certain actions by or on
behalf of the servicer indicating its insolvency or inability to pay
its obligations.
"Excess Loss" means Deficient Valuation, Fraud Loss or Special Hazard Loss
or any part thereof, occurring after the Bankruptcy Loss Coverage Amount, Fraud
Loss Coverage Amount or Special Hazard Loss Coverage Amount, respectively, has
been reduced to zero.
"Fraud Loss" means any Realized Loss attributable to fraud in the
origination of the related mortgage loan.
"Fraud Loss Coverage Amount" means the approximate amount set forth in the
following table for the indicated period:
<TABLE>
<CAPTION>
Period Fraud Loss Coverage Amount
----------------------------------------------- --------------------------------------------------------------------
<S> <C>
Initial................................... o $170,191.41 (1)
July 26, 2000 through June 30, 2001....... o $170,191.41 minus the aggregate amount of Fraud Losses that
would have been allocated to the Junior Certificates in the
absence of the Loss Allocation Limitation since the Cut-off Date
July 1, 2001 through June 30, 2003........ o (1) the lesser of (a) the Fraud Loss Coverage Amount as of the
most recent anniversary of the Cut-off Date and (b) 1% of the
then current Pool Scheduled Principal Balance minus (2) the
Fraud Losses that would have been allocated to the Junior
Certificates in the absence of the Loss Allocation Limitation
since the most recent anniversary of the Cut-off Date
July 1, 2003 through June 30, 2005........ o the lesser of (a) the Fraud Loss Coverage Amount as of the most
recent anniversary of the Cut-off Date and (b) 0.5% of the then
current Pool Scheduled Principal Balance minus (2) the Fraud
Losses that would have been allocated to the Junior Certificates
in the absence of the Loss Allocation Limitation since the most
recent anniversary of the Cut-off Date
After the earlier to occur of July 1, 2005
and the Cross-Over Date........................
o $0
</TABLE>
----------------------
(1) Represents approximately 1% of the Loans by Cut-Off Date Pool Balance.
"Interest Accrual Period" means for any Distribution Date and each class of
offered certificates, the period from and including the first day of each month,
commencing July 1, 2000,
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to and including the last day of that month on the basis of a 360-day year
consisting of twelve 30-day months.
"Interest Shortfall" means with respect to a Loan and any Distribution
Date, shortfalls in interest resulting from:
(1) any voluntary prepayment of principal in full on such Loan
received from the sixteenth day (or, in the case of the first
Distribution Date, from the Cut-Off Date) through the last day of the
month preceding such Distribution Date;
(2) any partial prepayment of principal on the Loan by the
mortgagor during the month preceding such Distribution Date; or
(3) a reduction in the interest rate on such Loan due to the
application of the Soldiers' and Sailors' Civil Relief Act of 1940
whereby, in general, members of the Armed Forces who entered into
mortgages prior to the commencement of military service may have the
interest rates on those mortgage loans reduced for the duration of
their active military service. See "Certain Legal Aspects of the
Mortgage Loans--Soldiers' and Sailors' Civil Relief Act" of 1940 in
the prospectus.
"Junior Certificates" means the Class M, Class B-1, Class B-2, Class B-3,
Class B-4 and Class B-5 Certificates.
"Junior Certificate Writedown Amount" means, as of any Distribution Date,
the amount by which (a) the sum of the Certificate Principal Balances of all of
the certificates, after giving effect to the distribution of principal and the
allocation of Realized Losses in reduction of the Certificate Principal Balances
of the certificates on that Distribution Date, exceeds (b) the Pool Scheduled
Principal Balance on the first day of the month of such Distribution Date less
any Deficient Valuations occurring before the Bankruptcy Loss Coverage Amount
has been reduced to zero.
"Junior Optimal Principal Amount" means for any Distribution Date, the sum
of:
(1) the Junior Percentage of the applicable Non-PO Percentage of
all scheduled monthly payments of principal due on each Loan on the
related due date without giving effect to any Deficient Valuation or
Debt Service Reduction that occurred prior to the reduction of the
Bankruptcy Loss Coverage Amount to zero;
(2) the Junior Percentage of the applicable Non-PO Percentage of
the principal portion of the Purchase Price of each Loan that was
repurchased by Provident or another person pursuant to the Pooling and
Servicing Agreement as of that Distribution Date;
(3) the Junior Percentage of the applicable Non-PO Percentage of
any Substitution Adjustment Amounts received with respect to that
Distribution Date;
(4) the Junior Percentage of the applicable Non-PO Percentage of
the amount of net insurance proceeds or net liquidation proceeds
allocable to principal and interest received in the prior calendar
month with respect to a Loan that is not a Liquidated Loan;
(5) with respect to each Loan that became a Liquidated Loan
during the calendar month preceding the month of that Distribution
Date, the lesser of:
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(a) the Junior Percentage of the applicable Non-PO Percentage of
the Scheduled Principal Balance of that Loan, and
(b) either (A) the Junior Prepayment Percentage or (B) if an
Excess Loss was sustained with respect to such Liquidated Loan during
the preceding calendar month, the Junior Percentage, of the applicable
Non-PO Percentage of the amount of the net insurance or net
liquidation proceeds allocable to principal received with respect to
that Loan; and
(6) the Junior Prepayment Percentage of the applicable Non-PO
Percentage of:
(a) principal prepayments in full received during the related
Prepayment Period, and
(b) partial principal prepayments applied during the related
Prepayment Period;
provided, however, that if a Deficient Valuation or Debt Service Reduction that
is an Excess Loss is sustained with respect to a Loan that is not a Liquidated
Loan, the Junior Optimal Principal Amount will be reduced on the related
Distribution Date by the Junior Percentage of the applicable Non-PO Percentage
of the principal portion of the Deficient Valuation or Debt Service Reduction.
"Junior Percentage" means with respect to any Distribution Date, 100% minus
the Senior Percentage. The initial Junior Percentage is expected to be
approximately 3.91%.
"Junior Prepayment Percentage" means with respect to any Distribution Date,
100% minus the Senior Prepayment Percentage, except that on any Distribution
Date after the Senior Final Distribution Date, the Junior Prepayment Percentage
will equal 100%.
"Liquidated Loan" means any defaulted Loan as to which the servicer has
determined that all amounts which it expects to recover from or on account of
such Loan have been recovered.
"Loan" means any of the mortgage loans included in the trust.
"Loss Allocation Limitation" means the limitation on reductions of the
Certificate Principal Balance of any class on any Distribution Date on account
of any Realized Loss to the extent that the reduction would have the effect of
reducing the aggregate Certificate Principal Balance of all of the certificates
as of that Distribution Date to an amount less than the Pool Scheduled Principal
Balance as of the first day of the month of that Distribution Date, less any
Deficient Valuations occurring before the Bankruptcy Loss Coverage Amount has
been reduced to zero.
"LTV Ratio" means with respect to a Loan at any given time, a fraction,
expressed as a percentage, the numerator of which is the principal balance of
the related 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 Loan underwritten pursuant to Provident's
Streamlined Documentation Program as described under "Underwriting Guidelines"
in this prospectus supplement. For 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 loans relating to properties located in California), the LTV
Ratio will be the ratio of the principal amount of the Loan outstanding at the
date of determination divided by the
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appraised value of the related mortgaged property at the time of the origination
of the loan being refinanced or (b) if the loan-to-value ratio at the time of
the origination of the loan being refinanced was greater than 75% (or greater
than 70% in the case of loans relating to properties located in California),
then the LTV Ratio will be the ratio of the principal amount of the 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 the
Loan.
"Mortgage Interest Rate" means with respect to each Loan, the per annum
interest rate at which the Loan accrues interest.
"Mortgage Note" is a document which evidences an interest in a mortgage
loan secured by a mortgage or deed of trust.
"Mortgaged Property" means with respect to any Loan, the property securing
the Loan.
"Net Interest Shortfall" means, with respect to any Distribution Date, the
excess of the aggregate Interest Shortfalls with respect to that Distribution
Date over the Compensating Interest, if any, for that Distribution Date.
"Net Mortgage Rate" for each Loan is the applicable Mortgage Interest Rate
less the sum of:
(1) the Servicing Fee Rate and
(2) the Trustee Fee Rate.
"Non-Discount Mortgage Loan" means any Loan having a Net Mortgage Rate
equal to or in excess of 7.75%.
"Non-Excess Realized Loss" means any Realized Loss other than an Excess
Loss.
"Non-PO Percentage" means with respect to:
(1) any Discount Mortgage Loan, the fraction, expressed as a
percentage, equal to Net Mortgage Rate divided by 7.75%; and
(2) any Non-Discount Mortgage Loan, 100%.
"Notional Principal Balance" means, with respect to the Class X
certificates and any Distribution Date, the aggregate Scheduled Principal
Balance of the outstanding Non-Discount Mortgage Loans as of the first day of
the calendar month preceding such Distribution Date. The initial aggregate
Notional Principal Balance of the Class X certificates is expected to be
approximately $147,878,310.
"Original Junior Principal Balance" means the aggregate Certificate
Principal Balances of the Junior Certificates as of the date of issuance of the
certificates.
"Plan" is any:
(1) employee benefit plan as defined in Section 3(3) of ERISA,
(2) plan described in Section 4975(e)(1) of the Code, including
individual retirement accounts or Keogh plans, or
(3) entity whose underlying assets include plan assets by reason of a
plan's a investment in entities specified in clauses (1) and (2) above.
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"PO Percentage" means with respect to
(1) any Discount Mortgage Loan, the fraction, expressed as a
percentage, equal to (7.75% - the Net Mortgage Rate) divided by 7.75%; and
(2) with respect to any Non-Discount Mortgage Loan, 0%.
"Pool Balance" means with respect to any date, the aggregate principal
balance of the Loans as of that date.
"Pool Scheduled Principal Balance" means as of any Distribution Date, the
aggregate Scheduled Principal Balances of the Loans that were outstanding on the
first day of the month preceding the related Distribution Date.
"Pooling and Servicing Agreement" is a pooling and servicing agreement
among the depositor, the originator, the servicer and the trustee.
"Prepayment Interest Shortfall" means with respect to any Distribution Date
and each Loan, the amount described in clauses (1) and (2) of the definition of
"Interest Shortfall."
"Prepayment Period" means with respect to any voluntary prepayment of a
Loan in full and Distribution Date the period from the 16th day of the calendar
month preceding the month in which that Distribution Date occurs (or, in the
case of the first Distribution Date, the Cut-Off Date) through the 15th day of
calendar month in which that Distribution Date occurs. With respect to any other
unscheduled prepayment of principal of any mortgage loan and any Distribution
Date, the Prepayment Period is the month preceding the month of such
Distribution Date
"Provident" means Provident Funding Associates, L.P.
"Purchase Price" means with respect to each defective Loan, an amount equal
to outstanding principal balance of the defective Loan as of the date of
purchase, plus accrued and unpaid interest at the applicable Mortgage Interest
Rate (less servicing fees) from the dates through which interest was last paid
by the related borrower or advanced (and not reimbursed) to the first day of the
month in which the amount is to be distributed).
"Rating Agency" means any of Fitch and Standard & Poor's Ratings Services.
"Realized Loss" means:
(1) as to any Liquidated Loan, the unpaid principal balance thereof
plus accrued and unpaid interest thereon at the Net Mortgage Rate through
the last day of the month of liquidation, less the net proceeds from the
liquidation of, and any insurance proceeds from, Loan and the related
Mortgaged Property.
(2) as to any Loan, a Deficient Valuation.
"Record Date" means with respect to any Distribution Date and the offered
certificates, the last business day of the month immediately preceding the month
in which the related Distribution Date occurs, or the closing date, in the case
of the first Distribution Date.
"Regular Certificates" means the Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5, Class PO, Class M, Class B-1 and Class B-2 certificates.
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"REO Property" is a property acquired on behalf of the certificateholders
in respect of a defaulted Loan through foreclosure, deed-in-lieu of foreclosure,
repossession or otherwise.
"Scheduled Principal Balance" means as to any Loan and due date, the unpaid
principal balance of such Loan as of that 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 principal prepayments
and liquidation proceeds allocable to principal and to the payment of principal
due on the due date and irrespective of any delinquency in payment by the
related borrower.
"Senior Certificates" means any of the Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5, Class A-R, Class X and Class PO certificates.
"Senior Final Distribution Date" means the Distribution Date on which the
respective Certificate Principal Balances of the Senior Certificates (other than
the Class PO and Class X certificates) have each been reduced to zero.
"Senior Optimal Principal Amount" means for any Distribution Date, the sum
of:
(1) the Senior Percentage of the applicable Non-PO Percentage of all
scheduled monthly payments of principal due on each Loan on the related due
date without giving effect to any Deficient Valuation or Debt Service
Reduction that occurred prior to the reduction of the Bankruptcy Loss
Coverage Amount to zero;
(2) the Senior Percentage of the applicable Non-PO Percentage of the
principal portion of the Purchase Price of each Loan that was repurchased
by Provident or another person pursuant to the Pooling and Servicing
Agreement as of that Distribution Date;
(3) the Senior Percentage of the applicable Non-PO Percentage of any
Substitution Adjustment Amounts received with respect to that Distribution
Date;
(4) the Senior Percentage of the applicable Non-PO Percentage of the
amount of net insurance proceeds or net liquidation proceeds allocable to
principal and interest received in the prior calendar month with respect to
a Loan that is not a Liquidated Loan;
(5) with respect to each Loan that became a Liquidated Loan during the
calendar month preceding the month of that Distribution Date, the lesser
of:
(a) the Senior Percentage of the applicable Non-PO Percentage of
the Scheduled Principal Balance of that Loan, and
(b) either (A) the Senior Prepayment Percentage or (B) if an
Excess Loss was sustained with respect to any Liquidated Loan during
the preceding calendar month, the Senior Percentage, of the applicable
Non-PO Percentage of the amount of the net insurance or net liquidation
proceeds allocable to principal received with respect to that Loan; and
(6) the Senior Prepayment Percentage of the applicable Non-PO
Percentage of:
(a) principal prepayments in full received during the related
Prepayment Period, and
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(b) partial principal prepayments applied during the related
Prepayment Period;
provided, however, that if a Deficient Valuation or Debt Service Reduction that
is an Excess Loss is sustained with respect to a Loan that is not a Liquidated
Loan, the Senior Optimal Principal Amount will be reduced on the related
Distribution Date by the Senior Percentage of the applicable Non-PO Percentage
of the principal portion of the Deficient Valuation or Debt Service Reduction.
"Senior Percentage" means with respect to any Distribution Date, the lesser
of 100% and the percentage obtained by dividing the aggregate Certificate
Principal Balances of all the Senior Certificates (other than the Class PO and
Class X certificates) immediately preceding that Distribution Date by the
aggregate Certificate Principal Balances of all the certificates (other than the
Class PO and Class X certificates) immediately preceding that Distribution Date.
The initial Senior Percentage is expected to be approximately 96.09%.
"Senior Prepayment Percentage" means with respect to any Distribution Date,
the percentage (not exceeding 100%) set forth in the following table:
Distribution Date Occurring %
------------------------------ ----------------------------------------
August 2000 through July 2005 100%
August 2005 through July 2006 Senior Percentage plus 70% of the Junior
Percentage
August 2006 through July 2007 Senior Percentage plus 60% of the Junior
Percentage
August 2007 through July 2008 Senior Percentage plus 40% of the Junior
Percentage
August 2008 through July 2009 Senior Percentage plus 20% of the Junior
Percentage
after July 2009 Senior Percentage
The reductions in the Senior Prepayment Percentage described above will not
occur, unless, as of the last day of the month preceding the Distribution Date,
either:
(1) the aggregate Scheduled Principal Balance of Loans delinquent
60 days or more (including for this purpose any Loans in
foreclosure and Loans with respect to which the related
Mortgaged Property has been acquired by the trust) does not
equal or exceed 50% of the aggregate Certificate Principal
Balances of the Junior Certificates as of that date; and
(2) cumulative Realized Losses do not exceed:
(a) 30% of the aggregate Original Junior Principal Balance if
such Distribution Date occurs between and including August
2005 and July 2006;
(b) 35% of the Original Junior Principal Balance if such
Distribution Date occurs between and including August 2006
and July 2007;
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(c) 40% of the Original Junior Principal Balance if such
Distribution Date occurs between and including August 2007
and July 2008;
(d) 45% of the Original Junior Principal Balance if such
Distribution Date occurs between and including August 2008
and July 2009; and
(e) 50% of the Original Junior Principal Balance if such
Distribution Date occurs during or after August 2009.
"Servicing Advances" means with respect to any Loan the reasonable and
customary "out-of-pocket" costs and expenses required to be incurred by the
servicer in the performance of its servicing obligations, including but not
limited to the cost of:
(1) the preservation, restoration and protection of the Mortgaged
Properties,
(2) any enforcement or judicial proceedings, including foreclosures,
and
(3) the management and liquidation of Mortgaged Properties acquired in
satisfaction of the related mortgage.
"Servicing Fee" is an amount equal to one-twelfth of the Servicing Fee Rate
for the Loan on the unpaid principal balance of the loan as of the related due
date after giving effect to payments of principal and other amounts in reduction
of the principal balance of the Loan on its due date.
"Servicing Fee Rate" means the rate equal to 0.25% per annum.
"SPA" means Standard Prepayment Assumption.
"Special Hazard Loss" means a Realized Loss attributable to damage or a
direct physical loss suffered by a Mortgaged Property--including any Realized
Loss due to the presence or suspected presence of hazardous wastes or substances
on a mortgaged property--other than any such damage or loss covered by a hazard
policy or a flood insurance policy required to be maintained in respect of the
Mortgaged Property under the Pooling and Servicing Agreement or any loss due to
normal wear and tear or certain other causes.
"Special Hazard Loss Coverage Amount" means approximately $2,939,767
(approximately 1.73% of the Loans by Cut-Off Date Pool Balance) less, on each
Distribution Date, the sum of (1) the aggregate amount of Special Hazard Losses
that would have been previously allocated to the Junior Certificates in the
absence of the Loss Allocation Limitation and (2) the Adjustment Amount. As of
any Distribution Date on or after the Cross-Over Date, the Special Hazard Loss
Coverage Amount will be zero.
"Standard Prepayment Assumption" represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of the pool of
loans for the life of the loans as described in "Prepayment and Yield
Considerations--Modeling Assumptions" in this prospectus supplement.
"Substitution Adjustment Amount" means in connection with a substitution of
a defective Loan for an Eligible Substitute Mortgage Loan, an amount equal to
the excess of the principal balance of the defective Loan over the principal
balance of the Eligible Substitute Mortgage Loan.
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"Termination Price" means with respect to each Loan to be purchased on or
after the first date on which the aggregate principal balance of the Loans, as
of that date, is less than 10% of the Cut-Off Date Pool Balance, an amount
generally equal to par plus one month's accrued interest for that Loan at the
related Mortgage Interest Rate (net of the Servicing Fee Rate).
"Trustee Fee" is an amount equal to the product of one-twelfth of the
Trustee Fee Rate and the aggregate of the principal balances of all the Loans as
of the first day of the applicable Collection Period.
"Trustee Fee Rate" means the rate equal to .005% per annum, or such other
per annum rate to ensure the trustee fee in the aggregate is equal to at least
$5,000 per annum.
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PROSPECTUS
July 21, 2000
PAINEWEBBER MORTGAGE ACCEPTANCE CORPORATION IV
Depositor
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(Issuable in Series)
PaineWebber Mortgage Acceptance Corporation IV from time to time will
offer asset-backed pass-through certificates or asset-backed notes. We will
offer the certificates or notes through this prospectus and a separate
prospectus supplement for each series.
For each series we will establish a trust fund consisting primarily of
o 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 or beneficial interests in them; or
o pass-through or participation certificates issued or guaranteed by
the Government National Mortgage Association, the Federal National
Mortgage Association or the Federal Home Loan Mortgage Corporation.
The certificates of a series will evidence beneficial ownership
interests in the trust fund. The notes of a series will evidence indebtedness of
the trust fund. The certificates or notes of a series may be divided into two or
more classes which may have different interest rates and which may receive
principal payments in differing proportions and at different times. In addition,
the rights of certain holders of classes may be subordinate to the rights of
holders of other classes to receive principal and interest.
--------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 17 IN
THIS PROSPECTUS AND IN THE RELATED PROSPECTUS SUPPLEMENT.
The securities will not represent obligations of PaineWebber Mortgage
Acceptance Corporation IV or any of its affiliates. No governmental agency will
insure the certificates or the collateral securing the securities.
You should consult with your own advisors to determine if the offered
securities are appropriate investments for you and to determine the applicable
legal, tax, regulatory and accounting treatment of the offered securities.
--------------------------------------------------------------------------------
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR NOTES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
No secondary market will exist for a series of certificates or notes
prior to its offering. We cannot assure you that a secondary market will develop
for the certificates or notes, as applicable, of any series, or, if it does
develop, that it will continue.
PAINEWEBBER INCORPORATED
<PAGE>
We may offer the certificates or notes, as applicable, through one or
more different methods, including offerings through underwriters, as more fully
described under "Plans of Distribution" in this prospectus and in the related
prospectus supplement. Our affiliates may from time to time act as agents or
underwriters in connection with the sale of the offered certificates or notes,
as applicable. We may retain or hold for sale, from time to time, one or more
classes of a series of certificates or notes, as applicable. We may offer
certain classes of the certificates or notes, as applicable, if so specified in
the related prospectus supplement, in one or more transactions exempt from the
registration requirements of the Securities Act of 1933, as amended. These
offerings will not be made pursuant to this prospectus or the related
registration statement.
----------
This prospectus may not be used to consummate sales of the offered
certificates or notes, as applicable, unless accompanied by a prospectus
supplement.
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<PAGE>
TABLE OF CONTENTS
Page
Summary of Terms...............................................................6
Risk Factors..................................................................17
Limited Liquidity of Securities May Adversely Affect Market Value
of Securities...........................................................17
Assets of Trust Fund Are Limited...........................................17
Credit Enhancement Is Limited in Amount and Coverage.......................18
Yield Is Sensitive to Rate of Principal Prepayment.........................18
Borrower May Be Unable to Make Balloon Payment.............................19
Nature of Mortgages Could Adversely Affect Value of Properties.............19
Violations of Environmental Laws May Reduce Recoveries on
Properties..............................................................21
Violations of Federal Laws May Adversely Affect Ability to Collect
on Loans................................................................22
Rating of the Securities Are Limited and May be Withdrawn or Lowered.......23
Adverse Conditions in the Residential Real Estate Markets May
Result in a Decline in Property Values..................................24
Book-Entry System for Certain Classes May Decrease Liquidity and
Delay Payment...........................................................25
Unsecured Home Improvement Contracts May Experience Relatively
Higher Losses...........................................................25
Mortgage Loans Underwritten as Non-Conforming Credits May
Experience Relatively Higher Losses.....................................26
Assets of the Trust Fund May Include Delinquent and Sub-Performing
Residential Loans.......................................................26
Changes in the Market Value of Properties May Adversely Affect
Payments on the Securities..............................................27
Defined Terms.................................................................27
The Trust Funds...............................................................27
Residential Loans..........................................................27
Agency Securities..........................................................35
Stripped Agency Securities.................................................40
Additional Information Concerning the Trust Funds..........................41
Use of Proceeds...............................................................43
Yield Considerations..........................................................43
Maturity and Prepayment Considerations........................................45
The Depositor.................................................................48
Residential Loans.............................................................49
Underwriting Standards.....................................................49
Representations by Unaffiliated Sellers; Repurchases.......................49
Sub-Servicing..............................................................50
Description of the Securities.................................................51
General....................................................................51
Assignment of Assets of the Trust Fund.....................................52
Deposits to the Trust Account..............................................56
Pre-Funding Account........................................................56
Payments on Residential Loans..............................................56
Payments on Agency Securities..............................................58
Distributions..............................................................58
Principal and Interest on the Securities...................................60
Available Distribution Amount..............................................61
Subordination..............................................................62
Advances...................................................................64
Statements to Holders of Securities........................................65
Book-Entry Registration of Securities......................................67
Collection and Other Servicing Procedures..................................70
Realization on Defaulted Residential Loans.................................71
Retained Interest, Administration Compensation and Payment of
Expenses................................................................73
Evidence as to Compliance..................................................74
Certain Matters Regarding the Master Servicer, the Depositor and
the Trustee.............................................................74
Deficiency Events..........................................................78
Events of Default..........................................................79
Amendment..................................................................84
Termination................................................................85
Voting Rights..............................................................85
Description of Primary Insurance Coverage.....................................85
Primary Credit Insurance Policies..........................................86
FHA Insurance and VA Guarantees............................................87
Primary Hazard Insurance Policies..........................................89
Description of Credit Support.................................................91
Pool Insurance Policies....................................................92
Special Hazard Insurance Policies..........................................94
Bankruptcy Bonds...........................................................97
Reserve Funds..............................................................97
Cross-Support Provisions...................................................98
Letter of Credit...........................................................98
Insurance Policies and Surety Bonds........................................98
Excess Spread..............................................................99
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Overcollateralization......................................................99
Certain Legal Aspects of Residential Loans....................................99
General....................................................................99
Mortgage Loans............................................................100
Cooperative Loans.........................................................101
Tax Aspects of Cooperative Ownership......................................102
Manufactured Housing Contracts Other Than Land Contracts..................103
Foreclosure on Mortgages..................................................105
Foreclosure on Cooperative Shares.........................................108
Repossession with respect to Manufactured Housing Contracts that
are not Land Contracts.................................................110
Rights of Redemption with respect to Residential Properties...............111
Notice of Sale; Redemption Rights with respect to Manufactured
Homes..................................................................111
Anti-Deficiency Legislation, Bankruptcy Laws and Other Limitations
on Lenders.............................................................111
Junior Mortgages..........................................................114
Consumer Protection Laws..................................................115
Enforceability of Certain Provisions......................................117
Prepayment Charges and Prepayments........................................118
Subordinate Financing.....................................................119
Applicability of Usury Laws...............................................119
Alternative Mortgage Instruments..........................................120
Environmental Legislation.................................................121
Soldiers' and Sailors' Civil Relief Act of 1940...........................122
Federal Income Tax Consequences..............................................123
General...................................................................123
REMICs....................................................................124
General...................................................................124
Taxation of Owners of Regular Securities..................................128
Taxation of Owners of Residual Securities.................................138
Taxes That May Be Imposed on the REMIC Pool...............................148
Liquidation of the REMIC Pool.............................................149
Administrative Matters....................................................149
Limitations on Deduction of Certain Expenses..............................150
Taxation of Certain Foreign Investors.....................................151
Backup Withholding........................................................152
Reporting Requirements....................................................153
Grantor Trust Funds.......................................................154
Classification of Grantor Trust Funds.....................................154
Standard Securities.......................................................154
Stripped Securities.......................................................158
Reporting Requirements and Backup Withholding.............................162
Partnership Trust Funds...................................................163
Classification of Partnership Trust Funds.................................163
Characterization of Investments in Partnership Securities and Debt
Securities.............................................................163
Taxation of Debt Holder of Securities.....................................163
Taxation of Owners of Partnership Securities..............................164
State and Other Tax Consequences.............................................170
ERISA Considerations.........................................................170
Legal Investment.............................................................175
Plans of Distribution........................................................178
Incorporation of Certain Information by Reference............................179
Legal Matters................................................................180
Financial Information........................................................180
Rating.......................................................................180
Glossary of Terms............................................................182
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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Two separate documents contain information about the offered
certificates or notes, as applicable. These documents progressively provide more
detail:
(1) this prospectus, which provides general information, some of which
may not apply to the offered securities; and
(2) the accompanying prospectus supplement for each series, which
describes the specific terms of the offered securities.
IF THE TERMS OF THE OFFERED SECURITIES VARY BETWEEN THIS PROSPECTUS
AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT, YOU SHOULD RELY ON THE INFORMATION
IN THE PROSPECTUS SUPPLEMENT.
You should rely only on the information contained in this prospectus
and the accompanying prospectus supplement. We have not authorized anyone to
provide you with information that is different from that contained in this
prospectus and the related prospectus supplement. The information in this
prospectus is accurate only as of the date of this prospectus.
----------
If you require additional information, the mailing address of our
principal executive offices is PaineWebber Mortgage Acceptance Corporation IV,
1285 Avenue of the Americas, New York, NY 10019 and the telephone number is
(212) 713-2000. For other means of acquiring additional information about us or
a series of securities, see "Incorporation of Certain Information by Reference"
in this prospectus.
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<PAGE>
SUMMARY OF TERMS
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT. IT
DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING AN
INVESTMENT DECISION. PLEASE READ THIS ENTIRE PROSPECTUS AND THE ACCOMPANYING
PROSPECTUS SUPPLEMENT AS WELL AS THE TERMS AND PROVISIONS OF THE RELATED POOLING
AND SERVICING AGREEMENT OR TRUST AGREEMENT CAREFULLY TO UNDERSTAND ALL OF THE
TERMS OF A SERIES OF SECURITIES.
RELEVANT PARTIES
Depositor..........................PaineWebber Mortgage Acceptance
Corporation IV, the depositor, is a
corporation organized under the laws of
the State of Delaware. The depositor is
a wholly owned limited purpose finance
subsidiary of PaineWebber Group Inc.
Master Servicer....................The entity or entities named as master
servicer in the related prospectus
supplement.
Trustees...........................The trustee or indenture trustee named
as trustee in the related prospectus
supplement. The owner trustee named as
owner trustee in the related prospectus
supplement.
Issuer of Notes....................The depositor or an owner trust
established for the purpose of issuing
the series of notes will issue each
series of notes through a separate
trust. The depositor, and the owner
trustee will enter into a separate trust
agreement to form each owner trust.
SECURITIES
Description of Securities..........The depositor will offer asset-backed
pass-through certificates or
asset-backed notes from time to time.
The depositor will offer these
securities in one or more series. Each
series of securities will include one or
more classes representing either a
beneficial ownership interest in, or
indebtedness secured by, a trust fund.
The trust fund will consist of a
segregated pool of residential loans or
agency securities, or beneficial
interests in them, and certain other
assets described below.
A series of securities may include one
or more classes of securities that may
be entitled to, among other things:
o principal distributions, with
disproportionate nominal or no
interest distributions;
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o interest distributions, with
disproportionate, nominal or no
principal distributions;
o distributions only of prepayments of
principal throughout the lives of the
securities or during specified
periods;
o subordinated distributions of
scheduled payments of principal,
prepayments of principal, interest or
any combination of these payments;
o distributions only after the
occurrence of events specified in the
related prospectus supplement;
o 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;
o interest at a fixed rate or a rate
that is subject to change from time
to time;
o distributions allocable to interest
only after the occurrence of events
specified in the related prospectus
supplement and may accrue interest
until these events occur.
The related prospectus supplement will
specify these entitlements.
The timing and amounts of these
distributions may vary among classes,
over time. 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.
The related prospectus supplement will
specify if each class of securities
o has a stated principal amount; and
o is entitled to distributions of
interest on the security principal
balance based on a specified security
interest rate.
Interest...........................Interest on each class of securities for
a series:
o will accrue at the applicable
security interest rate on its
outstanding security principal
balance;
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o will be distributed to holders of the
securities as provided in the related
prospectus supplement on the related
distribution date; and
o may be reduced to the extent of
certain delinquencies or other
contingencies described in the
related prospectus supplement.
Distributions with respect to accrued
interest on accrual securities will be
identified in the related prospectus
supplement. This accrued interest will
not be distributed but rather will be
added to the security principal balance
of each series prior to the time when
accrued interest becomes payable.
Distributions with respect to interest
on interest-only 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 in this
prospectus and in the related prospectus
supplement.
See "Yield Considerations," "Maturity
and Prepayment Considerations" and
"Description of the Securities" in this
prospectus.
Principal..........................The security principal balance of a
security represents the maximum dollar
amount, exclusive of interest, which you
are entitled to receive as principal
from future cash flow on the assets in
the related trust fund. The related
prospectus supplement will set forth the
initial security principal balance of
each class of securities.
Generally, distributions of principal
will be payable as set forth in the
related prospectus supplement, which may
be on a pro rata basis among all of the
securities of the same class, in
proportion to their respective
outstanding security principal balances.
If an interest-only security does not
have a security principal balance, it
will not receive distributions of
principal. See "The Trust Funds,"
"Maturity and Prepayment Considerations"
and "Description of the Securities" in
this prospectus.
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ASSETS
The Trust Funds....................Each trust fund will consist of:
o a segregated pool of residential
loans, agency securities and/or
mortgage securities; and
o certain other assets as described in
this prospectus and in the related
prospectus supplement.
The depositor will purchase all assets
of the trust fund, either directly or
through an affiliate, from unaffiliated
sellers. The depositor will generally
deposit the assets into the related
trust fund as of the first day of the
month in which the securities evidencing
interests in the trust fund or
collateralized by the assets of the
trust fund are initially issued. See
"Description of the
Securities-Pre-Funding Account" in this
prospectus.
A. Residential Loans..........The residential loans will consist of
any combination of:
o mortgage loans secured by first or
junior liens on one- to four-family
residential properties;
o mortgage loans secured by first or
junior liens on multifamily
residential properties consisting of
five or more dwelling units;
o home improvement installment sales
contracts and installment loan
agreements which may be unsecured or
secured by a lien on the related
mortgaged property;
o a manufactured home, which may have a
subordinate lien on the related
mortgaged property, as described in
the related prospectus supplement;
o one- to four-family first or junior
lien closed end home equity loans for
property improvement, debt
consolidation or home equity
purposes;
o cooperative loans secured primarily
by shares in a private cooperative
housing corporation. The shares,
together with the related proprietary
lease or occupancy agreement give the
owner of the shares the right to
occupy a particular dwelling unit in
the cooperative housing corporation;
or
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o manufactured housing conditional
sales contracts and installment loan
agreements which may be secured by
either liens on:
o new or used manufactured homes;
or
o the real property and any
improvements on it 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; and
o in certain cases, new or used
manufactured homes which are
not deemed to be a part of the
related real property under
applicable state law.
The mortgage properties, cooperative
shares, together with the right to
occupy a particular dwelling unit, and
manufactured homes may be located in any
one of the fifty states, the District of
Columbia or the Commonwealth of Puerto
Rico.
Each trust fund may contain any
combination of the following types of
residential loans:
o fully amortizing loans
o with a fixed rate of interest and
o level monthly payments to
maturity;
o fully amortizing loans with
o a fixed interest rate providing
for level monthly payments, or
o for payments of interest that
increase annually at a
predetermined rate until the
loan is repaid or for a
specified number of years,
o after which level monthly
payments resume;
o fully amortizing loans
o with a fixed interest rate
providing for monthly payments
during the early years of the
term that
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are calculated on the basis of
an interest rate below the
interest rate,
o 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,
o followed by level monthly
payments;
o fixed interest rate loans providing
for
o level payments of principal and
interest on the basis of an
assumed amortization schedule
and
o a balloon payment of principal
at the end of a specified term;
o fully amortizing loans with
o an interest rate adjusted
periodically, and
o 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.
These loans may provide for an election,
at the borrower'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;
o fully amortizing loans with an
adjustable interest rate providing
for monthly payments less than the
amount of interest accruing on the
loan and for the amount of interest
accrued but not paid currently to be
added to the principal balance of the
loan;
o adjustable interest rate loans
providing for an election at the
borrower's option to extend the term
to maturity for a period that will
result in level monthly payments to
maturity if an adjustment to the
interest rate occurs resulting in a
higher interest rate than at
origination; or
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o other types of residential loans as
may be described in the related
prospectus supplement.
The related prospectus supplement may
specify that the residential loans are
covered by:
o primary mortgage insurance policies;
o insurance issued by the Federal
Housing Administration; or
o partial guarantees of the Veterans
Administration.
See "Description of Primary Insurance
Coverage" in this prospectus.
B. Agency Securities..........The agency securities may consist of any
combination of:
o "fully modified pass-through"
mortgage-backed certificates
guaranteed by the Government National
Mortgage Association;
o guaranteed mortgage pass-through
securities issued by the Federal
National Mortgage Association; and
o mortgage participation certificates
issued by the Federal Home Loan
Mortgage Corporation.
C. Mortgage Securities........A trust fund may include previously
issued:
o asset-backed certificates;
o collateralized mortgage obligations;
or
o participation certificates evidencing
interests in, or collateralized by,
residential loans or agency
securities.
D. Trust Account..............Each trust fund will include one or more
trust accounts established and
maintained on behalf of the holders of
securities. To the extent described in
this prospectus and in the related
prospectus supplement, the master
servicer or the trustee will deposit
into the trust account all payments and
collections received or advanced with
respect to assets of the related trust
fund. A trust account may be maintained
as an interest bearing or a non-interest
bearing account. Alternatively, funds
held in the trust account may be
invested in certain short-term
high-quality obligations. See
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"Description of the Securities--
Deposits to the Trust Account" in this
prospectus.
E. Credit Support.............One or more classes of securities within
any series may be covered by any
combination of:
o a surety bond;
o a guarantee;
o letter of credit;
o an insurance policy;
o a bankruptcy bond;
o a reserve fund;
o a cash account;
o reinvestment income;
o overcollateralization;
o 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;
o cross-support between securities
backed by different asset groups
within the same trust fund; or
o another type of credit support to
provide partial or full coverage for
certain defaults and losses relating
to the residential loans.
The related prospectus supplement may
provide that 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 this
credit support relates. The related
prospectus supplement will also specify
the manner of determining the amount of
the coverage provided by the credit
support and the application of this
coverage to the identified trust funds.
See "Description of Credit Support" and
"Description of the Securities --
Subordination" in this prospectus.
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PRE-FUNDING ACCOUNT.....................The related prospectus supplement may
specify that funds on deposit in an
account a pre-funding account will be
used to purchase additional residential
loans during the period specified in the
related prospectus supplement.
SERVICING AND ADVANCES..................The master servicer, directly or through
sub-servicers:
o will service and administer the
residential loans included in a trust
fund; and
o if and to the extent the related
prospectus supplement so provides,
will be obligated to make certain
cash advances with respect to
delinquent scheduled payments on the
residential loans. This advancing
obligation will be limited to the
extent that the master servicer
determines that the advances will be
recoverable.
Advances made by the master servicer
will be reimbursable to the extent
described 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 borrower on any
surety bond will be named, and the terms
applicable to a cash advance reserve
fund will be described in the related
prospectus supplement. See "Description
of the Securities -- Advances." in this
prospectus.
OPTIONAL TERMINATION....................The related prospectus supplement may
specify that the assets in the related
trust fund may be sold, causing an early
termination of a series of securities in
the manner set forth in the related
prospectus supplement. See "Description
of the Securities-- Termination" in this
prospectus and the related section in
the related prospectus supplement.
TAX STATUS..............................The treatment of the securities for
federal income tax purposes will depend
on:
o whether a REMIC election is made with
respect to a series of certificates;
and
o if a REMIC election is made, whether
the certificates are "regular"
interest securities or "residual"
interest securities.
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<PAGE>
Notes will represent indebtedness of the
related trust fund. You are advised to
consult your tax advisors.
See "Federal Income Tax Consequences" in
this prospectus and in the related
prospectus supplement.
ERISA CONSIDERATIONS....................If you are a fiduciary of any employee
benefit plan subject to the fiduciary
responsibility provisions of the
Employee Retirement Income Security Act
of 1974, as amended, you should
carefully review with your own legal
advisors whether the purchase or holding
of securities could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the
Internal Revenue Code.
See "ERISA Considerations" in this
prospectus and in the related prospectus
supplement.
LEGAL INVESTMENT........................The applicable prospectus supplement
will specify whether the securities
offered will constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement
Act of 1984, as amended. If your
investment activities are subject to
review by federal or state authorities,
you should consult with your counsel or
the applicable authorities to determine
whether and to what extent a class of
securities constitutes a legal
investment for you.
See "Legal Investment" in this
prospectus and in the related prospectus
supplement.
USE OF PROCEEDS.........................The depositor will use the net proceeds
from the sale of each series for one or
more of the following purposes:
o to purchase the related assets of the
trust fund;
o to repay indebtedness which was
incurred to obtain funds to acquire
the assets of the trust fund;
o to establish any reserve funds
described in the related prospectus
supplement; and
o to pay costs of structuring,
guaranteeing and issuing the
securities.
See "Use of Proceeds" in this prospectus
and in the related prospectus
supplement.
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RATINGS.................................Prior to offering securities pursuant to
this prospectus and the related
prospectus supplement, each offered
class must be rated upon issuance in one
of the four highest applicable rating
categories of at least one nationally
recognized statistical rating
organization. The rating or ratings
applicable to the securities of each
series offered by this prospectus and by
the related prospectus supplement will
be set forth in the related prospectus
supplement.
o A security rating is not a
recommendation to buy, sell or hold
the securities of any series.
o A security rating is subject to
revision or withdrawal at any time by
the assigning rating agency.
o A security rating does not address
the effect of prepayments on the
yield you may anticipate when you
purchase your securities.
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RISK FACTORS
Before making an investment decision, you should carefully consider
the following risks and the risks described under "Risk Factors" in the
prospectus supplement for the applicable series of securities. We believe these
sections describe the principal factors that make an investment in the
securities speculative or risky. In particular, distributions on your securities
will depend on payments received on and other recoveries with respect to the
loans. Therefore, you should carefully consider the risk factors relating to the
loans and the properties.
Limited Liquidity of Securities May Adversely Affect Market Value of Securities
We cannot assure you that a secondary market for the securities of any
series will develop or, if it does develop, that it will provide you with
liquidity of investment or will continue for the life of your securities. The
market value of your securities will fluctuate with changes in prevailing rates
of interest. Consequently, if you sell your security in any secondary market
that develops, you may sell it for less than par value or for less than your
purchase price. You will have optional redemption rights only to the extent the
related prospectus supplement so specifies. The prospectus supplement for any
series may indicate that an underwriter intends to establish a secondary market
in the securities, but no underwriter must do so.
Assets of Trust Fund Are Limited
The trust fund for your series constitutes the sole source of payment
for your securities. The trust fund will consist of, among other things:
o payments with respect to the assets of the trust fund; and
o any amounts available pursuant to any credit enhancement for your
series, for the payment of principal of and interest on the
securities of your series.
You will have no recourse to the depositor or any other person if you
do not receive distributions on your securities. Furthermore, certain assets of
the trust fund and/or any balance remaining in the trust account may be promptly
released or remitted to the depositor, the master servicer, any credit
enhancement provider or any other person entitled to these amounts immediately
after making
o all payments due on the securities of your series;
o adequate provision for future payments on certain classes of
securities; and
o any other payments specified in the related prospectus supplement.
You will no longer receive payments from these trust fund assets.
The securities will not represent an interest in or obligation of the
depositor, the master servicer or any of their respective affiliates.
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Credit Enhancement Is Limited in Amount and Coverage
Credit enhancement reduces your risk of delinquent payments or losses.
However, the amount of credit enhancement will be limited, as set forth in the
related prospectus supplement, and may decline and could be depleted under
certain circumstances before payment in full of your securities. As a result,
you may suffer losses. Moreover, the credit enhancement may not cover all
potential losses or risks. For example, it may or may not fully cover fraud or
negligence by a loan originator or other parties. See "Description of Credit
Support" in this prospectus.
Yield Is Sensitive to Rate of Principal Prepayment
The yield on the securities of each series will depend in part on the
rate of principal payment on the assets of the trust fund. In particular,
variations on this rate will include:
o the extent of prepayments of the residential loans and, in the case
of agency securities, the underlying loans, comprising the trust
fund;
o the allocation of principal and/or payment among the classes of
securities of a series as specified in the related prospectus
supplement;
o the exercise of any right of optional termination; and
o the rate and timing of payment defaults and losses incurred with
respect to the assets of the trust fund.
Material breaches of representations and warranties by sellers of
residential loans not affiliated with the depositor, the originator or the
master servicer may result in repurchases of assets of the trust fund. These
repurchases may lead to prepayments of principal. The rate of prepayment of the
residential loans comprising or underlying the assets of the trust fund may
affect the yield to maturity on your securities. See "Yield Considerations" and
"Maturity and Prepayment Considerations" in this prospectus.
The rate of prepayments is influenced by a number of factors,
including:
o prevailing mortgage market interest rates;
o local and national interest rates;
o homeowner mobility; and
o the ability of the borrower to obtain refinancing.
Interest payable on the securities on each distribution date will
include all interest accrued during the period specified in the related
prospectus supplement. If interest accrues over a period ending two or more days
before a distribution date, your effective yield will be reduced from the yield
you would have obtained if interest payable on the securities accrued through
the day immediately before each distribution date. Consequently, your effective
yield, at par, will be
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less than the indicated coupon rate. See "Description of the Securities --
Distributions" and "-- Principal Interest on the Securities" in this prospectus.
Borrower May Be Unable to Make Balloon Payment
Some of the residential loans may not fully amortize over their terms
to maturity and, thus, may require principal payments, i.e. balloon payments, at
their stated maturity. Residential loans with balloon payments involve greater
risk because a borrower's ability to make a balloon payment typically will
depend on its ability to:
o timely refinance the loan; or
o timely sell the related residential property.
A number of factors will affect a borrower's ability to accomplish
either of these goals, including:
o the level of available mortgage rates at the time of sale or
refinancing;
o the borrower's equity in the related residential property;
o the financial condition of the borrower; and
o the tax laws.
A borrower's failure to make a balloon payment would increase the risk that you
might not receive all payments to which you are entitled.
Nature of Mortgages Could Adversely Affect Value of Properties
Several factors could adversely affect the value of the residential
properties. As a result, the outstanding balance of the related residential
loans, together with any senior financing on the residential properties, if
applicable, may equal or exceed the value of the residential properties. Among
these factors are:
o an overall decline in the residential real estate market in the
areas in which the residential properties are located;
o a decline in the general condition of the residential properties as
a result of failure of borrowers to adequately maintain the
residential properties; or
o a decline in the general condition of the residential properties as
a result of natural disasters that are not necessarily covered by
insurance, such as earthquakes and floods.
A decline that affects residential loans secured by junior liens 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 a decline occurs, the actual rates of delinquencies,
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foreclosures and losses on all residential loans could be higher than those
currently experienced in the mortgage lending industry in general.
Even if the residential properties provide adequate security for the
residential loans, the master servicer could encounter substantial delays in
liquidating the defaulted residential loans. These delays in liquidating the
loans could lead to delays in receiving your proceeds because:
o foreclosures on residential properties securing residential loans
are regulated by state statutes and rules;
o foreclosures on residential properties are also subject to delays
and expenses of other types of lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to
complete; and
o in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of residential properties.
Therefore, if a borrower defaults, the master servicer may be unable to
foreclose on or sell the residential property or obtain liquidation proceeds
sufficient to repay all amounts due on the related residential loan. In
addition, the master servicer will be entitled to deduct from related
liquidation proceeds all expenses reasonably incurred in attempting to recover
amounts due on defaulted residential loans and not yet reimbursed. These
expenses may include 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 on
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 larger
defaulted loan having a large remaining principal balance. The mortgages and
deeds of trust securing certain mortgage loans, multifamily loans and home
improvement contracts may be junior liens subordinate to the rights of the
senior lienholder. Consequently, the proceeds from the liquidation, insurance or
condemnation proceeds will be available to satisfy the junior loan amount 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.
If a junior mortgagee forecloses, it must either pay the entire amount due on
any senior mortgage at or prior to the foreclosure sale or undertake the
obligation to make payments on the senior mortgage if the borrower defaults
under the senior mortgage. The trust fund will not have any source of funds to
satisfy any senior mortgages or make payments due to any senior mortgagees.
However, the master servicer or sub-servicer may, at its option, advance these
amounts to the extent deemed recoverable and prudent.
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If proceeds from a foreclosure or similar sale of the related
mortgaged property are insufficient to satisfy all senior liens and the junior
lien 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:
o incur losses in jurisdictions in which a deficiency judgment
against the borrower is not available; and
o incur losses if any deficiency judgment obtained is not realized
on.
In addition, the rate of default of junior loans may be greater than that of
mortgage loans secured by first liens on comparable properties.
Applicable state laws generally:
o regulate interest rates and other charges;
o require certain disclosures; and
o 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. Violations of these laws, policies and
principles:
o may limit the ability of the master servicer to collect all or part
of the principal of or interest on the residential loans;
o may entitle the borrower to a refund of amounts previously paid;
and
o could subject the master servicer to damages and administrative
sanctions.
See "Certain Legal Aspects of Residential Loans" in this prospectus.
Violations of Environmental Laws May Reduce Recoveries on Properties
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 result in a lien on the property to assure the costs of cleanup.
In several states, this lien has priority over the lien of an existing mortgage
against the property. In addition, under the laws of some states and under the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, 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. This liability could result 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 this liability on foreclosure of the related
property. If this liability is imposed on the trust fund there would be an
increased risk that you might not receive all
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payments to which you are entitled. See "Certain Legal Aspects of Residential
Loans -- Environmental Legislation" in this prospectus.
Violations of Federal Laws May Adversely Affect Ability to Collect on Loans
The residential loans may also be subject to federal laws, including:
o the Federal Truth in Lending Act and Regulation Z promulgated under
that act, which require certain disclosures to the borrowers
regarding the terms of the residential loans;
o the Equal Credit Opportunity Act and Regulation B promulgated under
that act, 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;
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience; and
o 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. This Act
also restricts a lender's ability to declare a default or to
suspend or reduce a borrower's credit limit to certain enumerated
events.
Certain mortgage loans are subject to the Riegle Community Development
and Regulatory Improvement Act of 1994 which incorporates the Home Ownership and
Equity Protection Act of 1994. These provisions may:
o 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;
o apply on a mandatory basis to all mortgage loans originated on or
after October 1, 1995;
o impose specific statutory liabilities on creditors who fail to
comply with their provisions; and
o 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. These laws
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o protect the homeowner from defective craftsmanship or incomplete
work by a contractor;
o permit the obligated party to withhold payment if the work does not
meet the quality and durability standards agreed to by the
homeowner and the contractor; and
o subject any person to whom the seller assigns its consumer credit
transaction to all claims and defenses which the obligated party in
a 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. In addition, violations could subject the
trust fund to damages and administrative enforcement. Accordingly, violations of
these federal laws would increase the risk that you might not receive all
payments to which you are entitled. See "Certain Legal Aspects of Residential
Loans" in this prospectus.
Rating of the Securities Are Limited and May be Withdrawn or Lowered
Each class of securities offered by this prospectus and the related
prospectus supplement must be rated upon issuance in one of the four highest
rating categories by one or more rating agencies. The rating will be based on,
among other things:
o the adequacy of the value of the assets of the trust fund;
o any credit enhancement with respect to the class; and
o the likelihood that you will receive payments to which you are
entitled under the terms of your securities.
The rating will not be based on:
o the likelihood that principal prepayments on the related
residential loans will be made;
o the degree to which prepayments might differ from those originally
anticipated; or
o the likelihood of early optional termination of the series of
securities.
You should not interpret the rating as a recommendation to purchase,
hold or sell securities, because it does not address market price or suitability
for a particular investor. The rating will not address:
o the possibility that prepayment at higher or lower rates than you
anticipate may cause you to experience a lower than anticipated
yield; or
o the possibility that if you purchase your security at a significant
premium, then you might fail to recoup your initial investment
under certain prepayment scenarios.
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We cannot assure you that any rating will remain in effect for any
given period of time or that a rating agency will not lower or withdraw its
rating entirely in the future due to, among other reasons:
o if in the judgment of the rating agency, circumstances in the
future so warrant;
o any erosion in the adequacy of the value of the assets of the trust
fund or any credit enhancement with respect to a series; or
o an adverse change in the financial or other condition of a credit
enhancement provider or a change in the rating of the credit
enhancement provider's long term debt.
Each rating agency rating the securities will establish criteria to
determine the amount, type and nature of credit enhancement, if any, established
with respect to a class of securities. Rating agencies often determine the
amount of credit enhancement required with respect to each class based on an
actuarial analysis of the behavior of similar loans in a larger group. With
respect to the rating, we cannot assure you:
o that the historical data supporting the actuarial analysis will
accurately reflect future experience;
o 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; or
o 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. See "Rating" in this prospectus.
A rating agency's withdrawal or reduction of a rating on your securities would
increase the risk that the market value of your securities will decrease.
Adverse Conditions in the Residential Real Estate Markets May Result in a
Decline in Property Values
The residential real estate markets may experience an overall decline
in property values. This decline could lead to a number of adverse results:
o the outstanding principal balances of the residential loans in a
particular trust fund are equal to or greater than the value of the
residential properties;
o any secondary financing on the related residential properties are
equal to or greater than the value of the residential properties;
and
o the rate of delinquencies, foreclosures and losses are higher than
those now generally experienced in the mortgage lending industry.
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In addition, adverse economic conditions, which may or may not affect real
property values, may affect the timely payment by borrowers of scheduled
payments of principal and interest on the residential loans. Accordingly, these
factors may also affect the rates of delinquencies, foreclosures and losses with
respect to any trust fund. To the extent that these losses are not covered by
credit enhancement, these losses may be borne, at least in part, by you.
Book-Entry System for Certain Classes May Decrease Liquidity and Delay Payment
Transactions in the classes of book-entry securities of any series
generally can be effected only through The Depository Trust Company,
participating organizations, financial intermediaries and certain banks.
Therefore:
o the liquidity of book-entry securities in the secondary trading
market that may develop may be limited because investors may be
unwilling to purchase securities for which they cannot obtain
physical securities;
o your ability to pledge a security to persons or entities that do
not participate in the DTC system, or otherwise to take action in
respect of the securities, may be limited due to lack of a physical
security representing the securities; and
o you may experience some delay in receiving distributions of
interest and principal on your securities because the trustee will
make distributions to DTC. DTC will then be required to credit the
distributions to the accounts of the participating organizations.
Only then will they be credited to your account either directly or
indirectly through Financial Intermediaries.
See "Description of the Securities-- Book-Entry Registration of
Securities" in this prospectus.
Unsecured Home Improvement Contracts May Experience Relatively Higher Losses
A borrower's obligations under an unsecured home improvement contract
will not be secured by an interest in the related real estate or otherwise. A
borrower's loan being unsecured would increase the risk that you might not
receive all payments to which you are entitled because:
o the related trust fund, as the owner of the unsecured home
improvement contract, will be a general unsecured creditor to these
obligations;
o if a default occurs under an unsecured home improvement contract,
the related trust fund will have recourse only against the
borrower's assets generally, along with all other general unsecured
creditors of the borrower;
o in a bankruptcy or insolvency proceeding relating to a borrower on
an unsecured home improvement contract, the borrower's obligations
under this unsecured home improvement contract may be discharged in
their entirety. This discharge may occur even if the portion of the
borrower's assets made available to pay the amount due and
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owing to the related trust fund as a general unsecured creditor are
sufficient to pay these amounts in whole or part; and
o the borrower may not demonstrate the same degree of concern over
performance of the borrower's obligations as if these obligations
were secured by the real estate owned by the borrower.
Mortgage Loans Underwritten as Non-Conforming Credits May Experience Relatively
Higher Losses
The single family mortgage loans assigned and transferred to a trust
fund may include mortgage loans underwritten in accordance with the underwriting
standards for "non-conforming credits." These borrowers may include those 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:
o 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;
o made to a borrower whose creditworthiness and repayment ability do
not satisfy the FNMA or FHLMC underwriting guidelines; or
o made to 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.
Mortgage loans made to borrowers who are characterized as
"non-conforming credits" may experience greater delinquency and foreclosure
rates than loans originated in accordance with the FNMA or FHLMC underwriting
guidelines. This may occur because these borrowers are less creditworthy than
borrowers who meet the FNMA or FHLMC underwriting guidelines. As a result, if
the values of the mortgaged properties decline, then the rates of loss on
mortgage loans made to "non-conforming credits" are more likely to increase than
the rates of loss on mortgage loans made in accordance with the FNMA or FHLMC
guidelines and this increase may be substantial. As a result you may suffer
losses. See "Residential Loans -- Underwriting Standards" in this prospectus.
Assets of the Trust Fund May Include Delinquent and Sub-Performing Residential
Loans
The assets of the trust fund may include residential loans that are
delinquent or sub-performing. The credit enhancement provided with respect to
your series of securities may not cover all losses related to these delinquent
or sub-performing residential loans. You should consider the risk that including
these residential loans in the trust fund could increase the risk that you will
suffer losses because:
o the rate of defaults and prepayments on the residential loans to
increase; and
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o in turn, losses may exceed the available credit enhancement for the
series and affect the yield on your securities.
See "The Trust Funds-- Residential Loans" in this prospectus.
Changes in the Market Value of Properties May Adversely Affect Payments on the
Securities
We cannot assure you that the market value of the assets of the trust
fund 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 on it. If the assets in the trust fund have
to be sold for any reason, the net proceeds from the sale, after paying expenses
of sale and unpaid fees and other amounts owing to the master servicer and the
trustee, may be insufficient to pay in full the principal of and interest on
your securities.
DEFINED TERMS
We define and use capitalized terms in this prospectus to assist you
in understanding the terms of the offered securities and this offering. We
define the capitalized terms used in this prospectus are defined under the
caption "Glossary of Terms" in this prospectus on page 183.
THE TRUST FUNDS
The depositor will select each asset of the trust fund to include in a
trust fund from among those purchased, either directly or through affiliates,
from unaffiliated sellers, or, from sellers affiliated with the depositor, as
provided in the related prospectus supplement.
Residential Loans
The residential loans may consist of any combination of:
o Mortgage loans secured by first or junior liens on one-to
four-family residential properties;
o Multifamily Loans;
o Home Improvement Contracts;
o Home Equity Loans;
o Cooperative Loans; or
o Manufactured Housing Contracts
The mortgaged properties, cooperative shares, the right to occupy a
particular cooperative unit in any of these cooperative shares and manufactured
homes may be located in any one of the fifty states, the District of Columbia or
the Commonwealth of Puerto Rico. Each trust fund may
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contain, and any participation interest in any of the foregoing will relate to,
any combination of the following types of residential loans:
(1) Fully amortizing loans with a fixed rate of interest 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, with corresponding adjustments in the amount of monthly payments,
to equal the sum, that may be rounded, of a fixed margin and an index as
described in the related prospectus supplement. These loans may provide for an
election, at the borrower'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 the loan and
for the amount of interest accrued but not paid currently to be added to the
principal balance of the loan;
(7) Fully amortizing loans with an adjustable interest rate providing
for an election at the borrower's option, if an adjustment to the interest rate
occurs resulting in an interest rate in excess of the interest rate at
origination of the loan, to extend the term to maturity for a period as will
result in level monthly payments to maturity; or
(8) Any other types of residential loans as may be described in the
related prospectus supplement.
The related prospectus supplement may specify that the trust fund
underlying a series of securities may include mortgage securities consisting of
previously issued asset-backed certificates, collateralized mortgage obligations
or participation certificates. The mortgage securities may:
o evidence interests in, or be collateralized by, residential loans
or agency securities as described in this prospectus and in the
related prospectus supplement; or
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o have been issued previously by:
o the depositor or an affiliate of the depositor;
o a financial institution; or
o another 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 the trusts, and selling beneficial interests in these
trusts.
If the mortgage securities were issued by an entity other than the
depositor or its affiliates, the mortgage securities will have been:
o acquired in bona fide secondary market transactions from persons
other than the issuer of the mortgage securities or its affiliates;
and
(1) offered and distributed to the public pursuant to an effective
registration statement or
(2) purchased in a transaction not involving any public offering
from a person who is not an affiliate of the issuer of those
securities at the time of sale nor an affiliate of the issuer
at any time during the preceding three months. However, a
period of two years must have elapsed since the later of the
date the securities were acquired from the issuer or from an
affiliate of the issuer.
Generally, the mortgage securities will be similar to securities
offered by this prospectus. As to any series of securities that the Trust Fund
includes mortgage securities, the related prospectus supplement will include a
description of:
o the mortgage securities;
o any related credit enhancement;
o the residential loans underlying the mortgage securities; and
o any other residential loans included in the trust fund relating to
the series.
References to advances to be made and other actions to be taken by the master
servicer in connection with the residential loans underlying the mortgage
securities, may include the advances made and other actions taken pursuant to
the terms of the mortgage securities.
The related prospectus supplement may specify that residential loans
contain provisions prohibiting prepayments for a specified Lockout Period.
The related prospectus supplement may specify that the assets of a
trust fund will include residential loans that are delinquent or sub-performing.
The inclusion of these residential loans in the trust fund for a series may
cause the rate of defaults and prepayments on the residential loans
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to increase. This, in turn, may cause losses to exceed the available credit
enhancement for the series and affect the yield on the securities of the series.
Mortgage Loans. The mortgage loans will be evidenced by promissory
notes secured by mortgages or deeds of trust creating first or junior liens on
the mortgaged properties. The mortgage loans will be secured by one- to
four-family residences, including:
o detached and attached dwellings;
o townhouses;
o rowhouses;
o individual condominium units;
o individual units in planned-unit developments; and
o individual units in de minimis planned-unit developments.
The related prospectus supplement may specify that the mortgage loans will be
insured by the FHA or partially guaranteed by the VA. See "The Trust Funds --
Residential Loans -- FHA Loans and VA Loans" and "Description of Primary
Insurance Coverage -- FHA Insurance and VA Guarantees" in this prospectus.
Certain of the mortgage loans may be secured by junior liens, and the
related 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 lien to satisfy fully both the senior lien and the junior lien.
This possibility could arise under any of a number of different circumstances:
o If a holder of a senior lien forecloses on a mortgaged property,
the proceeds of the foreclosure or similar sale will be applied:
o first, to the payment of court costs and fees in connection with
the foreclosure;
o second, to real estate taxes; and
o third, in satisfaction of all principal, interest, prepayment or
acceleration penalties, if any, and any other sums due and owing
to the holder of the senior lien.
The claims of the holders of senior liens will be satisfied in full out of
proceeds of the liquidation of the mortgage loan, if the proceeds are
sufficient, before the trust fund as holder of the junior lien receives any
payments in respect of the mortgage loan.
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o If the master servicer forecloses on any mortgage loan, it would do
so subject to any related senior liens.
o In order for the debt related to the mortgage loan included in
the Trust Fund to be paid in full at the sale, a bidder at the
foreclosure sale of the mortgage loan would have to bid an
amount sufficient to pay off all sums due under the mortgage
loan and any senior liens or purchase the related mortgaged
property subject to any senior liens.
o If the proceeds from a foreclosure or similar sale of the
related mortgaged property are insufficient to satisfy all
senior liens and the junior lien in the aggregate, the trust
fund, as the holder of the junior lien. As a result, holders of
one or more classes of the securities bear:
o the risk of delay in distributions while a deficiency
judgment against the borrower is obtained;
o the risk of loss if the deficiency judgment is not realized
on; and
o the risk that deficiency judgments may not be available in
certain jurisdictions.
o In addition, a junior mortgagee may not foreclose on the property
securing a junior mortgage unless it forecloses subject to the
senior mortgage.
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 on
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 of a loan with a
smaller remaining balance would be smaller as a percentage of the loan amount
than would be the case with the defaulted mortgage loan having a larger
remaining balance.
Multifamily Loans. The Multifamily Loan 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. The related
prospectus supplement will specify the original terms to stated maturity of the
Multifamily Loans, which are generally not more than 30 years. The related
prospectus supplement may specify that the Multifamily Loans are 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" in this prospectus.
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The related prospectus supplement may specify that the Multifamily
Loans:
o contain a Lockout Period;
o prohibit prepayments entirely; or
o require the payment of a prepayment penalty if prepayment in full
or in part occurs.
If you are 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. 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. The
Home Improvement Contracts may be fully amortizing or may have substantial
balloon payments due at maturity. They may also have fixed or adjustable rates
of interest and may provide for other payment characteristics. The related
prospectus supplement may specify that the Home Improvement Contracts are FHA
loans. See "The Trust Funds -- Residential Loans -- FHA Loans and VA Loans" and
"Description of Primary Insurance Coverage -- FHA Insurance and VA Guarantees"
in this prospectus.
Cooperative Loans. The Cooperative Loans will be evidenced by
promissory notes secured by security interests in shares issued by cooperative
housing corporations 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). Under Section 5402(6), a "manufactured home" is
defined 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 in the manufactured home. However, the term "manufactured
home" 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."
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The related prospectus supplement may specify that the Manufactured
Housing Contracts are 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" in this prospectus.
Buydown Loans. The related prospectus supplement may specify that
residential loans are subject to temporary buydown plans. The monthly payments
made by the borrower in the early years of these loans, known as the buydown
period, will be less than the scheduled payments on these loans. The resulting
difference will be recovered from:
o an amount contributed by the borrower, the seller of the
residential property or another source and placed in a custodial
account; and
o investment earnings on the buydown funds to the extent that the
related prospectus supplement provides for these earnings.
Generally, the borrower under each of these loans will be eligible for at a
reduced interest rate. Accordingly, the repayment of these loans is dependent on
the ability of the borrowers to make larger monthly payments after the buydown
funds have been depleted and, for certain buydown loans, during the buydown
period. See "Residential Loans -- Underwriting Standards" in this prospectus.
FHA Loans and VA Loans. FHA loans will be insured by the FHA as
authorized under the National Housing Act of 1934, as amended, 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. The 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 the FHA loan.
See "Description of Primary Insurance Coverage -- FHA Insurance and VA
Guarantees" in this prospectus.
Home Improvement Contracts and Manufactured Housing Contracts that are
FHA loans are insured by the FHA pursuant to Title I of the Housing Act. As
described in the related prospectus supplement, these loans are insured 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.
There are two primary FHA insurance programs that are available for
Multifamily Loans:
o Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD to
insure Multifamily Loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section
244 of the Housing Act provides for co-insurance of the loans made
under Sections 221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved
co-insurer. Generally the term of these Multifamily Loans may be up
to 40 years and the ratio of the loan amount to property
replacement cost can be up to 90%.
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o 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. However, 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 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 the 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" in this prospectus.
Loan-to-Value Ratio. The prospectus supplement for a series backed by
residential loans will describe the Loan-to-Value Ratios of the loans.
o Generally, 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
(1) 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, plus
(2) 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.
o Generally, 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 on 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.
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We cannot assure you 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 experiences an overall decline in property values such that the
outstanding principal balances of the residential loans, and any other financing
on the related residential properties, become equal to or greater than the value
of the residential properties, the actual rates of delinquencies, foreclosures
and losses may be higher than those now generally experienced in the mortgage
lending industry. In addition, adverse economic conditions, which may or may not
affect real property values, may affect the timely payment by borrowers of
scheduled payments of principal and interest on the residential loans and,
accordingly, the actual rates of delinquencies, foreclosures and losses. To the
extent that the losses are not covered by the applicable insurance policies and
other forms of credit support described in this prospectus and in the related
prospectus supplement, the losses will be borne, at least in part, by you. See
"Description of the Securities" and "Description of Credit Support" in this
prospectus.
Agency Securities
The agency securities will consist of any combination of "fully
modified pass-through" mortgage-backed certificates guaranteed by the GNMA,
guaranteed mortgage pass-through securities issued by the FNMA and mortgage
participation certificates issued by the FHLMC.
GNMA. Government National Mortgage Association 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 the 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. 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:
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o the GNMA guaranty program;
o the characteristics of the pool underlying the GNMA Certificates;
o the servicing of the related pool;
o the payment of principal and interest on GNMA Certificates to the
extent not described in this prospectus; and
o other relevant matters with respect to the GNMA Certificates.
Generally, 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 the GNMA Certificates. Generally, this payment shall be in
an amount 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 the 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
the holder of any prepayments of principal of the FHA loans or VA loans
underlying the GNMA Certificates and the holder's proportionate interest in the
remaining principal balance if a foreclosure or other disposition of any the FHA
loan or VA loan occurs.
The GNMA Certificates do not constitute a liability of, or evidence
any recourse against, the issuer of the GNMA Certificates, the depositor or any
of their affiliates. 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 the GNMA Certificates. Pursuant to the agreement,
the issuer, in its capacity as servicer, is required to perform customary
functions of a servicer of FHA loans and VA loans, including:
o collecting payments from borrowers and remitting the collections to
the registered holder;
o maintaining escrow and impoundment accounts of borrowers for
payments of taxes, insurance and other items required to be paid by
the borrower;
o maintaining primary hazard insurance; and
o advancing from its own funds in order to make timely payments of
all amounts due on the GNMA Certificates, even if the payments
received by the issuer on the loans backing the GNMA Certificates
are less than the amounts due on the loans.
If the issuer is unable to make payments on GNMA Certificates as they become
due, it must promptly notify GNMA and request GNMA to make the payment. After
the notification and request, GNMA will make the payments directly to the
registered holder of the GNMA
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Certificate. If no payment is made by the issuer and the issuer fails to notify
and request GNMA to make the payment, the registered holder of the GNMA
Certificate has recourse against only GNMA to obtain the 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 the 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 the
GNMA Certificates and underlying residential loans meet the criteria of the
rating agency or agencies. The GNMA Certificates and underlying residential
loans will be described in the related prospectus supplement.
FNMA. The Federal National Mortgage Association is a federally
chartered and stockholder-owned corporation organized and existing under the
Federal National Mortgage Association Charter Act, as amended. 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, thus 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:
o must meet the applicable standards of the FNMA purchase program;
o is either provided by FNMA from its own portfolio or purchased
pursuant to the criteria of the FNMA purchase program; and
o is either a conventional mortgage loan, an FHA loan or a VA loan.
The prospectus supplement for securities of each series evidencing interests in
a trust fund including FNMA Certificates will set forth additional information
regarding:
o the FNMA program;
o the characteristics of the pool underlying the FNMA Certificates;
o the servicing of the related pool;
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o payment of principal and interest on the FNMA Certificates to the
extent not described in this prospectus; and
o 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 the holder's proportionate share of scheduled
principal and interest at the applicable pass-through rate provided for by the
FNMA Certificate on the underlying mortgage loans, whether or not received. In
addition, FNMA will distribute the holder's proportionate share of the full
principal amount of any prepayment or foreclosed or other finally liquidated
mortgage loan, whether or not that 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 its obligations, distributions to
the holders of FNMA Certificates would consist solely of payments and other
recoveries on the underlying loans. Accordingly, monthly distributions to the
holders of FNMA Certificates would be affected by delinquent payments and
defaults on these loans. FNMA Certificates evidencing interests in pools of
mortgage loans formed on or after May 1, 1985, other than FNMA Certificates
backed by pools containing graduated payment mortgage loans or Multifamily
Loans, are available in book-entry form only. With respect to a FNMA Certificate
issued in book-entry form, distributions on that certificate will be made by
wire. With respect to a fully registered FNMA Certificate, distributions on that
certificate 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 the
FNMA Certificates and underlying mortgage loans meet the criteria of the rating
agency or rating agencies rating the certificates of the related series. These
FNMA Certificates and underlying mortgage loans will be described in the related
prospectus supplement.
FHLMC. The Federal Home Loan Mortgage Corporation is a corporate
instrumentality of the United States created pursuant to Title III of the
Emergency Home Finance Act of 1970, as amended. 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 purchasing first lien, conventional residential mortgage
loans or participation interests in the mortgage loans and reselling 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 in those mortgage loans which it deems to be
of a 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. Each mortgage loan
securing an FHLMC Certificate must meet the applicable
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standards set forth in Title III of the Emergency House Finance Act of 1970, as
amended. A group of FHLMC Certificates may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another group of FHLMC Certificates. The prospectus
supplement for securities of each series evidencing interests in a trust fund
including FHLMC Certificates will set forth additional information regarding:
o the FHLMC guaranty program;
o the characteristics of the pool underlying the FHLMC Certificate;
o the servicing of the related pool;
o payment of principal and interest on the FHLMC Certificate to the
extent not described in this prospectus; and
o other relevant matters with respect to the FHLMC Certificates.
Except as described below with respect to Stripped Agency Securities:
o FHLMC guarantees to each registered holder of a FHLMC Certificate
the timely payment of interest on the underlying mortgage loans.
This guarantee is only 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 group of FHLMC Certificates represented by the FHLMC
Certificate, whether or not received.
o FHLMC also guarantees to each registered holder of a FHLMC
Certificate collection by the holder of all principal on the
underlying mortgage loans, without any offset or deduction, to the
extent of the holder's pro rata share. FHLMC's guarantee of timely
payment of scheduled principal will be limited to the extent set
forth in the prospectus supplement.
o 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:
o foreclosure sale;
o payment of the claim by any mortgage insurer; and
o the expiration of any right of redemption; but in any event no
later than one year after demand has been made of the borrower
for accelerated payment of principal.
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In taking actions regarding the collection of defaulted mortgage loans
underlying FHLMC Certificates, including the timing of demand for acceleration,
FHLMC reserves the right to exercise its servicing judgment in the same manner
used 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 borrower. FHLMC has not adopted
servicing standards that require that the demand be made within any specified
period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank. FHLMC Certificates 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 the obligations, distributions to holders of FHLMC
Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans. Accordingly, monthly distributions to holders of
FHLMC Certificates would be affected by delinquent payments and defaults on the
mortgage loans.
The FHLMC Certificates included in a trust fund may have other
characteristics and terms, different from those described above, so long as
those FHLMC Certificates and underlying mortgage loans meet the criteria of the
rating agency or rating agencies rating the securities of the related series.
The 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, known as Stripped Agency Securities, which
represent:
o 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
o in some specified portion of the principal or interest
distributions but not all of the distributions, on an underlying
pool of mortgage loans or certain other GNMA Certificates, FNMA
Certificates or FHLMC Certificates.
To the extent set forth in the related Prospectus Supplement, GNMA,
FNMA or FHLMC, as applicable, will guarantee each Stripped Agency Security to
the same extent as the entity guarantees the underlying securities backing the
Stripped Agency Securities or to the extent described above with respect to a
Stripped Agency Security backed by a pool of mortgage loans. The prospectus
supplement for each series of Stripped Agency Securities will set forth
o additional information regarding the characteristics of the assets
underlying the Stripped Agency Securities,
o the payments of principal and interest on the Stripped Agency
Securities and
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o 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 the 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:
o the aggregate outstanding principal balance and the average
outstanding principal balance of the assets of the trust fund as of
the applicable Cut-Off Date;
o the types of related residential properties--e.g.,
o one- to four-family dwellings,
o multifamily residential properties,
o shares in cooperative housing corporations and the related
proprietary leases or occupancy agreements,
o condominiums and planned-unit development units,
o vacation and second homes and
o new or used manufactured homes;
o the original terms to maturity;
o the outstanding principal balances;
o the years in which the loans were originated;
o with respect to Multifamily Loans, the Lockout Periods and
prepayment penalties;
o the Loan-To-Value ratios or, with respect to residential loans
secured by a junior lien, the combined Loan-To-Value ratios at
origination;
o the interest rates or range of interest rates borne by the
residential loans or residential loans underlying the agency
securities;
o the geographical distribution of the residential properdies on a
state-by-state basis;
o with respect to fully amortizing loans with an adjustable interest
rate, 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 these loans; and
o information as to the payment characteristics of the residential
loans.
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If specific information respecting the assets of the trust fund 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. In addition, specific information will be set
forth in a report made available at or before the issuance of those securities.
This information will be included in a report on Form 8-K and will be available
to purchasers of the related securities at or before the initial issuance of
those securities. This report on Form 8-K will be filed with the SEC within
fifteen days after the initial issuance of those securities.
The depositor will cause the residential loans comprising each trust
fund, or mortgage securities evidencing interests in the residential loans to be
assigned to the trustee for the benefit of the holders of the securities 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, the trustee and the other
parties specified in the related prospectus supplement, and will receive a fee
for these services. See "Residential Loans" and "Description of the Securities"
in this prospectus. 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 the residential loans, unless the related prospectus
supplement provides otherwise.
The depositor will assign the residential loans to the related trustee
on a non-recourse basis. The obligations of the depositor with respect to the
residential loans will be limited to certain representations and warranties made
by it, unless the related prospectus supplement provides that another party will
make the representations and warranties. See "Description of the Securities --
Assignment of Assets of the Trust Fund" in this prospectus. 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 purchases and other obligations
of sub-servicers or Unaffiliated Sellers, or both, as more fully described in
this prospectus under "Residential Loans -- Representations by Unaffiliated
Sellers; Repurchases"; "-- Sub-Servicing" and "Description of the Securities --
Assignment of Assets of the Trust Fund." In addition, the related prospectus
supplement may specify that the master servicer has an obligation to make
certain cash advances in the event of delinquencies in payments on or with
respect to the residential loans in amounts described in this prospectus under
"Description of the Securities -- 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 in this prospectus 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. The depositor will
register the agency securities in accordance with the procedures established by
the issuer or guarantor for registration of these securities with a member of
the Federal Reserve System. Distributions on agency securities to which the
trust fund is entitled will be made directly to the trustee.
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The trustee will administer the 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 these services. The agency
securities and any moneys attributable to distributions on the 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 holders of the securities to the extent they
are entitled to those assets of the trust fund or to other persons specified in
the related prospectus supplement and except for its power and authority to
invest assets of the trust fund in certain permitted instruments in compliance
with the trust agreement. The trustee will have no responsibility for
distributions on the securities, other than to pass through all distributions it
receives with respect to the agency securities to the holders of the related
securities without deduction, other than for
o any applicable trust administration fee payable to the trustee,
o certain expenses of the trustee, if any, in connection with legal
actions relating to the agency securities,
o any applicable withholding tax required to be withheld by the
trustee and
o 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:
o to purchase the related assets of the trust fund;
o to repay indebtedness which was incurred to obtain funds to acquire
the assets of the trust fund;
o to establish any Reserve Funds or other funds described in the
related prospectus supplement; and
o to pay costs of structuring, guaranteeing and issuing the
securities, including the costs of obtaining credit support, if
any.
The purchase of the assets of the trust fund for a series may be effected by an
exchange of securities with the seller of the assets of the trust fund.
YIELD CONSIDERATIONS
The related prospectus supplement will specify the manner in which
each monthly or other periodic interest payment on an asset of the trust fund is
calculated--generally, one-twelfth of the applicable interest rate multiplied by
the unpaid principal balance of the asset. In the case of Accrual Securities and
interest-only securities, the distributions of interest will be made in the
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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 holders of the securities will be below the
yield otherwise produced by the applicable security interest rate, or with
respect to an interest-only security, the distributions of interest on the
security, and purchase price paid by the investors of these securities. This is
so because while interest will generally accrue on each asset of the trust fund
from the first day of each month, the distribution of the interest, or the
accrual of the interest in the case of Accrual Securities, will not be made
until the distribution date occurring:
o in the month or other periodic interval following the month or
other period of accrual in the case of residential loans;
o in later months in the case of agency securities; or
o in intervals occurring less frequently than monthly in the case of
series of securities having distribution dates occurring at
intervals less frequently than monthly.
When a full prepayment is made on a residential loan, the borrower is
generally charged interest only for the number of days actually elapsed from the
due date of the preceding monthly payment up to the date of the prepayment,
instead of for a full month. Accordingly, the effect of the prepayments is to
reduce the aggregate amount of interest collected that is available for
distribution to holders of the securities. However, the residential loans may
contain provisions limiting prepayments of the loans or requiring the payment of
a prepayment penalty if the loan is prepaid in full or in part. The related
prospectus supplement may specify that any prepayment penalty collected with
respect to the residential loans will be applied to offset the 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. The related prospectus
supplement may specify that 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. The related prospectus supplement may specify that 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 holders of the securities on the related
distribution date. See "Maturity and Prepayment Considerations" and "Description
of the Securities" in this prospectus.
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 mortgage loans. Accordingly, corresponding
delays in the receipt of related proceeds by holders of the securities could
occur. An action to foreclose on a mortgaged property securing a mortgage 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. If a default by a borrower occurs, 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
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amounts due on the related mortgage 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 mortgage loans and
not yet reimbursed, including
o payments to senior lienholders,
o legal fees and costs of legal action,
o real estate taxes and
o maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing on
a defaulted mortgage loan having a small remaining principal balance, the amount
realized after expenses of liquidation of a mortgage loan with a small remaining
balance would be smaller as a percentage of the loan than would be the case with
the other defaulted mortgage loan having a larger 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 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
o limit the ability of the master servicer to collect all or part of
the principal of or interest on the residential loans,
o entitle the borrower to a refund of amounts previously paid and,
o subject the trustee or master servicer to damages and
administrative sanctions which could reduce the amount of
distributions available to holders of the securities.
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 assets of the trust fund in a
given trust fund may vary depending on the type of residential loans or the
residential loans underlying the agency securities included in the trust fund.
Each prospectus supplement will contain information with respect to the type and
maturities of the assets of the trust fund. The related prospectus supplement
may specify that 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.
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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 the security is 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 the related series. If applicable, the prospectus
supplement will also contain tables setting forth the projected weighted average
life of the securities of the related 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. These
assumptions include 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 assets of the trust fund 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:
o homeowner mobility;
o economic conditions;
o enforceability of due-on-sale clauses;
o market interest rates and the availability of funds;
o the existence of lockout provisions and prepayment penalties;
o the inclusion of delinquent or sub-performing residential loans in
the assets of the trust fund;
o the relative tax benefits associated with the ownership of
property; and
o in the case of Multifamily Loans, the quality of management of the
property.
The rate of prepayments of conventional residential loans has fluctuated
significantly in recent years. In general, however, if prevailing interest rates
fall significantly below the interest rates on the assets of the trust fund, the
assets of the trust fund are likely to be the subject of higher
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principal prepayments than if prevailing rates remain at or above the interest
rates borne by the assets of the trust fund.
Other factors that might be expected to affect the prepayment rate of
securities backed by junior lien mortgage loans or Home Improvement Contracts
include:
o the amounts of the underlying senior mortgage loans;
o the interest rates on the underlying senior mortgage loans;
o the use of first mortgage loans as long-term financing for home
purchase; and
o the use of subordinate mortgage loans as shorter-term financing for
a variety of purposes, including:
o home improvement;
o education expenses; and
o 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 the 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. The related prospectus supplement may specify that the residential loans,
except for FHA loans and VA loans, contain or do not 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
clause of this type 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
if there is a 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 if there
is a transfer or further encumbrance of the property must be exercised, so long
as the acceleration is permitted under applicable law.
With respect to a series of securities evidencing interests in a trust
fund including residential loans, the master servicer generally is required to
enforce any provision limiting prepayments and any due-on-sale or
due-on-encumbrance clause. The master servicer is
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required to enforce these provisions only 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. However, the master servicer will generally be
prohibited from taking 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" in this prospectus for a description of
provisions of each pooling and servicing agreement and legal developments that
may affect the prepayment experience on the residential loans. See also
"Description of the Securities -- Termination" in this prospectus for a
description of the possible early termination of any series of securities. See
also "Residential Loans -- Representations by Unaffiliated Sellers; Repurchases"
and "Description of the Securities -- Assignment of Assets of the Trust Fund" in
this prospectus for a description of the circumstances under which the
Unaffiliated Sellers, the master servicer and the depositor are generally
obligated to repurchase residential loans.
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 the optional repurchase
right, if any, may be exercised.
In addition, the 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 the
underlying residential loans.
The prospectus supplement for each series of securities may set forth
additional information regarding related maturity and prepayment considerations.
THE DEPOSITOR
PaineWebber Mortgage Acceptance Corporation IV, the depositor, is a
Delaware corporation organized on April 23, 1987, as a wholly owned limited
purpose finance subsidiary of PaineWebber Group Inc. The depositor maintains its
principal office at 1285 Avenue of the Americas, New York, New York. Its
telephone number is (212) 713-2000.
The depositor does not have, nor is it expected in the future to have,
any significant assets. We do not expect that the depositor will have any
business operations other than acquiring and pooling residential loans and
agency securities, offering securities 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.
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RESIDENTIAL LOANS
Underwriting Standards
The residential loans will have been purchased by the depositor,
either directly or through affiliates, from loan sellers. The related prospectus
supplement will specify the underwriting criteria generally used to originate
the residential loans. The underwriting standards applicable to residential
loans underlying mortgage securities may vary substantially from the
underwriting standards set forth in the related prospectus supplement.
Representations by Unaffiliated Sellers; Repurchases
Each Unaffiliated Seller made representations and warranties in
respect of the residential loans sold by the Unaffiliated Seller. The related
prospectus supplement will specify these representations and warranties which
may include, among other things:
o that the Unaffiliated Seller had good title to each residential
loan and the residential loan was subject to no offsets, defenses,
counterclaims or rights of rescission except to the extent that any
buydown agreement may forgive certain indebtedness of a borrower;
o 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;
o 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 by the contract;
o that the residential property was free from damage and was in good
repair;
o that there were no delinquent tax or assessment liens against the
residential property;
o that each residential loan was current as to all required payments;
and
o 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 the Unaffiliated Seller sold the residential loan to the
depositor or its affiliate. A substantial period of time may have elapsed
between that date and the date of initial issuance of the series of securities
evidencing an interest in the 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 the Unaffiliated Seller, its
repurchase obligation will not arise if the relevant event that would otherwise
have given rise to this type of obligation occurs after the date of the sale to
or on behalf of the depositor.
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The master servicer or the trustee will be required to 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 holders of the securities in the residential loan.
If the Unaffiliated Seller cannot cure the breach, then the Unaffiliated Seller
will be obligated to repurchase this residential loan from the trustee at the
purchase price for the loan. The related prospectus supplement will specify this
purchase price, which is generally equal to the sum of:
o the unpaid principal balance of the residential loans;
o unpaid accrued interest on the unpaid principal balance 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; and
o 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.
An Unaffiliated Seller, rather than repurchase a residential loan as
to which a breach has occurred, may have the option to cause the removal of the
breached residential loan from the trust fund and substitute in its place one or
more other residential loans. This option must be exercised within a specified
period after initial issuance of the related series of securities and be done in
accordance with the standards described in the related prospectus supplement.
The related prospectus supplement may specify that this repurchase or
substitution obligation will constitute the sole remedy available to holders of
securities or the trustee for a breach of representation by an Unaffiliated
Seller.
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. We cannot assure you that Unaffiliated Sellers will carry out their
repurchase and substitution obligations with respect to residential loans. Any
residential loan that is not repurchased or substituted for will remain in the
related trust fund. Any resulting losses on that residential loan will be borne
by holders of the securities, 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.
The sub-servicing agreement must be consistent with the terms of the servicing
agreement relating to the trust fund that includes the residential loan.
Although each sub-servicing agreement will be a contract solely between the
master servicer and the sub-servicer, the related pooling and servicing
agreement pursuant to which a series of securities is issued may provide that,
if for any reason the master servicer for the series of securities is no longer
acting in that capacity, the trustee or any successor master servicer must
recognize the sub-servicer's rights and obligations under any sub-servicing
agreement.
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DESCRIPTION OF THE SECURITIES
General
The certificates of each series evidencing interests in a trust fund
will be issued pursuant to a separate pooling and servicing agreement or trust
agreement. Each series of notes, or, in certain instances, two or more series of
notes, will be issued pursuant to an indenture, and the issuer of the notes will
be a trust established by the depositor pursuant to an owner trust agreement or
another entity as may be specified in the related prospectus supplement. As to
each series of notes where the issuer is an owner trust, the ownership of the
trust fund will be evidenced by equity certificates issued under the owner trust
agreement, which may be offered by the related prospectus supplement.
Forms of each of the agreements referred to above 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 SEC within fifteen days after the
initial issuance of the securities and a copy of the agreement will be available
for inspection at the corporate trust office of the trustee specified in the
related prospectus supplement. 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.
As to each series, the securities will be issued in authorized
denominations evidencing a portion of all of the securities of the related
series as set forth in the related prospectus supplement. Each trust fund will
consist of:
o residential loans, including any mortgage securities, or agency
securities, exclusive of
o any portion of interest payments relating to the residential loans
retained by the depositor, any of its affiliates or its predecessor
in interest ("retained interest") and
o principal and interest due on or before the Cut-Off Date, as
from time to time are subject to the agreement;
o 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 holders of the securities;
o with respect to trust funds that include residential loans:
o property acquired by foreclosure or deed in lieu of foreclosure
of mortgage loans on behalf of the holders of the securities,
or, in the case of Manufactured Housing Contracts that are not
Land Contracts, by repossession;
o any Primary Credit Insurance Policies and Primary Hazard
Insurance;
o any combination of a Pool Insurance Policy, a Bankruptcy Bond, a
special hazard insurance policy or other type of credit support;
and
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o the rights of the trustee to any cash advance reserve fund or
surety bond as described under "--Advances" in this prospectus;
o if specified in the related prospectus supplement, the reserve
fund; and
o 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 Security Register maintained by the Security Registrar.
However, the depositor or the trustee may require payment of a sum sufficient to
cover any tax or other governmental charge.
Each series of securities may consist of any combination of:
o one or more classes of senior securities, one or more classes of
which will be senior in right of payment to one or more of the
other classes subordinate to the extent described in the related
prospectus supplement.
o one or more classes of securities which will be entitled to:
o principal distributions, with disproportionate, nominal or no
interest distributions; or
o interest distributions, with disproportionate, nominal or no
principal distributions;
o 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 Accrual
Securities; or
o other types of classes of securities, as described in the related
prospectus supplement.
Each class of securities, other than certain interest-only securities,
will have a security principal balance and, generally will be entitled to
payments of interest based on a specified security interest rate as specified in
the related prospectus supplement. See "--Principal and Interest on the
Securities" in this Prospectus. 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. 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.
Assignment of Assets of the Trust Fund
At the time of issuance of each series of securities, the depositor
will cause the assets comprising the related trust fund or mortgage securities
included in the related trust fund to be assigned to the trustee. The
residential loan or agency security documents described below will be delivered
to the trustee or to the custodian. The trustee will, concurrently with the
assignment, deliver the securities to the depositor in exchange for the assets
of the trust fund. Each asset of
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the trust fund will be identified in a schedule appearing as an exhibit to the
related agreement. The schedule will include, among other things:
o information as to the outstanding principal balance of each trust
fund asset after application of payments due on or before the
Cut-Off Date;
o the maturity of the mortgage note, cooperative note, Manufactured
Housing Contract or agency securities;
o any Retained Interest, with respect to a series of securities
evidencing interests in a trust fund including agency securities;
o the pass-through rate on the agency securities;
o and with respect to a series of securities evidencing interests in
residential loans, for each loan:
o information respecting its interest rate;
o its current scheduled payment of principal and interest;
o its Loan-to-Value Ratio; and
o certain other information.
Mortgage Loans and Multifamily Loans. The depositor will be required,
as to each mortgage loan, other than mortgage loans underlying any mortgage
securities, and Multifamily Loan, to 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 the mortgage loan, including:
o the mortgage note endorsed without recourse to the order of the
trustee;
o the mortgage with evidence of recording indicated, 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
the mortgage certified by the related Unaffiliated Seller that it
is a true and complete copy of the original of that Mortgage
submitted for recording; and
o an assignment in recordable form of the mortgage to the trustee.
The related prospectus supplement may specify that the depositor or another
party will be required to promptly cause the assignment of each related mortgage
loan and Multifamily Loan to be recorded in the appropriate public office for
real property records. However, recording of assignments will not be required in
states where, in the opinion of counsel acceptable to the trustee, recording is
not required to protect the trustee's interest in the mortgage loan or the
Multifamily Loan against the claim of any subsequent transferee or any successor
to or creditor of the depositor or the originator of the mortgage loan.
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Home Equity Loans and Home Improvement Contracts. The related
prospectus supplement may specify that the depositor will:
o as to each Home Equity Loan and Home Improvement Contract, cause to
be delivered to the trustee or to the custodian the note endorsed
to the order of the trustee;
o with respect to Home Equity Loans and secured Home Improvement
Contracts, the mortgage with evidence of recording indicated on it.
If any mortgage is not returned from the public recording office,
in which case the depositor will deliver or cause to be delivered a
copy of the mortgage certified by the related Unaffiliated Seller
that it is a true and complete copy of the original of the mortgage
submitted for recording; and
o with respect to Home Equity Loans and secured Home Improvement
Contracts, an assignment in recordable form of the mortgage to the
trustee.
The related prospectus supplement may specify that the depositor or
another party will be required to 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. However, recording of
assignments will not be required in states where, in the opinion of counsel
acceptable to the trustee, 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 a Home Equity Loan or Home Improvement Contract.
With respect to unsecured Home Improvement Contracts, the depositor
will cause to be transferred physical possession of the Home Improvement
Contracts to the trustee or a designated custodian or, if applicable, the
Unaffiliated Seller may retain possession of the Home Improvement Contracts as
custodian for the trustee. In addition, the depositor will be required to 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 or security
interest in the Home Improvement Contracts. The related prospectus supplement
may specify that 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 an 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:
o the related cooperative note;
o the original security agreement;
o the proprietary lease or occupancy agreement;
o the related stock certificate and related stock powers endorsed in
blank; and
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o a copy of the original filed financing statement together with an
assignment of the financing statement to the trustee in a form
sufficient for filing.
The depositor or another party will cause the assignment and financing statement
of each related Cooperative Loan to be filed in the appropriate public office.
However, a filing is not required in states where in the opinion of counsel
acceptable to the trustee, 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 the
Cooperative Loan.
Manufactured Housing Contracts. The related prospectus supplement may
specify that the depositor will be required, as to each Manufactured Housing
Contract, to deliver or cause to be delivered to the trustee or to the
custodian:
o the original Manufactured Housing Contract endorsed to the order of
the trustee; and
o if applicable, copies of documents and instruments related to each
Manufactured Housing Contract and the security interest in the
manufactured home securing each Manufactured Housing Contract.
The related prospectus supplement may specify that in order to give notice of
the right, title and interest of the holders of securities to the Manufactured
Housing Contracts, the depositor will be required to 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. Registration must be done in accordance with the
procedures established by the issuer or guarantor for registration of the
securities with a member of the Federal Reserve System. Distributions on the
agency 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 after receipt, and the trustee or custodian will
hold the documents in trust for the benefit of the holders of securities.
Generally, if any document is found to be missing or defective in any material
respect, the trustee or custodian will immediately notify the master servicer
and the depositor. The master servicer will then immediately notify the
applicable Unaffiliated Seller. If the Unaffiliated Seller cannot cure the
omission or defect, the Unaffiliated Seller will be obligated to repurchase the
related residential loan from the trustee at the purchase price specified under
"Residential Loans--Representations by Unaffiliated Sellers; Repurchases", or,
in certain cases, substitute for the residential loan.
We cannot assure you that an Unaffiliated Seller will fulfill this
repurchase or substitution obligation. Although the master servicer or trustee
is obligated to enforce this obligation to the extent described above under
"Residential Loans -- Representations by Unaffiliated Sellers; Repurchases"
neither the master servicer nor the depositor will be obligated to repurchase or
substitute for the residential loan if the Unaffiliated Seller defaults on its
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obligation. Generally, this repurchase or substitution obligation, if
applicable, will constitute the sole remedy available to the holders of
securities 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.
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
assets of the trust fund. The Trust Account(s) must be maintained with a federal
or state chartered depository institution, and in a manner, satisfactory to each
rating agency rating the securities of the related series at the time any
amounts are held on deposit in the Trust Account.
The collateral eligible to secure amounts in the Trust Account is
limited to United States government securities and other high quality
investments. A Trust Account may be maintained as an interest bearing or
non-interest bearing account. Alternatively, the funds held in the Trust Account
may be invested pending the distribution on each succeeding distribution date in
United States government securities and other high quality investments. The
prospectus supplement will specify who is entitled to the interest or other
income earned on funds in the Trust Account. In respect of any series of
securities having distribution dates occurring less frequently than monthly, the
master servicer may obtain from an entity 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 the series, a Trust Account may contain funds relating to more
than one series of securities.
Pre-Funding Account
The master servicer or the trustee may establish and maintain a
pre-funding account, in the name of the related trustee on behalf of the related
holders of the securities, 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 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
holders of securities 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 prospectus supplement may specify that the master servicer will be
required to deposit or cause to be deposited in a Trust Account for each trust
fund including residential loans or, in the case of advances on or before the
applicable distribution date, the following payments and collections received or
made by or on behalf of the master servicer subsequent to the Cut-Off
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Date. These payments will not include payments due on or before the Cut-Off Date
and exclusive of any amounts representing a Retained Interest:
(1) all payments on account of principal, including principal
prepayments, on the residential loans;
(2) all payments on account of interest on the residential loans,
exclusive of any portion representing interest in excess of the Net Interest
Rate, unless the excess amount is required to be deposited pursuant to the
related agreement, and, if provided in the related prospectus supplement,
prepayment penalties;
(3) all proceeds of
o any Primary Hazard Insurance Policies and any special hazard
insurance policy, to the extent the 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, and
o any Primary Credit Insurance Policy, any FHA Insurance, VA
Guarantee, any Bankruptcy Bond and any Pool Insurance Policy,
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;
(4) all other cash amounts received, by foreclosure, eminent domain,
condemnation or otherwise, in connection with the liquidation of defaulted
residential loans. These amounts will also include the net proceeds on a monthly
basis with respect to any properties acquired for the benefit of holders of
securities by deed in lieu of foreclosure or repossession
(5) any advances made as described under "--Advances" in this
prospectus;
(6) all amounts required to be transferred to the Trust Account from a
Reserve Fund, if any, as described below under "--Subordination" in this
prospectus;
(7) all proceeds of any residential loan or underlying mortgaged
property purchased by any Unaffiliated Seller as described under "Residential
Loans -- Representations by Unaffiliated Sellers; Repurchases," exclusive of any
Retained Interest applicable to the loan;
(8) all proceeds of any residential loan repurchased as described
under "--Termination" in this prospectus;
(9) any 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"
in this prospectus;
(10) 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;
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(11) any amounts required to be transferred to the Trust Account
pursuant to any guaranteed investment contract; and
(12) any distributions received on any mortgage securities included in
the related trust fund.
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 on the agency securities will
be made directly to the trustee. The trustee will deposit or cause to be
deposited into the Trust Account 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. The trustee will not be required to
deposit payments due on or before the Cut-Off Date and 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
distribution dates and at the intervals specified in the related prospectus
supplement. These intervals may be monthly, quarterly, semi-annual or as
specified in the related prospectus supplement. The trustee will make these
distributions to the persons in whose names the securities are registered at the
close of business on the record date specified in the related 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:
o by wire transfer in immediately available funds to the account of a
holder of securities at a bank or other entity having appropriate
facilities for the transfer, if the holder of securities has so
notified the trustee or the master servicer and holds securities in
any requisite amount specified in the related prospectus
supplement, or
o by check mailed to the address of the person entitled to the check
as it appears on the Security Register.
However, the final distribution in retirement of the securities will be made
only if presentation and surrender of the securities has occurred at the office
or agency of the Security Registrar specified in the notice to holders of
securities of the final distribution. The related prospectus supplement may
specify that distributions made to the holders of securities will be made on a
pro rata basis among the holders of securities of record on the related record
date, other than in respect of the final distribution, based on the aggregate
percentage interest represented by their respective securities.
Final Distribution Date. If specified in the prospectus supplement for
any series consisting of classes having sequential priorities for distributions
of principal, the final distribution date for each class of securities is the
latest distribution date on which the security
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principal balance is expected to be reduced to zero. The final distribution date
will be based on various assumptions, including the assumption that no
prepayments or defaults occur with respect to the related assets of the trust
fund. Since the rate of distribution of principal of any class of securities
will depend on, among other things, the rate of payment, including prepayments,
of the principal of the assets of the trust fund, 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 assets of the trust fund for any series of
securities will depend on their particular characteristics, as well as on the
prevailing level of interest rates from time to time and other economic factors.
We cannot assure the actual prepayment experience of the assets of the trust
fund. See "Maturity and Prepayment Considerations" in this prospectus. In
addition, substantial losses on the assets of the trust fund in a given period,
even though within the limits of the protection afforded by the instruments
described under "Description of Credit Support," in this prospectus or by the
subordinate securities in the case of a senior/subordinate series, may cause the
actual last distribution date of certain classes of securities to occur after
their final distribution date.
Special Distributions. With respect to any series of securities with
distribution dates occurring at intervals less frequently than monthly, the
securities may be subject to special distributions under the circumstances and
in the manner described below if and to the extent provided in the related
prospectus supplement. If applicable, the master servicer may 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 for the distributions in the related Trust Account. The related
prospectus supplement will specify the date the special distribution is to be
made. Special distributions may be made if, as a result of
o substantial payments of principal on the assets of the trust fund,
o low rates then available for reinvestment of payments on assets of
the trust fund,
o substantial Realized Losses or
o some combination of the foregoing, and
o 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, together with the amount available to be
withdrawn from any related Reserve Fund, may be insufficient to make required
distributions on the securities of the related series on the distribution date
or the 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.
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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 interest-only
securities, may have a different security 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. The related prospectus supplement will specify the basis
on which interest on the securities will be calculated.
Some classes of securities will not be entitled to interest payments.
With respect to each distribution date, the accrued interest with
respect to each security other than an interest-only security, will be equal to
interest on the outstanding security principal balance 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 the
related series. As to each interest-only security, the interest with respect to
any distribution date will equal the amount described in the related prospectus
supplement for the related period.
The related prospectus supplement may specify that the Accrued
Security Interest on each security of a series will be reduced, if shortfalls in
collections of interest occur 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. This shortfall will be allocated
among all of the securities of that series in proportion to the respective
amounts of Accrued Security Interest that would have been payable on the
securities absent the reductions and absent any delinquencies or losses. The
related prospectus supplement may specify that neither the trustee, the master
servicer nor the depositor will be obligated to fund shortfalls in interest
collections resulting from prepayments. See "Yield Considerations" and "Maturity
and Prepayment Considerations" in this prospectus.
Distributions of Accrued Security Interest that would otherwise be
payable on any class of Accrual Securities of a series will be added to the
security principal balance of the Accrual Securities on each distribution date
until the time specified in the related prospectus supplement on and after which
payments of interest on the Accrual Securities will be made. See
"--Distributions--Final distribution date" in this prospectus.
Some securities 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 assets of the trust
fund and other assets included in the related trust fund. With respect to each
of those securities, distributions generally will be applied to accrued and
currently payable interest, and then to principal. The outstanding security
principal balance of a security will be reduced to the extent of distributions
in respect of principal, and in the case of
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securities evidencing interests in a trust fund that includes residential loans,
by the amount of any Realized Losses allocated to the securities.
Some securities will not have a security principal balance and will
not be entitled to principal payments. The initial aggregate security principal
balance of a series and each class of the related series will be specified in
the related prospectus supplement. The initial aggregate security principal
balance of all classes of securities of a series may be based on the aggregate
principal balance of the assets in the related trust fund. Alternatively, the
initial security principal balance for a series of securities may equal the
initial aggregate Cash Flow Value of the related assets of the trust fund as of
the applicable Cut-Off Date.
The aggregate of the initial Cash Flow Values of the assets of the
trust fund included in the trust fund for a series of securities will be at
least equal to the aggregate security principal balance of the securities of
that series at the date of initial issuance of that series.
With respect to any series as to which the initial security principal
balance is calculated on the basis of Cash Flow Values of the assets of the
trust fund, the amount of principal distributed for the series on each
distribution date will be calculated in the manner set forth in the related
prospectus supplement, which may be on the basis of:
o the decline in the aggregate Cash Flow Values of the assets of the
trust fund during the related Due Period, calculated in the manner
prescribed in the related agreement; minus
o 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" in this prospectus, the portion of
the Cash Flow Value of the assets of the trust fund corresponding
to the Realized Loss.
Generally, distributions in respect of principal will be made on each
distribution date to the class or classes of security entitled to distributions
of principal until the security principal balance of the class has been reduced
to zero. In the case of two or more classes of securities in a series, 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 class will 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 the class.
Available Distribution Amount
As more specifically set forth in the related prospectus supplement,
all distributions on the securities of each series on each distribution date
will generally be made from the "Available Distribution Amount" which consists
of the following amounts:
(1) the total amount of all cash on deposit in the related Trust
Account as of a determination date specified in the related prospectus
supplement, exclusive of certain amounts payable on future distribution dates
and certain amounts payable to the master servicer, any applicable sub-servicer,
the trustee or another person as expenses of the trust fund;
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(2) any principal and/or interest advances made with respect to the
distribution date, if applicable;
(3) any principal and/or interest payments made by the master servicer
out of its servicing fee in respect of interest shortfalls resulting from
principal prepayments, if applicable; and
(4) all net income received in connection with the operation of any
residential property acquired on behalf of the holders of securities through
deed in lieu of foreclosure or repossession, if applicable.
On each distribution date for a series of securities, the trustee or
the master servicer will be required to withdraw or cause to be withdrawn from
the Trust Account the entire Available Distribution Amount. The trustee or
master servicer will then be required to distribute the withdrawn amount or
cause the withdrawn amount to be distributed to the related holders of
securities in the manner set forth in this prospectus and in the related
prospectus supplement.
Subordination
A senior/subordinate series will consist of one or more classes of
securities senior in right of payment to one or more classes of subordinate
securities, as specified in the related prospectus supplement. 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
securities as to which credit support is provided by shifting interest
subordination, the rights of the holders of certain classes of subordinate
securities to receive distributions with respect to the residential loans will
be subordinate to the rights of the holders of certain classes of senior
securities. With respect to any defaulted residential loan that is finally
liquidated, the amount of any Realized Loss will generally 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 the reduction will be treated as a Realized Loss.
All Realized Losses will be allocated first to the most subordinate
securities of the related series as described in the related prospectus
supplement, until the security principal balance of the most subordinate
securities has been reduced to zero. Any additional Realized Losses will then be
allocated to the more senior securities or, if the series includes more than one
class of more senior securities, either on a pro rata basis among all of the
more senior securities in proportion to their respective outstanding security
principal balances, or as 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, the amount that may be allocated to the subordinate
securities of the related series may be limited to an amount specified in the
related prospectus supplement. See "Description of Credit Support -- Special
Hazard Insurance Policies" in this prospectus. If
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so, any Realized Losses which are not allocated to the subordinate classes may
be allocated among all outstanding classes of securities of the related series,
either on a pro rata basis in proportion to their outstanding security principal
balances, regardless of whether any subordinate securities remain outstanding,
or as provided in the related prospectus supplement.
As set forth above, the rights of holders of the various classes of
securities of any series to receive distributions of principal and interest is
determined by the aggregate security principal balance of each class. The
security principal balance of any security will be reduced by all amounts
previously distributed on the security in respect of principal, and, if so
provided in the related prospectus supplement, by any Realized Losses allocated
to the security. However, to the extent so provided in the related prospectus
supplement, holders of senior securities may be entitled to receive a
disproportionately larger amount of prepayments received in certain
circumstances. This will have the effect, in the absence of offsetting losses,
of accelerating the amortization of the senior securities and increasing the
respective percentage interest evidenced by the subordinate securities in the
related trust fund, with a corresponding decrease in the percentage interest
evidenced by the senior securities, as well as preserving the availability of
the subordination provided by the subordinate securities. In addition, the
Realized Losses will be first allocated to subordinate securities by reduction
of their security principal balance, which will have the effect of increasing
the respective ownership interest evidenced by the senior securities 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
securities 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, if losses on the
residential loans occur not in excess`of the Available Subordination Amount, the
rights of the holders of subordinate securities to receive distributions of
principal and interest with respect to the residential loans will be subordinate
to the rights of the holders of senior securities.
The protection afforded to the holders of senior securities from the
subordination provisions may be effected both by the preferential right of the
holders of senior securities to receive current distributions from the trust
fund, subject to the limitations described in this prospectus, and by the
establishment and maintenance of any 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 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, if any, other than earnings on the
Reserve Funds, will be withdrawn for distribution to holders of senior
securities as may be necessary to make full distributions to those holders on a
particular distribution date, as described above. If on any distribution date,
after giving effect to the distributions to the holders of senior securities on
this date, the amount of the Reserve Fund exceeds the amount required to be held
in the Reserve Fund, the excess will be withdrawn and distributed in the manner
specified in the related prospectus supplement.
If any Reserve Fund is depleted before the Available Subordination
Amount is reduced to zero, the holders of senior securities will nevertheless
have a preferential right to receive current
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distributions from the trust fund to the extent of the then Available
Subordination Amount. However, under these circumstances, if current
distributions are insufficient, the holders of senior securities could suffer
shortfalls of amounts due to them. The holders of senior securities will bear
their proportionate share of any losses realized on the trust fund in excess of
the Available Subordination Amount.
Amounts remaining in any Reserve Fund after the Available
Subordination Amount is reduced to zero will no longer be subject to any claims
or rights of the holders of senior securities of the series.
Funds in any Reserve Fund may be invested in United States government
securities and other high quality investments. The earnings or losses on those
investments will be applied in the manner described in the related prospectus
supplement.
The time necessary for any Reserve Fund to reach the required 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. The security principal balances of
the various classes of securities comprising a senior/subordinate series may be
based on the Cash Flow Value of the residential loans. If the percentage
allocated to the senior securities of the decline in the Cash Flow Value of the
residential loans during the related Deposit Period exceeds the remaining amount
of collections and advances in respect of the residential loans after paying
interest on the senior securities, the holders of the senior securities may not
receive all amounts to which they are entitled. In addition, this may result in
a loss being borne by the holders of the subordinate securities.
Because the Cash Flow Value of a residential loan will never exceed
the outstanding principal balance of the residential loan, prepayments in full
and liquidations of the residential loans may result in proceeds attributable to
principal in excess of the corresponding Cash Flow Value decline. Any excess
will be applied to offset losses realized during the related Deposit Period,
such as those described in the immediately preceding paragraph, in respect of
other liquidated residential loans without affecting the remaining
subordination. This excess may also be deposited in a Reserve Fund for future
distributions.
Advances
The related prospectus supplement, with respect to any series of
securities evidencing interests in a trust fund that includes residential loans
may specify that 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 the distribution date. The amount of the advance will be
equal to the aggregate of payments of principal and/or interest, adjusted to the
applicable Net Interest Rate, on the residential loans that were due during the
related Due Period and that were delinquent, and not advanced by any
sub-servicer, on the applicable determination date. Any amounts held for future
distribution and so used will be replaced by the master servicer on or before
any future
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distribution date to the extent that funds in the Trust Account on the
distribution date will be less than payments to holders of securities required
to be made on the distribution date.
The related prospectus supplement may specify that the obligation of
the master servicer to make advances may be subject to the good faith
determination of the master servicer that the advances will be reimbursable from
related late collections, Insurance Proceeds or Liquidation Proceeds. See
"Description of Credit Support" in this prospectus. 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 the mortgage securities.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of securities, rather than to guarantee or
insure against losses. The related prospectus supplement may specify that
advances will be reimbursable to the master servicer, with interest, out of
related recoveries on the residential loans respecting which amounts were
advanced, or, to the extent that the master servicer determines that any 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. The related prospectus supplement may specify that 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 borrower of, any surety bond, will be set forth in
the related prospectus supplement.
Statements to Holders of Securities
On each distribution date, the master servicer or the trustee will
forward or cause to be forwarded to each holder of securities of the related
series and to the depositor a statement including the information specified in
the related prospectus supplement. This information may include the following:
(1) the amount of the 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;
(2) the amount of the distribution, if any, allocable to interest;
(3) the amount of administration and servicing compensation received
by or on behalf of the trustee, master servicer and any sub-servicer with
respect to the distribution date and other customary information as the master
servicer or the trustee deems necessary or desirable to enable holders of
securities to prepare their tax returns or which a holder of securities
reasonably requests for this purpose;
(4) if applicable, the aggregate amount of any advances included in
this distribution and the aggregate amount of any unreimbursed advances as of
the close of business on the distribution date;
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(5) 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 the distribution date;
(6) 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;
(7) 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 the month and the
date of acquisition;
(8) 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;
(9) the aggregate unpaid principal balance of the mortgage loans at
the close of business on the related distribution date;
(10) in the case of securities with a variable security interest rate,
the security interest rate applicable to the distribution date, as calculated in
accordance with the method specified in the prospectus supplement relating to
the related series;
(11) 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 security interest rate applicable to the next succeeding
distribution date;
(12) as to any series including one or more classes of Accrual
Securities, the interest accrued on each class with respect to the related
distribution date and added to the security principal balance;
(13) the amount remaining in the Reserve Fund, if any, as of the close
of business on the distribution date, after giving effect to distributions made
on the related distribution date;
(14) as to any senior/subordinate series, information as to the
remaining amount of protection against losses afforded to the holders of senior
securities by the subordination provisions and information regarding any
shortfalls in payments to the holder of senior securities which remain
outstanding; and
(15) 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.
Information furnished pursuant to clauses (1), (2) and (3) above may be
expressed as a dollar amount per minimum denomination security.
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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 the calendar year. This report will set forth the aggregate of amounts
reported pursuant to clauses (1), (2) and (3) of the immediately preceding
paragraph for the related calendar year or if the person was a holder of record
during a portion of the calendar year, for the applicable portion of that year.
The related prospectus supplement may provide that additional
information with respect to a series of securities will be included in these
statements. In addition, the master servicer or the trustee will file with the
Internal Revenue Service and furnish to holders of securities the statements or
information as may be required by the Code or applicable procedures of the IRS.
Book-Entry Registration of Securities
If not issued in fully registered form, each class of securities will
be registered as book-entry securities. Persons acquiring beneficial ownership
interests in the securities will hold their securities through the Depository
Trust Company in the United States, or Clearstream Banking, societe anonyme or
The Euroclear System in Europe, if they are Participants of these systems, or
indirectly through organizations which are Participants in these 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. Clearstream Banking
and Euroclear will hold omnibus positions on behalf of their Participants
through customers' securities accounts in Clearstream Banking's and Euroclear's
names on the books of their respective depositaries which in turn will hold
these positions in customers' securities accounts in the depositaries' names on
the books of DTC. Except as described below, no Security Owner will be entitled
to receive a Definitive Certificate. Unless and until Definitive Securities are
issued, we anticipate that only "holders" of the securities will be Cede & Co.,
as nominee of DTC. Security Owners are only permitted to exercise their rights
indirectly through the Participants and DTC.
The Security Owner's ownership of a book-entry security will be
recorded on the records of the Financial Intermediary. In turn, the Financial
Intermediary's ownership of the 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 Clearstream Banking or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the securities from the trustee through DTC and the Participants.
While the securities are outstanding, except under the circumstances described
under this caption "--Book-Entry Registration of Securities," under the rules,
regulations and procedures creating and affecting DTC and its operations, DTC is
required to make book-entry transfers among Participants on whose behalf it acts
with respect to the 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 these distributions on behalf of their
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respective Security Owners. Accordingly, although Security Owners will not
possess certificates, the rules creating and affecting DTC and its operations
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 the Participants and indirect participants to transfer securities,
by book-entry transfer, through DTC for the account of the purchasers of the
securities, which account is maintained with their respective Participants.
Under the rules creating and affecting DTC and its operations and in accordance
with DTC's normal procedures, transfers of ownership of securities 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
Clearstream Banking 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. The credits or any transactions
in the securities settled during this processing will be reported to the
relevant Euroclear or Clearstream Banking Participants on that business day.
Cash received in Clearstream Banking or Euroclear as a result of sales of
securities by or through a Clearstream Banking Participant or Euroclear
Participant to a DTC Participant will be received with value on the DTC
settlement date but will be available in the relevant Clearstream Banking or
Euroclear cash account only as of the business day following settlement in DTC.
Transfers between Participants will occur in accordance with the rules
creating and affecting DTC and its operations. Transfers between Clearstream
Banking Participants and Euroclear Participants will occur in accordance with
their respective rules and operating procedures.
Under a book-entry format, beneficial owners of the book-entry
securities may experience some delay in their receipt of payments, since the
trustee will forward payments to Cede & Co. Distributions with respect to
securities held through Clearstream Banking or Euroclear will be credited to the
cash accounts of Clearstream Banking Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the relevant depositary. These distributions will be subject to tax
reporting in accordance with the relevant United States tax laws and
regulations. See "Federal Income Tax Consequences" in this prospectus. 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 the book-entry securities, may by limited due to the lack of physical
certificates for the book-entry securities. In addition, issuance of the
book-entry securities in book-entry form may reduce the liquidity of the
securities in the secondary market since certain potential investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates.
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The related prospectus supplement may specify that Cede & Co. will
provide monthly and annual reports on the trust fund as nominee of DTC. Cede &
Co. may make these reports available to beneficial owners if requested, 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 the beneficial owners are credited.
We understand 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 terms of the securities only at the direction of one or
more Financial Intermediaries to whose DTC accounts the book-entry securities
are credited, to the extent that these actions are taken on behalf of Financial
Intermediaries whose holdings include these book-entry securities. Clearstream
Banking or Euroclear, as the case may be, will take any other action permitted
to be taken by a holder of securities under the terms of the securities on
behalf of a Clearstream Banking Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the relevant depositary to effect the 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.
Definitive Securities will be delivered to beneficial owners of
securities (or their nominees) only if:
(1) DTC is no longer willing or able properly to discharge its
responsibilities as depository with respect to the securities, and the depositor
is unable to locate a qualified successor,
(2) the depositor or trustee, at its sole option, elects to terminate
the book-entry system through DTC, or
(3) after the occurrence of an event of default under the pooling and
servicing agreement, Security Owners representing a majority in principal amount
of the securities of any class then outstanding advise DTC through a Participant
of DTC in writing that the continuation of a book-entry system through DTC or a
successor thereto is no longer in the best interest of the Security Owners.
If any of the events described in the immediately preceding paragraph
occur, the trustee will notify all beneficial owners of the occurrence of the
event and the availability through DTC of Definitive Securities. If the global
certificate or certificates representing the book-entry securities and
instructions for reregistration are surrendered by DTC, the trustee will issue
Definitive Securities. The trustee will then recognize the holders of the
Definitive Securities as holders of securities under the applicable agreement.
Although DTC, Clearstream Banking and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of securities among
Participants of DTC, Clearstream Banking and Euroclear, they are under no
obligation to perform or continue to perform the procedures and may discontinue
the procedures 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
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interests of the book-entry securities held by Cede & Co., as nominee for DTC,
or for maintaining, supervising or reviewing any records relating to the
beneficial ownership interests. WE CANNOT ASSURE YOU THAT CEDE & CO., DTC OR ANY
FINANCIAL INTERMEDIARY WILL PROVIDE INFORMATION TO YOU OR ACT IN ACCORDANCE WITH
THEIR RESPECTIVE RULES, REGULATIONS, AND PROCEDURES.
Collection and Other Servicing Procedures
Residential Loans. The master servicer, directly or through
sub-servicers, will be required to
o make reasonable efforts to collect all required payments under the
residential loans and
o follow or cause to be followed the 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. However, these procedures must be consistent with any
insurance policy, bond or other instrument described under
"Description of Primary Insurance Coverage" or "Description of
Credit Support" in this prospectus.
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 these 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 the
conveyance, encumbrance, or proposed conveyance or encumbrance, exercise or
cause to be exercised its rights to accelerate the maturity of the residential
loan under any applicable due-on-sale or due-on-encumbrance clause. The master
servicer will accelerate the maturity only if the exercise of the 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 the 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 the property has
been conveyed, encumbered or is proposed to be conveyed or encumbered. Pursuant
to the assumption and modification agreement, the person to whom the property
has been conveyed becomes liable under the mortgage note, cooperative note, Home
Improvement Contract or Manufactured Housing Contract. To the extent permitted
by applicable law, the borrower remains liable on the mortgage note, cooperative
note, Home Improvement Contract or Manufactured Housing Contract, provided that
coverage under any Insurance Instrument with respect to the residential loan is
not adversely affected.
The master servicer can enter into a substitution of liability
agreement with the person to whom the property is conveyed, pursuant to which
the original borrower is released from liability and the person is substituted
as the borrower and becomes liable under the mortgage note, cooperative note,
Home Improvement Contract or Manufactured Housing Contract. In
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connection with any 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 may be retained by or
on behalf of the master servicer as additional compensation for administering of
the assets of the trust fund. See "Certain Legal Aspects of Residential Loans --
Enforceability of Certain Provisions" and "-- Prepayment Charges and
Prepayments" in this prospectus. The master servicer will be required to notify
the trustee and any custodian that any assumption or substitution agreement has
been completed.
Agency Securities. The trustee will be required, if it has not
received a distribution with respect to any agency security by the date
specified in the related prospectus supplement in accordance with the terms of
its agency security, to request the issuer or guarantor, if any, of the agency
security to make this payment as promptly as possible. The trustee will be
legally permitted to take legal action against the issuer or guarantor as the
trustee deems appropriate under the circumstances, including the prosecution of
any claims in connection with the agency securities. The reasonable legal fees
and expenses incurred by the trustee in connection with the prosecution of the
legal action will be reimbursable to the trustee out of the proceeds of the
action and will be retained by the trustee prior to the deposit of any remaining
proceeds in the Trust Account pending distribution to holders of securities of
the related series. If the proceeds of the 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 the expenses
incurred by it, in which event the trust fund may realize a loss up to the
amount so charged.
Realization on Defaulted Residential Loans
As servicer of the residential loans, the master servicer, on behalf
of itself, the trustee and the holders of securities, will present claims to the
insurer under each Insurance Instrument, to the extent specified in the related
prospectus supplement. The master servicer will be required to take reasonable
steps as are necessary to receive payment or to permit recovery under the
Insurance Instrument with respect to defaulted residential loans. The related
prospectus supplement may specify that 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 may be entitled to reimbursement for any
unreimbursed advances and reimbursable expenses for the defaulted residential
loan.
If any property securing a defaulted residential loan is damaged and
proceeds, if any, from the related Primary Hazard Insurance Policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under the related Primary Credit Insurance Policy, if any, the master
servicer will not be required to expend its own funds to restore the damaged
property unless it determines:
(1) that the restoration will increase the proceeds to holders of
securities on liquidation of the residential loan after reimbursement of the
master servicer for its expenses; and
(2) that the expenses will be recoverable by it from related Insurance
Proceeds or Liquidation Proceeds.
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If recovery on a defaulted residential loan under any related Primary
Credit Insurance Policy 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 the normal practices and
procedures as it deems necessary, and appropriate for the type of defaulted
residential loan, or advisable to realize on the defaulted residential loan. If
the proceeds of any liquidation of the property securing the defaulted
residential loan are less than:
o the outstanding principal balance of the defaulted residential
loan, or the Cash Flow Value of the mortgage loan if the security
principal balances are based on Cash Flow Values);
o the amount of any liens senior to the defaulted residential loan
plus interest accrued on the defaulted residential loan at the Net
Interest Rate; plus
o the aggregate amount of expenses incurred by the master servicer in
connection with the proceedings and which are reimbursable under
the related agreement
the trust fund will realize a loss in the amount of this 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 the related residential loan. If the master servicer has
expended its own funds to restore damaged property and these 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 the expenses incurred by it, in which event the trust fund may
realize a loss up to the amount charged. Because Insurance Proceeds cannot
exceed deficiency claims and certain expenses incurred by the master servicer,
no 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 on the defaulted residential loan 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 amount is legally permissible, the insurer
will exercise its right under any related pool insurance policy to purchase the
property and realize for itself any excess proceeds. See "Description of Primary
Insurance Coverage" and "Description of Credit Support" in this prospectus.
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 housing corporation 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 Cooperative Shares" in this prospectus. This approval is
usually based on the purchaser's income and net worth and numerous other
factors. The
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necessity of acquiring approval could limit the number of potential purchasers
for those shares and otherwise limit the master servicer's ability to sell, and
realize the value of, those shares.
Retained Interest, Administration Compensation and Payment of Expenses
If the related prospectus supplement provides for Retained Interests,
they may 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 an asset of the trust fund represents a specified portion
of the interest payable on the asset. The Retained Interest will be deducted
from related payments as received and will not be part of the related trust
fund. Any partial recovery of interest on a residential loan, after deduction of
all applicable administration fees, may be allocated between Retained Interest,
if any, and interest at the Net Interest Rate on a pro rata basis.
The related prospectus supplement may specify that the primary
administration compensation of the master servicer or the trustee with respect
to a series of securities will generally come from the monthly payment to it,
with respect to each interest payment on a trust fund asset. The amount of the
compensation may be at a rate equal to one-twelfth of the difference between the
interest rate on the asset and the sum of the Net Interest Rate and the Retained
Interest Rate, if any, times the scheduled principal balance of the trust fund
asset.
With respect to a series of securities as to which the trust fund
includes mortgage securities, the compensation payable to the master servicer
for servicing and administering these mortgage securities on behalf of the
holders of the securities may be based on a percentage per annum described in
the related prospectus supplement of the outstanding balance of these mortgage
securities and may be retained from distributions on the mortgage securities.
Any sub-servicer may 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, these amounts
will decrease as the assets of the trust fund amortize.
As additional compensation in connection with a series of securities
relating to residential loans, the master servicer or the sub-servicers may be
entitled to retain all assumption fees and late payment charges and any
prepayment fees collected from the borrowers and any excess recoveries realized
on liquidation of a defaulted residential loan. 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. The prospectus
supplement will further specify any allocations for these amounts.
With respect to a series of securities relating to residential loans,
the master servicer will pay from its administration compensation its regular
expenses incurred in connection with its servicing of the residential loans,
other than expenses relating to foreclosures and disposition of property
acquired in foreclosure.
We anticipate that the administration compensation will in all cases
exceed these expenses. The master servicer is entitled to reimbursement for
certain expenses incurred by it in
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connection with the liquidation of defaulted residential loans. The
reimbursement includes under certain circumstances reimbursement of expenditures
incurred by it in connection with the restoration of residential properties,
this right of reimbursement being prior to the rights of holders of securities
to receive any related Liquidation Proceeds. The master servicer may also be
entitled to reimbursement from the Trust Account for advances, if applicable.
With respect to a series of securities relating to agency securities, the
trustee will be required to pay all of its anticipated recurring expenses.
Evidence as to Compliance
Each agreement will generally provide that on or before a specified
date in each year, beginning with the first date that occurs at least six months
after the Cut-Off Date, the master servicer, or the trustee, at its expense
shall cause a firm of independent public accountants which is a member of the
American Institute of Certified Public Accountants to furnish a statement to the
trustee. In the statement, the accounting firm will be required to state that
they have performed tests in accordance with generally accepted accounting
principles regarding the records and documents relating to residential loans or
agency securities serviced, as part of their examination of the financial
statements of the master servicer or the trustee, as the case may be. Based on
the examination, the accountants will be required to state that there were no
exceptions that, in their opinion, were material, or provide a list of the
exceptions. In rendering that statement, the firm may rely, as to matters
relating to direct servicing of residential loans by sub-servicers, on
comparable statements for examinations conducted substantially in compliance
with generally accepted accounting principles in the residential loan servicing
industry, rendered within one year of the statement, of independent public
accountants with respect to the related sub-servicer.
Each applicable servicing agreement or trust agreement will also
provide for delivery to the trustee, on or before a specified date in each year,
of an annual statement signed by an officer of the master servicer, in the case
of a pool of agency securities or mortgage securities, or of the trustee, in the
case of a trust agreement. This statement will be to the effect that, to the
best of the officer's knowledge, the master servicer or the trustee, as the case
may be, has fulfilled its obligations under the related 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
servicing agreement will generally provide that:
o 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
o shall resign if a determination is made that its duties under the
related agreement are no longer permissible under applicable law;
and
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o the resignation will not 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 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 holders of securities
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. However,
neither the master servicer nor any person shall be protected
o against any liability for any breach of warranties or
representations made in the servicing agreement; or
o against any specific liability imposed on the master servicer; or
o by the terms of the servicing agreement; or
o by reason of willful misfeasance, bad faith or gross negligence
in the performance of duties under the agreement; or
o by reason of reckless disregard of obligations and duties under
the related servicing agreement.
The master servicer and any director, officer, employee or agent of the master
servicer will be entitled to 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 may
further provide that the master servicer and any director, officer, employee or
agent of the master servicer will be
o entitled to indemnification by the trust fund and
o 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
o any loss, liability, or expense related to any specific
residential loan or residential loans,
o any loss, liability, or expense otherwise reimbursable pursuant
to the servicing agreement, and
o any loss, liability, or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance
of duties under the agreement or by reason of reckless
disregard of obligations and duties under the agreement.
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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 be permitted, however, in its discretion to undertake any action
which it may deem necessary or desirable with respect to the servicing agreement
and the rights and duties of the parties to the servicing agreement and the
interests of the holders of securities under the servicing agreement. In that
event, the legal expenses and costs of the action and any liability resulting
from taking the actions will be expenses, costs and liabilities of the trust
fund. The master servicer will be entitled to be reimbursed for these expenses
out of the Trust Account. This right of reimbursement is prior to the rights of
holders of securities to receive any amount in the Trust Account.
Any entity into which the master servicer may be merged, consolidated
or converted, or any entity resulting from any merger, consolidation or
conversion to which the master servicer is a party, or any entity succeeding to
the business of the master servicer, will be the successor of the master
servicer under each servicing agreement. However, the successor or surviving
entity must meet the qualifications specified in the related prospectus
supplement.
The related prospectus supplement may specify that the master
servicer's duties may be terminated if a termination fee is paid, and the master
servicer may be replaced with a successor meeting the qualifications specified
in the related prospectus supplement.
The Depositor. Each applicable 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 holders of securities 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. However, neither the
depositor nor any person will 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
under the agreement or by reason of reckless disregard of obligations and duties
under the agreement. The depositor and any director, officer, employee or agent
of the depositor will be entitled to 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:
o the agreement or the securities;
o any Pool Insurance Policy;
o any special hazard insurance policy and the Bankruptcy Bond; or
o any agency securities,
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other than any loss, liability, or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties under
the related agreement or by reason of reckless disregard of obligations and
duties under the related agreement.
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 the related agreement and which in
its opinion may involve it in any expense or liability. The depositor may be
permitted, however, in its discretion to undertake any action which it may deem
necessary or desirable with respect to the related agreement and the rights and
duties of the parties to the related agreement and the interests of the holders
of securities under the related agreement. In that event, the legal expenses and
costs of the action and any liability resulting from taking these actions will
be expenses, costs and liabilities of the trust fund. The depositor will be
entitled to be reimbursed for those expenses out of the Trust Account. This
right of reimbursement will be prior to the rights of holders of securities 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. Each trustee for any series of securities will be
required to be an entity 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 as 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 or the trustee
may have the power to appoint co-trustees or separate trustees of all or any
part of the trust fund. If the appointment occurs, all rights, powers, duties
and obligations conferred or imposed on the trustee by the agreement relating to
the series shall be conferred or imposed on the trustee and the separate trustee
or co-trustee jointly. In any jurisdiction in which the trustee shall be
incompetent or unqualified to perform certain acts, the rights, powers and
duties shall be conferred or imposed on the separate trustee or co-trustee
singly. The separate trustee or co-trustee will be required to exercise and
perform these rights, powers, duties and obligations solely at the direction of
the trustee.
The trustee may resign at any time, in which event the depositor or
the other party specified in the related agreements will be obligated to appoint
a successor trustee. The depositor or the other party specified in the related
agreements 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 these circumstances, the depositor or the other party
specified in the related agreements will be obligated to appoint a successor
trustee. The holders of securities evidencing not less than a majority of the
voting rights allocated to the 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
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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 asset of the
trust fund or related document other than the certificate of authentication on
the forms of securities, and will not assume any responsibility for their
correctness. The trustee under any agreement will not be 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 assets of the trust fund, 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 has
occurred and is continuing, the trustee will be required to perform only those
duties specifically required under the related agreement. However, when the
trustee receives the various certificates, reports or other instruments required
to be furnished to it under an agreement, the trustee will be required to
examine those documents and to determine whether they conform to the
requirements of the agreement.
Each agreement may 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 holders of securities 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. However, neither the trustee nor any
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 under the related agreement or by
reason of reckless disregard of obligations and duties under the related
agreement. 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 may 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. However, the trustee may not be held
harmless against any loss, liability, or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties under
the related agreement or by reason of reckless disregard of obligations and
duties under the related agreement.
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 may apply if specified
in the related prospectus supplement.
A deficiency event with respect to the securities of any of the series
is the inability to distribute to holders of one or more classes of securities
of these series, in accordance with the terms of the securities and the related
agreement, any distribution of principal or interest on these securities when
and as distributable, in each case because of the insufficiency for the purpose
of the funds then held in the related trust fund.
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If a deficiency event occurs, the trustee or master servicer, as may
be set forth in the related prospectus supplement, may be required to determine
the sufficiency of funds available to make future required distributions on the
securities.
The trustee or master servicer may obtain and rely on 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 the trust fund to
make the distributions on the securities, which opinion or report will be
conclusive evidence as to sufficiency. Prior to making this determination,
distributions on the securities shall continue to be made in accordance with
their terms.
If 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 the series in accordance with their terms.
However, these distributions will be made monthly and without regard to the
amount of principal that would otherwise be distributable on any distribution
date. Under certain circumstances following the positive determination, the
trustee or master servicer may resume making distributions on the 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 securities of the series pro rata,
without regard to the priorities as to distribution of principal set forth in
these securities. Also, these securities will, to the extent permitted by
applicable law, accrue interest at the highest security interest rate borne by
any security of the series. Alternatively, if any class of the series shall have
an adjustable or variable security interest rate, interest will accrue 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 this case, the holders of
securities evidencing a majority of the voting rights allocated to the
securities may direct the trustee to sell the related trust fund. Any direction
to sell the trust fund will be irrevocable and binding on the holders of all
securities of the series and on the owners of any residual interests in the
trust fund. In the absence of this direction, the trustee may not sell all or
any portion of the trust fund.
Events of Default
Pooling and Servicing Agreements. Events of default under each pooling
and servicing agreement will be specified in the related prospectus supplement
and will generally consist of:
o any failure by the master servicer to distribute or cause to be
distributed to holders of the certificates, or the failure of the
master servicer to remit funds to the trustee for this
distribution, which continues unremedied for five days or another
period specified in the servicing agreement after the giving of
written notice of the failure in accordance with the procedures
described in the agreement;
o 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 or another
period specified in the pooling and servicing
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agreement after the giving of written notice of the failure in
accordance with the procedures described in the agreement;
o 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; and
o any other event of default specified in the pooling and servicing
agreement.
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 a percentage of the voting rights allocated
to the certificates as may be specified in the pooling and servicing agreement
will be required to 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 of the residential loans. The trustee or another
successor servicer will then succeed to all responsibilities, duties and
liabilities of the master servicer and will be entitled to similar compensation
arrangements.
If the trustee would be obligated to succeed the master servicer but
is unwilling to act as master servicer, it may, 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, or other amount as may be specified in the related
agreement, to act as successor to the master servicer under the pooling and
servicing agreement. Pending the appointment, the trustee is obligated to act in
this capacity. The trustee and the successor may agree on 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 holder of the certificate will have the right under any pooling and
servicing agreement to institute any proceeding with respect to its certificates
unless permitted in the related agreement and:
o the 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 of the event of default;
o the holders of certificates evidencing not less than 25% of the
voting rights allocated to the certificates, or other percentages
specified in the agreement, have made written request to the
trustee to institute the proceeding in its own name as trustee and
have offered to the trustee reasonable indemnity as it may require
against the costs, expenses and liabilities to be incurred by
instituting the proceedings; and
o the trustee for sixty days after receipt of notice, request and
offer of indemnity has neglected or refused to institute any
proceeding.
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The trustee, however, is generally under no obligation to
o exercise any of the trusts or powers vested in it by any pooling
and servicing agreement or to make any investigation of matters
arising under the pooling and servicing agreement or
o institute, conduct, or defend any litigation under, or in relation
to, the pooling and servicing agreement, at the request, order or
direction of any of the holders of certificates covered by the
pooling and servicing agreement,
unless the holders of the certificates have offered to the trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred in the undertaking.
Servicing Agreement. Servicing defaults under the related servicing
agreement will be specified in the related prospectus supplement and will
generally include:
o any failure by the master servicer to pay or cause to be paid to
holders of the notes, or the failure of the master servicer to
remit funds to the trustee for the payment which continues
unremedied for the period specified in the servicing agreement
after the giving of written notice of the failure in accordance
with the procedures described in the agreement;
o 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 the period specified
in the pooling and servicing agreement after the giving of written
notice of the failure in accordance with the procedures described
in the agreement;
o 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; and
o any other servicing default specified 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.
However, the right of the master servicer as noteholder or as holder of the
Equity Certificates and the right to receive servicing compensation and expenses
for servicing the mortgage loans during any period prior to the date of the
termination may not be terminated. The trustee or another successor servicer
will then succeed to all responsibilities, duties and liabilities of the master
servicer and will be entitled to similar compensation arrangements.
If 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 an amount specified
in the related agreement, to act as successor to the master servicer under
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the servicing agreement. Pending this appointment, the trustee is obligated to
act in that capacity. The trustee and the successor may agree on the servicing
compensation to be paid, which in no event may be greater than the compensation
to the initial master servicer under the servicing agreement.
Indenture. Events of default under the indenture will be specified in
the related prospectus supplement and will generally include:
o a default for five days or more, or another period of time
specified in the related indenture, in the payment of any principal
of or interest on any note of the related series;
o failure to perform any other covenant of the issuer or the trust
fund in the indenture which continues for the period specified in
the related indenture, after notice of the event of default is
given in accordance with the procedures described in the related
indenture;
o any representation or warranty made by the issuer or the trust fund
in the indenture or in any other writing delivered in connection
with the indenture having been incorrect in a material respect as
of the time made, and the breach is not cured within the period
specified in the related indenture, after notice of the breach is
given in accordance with the procedures described in the related
indenture;
o certain events of bankruptcy, insolvency, receivership or
liquidation of the issuer or the trust fund; and
o any other event of default provided with respect to notes of that
series.
If an event of default with respect to the notes of any series at the
time outstanding occurs and is continuing, the trustee or the holders of a
majority of the voting rights allocable to the notes, or another percentage
specified in the indenture, may declare the principal amount of all the notes of
the series to be due and payable immediately. This 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 the series have been declared to be due and payable, the trustee
may, in its discretion, regardless of acceleration, elect to
o maintain possession of the collateral securing the notes of the
series and
o continue to apply payments on the collateral as if there had been
no declaration of acceleration.
The trustee may only do so if the collateral continues to provide sufficient
funds for the payment of principal of and interest on the notes of the series as
they would have become due if there had not been a declaration.
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In addition, the trustee may not sell or otherwise liquidate the
collateral securing the notes of a series following an event of default, unless
o the holders of 100% of the voting rights allocated to the notes of
the series consent to the sale,
o the proceeds of the sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the
outstanding notes of the series at the date of the sale,
o the trustee determines that the collateral would not be sufficient
on an ongoing basis to make all payments on the notes as the
payments would have become due if the related 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 the series, or
o the trustee satisfies the other requirements as may be set forth in
the related indenture.
If the trustee liquidates the collateral in connection with an event
of default under the indenture, the indenture provides that the trustee will
have a prior lien on the proceeds of any liquidation for unpaid fees and
expenses. As a result, if an event of default occurs under the indenture, the
amount available for payments to the Noteholders would be less than would
otherwise be the case. However, the trustee will not be permitted to institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the indenture for the benefit of
the Noteholders after the occurrence of an event of default under the indenture.
If the principal of the notes of a series is declared due and payable,
the holders of any notes issued at a discount from par may be entitled to
receive no more than an amount equal to the unpaid principal amount of the
related note less the amount of the discount that is unamortized.
No noteholder generally will have any right under an indenture to
institute any proceeding with respect to the related agreement unless permitted
by the indenture and
o the holder previously has given to the trustee written notice of
default and the continuance of a default;
o the holders of notes or Equity Certificates of any class evidencing
not less than 25% of the voting rights allocated to the notes, or
another percentage specified in the indenture:
o have made written request to the trustee to institute the
proceeding in its own name as trustee; and
o have offered to the trustee reasonable indemnity;
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o the trustee has neglected or refused to institute any proceeding
for 60 days after receipt of a request and indemnity; and
o no direction inconsistent with the written request has been given
to the trustee during the 60 day period by the holders of a
majority of the note principal balances of the related class.
However, the trustee will generally be under no obligation to
o exercise any of the trusts or powers vested in it by the indenture
or
o institute, conduct or defend any litigation under the indenture or
in relation to the indenture at the request, order or direction of
any of the holders of notes covered by the agreement,
unless those holders have offered to the trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred in
this undertaking.
Amendment
With respect to each series of securities, each agreement governing
the rights of the holders of the securities may generally be amended by the
parties to the agreement, without the consent of any of the holders of
securities:
(1) to cure any ambiguity;
(2) to correct or supplement any provision in any agreement which may
be inconsistent with any other provision in any agreement;
(3) to make any other provisions with respect to matters or questions
arising under the agreement; and
(4) if the 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 action which,
if made effective, would apply retroactively to the trust fund at least from the
effective date of the amendment,
provided that the required action, other than an amendment described in clause
(4) above, will not adversely affect in any material respect the interests of
any holder of the securities covered by the agreement. Each agreement may also
be amended, subject to certain restrictions to continue favorable tax treatment
of the entity by the parties to this agreement, with the consent of the holders
of securities evidencing not less than 51% of the voting rights allocated to the
securities, or another percentage specified in the indenture, for any purpose.
However, no amendment may
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(a) reduce in any manner the amount of, or delay the timing of,
payments received on assets of the trust fund which are required to be
distributed on any security without the consent of the holder of the
security; or
(b) reduce the aforesaid percentage of voting rights required for
the consent to the amendment without the consent of the holders of all
securities of the related series then outstanding, or as otherwise
provided in the related agreement.
Termination
The obligations created by the agreement for each series of securities
will generally terminate when any of the following first occurs
o the payment to the holders of securities of that series of all
amounts held in the Trust Account and required to be paid to the
holders of securities pursuant to the agreement,
o 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,
o the purchase of all of the assets of the trust fund by the party
entitled to effect the termination,
in each case, under the circumstances and in the manner set forth in the related
prospectus supplement.
In no event, however, will the trust created by the agreement continue
beyond the period specified in the related prospectus supplement. Written notice
of termination of the agreement will be given to each holder of securities. The
final distribution will be made only after surrender and cancellation of the
securities at an office or agency appointed by the trustee which will be
specified in the notice of termination.
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
Voting rights allocated to securities of a series will generally be
based on security principal balances. Any other method of allocation will be
specified in the related prospectus supplement. The prospectus supplement may
specify that 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
The prospectus supplement may specify that each residential loan may
be covered by a Primary Hazard Insurance Policy and, if required as described in
the related prospectus
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supplement, a Primary Credit Insurance Policy. In addition, the prospectus
supplement may specify that 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. This insurance is subject to underwriting and approval of
individual residential loans by the respective insurers.
Primary Credit Insurance Policies
The prospectus supplement will specify whether the master servicer
will be required to 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 this insurance is required, as described under
"Description of the Securities -- Realization on Defaulted Residential Loans" in
this prospectus.
The master servicer will be required to cause to be paid the premium
for each Primary Credit Insurance Policy to be paid on a timely basis. The
master servicer, or the related sub-servicer, if any, will be required to
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 on its being so named, or on
the extent to which information in this regard is furnished by borrowers. All
amounts collected by the master servicer under any policy will be required to be
deposited in the Trust Account. The master servicer will generally not be
permitted to cancel or refuse to renew any 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. However, the master servicer may
cancel or refuse to renew any Primary Credit Insurance Policy, if it uses its
best efforts to obtain a replacement Primary Credit Insurance Policy for the
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 or notes 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, if a
default by the borrower occurs, among other things, to:
o advance or discharge
o hazard insurance premiums; and
o as necessary and approved in advance by the insurer, real estate
taxes, protection and preservation expenses and foreclosure and
related costs;
o if any physical loss or damage to the residential property occurs,
have the residential property restored to at least its condition at
the effective date of the Primary Credit Insurance Policy, with
ordinary wear and tear excepted; and
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o 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 relating to 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. The following, together with any further description in the
related prospectus supplement, 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 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 mortgage 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 will be 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 borrower'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 borrower. These forbearance plans may involve the
reduction or suspension of regular mortgage payments for a specified period,
with the payments to be made on 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 circumstances beyond a
borrower's control is accompanied by certain other criteria, HUD may provide
relief by making payments. These payments are to be repaid to HUD by borrower,
to the master servicer or any sub-servicer in partial or full satisfaction of
amounts due under the residential loan 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 borrower 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. The master servicer or any sub-servicer of each
FHA-insured single family loan will generally be obligated to purchase any
debenture
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issued in satisfaction of the residential loan if a default occurs for an amount
equal to the principal amount of any 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 will be compensated for no more than two-thirds of its foreclosure
costs, and will be compensated for interest accrued and unpaid prior to this
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 will include
full compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured residential loan,
bears interest from a date 30 days after the borrower's first uncorrected
failure to perform any obligation to make any payment due under the mortgage
and, upon assignment, from the date of assignment to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Residential loans designated in the related prospectus supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended. 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 the related residential loan. The prospectus supplement relating
to 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 will be, 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 will be 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 generally 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 these
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.
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Primary Hazard Insurance Policies
The related prospectus supplement may specify that the related
servicing agreement will require the master servicer to cause the borrower on
each residential loan to maintain a Primary Hazard Insurance Policy. This
coverage will be specified in the related prospectus supplement, and in general
will equal the lesser of the principal balance owing on the 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. In either
case, the coverage may not be 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 be required to 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 on its being so named, or on the extent to which information in
this regard is furnished by borrowers. All amounts collected by the master
servicer under any 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 a hazard insurance policy by
the master servicer's maintaining a blanket policy insuring against hazard
losses on the residential loans. If the blanket policy contains a deductible
clause, the master servicer will generally be required to deposit in the Trust
Account all sums which would have been deposited in the Trust Account but for
this clause. The master servicer will also generally be required to maintain a
fidelity bond and errors and omissions policy with respect to its officers and
employees. This policy will generally provide 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 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. The policies relating to the residential loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms. Therefore, the policies will not contain identical terms
and conditions. The basic terms of those policies are dictated by respective
state laws, and most policies typically do not cover any physical damage
resulting from the following:
o war,
o revolution,
o governmental actions,
o floods and other water-related causes,
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o earth movement, including earthquakes, landslides and mudflows,
o nuclear reactions,
o wet or dry rot,
o vermin, rodents, insects or domestic animals,
o theft, and,
o 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 may require the master servicer
to cause the borrower to acquire and maintain flood insurance in an amount equal
in general to the lesser of:
(1) 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
(2) 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 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, this clause generally provides that the insurer's liability if a
partial loss occurs does not exceed the greater of:
(1) the replacement cost of the improvements less physical
depreciation; and
(2) that proportion of the loss as the amount of insurance carried
bears to the specified percentage of the full replacement cost of the
improvements.
The related agreement will generally not require that a hazard or
flood insurance policy be maintained for any Cooperative Loan. Generally, the
cooperative housing corporation is responsible for maintenance of hazard
insurance for the property owned by it and the tenant-stockholders of that
cooperative housing corporation do not maintain individual hazard insurance
policies. To the extent, however, that a cooperative housing corporation and the
related borrower on a cooperative note do not maintain similar insurance or do
not maintain adequate coverage or any insurance proceeds are not applied to the
restoration of the damaged property, damage to the borrower's cooperative
apartment or the building could significantly reduce the value of the collateral
securing the cooperative note.
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The effect of co-insurance if a partial loss occurs on improvements
securing residential loans may be that hazard Insurance Proceeds may be
insufficient to restore fully the damaged property because:
(1) the amount of hazard insurance the master servicer will be
required to cause to be maintained on the improvements securing the residential
loans will decline as the principal balances owing on them decrease, and
(2) residential properties have historically appreciated in value over
time.
Under the terms of the residential loans, borrowers are generally required to
present claims to insurers under hazard insurance policies maintained on the
residential properties.
The master servicer, on behalf of the trustee and holders of
securities, 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 these claims is dependent on the extent to which information in this
regard is furnished to the master servicer by borrowers. However, the related
prospectus supplement may specify that to the extent of the amount available to
cover hazard losses under the special hazard insurance policy for a series,
holders of securities may not suffer loss by reason of delinquencies or
foreclosures following hazard losses, whether or not subject to co-insurance
claims.
Description of Credit Support
The related prospectus supplement will specify if the trust fund that
includes residential loans for a series of securities may include credit support
for this series or for one or more classes of securities comprising this 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 by this credit
support or a specified dollar amount:
o a Pool Insurance Policy;
o a special hazard insurance policy;
o a Bankruptcy Bond;
o a reserve fund;
o or a similar credit support instrument.
Alternatively, the prospectus supplement relating to a series of securities will
specify if credit support may be provided by subordination of one or more
classes of securities or by overcollateralization, in combination with or in
lieu of any one or more of the instruments set forth above. See "Description of
the Securities -- Subordination" and "Description of Credit Support--
Overcollateralization" in this prospectus. 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 the
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related series, and the borrowers on the 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 by the credit
support.
Pool Insurance Policies
The prospectus supplement relating to a series of securities may
specify that 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 under the Pool Insurance Policy 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. The master servicer will be required to pay the premiums for each
Pool Insurance Policy on a timely basis unless, as described in the related
prospectus supplement, the payment of these fees is otherwise provided. The
master servicer will be required to present or cause to be presented claims
under each Pool Insurance Policy to the pool insurer on behalf of itself, the
trustee and the holders of securities. Pool Insurance Policies, however, are not
blanket policies against loss, since claims under these policies may be made
only if certain conditions are satisfied, 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 for the failure.
Pool Insurance Policies in general provide that no claim may be
validly presented under Pool Insurance Policies with respect to a residential
loan unless:
o an acceptable Primary Credit Insurance Policy, if the initial
Collateral Value of the residential loan exceeded 80%, has been
kept in force until the Collateral Value is reduced to 80%;
o 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;
o 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
o 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.
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Assuming the satisfaction of these conditions, the pool insurer typically has
the option to either
(1) acquire the property securing the defaulted residential loan for a
payment equal to the principal balance of the loan plus accrued and unpaid
interest at its interest rate to the date of acquisition and certain expenses
described above advanced by or on behalf of the insured. This option is
conditioned on the pool insurer being 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
(2) pay the amount by which the sum of the principal balance of the
defaulted residential loan and accrued and unpaid interest at its interest rate
to the date of the payment of the claim and these expenses exceeds the proceeds
received from a sale of the residential property that the pool insurer has
approved.
In both (1) and (2), the amount of payment under a Pool Insurance Policy will
generally be reduced by the amount of the 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
(1) in the case when a Primary Credit Insurance Policy is in force,
within a specified number of days after the claim for loss has been settled or
paid under a Primary Credit Insurance Policy, or after acquisition by the
insured or a sale of the property approved by the pool insurer, whichever is
later; or
(2) in the case when a Primary Credit Insurance Policy is not in
force, within a specified number of 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 after the claim is made by the
insured.
The prospectus supplement relating to a series of securities will
specify whether the amount of coverage under each Pool Insurance Policy will be
reduced over the life of the securities of the 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
will generally include 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, holders of securities may experience a shortfall in the
amount of interest distributed in connection with the payment of claims under a
Pool Insurance Policy. This shortfall may result because the pool insurer will
be required to remit only unpaid interest through the date a claim is paid,
rather than unpaid interest through the end of the month in which the claim is
paid.
In addition, holders of securities 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 the
Pool Insurance Policy. These expenditures by the master servicer could include
amounts necessary to cover real estate taxes and to repair the related
residential property. The master servicer will be reimbursed for the
expenditures from amounts that otherwise would be distributed to holders of
securities, and the expenditures will
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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 that are not Land
Contracts" in this prospectus. 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. As a result, any further losses will be
borne by holders of securities of the related series.
If a pool insurer ceases to be a Qualified Insurer, the master
servicer will be required to 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 the Pool Insurance Policy. However, the related
prospectus supplement will specify whether if the cost of the replacement policy
is greater than the cost of the 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 the Pool Insurance Policy. However, if 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
be required to 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 be required to 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, this policy will not provide
coverage against hazard losses. As set forth under "Description of Primary
Insurance Coverage--Primary Hazard Insurance Policies" in this prospectus, the
Primary Hazard Insurance Policies covering the residential loans typically
exclude from coverage physical damage resulting from a number of causes. Even
when the damage is covered, the Primary Hazard Insurance Policies may afford
recoveries that are significantly less than full replacement cost of the losses.
Further, a special hazard insurance policy will not cover all risks, and the
coverage under this type of policy will be limited in amount. Certain hazard
risks will, as a result, be uninsured and will therefore be borne by you.
Special Hazard Insurance Policies
The prospectus supplement with respect to a series of securities may
specify that the master servicer will be required to obtain a special hazard
insurance policy for the series. This policy will be issued by the special
hazard insurer specified in the prospectus supplement and cover any special
hazard amount as described in the immediately succeeding paragraph. 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 under the policy has been exhausted through payment of claims.
However, the master servicer will be under no obligation to maintain the policy
if a Pool Insurance Policy covering the series is no longer in effect. 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 these premiums is otherwise provided for.
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Claims under each special hazard insurance policy will generally be
limited to:
(1) a percentage set forth in the related prospectus supplement, which
is generally not greater than 1%, of the aggregate principal balance as of the
Cut-Off Date of the residential loans comprising the related trust fund;
(2) twice the unpaid principal balance as of the Cut-Off Date of the
largest residential loan in the trust fund; or
(3) 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.
As more specifically provided in the related prospectus supplement,
each special hazard insurance policy will, subject to limitations of the kind
described below, typically protect holders of securities of the related series
from:
o 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
o 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
o normal wear and tear,
o war,
o civil insurrection,
o certain governmental actions,
o errors in design,
o faulty workmanship or materials,
o except under certain circumstances, nuclear or chemical reaction or
contamination,
o flood, if the property is located in a federally designated flood
area, and
o 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:
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(1) the cost of repair to the property; and
(2) when transfer of the property to the insurer occurs, the unpaid
principal balance of the residential loan at the time of acquisition of the
property by foreclosure, deed in lieu of foreclosure or repossession, plus
(a) accrued interest at the interest rate to the date of claim
settlement and
(b) 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 (1) of the immediately preceding paragraph will satisfy the
condition under a Pool Insurance Policy that the property be restored before a
claim under this type of policy may be validly presented with respect to the
defaulted residential loan secured by the property. The payment described under
clause (2) of the immediately preceding paragraph will render unnecessary
presentation of a claim in respect of the 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 holders of securities, but
will affect the relative amounts of coverage remaining under any special hazard
insurance policy and any Pool Insurance Policy.
The special hazard insurer must typically approve the sale of a
residential property under any special hazard insurance policy. The funds
received by the insured in excess of the unpaid principal balance of the
residential loan plus interest on that balance 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 the special hazard insurer. To the extent funds are refunded
to the special hazard insurer, 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 under the policy will be
exhausted and any further losses will be borne by the holders of securities.
A claim under a special hazard insurance policy generally must be
filed within a specified number of 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 after a claim is accepted by the special
hazard insurer. Special hazard insurance policies generally provide that no
claim may be paid unless
o Primary Hazard Insurance Policy premiums,
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o flood insurance premiums, if the property is located in a federally
designated flood area, and, as approved by the special hazard
insurer,
o real estate property taxes, if applicable,
o property protection and preservation expenses and
o foreclosure costs
have been paid by or on behalf of the insured, and unless the insured has
maintained the Primary 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 the special
hazard insurance policy. The replacement policy must have total coverage that is
equal to the then existing coverage of the special hazard insurance policy.
However, if the cost of the replacement policy is greater than the cost of the
special hazard insurance policy, the coverage of the replacement policy may be
reduced to a level so that the premium rate does not exceed the premium rate on
the special hazard insurance policy as provided in the related prospectus
supplement.
Each special hazard insurance policy is designed to permit full
recoveries under a Pool Insurance Policy in circumstances in which the
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. Therefore, each pooling and servicing agreement will generally
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
The prospectus supplement with respect to a series of securities may
specify that the master servicer will be required to obtain a Bankruptcy Bond
for the series. The obligor on, and the amount of coverage of, any Bankruptcy
Bond will be set forth in the related prospectus supplement. The master servicer
will be required to exercise its best reasonable efforts to maintain or cause to
be maintained the Bankruptcy Bond in full force and effect, unless coverage
under the Bankruptcy Bond has been exhausted through payment of claims. The
master servicer will be required to pay or cause to be paid the premiums for
each Bankruptcy Bond on a timely basis, unless, as described in the related
prospectus supplement, payment of the premiums is otherwise provided for.
Reserve Funds
The related prospectus supplement may specify that the depositor will
deposit or cause to be deposited in an account any combination of cash, one or
more irrevocable letters of credit or one or more United States government
securities and other high quality investments in specified amounts, or any other
instrument satisfactory to the rating agency or agencies. These deposits
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will be applied and maintained in the manner and under the conditions specified
in the prospectus supplement. In the alternative or in addition to the 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 holders
of securities, 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. The related prospectus
supplement may specify that any 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
The related prospectus supplement may specify that 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. In addition,
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 relating to a series that includes a cross-support provision will
describe the manner and conditions for applying the 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 the credit support
relates and the manner of determining the amount of the coverage provided by the
credit support and of the application of the coverage to the identified trust
funds.
Letter of Credit
The prospectus supplement relating to a series of securities may
specify that the residential loans in the related trust fund may be covered by
one or more letters of credit, issued by a bank or financial institution
specified in the prospectus supplement. Under a letter of credit, the issuing
bank or financial institution will be obligated to honor draws in an aggregate
fixed dollar amount, net of unreimbursed payments, 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. Any letter of credit may permit draws only if certain
types of losses occur. The amount available under the letter of credit will, in
all cases, be reduced to the extent of the unreimbursed payments under the
letter of credit.
Insurance Policies and Surety Bonds
The prospectus supplement relating to a series of securities may
specify that one or more classes of securities of the series will be covered by
insurance policies and/or surety bonds provided by one or more insurance
companies or sureties. The instruments may cover timely distributions of
interest and/or full distributions of principal on the basis of a schedule of
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principal distributions set forth in or determined in the manner specified in
the related prospectus supplement.
Excess Spread
The prospectus supplement may specify that a portion of the interest
payments on residential loans 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 residential loans.
Overcollateralization
The related prospectus supplement may specify that the subordination
provisions of a trust fund may be used to accelerate to a limited extent the
amortization of one or more classes of securities relative to the amortization
of the related assets of the trust fund. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of securities. This acceleration feature
creates, with respect to the assets of the trust fund, overcollateralization
which results from the excess of the aggregate principal balance of the related
assets of the trust fund, over the principal balance of the related class or
classes of securities. This acceleration may continue for the life of the
related security, or may be limited. In the case of limited acceleration, once
the required level of overcollateralization is reached, and subject to certain
provisions specified in the related prospectus supplement, the limited
acceleration feature may cease, unless necessary to maintain the required level
of overcollateralization.
CERTAIN LEGAL ASPECTS OF RESIDENTIAL LOANS
The following discussion contains general summaries of certain legal
aspects of loans secured by residential properties. Because the legal aspects
are governed by applicable state law, which 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" in this prospectus.
General
All of the residential loans are generally loans to homeowners. 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 on the type of security instrument customary to
grant a security interest in real property in the state in which the residential
property is located. The prospectus supplement relating to a series of
securities may specify that a trust fund also contains:
(1) Home Improvement Contracts evidenced by promissory notes, which
may be secured by an interest in the related mortgaged property or may be
unsecured;
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(2) 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
(3) Manufactured Housing Contracts evidencing both
o the obligation of the borrower to repay the loan evidenced by
the Manufactured Housing Contract; and
o the grant of a security interest in the related manufactured
home or with respect to Land Contracts, a lien on the real
estate 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 this loan.
Generally, any of the foregoing types of encumbrance will create a lien on, or
grant a title interest in, the subject property. The priority of the lien will
depend on the terms of the particular security instrument, if any, the knowledge
of the parties to the instruments, as well as the order of recordation or filing
of the instrument in the appropriate public office. This 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 generally be secured by
either mortgages, deeds of trust, security deeds or deeds to secure debt
depending on 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 on or conveys title to the real property
encumbered by this instrument and represents the security for the repayment of
an obligation that is customarily evidenced by a promissory note. This 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, and
the mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. However, 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, who is similar to a mortgagor and who
is the owner of the subject property and may or may not be the borrower, the
beneficiary who is similar to a mortgagee and who is the lender, and the
trustee, a third-party grantee. Under a deed of trust, the trustor grants the
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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 on, the subject property to the grantee until a time when the
underlying debt is repaid. The mortgagee's authority under a mortgage and the
trustee's authority under a deed of trust, security deed or deed to secure debt
are governed by
o the law of the state in which the real property is located,
o the express provisions of the mortgage, deed of trust, security
deed or deed to secure debt and,
o 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 in the
real property sufficient to permit it to own the building and all separate
dwelling units in the building. 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,
or an underlying lease of the land, 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
(1) 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
(2) 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 the mortgage and its consequent inability to make the
final payment could lead to foreclosure by the mortgagee. Similarly, a land
lease has an expiration date and the inability of the Cooperative to extend its
term or, in the alternative, to purchase the land could lead to termination of
the 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
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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 the tenant-stockholder's
pro rata share of the Cooperative's payments for its blanket mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a Cooperative and accompanying occupancy rights 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 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. If a default of the tenant-stockholder occurs, the lender may
generally 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 "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. These amounts paid or accrued represent his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Section 216(a) of the Code to the corporation
under Sections 163 and 164 of the Code. In order for a corporation to qualify
under Section 216(b)(1) of the Code for its taxable year in which the items are
allowable as a deduction to the corporation, this 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 this section for any
particular year. If a Cooperative of this type 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 this failure would be permitted to continue over a
period of years appears remote.
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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. The 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 the responsible 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 the 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 the office, depending on state law.
The master servicer will generally be required to obtain possession of
the certificate of title, but, the related prospectus supplement may specify if
it will not be required to effect the notation or delivery of the required
documents and fees. The failure to effect the notation or delivery, or the
taking of action under the wrong law, under a motor vehicle title statute rather
than under the UCC, is likely to cause the trustee not to 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, regardless of 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 borrower from permanently attaching the manufactured home to its
site. So long as the borrower 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 holders of
securities. The related prospectus supplement
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may specify that neither the depositor, the master servicer nor the trustee will
amend the certificates of title to identify the trustee, on behalf of the
holders of securities, as the new secured party. 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, the
assignment is an effective conveyance of the security interest without amendment
of any lien noted on the related certificate of title and the new secured party,
therefore, succeeds to the depositor's rights as the secured party. However, in
some states there exists a risk that, in the absence of an amendment to the
certificate of title, the assignment of the security interest might not be held
effective against creditors of the depositor or the 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 following actions should 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:
o the notation of the lien of the depositor on the certificate of
title or delivery of the required documents and fees or,
o 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.
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, the 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 holders of securities as the new
secured party on the certificate of title that, through fraud or negligence, the
security interest of the trustee could be released.
If the owner of a manufactured home moves it to a state other than the
state in which the 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 the relocation and after that period until the
owner re-registers the manufactured home in the new state. If the owner were to
relocate a manufactured home to another state and re-register the manufactured
home in the other state, and if the depositor did not take steps to re-perfect
its security interest in the new 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 this manufactured home, it must surrender possession
of the 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 a borrower under a
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manufactured housing conditional sales contract sells a manufactured home, the
lender must surrender possession of the certificate of title or it will receive
notice as a result of its lien noted thereon. Accordingly, the lender will have
an opportunity to require satisfaction of the related manufactured housing
conditional sales contract before release of the lien. The master servicer will
be obligated to take the steps, at the master servicer's expense, as are
necessary to maintain perfection of security interests in the manufactured
homes.
Under the laws of most states, statutory liens, such as liens for
repairs performed on a manufactured home and liens for personal property taxes
take priority even over a perfected security interest. In addition, certain
liens arising as a matter of federal law, such as federal tax liens, also take
priority over a perfected security interest. The depositor will obtain the
representation of the Unaffiliated Seller that it has no knowledge of any liens
with respect to any manufactured home securing a contract. However, these types
of liens could arise at any time during the term of a mortgage note or
Manufactured Housing Contract. No notice will be given to the trustee or holders
of securities if this type of a lien arises.
Foreclosure on Mortgages
Foreclosure of a mortgage is generally accomplished by judicial
action. Generally, the action is initiated by serving legal pleadings on 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 party defendants. 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 borrower is bound by the terms of
the mortgage note and the mortgage as made and cannot be relieved from its own
default. A foreclosure action is equitable in nature and is addressed to a court
of equity. Accordingly, the court may relieve a borrower of a default and deny
the mortgagee foreclosure on proof that the borrower's default was neither
willful nor in bad faith and that the mortgagee's action was meant to establish
a waiver, or fraud, bad faith, oppressive or unconscionable conduct to warrant a
court of equity to refuse affirmative relief to the mortgagee. Under certain
circumstances a court of equity may relieve the borrower from an entirely
technical default where the 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. The challenge could be successful if a court determines that the sale
was for less than fair consideration and the sale occurred while the borrower
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
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foreclosure, the mortgagee being precluded from pursuing both at the same time.
In some states, mortgages may also be foreclosed by advertisement in accordance
with 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 if the borrower defaulted
under the terms of the note or deed of trust. In some states, prior to the 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 posting of a copy of the notice of sale on the property,
recording and sending the notice 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. It is uncommon for a third party to purchase the property at the
foreclosure sale because:
(1) of the difficulty potential third party purchasers at the sale
might have in determining the exact status of title and
(2) the physical condition of the property may have deteriorated
during the foreclosure proceedings.
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 and section 548 of the current Bankruptcy Code,
and, therefore, could be rescinded in favor of the bankrupt's estate, if:
(1) 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
(2) the price paid for the foreclosed property did not represent "fair
consideration," which is "reasonably equivalent value" under the Bankruptcy
Code.
However, on May 23, 1994, Durrett was effectively overruled by the United States
Supreme Court in BFP v. Resolution Trust Corporation, as Receiver for Imperial
Federal Savings and
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Loan Association, et al., in which the Court held that "`reasonably equivalent
value', for foreclosed property, is the price in face received at the
foreclosure sale, so long as all the requirements of the State's foreclosure law
have been complied with." The Supreme Court decision, however, may not be
controlling as to whether a non-collusive, regularly conducted foreclosure can
be avoided as a fraudulent conveyance under applicable state law, if a court
determines that the sale was for less than "fair consideration" under applicable
state law. For these reasons, it is common for the lender to purchase the
property from the trustee or referee for an amount equal to the principal amount
of the mortgage or deed of trust plus accrued and unpaid interest and the
expenses of foreclosure.
Generally, state law controls the amount of foreclosure costs and
expenses, including attorneys' and trustee's fees, which may be recovered by a
lender. In some states there is a statutory minimum purchase price which the
lender may offer for the property. Thereafter, subject to the right of the
borrower in some states to remain in possession during the redemption period,
the lender will assume ownership of the mortgaged property. The burdens of
ownership include obtaining casualty insurance, paying taxes and making repairs
at the lender's own expense as are necessary to render the property suitable for
sale. Depending on 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. If it does
foreclose, the junior mortgagee 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 if the borrower is in default under the senior mortgage. In either
event the junior mortgagee would add the amounts expended to the balance due on
the junior loan, and it may be subrogated to the rights of the senior
mortgagees. In addition, if 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 borrower 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
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for the borrower's default and the likelihood that the borrower will be able to
reinstate the loan. The courts have taken a number of different approaches:
o 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;
o 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;
o 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. This statutory 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 these costs could be substantial, it is unclear
whether they would be imposed on a secured lender on residential properties. If
title to a residential property was acquired on behalf of holders of securities
and cleanup costs were incurred in respect of the residential property, the
holders of securities might realize a loss if these 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. These agreements 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 the tenant-stockholder, including mechanics'
liens against the Cooperative apartment building incurred by the
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 on the shares to which the proprietary lease or
occupancy agreement relates.
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In addition, the proprietary lease or occupancy agreement generally
permits the Cooperative to terminate this lease or agreement if the
tenant-stockholder fails to make payments or defaults in the performance of
covenants required under the related agreement. 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 if a default by the tenant-stockholder occurs 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, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate the proprietary
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. However, the Cooperative will retain its right to sums
due under the 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 on the Cooperative Loan.
Recognition agreements also provide that if a foreclosure occurs 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 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.
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Repossession with respect to Manufactured Housing Contracts that are not Land
Contracts
Repossession of manufactured housing is governed by state law. So long
as a manufactured home has not become so attached to real estate that it would
be treated as a part of the real estate under the law of the state where it is
located, repossession of the home, if a default occurs by the borrower, 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:
(1) Except in those few states where the debtor must receive notice of
his right to cure his default -typically 30 days to bring the account
current-repossession can commence immediately when a default occurs without
prior notice. Repossession may be effected either through self-help, which is
the peaceable retaking without court order, voluntary repossession or through
judicial process, which is the repossession pursuant to court-issued writ of
replevin. The self-help and/or voluntary repossession methods are more commonly
employed, and are accomplished simply by retaking possession of the manufactured
home. In cases where the debtor objects or raises a defense to repossession, a
court order must be obtained from the appropriate state court, and the
manufactured home must then be repossessed in accordance with that order.
Whether the method employed is self-help, voluntary repossession or judicial
repossession, the repossession can be accomplished either by an actual physical
removal of the manufactured home to a secure location for refurbishment and
resale or by removing the occupants and their belongings from the manufactured
home and maintaining possession of the manufactured home on the location where
the occupants were residing. Various factors may affect whether the manufactured
home is physically removed or left on location, such as the nature and term of
the lease of the site on which it is located and the condition of the unit. In
many cases, leaving the manufactured home on location is preferable, if 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.
(2) 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, if notice to the debtor is given, 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.
(3) 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 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
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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 on its security and to bar the borrower, 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 the foreclosure 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 borrower 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 after payment of the
foreclosure sales price, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The exercise of a
right of redemption would defeat the title of any purchaser subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
a right of redemption is to force the lender to retain the property and pay the
expenses of ownership and maintenance of the property until the redemption
period has expired. In some states, there is no right to redeem property after a
trustee's sale under a deed of trust.
Notice of Sale; Redemption Rights with respect to Manufactured Homes
While state laws do not usually require notice to be given debtors
prior to repossession, many states do require delivery of a notice of default
and of the debtor's right to cure defaults before repossession. The law in most
states also requires that the debtor be given notice of sale prior to the resale
of the home so that the owner may redeem at or before resale. In addition, the
sale must comply with the requirements, including the notice requirements, of
the UCC.
Anti-Deficiency Legislation, Bankruptcy Laws and Other Limitations on Lenders
States have taken a number of approaches to anti-deficiency and
related legislation:
o Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee
under a mortgage.
o 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
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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 from the public sale of the real property and
the amount due to the lender.
o 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.
o In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first
exhausting its security. However in some of these states, the
lender, following judgment on the personal action, may be deemed to
have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical effect of
the election requirement, in those states permitting election, is
that lenders will usually proceed against the security first rather
than bringing a personal action against the borrower.
o Finally, other statutory provisions limit any deficiency judgment
against the former borrower following a judicial sale to the excess
of the outstanding debt over the fair market value of the property
at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or a mortgagee from obtaining a
large deficiency judgment against the former borrower as a result
of low or no bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the Bankruptcy Code and state
laws affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to obtain payment of a mortgage loan, to realize on
collateral and/or enforce a deficiency judgment. For example, under the
Bankruptcy Code, virtually all actions, including foreclosure actions and
deficiency judgment proceedings, are automatically stayed when a bankruptcy
petition is filed, and, usually, no interest or principal payments are made
during the course of the bankruptcy case. Foreclosure of an interest in real
property of a debtor in a case under the Bankruptcy Code can typically occur
only if the bankruptcy court vacates the stay; an action the bankruptcy court
may be reluctant to take, particularly if the debtor has the prospect of
restructuring his or her debts and the mortgage collateral is not deteriorating
in value. The delay and the consequences caused by the automatic stay can be
significant. Also, under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a subordinate lender secured by a mortgage on the
property, may stay the senior lender from taking action to foreclose out the
junior lien.
A homeowner may file for relief under the Bankruptcy Code under any of
three different chapters of the Bankruptcy Code. Under Chapter 7, the assets of
the debtor are liquidated and a lender secured by a lien may "bid in", i.e., bid
up to the amount of the debt, at the sale of the asset. See "--Foreclosure on
Mortgages" above. A homeowner may also file for relief under Chapter 11 of the
Bankruptcy Code and reorganize his or her debts through his or her
reorganization plan. Alternatively, a homeowner may file for relief under
Chapter 13 of the Bankruptcy Code and address his or her debts in a
rehabilitation plan. Chapter 13 is often referred to as the "wage earner
chapter" or "consumer chapter" because most individuals seeking to restructure
their debts file for relief under Chapter 13 rather than under Chapter 11.
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A reorganization plan under Chapter 11 and a rehabilitation plan under
Chapter 13 of the Bankruptcy Code may each allow a debtor to cure a default with
respect to a mortgage loan on the debtor's residence by paying arrearages within
a reasonable time period and to deaccelerate and reinstate the original mortgage
loan payment schedule. This cure is allowed even though the lender accelerated
the loan and a final judgment of foreclosure had been entered in state court
provided no sale of the property had yet occurred, prior to the filing of the
debtor's petition under the Bankruptcy Code. Courts have approved Chapter 11
plans that have allowed curing of defaults over a number of years. In certain
circumstances, defaults may be cured over a number of years even if the full
amount due under the original loan is never repaid, even if the mortgagee
objects. Under a Chapter 13 plan, curing of defaults must be accomplished within
the five year maximum term permitted for repayment plans.
Generally, a repayment plan filed in a case under Chapter 13 may not
modify the claim of a mortgage lender if the borrower elects to retain the
property, the property is the borrower's principal residence and the property is
the lender's only collateral. If the last payment on the original payment
schedule of a mortgage loan secured only by the debtor's principal residence is
due before the final date for payment under a debtor's Chapter 13 plan --which
date could be up to five years after the debtor emerges from bankruptcy--under a
case recently decided by an intermediate appellate court, the debtor's
rehabilitation plan could modify the terms of the loan by bifurcating an
undersecured lender's claim into a secured and an unsecured component in the
same manner as if the debtor were a debtor in a case under Chapter 11. While
this decision is contrary to a prior decision of a more senior appellate court
in another jurisdiction, it is possible that the intermediate court's decision
will become the accepted interpretation in view of the language of the
applicable statutory provision. If this interpretation is adopted by a court
considering the treatment in a Chapter 13 repayment plan of a home equity loan,
the home equity loan could be restructured as if the bankruptcy case were under
Chapter 11 if the final payment is due within five years of the debtor's
emergence from bankruptcy.
In a case under Chapter 11, provided certain substantive and
procedural safeguards are met, the amount and terms of a mortgage loan secured
by property of the debtor, including the debtor's principal residence, may be
modified. Under the Bankruptcy Code, the outstanding amount of a loan secured by
the real property may be reduced to the then-current value of the property as
determined by the court, with a corresponding partial reduction of the amount of
the lender's security interest, if the value is less than the amount due on the
loan. This reduction will leave the lender a general unsecured creditor for the
difference between the value of the collateral and the outstanding balance of
the loan. A borrower's unsecured indebtedness will typically be discharged in
full when payment of a substantially reduced amount is made.
Other modifications may include a reduction in the amount of each
scheduled payment, and/or an extension or reduction of the final maturity date.
State statutes and general principles of equity may also provide a borrower with
means to halt a foreclosure proceeding or sale and to force a restructuring of a
mortgage loan on terms a lender would not otherwise accept. Because many of the
mortgage loans will have loan-to-value ratios in excess of 100% at origination,
or the loan-to-value ratios otherwise may exceed 100% in cases where the market
value declined subsequent to origination, a potentially significant portion of
the unpaid principal amount of the related mortgage loan would likely be treated
as unsecured indebtedness in a case under Chapter 11.
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In a bankruptcy or similar proceeding of a borrower, action may be
taken seeking the recovery, as a preferential transfer or on other grounds, of
any payments made by the borrower under the related mortgage loan. Payments on
long-term debt may be protected from recovery as preferences if they are
payments in the ordinary course of business made on debts incurred in the
ordinary course of business or if the value of the collateral exceeds the debt
at the time of payment. Whether any particular payment would be protected
depends on the facts specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. In certain circumstances, subject to the court's
approval, a debtor in a case under Chapter 11 of the Bankruptcy Code may have
the power to grant liens senior to the lien of a mortgage. Moreover, the laws of
certain states also give priority to certain tax and mechanics liens over the
lien of a mortgage. Under the Bankruptcy Code, if the court finds that actions
of the mortgagee have been unreasonable and inequitable, the lien of the related
mortgage may be subordinated to the claims of unsecured creditors.
Various proposals to amend the Bankruptcy Code in ways that could
adversely affect the value of the mortgage loans have been considered by
Congress, and more proposed legislation may be considered in the future. No
assurance can be given that any particular proposal will or will not be enacted
into law, or that any provision so enacted will not differ materially from the
proposals described above.
The Code provides priority to certain tax liens over the lien of the mortgage.
This may have the effect of delaying or interfering with the enforcement of
rights in respect of a defaulted mortgage loan.
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 holders of securities 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. These rights
include the prior rights of the senior mortgagee or beneficiary to receive and
apply hazard insurance and condemnation proceeds and, if the borrower defaults,
to cause a foreclosure on the property. When the foreclosure proceedings are
completed 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
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subordinate interest in a property in foreclosure proceedings. See
"-- Foreclosure" in this prospectus.
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. If a conflict
exists 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. If the borrower or trustor fails 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 makes these expenditures, the expenditures will generally
have priority over all sums due under the junior mortgage.
Consumer Protection Laws
Numerous Federal consumer protection laws impose substantial
requirements on creditors involved in consumer finance. These laws include
o the federal Truth-in-Lending Act and Regulation Z,
o Real Estate Settlement Procedures Act and Regulation X,
o Equal Credit Opportunity Act and Regulation B,
o Fair Credit Billing Act,
o Fair Credit Reporting Act,
o Fair Housing Act, Housing and Community Development Act,
o Home Mortgage Disclosure Act,
o Federal Trade Commission Act,
o Fair Debt Collection Practices Act,
o Uniform Consumer Credit Code,
o Consumer Credit Protection Act,
o Riegle Act, and
o related statutes and regulations.
In addition state consumer protection laws also impose substantial
requirements on creditors involved in consumer finance. The applicable state
laws generally regulate:
o the disclosures required to be made to borrowers,
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o licensing of originators of residential loans,
o debt collection practices,
o origination practices, and
o servicing practices.
These Federal and state laws can impose specific statutory liabilities
on creditors who fail to comply with their provisions and may affect the
enforceability of a residential loan. In particular, a violation of these
consumer protection laws may:
o limit the ability of the master servicer to collect all or part of
the principal of or interest on the loan,
o subject the trust, as an assignee of the loans, to liability for
expenses, damages and monetary penalties resulting from the
violation,
o subject the trust to an administrative enforcement action,
o provide the borrower with the right to rescind the loan, and
o provide the borrower with set-off rights against the trust.
Residential loans often contain provisions obligating the borrower 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. The related prospectus supplement may specify that 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 holders of
securities.
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" Rules of the Federal Trade
Commission have 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 Holder-in-Due-Course
Rules is subject to any applicable limitations implied by the Riegle Act and is
limited to the amounts paid by a debtor on the residential loan, and the holder
of the residential loan may also be unable to collect amounts still due under
those rules.
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If a residential loan is subject to the requirements of the
Holder-in-Due-Course-Rules, the trustee will be subject to any claims or
defenses that the debtor may assert against the seller.
Enforceability of Certain Provisions
Generally, 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 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 "encourages" 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. The preemption pursuant to the Garn-St. Germain Act
exempts 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. 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 the Window
Period Loans unless the property underlying a window period loan is located in
Michigan, New Mexico or Utah. 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 these institutions are therefore not deemed to be Window Period
Loans.
When the Window Period Loans exemption expired on October 15, 1985,
due-on-sale clauses became generally enforceable except in those states whose
legislatures exercised their authority to regulate the enforceability of
due-on-sale clauses with respect to mortgage loans that were
(1) originated or assumed during the "window period", which ended in
all cases not later than October 15, 1982, and
(2) originated by lenders other than national banks, federal savings
institutions and federal credit unions.
FHLMC took 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--enacted statutes extending, on various terms and for
varying periods, prohibiting enforcement of due-on-sale clauses with respect to
certain categories of Window Period Loans. The Garn-St. Germain Act also sets
forth nine specific instances in which a mortgage lender covered by the
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Garn-St. Germain Act, including federal savings and loan associations and
federal savings banks, may not exercise a due-on-sale clause, regardless of the
fact that a transfer of the property may have occurred. These include
intra-family transfers, certain transfers by operation of law, leases of fewer
than three years, the creation of a junior encumbrance and other instances where
regulations promulgated by the Director of the Office of Thrift Supervision,
successor to the Federal Home Loan Bank Board, prohibit the enforcement of
due-on-sale clauses. To date none of these regulations have been issued.
Regulations promulgated under the Garn-St. Germain Act prohibit the imposition
of a prepayment penalty if a loan is accelerated 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. As a result, this inability to
enforce due-on-sale clauses may have an impact on the average life of the
mortgage loans related to a series and the number of those 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 lender on the contract and
permitting the acceleration of the maturity of the related contracts by the
lender on the contract if any sale or transfer occurs that is not consented to.
The related prospectus supplement may specify that the master servicer will, to
the extent it has knowledge of this conveyance or proposed conveyance, exercise
or cause to be exercised its rights to accelerate the maturity of the related
Manufacturing Housing Contracts through enforcement of "due-on-sale" clauses,
subject to applicable state law. In certain cases, the transfer may be made by a
delinquent borrower 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 Manufactured
Housing 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, some states may prohibit the master servicer 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 Contracts 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 these loans, including
o prohibiting prepayment for a specified period after origination,
o prohibiting partial prepayments entirely or
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o requiring the payment of a prepayment penalty if a prepayment in
full or in part occurs.
The laws of certain states may
o render prepayment fees unenforceable after a mortgage loan is
outstanding for a certain number of years, or
o 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
borrower. Some state statutory provisions may also treat certain prepayment fees
as usurious if in excess of statutory limits.
Subordinate Financing
When the borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the borrower
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the borrower --as junior loans often do-- and
the senior loan does not, a borrower 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
borrower 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 borrower is
additionally burdened. Third, if the borrower defaults on the senior loan and/or
any junior loan or loans, the existence of junior loans and actions taken by
junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980, provides that state usury
limitations shall not apply to 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.
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The depositor believes 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 the mortgage
loans, any limitation under the state's usury law would not apply to the
mortgage loans.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted, no
mortgage loans originated after the date of this state action will be eligible
for inclusion in a trust fund if the mortgage loans bear interest or provide for
discount points or charges in excess of permitted levels. No mortgage loan
originated prior to January 1, 1980 will bear interest or provide for discount
points or charges in excess of permitted levels.
Alternative Mortgage Instruments
Adjustable rate mortgage loans originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. These
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 of the Garn-St. Germain Act which provides
that, regardless of any state law to the contrary,
(1) state-chartered banks may originate "alternative mortgage
instruments," including adjustable rate mortgage loans, in accordance with
regulations promulgated by the Comptroller of the Currency with respect to
origination of alternative mortgage instruments by national banks;
(2) 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
(3) all other non-federally chartered housing creditors, including
without limitation
o state-chartered savings and loan associations,
o savings banks and mutual savings banks and
o 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 of the Garn-St. Germain Act further provides that a state
does not need to apply the provisions of Title VIII by adopting, prior to
October 15, 1985, a law or constitutional provision expressly rejecting the
applicability of these provisions. Certain states have done this.
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Environmental Legislation
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended, 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 amended, among other things, the provisions of CERCLA with respect to
lender liability and the secured creditor exemption. The Conservation Act offers
protection to lenders by defining certain activities in which a lender can
engage and still have the benefit of the secured creditor exemption. A lender
will be deemed to have participated in the management of a mortgaged property,
and will lose the secured creditor exemption, if it actually participates in the
operational affairs of the property of the borrower. The Conservation Act
provides that "merely having the capacity to influence, or unexercised right to
control" operations does not constitute participation in management. A lender
will lose the protection of the secured creditor exemption if it exercises
decision-making control over the borrower's environmental compliance and
hazardous substance handling and disposal practices, or assumes day-to-day
management of all operational functions of the mortgaged property. The
Conservation Act also provides that a lender may continue to have the benefit of
the secured creditor exemption even if it forecloses on a mortgaged property,
purchases it at a foreclosure sale or accepts a deed-in-lieu of foreclosure
provided that the lender seeks to sell the mortgaged property at the earliest
practicable commercially reasonable time on commercially reasonable terms.
Other federal and state laws in certain circumstances may impose
liability on a secured party which takes a deed-in-lieu of foreclosure,
purchases a mortgaged property at a foreclosure sale, or operates a mortgaged
property on which contaminants other than CERCLA hazardous substances are
present, including petroleum, agricultural chemicals, hazardous wastes,
asbestos, radon, and lead-based paint. The cleanup costs may be substantial. It
is possible that the cleanup costs could become a liability of a trust fund and
reduce the amounts otherwise distributable to the holders of the related series
of securities. Moreover, certain federal statutes and certain states by statute
impose an environmental lien for any cleanup costs incurred by a state on the
property that is the subject of these types of cleanup costs. All subsequent
liens on the property generally are subordinated to the environmental lien. 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 an environmental lien could be adversely
affected.
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The related prospectus supplement may specify that the mortgage loan
seller will make representations 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 the mortgage loan to the trustee. In
addition, the related agreement may 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 these
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 these laws.
See "Description of the Securities--Realization on Defaulted Mortgage Loans" in
this prospectus.
Soldiers' and Sailors' Civil Relief Act of 1940
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, a borrower who enters military service after the origination of the
borrower's residential loan, including a borrower who was in reserve status and
is called to active duty after origination of the mortgage loan, may not be
charged interest, including fees and charges, above an annual rate of 6% during
the period of the borrower's active duty status, unless a court orders otherwise
upon application of the lender. The Relief Act applies to borrowers 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 borrowers who enter military
service, 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 the prospectus supplement
may specify that the shortfalls would not be covered by advances or, any form of
credit support provided in connection with the securities. In addition, the
Relief Act imposes limitations that impair the ability of the master servicer to
foreclose on an affected mortgage loan or enforce rights under a Home
Improvement Contract or Manufactured Housing Contract during the borrower's
period of active duty status, and, under certain circumstances, during an
additional three month period after that period. Thus, if a mortgage loan or
Home Improvement Contract or Manufactured Housing Contract goes into default,
there may be delays and losses occasioned as a result.
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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 by this prospectus. This discussion is directed solely to
holders of securities that hold the securities as capital assets within the
meaning of Section 1221 of the Code. This discussion 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 in this prospectus,
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" in this prospectus. Holders of securities 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 under this prospectus.
The following discussion addresses securities of four general types:
(1) REMIC Securities,
(2) Grantor Trust Securities,
(3) Partnership Securities, and
(4) Debt Securities.
The prospectus supplement relating to each series of securities will indicate
which of the foregoing treatments will apply to the series. If a REMIC election
or elections will be made for the related trust fund, the prospectus supplement
will identify all "regular interests" and "residual interests" in the REMIC. For
purposes of this tax discussion:
(1) references to a "holder of securities" or a "holder" are to the
beneficial owner of a security,
(2) references to "REMIC Pool" are to an entity or portion of an
entity as to which a REMIC election will be made and
(3) references to mortgage loans include agency securities and private
mortgage-backed securities as specified in the related prospectus supplement.
The following discussion is based in part on the OID Regulations, and
in part on the REMIC Provisions. The OID Regulations do not adequately address
certain issues relevant to, and in some instances provide that they are not
applicable to, debt instruments such as the securities.
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REMICs
General
Classification of REMICs. When each series of REMIC Securities is
issued, Cadwalader, Wickersham & Taft, special counsel to the depositor, will
deliver an opinion. This opinion will generally be to the effect that, assuming
compliance with all provisions of the related pooling and servicing agreement,
(1) the related trust fund, or each applicable portion of the related
trust fund, will qualify as a REMIC and
(2) the REMIC securities offered with respect to the related trust
fund will be considered to evidence ownership of "regular interests" or
"residual interests" 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 and at all times
after that date, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant to
which the de minimis requirement will be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than 1% of the aggregate
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a de minimis
amount of nonqualified assets. A REMIC Pool also must provide "reasonable
arrangements" to prevent its residual interests from being held by "disqualified
organizations" or their agents 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 certificates will contain
provisions meeting these requirements. See "--Taxation of Owners of Residual
Securities--Tax-Related Restrictions on Transfer of Residual
Securities--Disqualified Organizations" in this prospectus.
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
after that date pursuant to a fixed price contact in effect on the Startup Day.
Qualified mortgages include whole 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 after that date; or
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(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 borrower; and
(iv) a mortgage that was not in fact principally secured by real
property, but only if that 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 the 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 if defaults occur, 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 that 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.
Foreclosure property is 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:
(1) one or more classes of regular interests or
(2) 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
o issued on the Startup Day with fixed terms,
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o designated as a regular interest,
o unconditionally entitles the holder to receive a specified
principal amount, or other similar amount, and
o 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.
This 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 that interest are subordinated to payments on other
regular interests or the residual interest in the REMIC Pool, and are dependent
on the absence of defaults or delinquencies on qualified mortgages or permitted
investments, lower than reasonably expected returns on permitted investments,
unanticipated expenses incurred by the REMIC Pool or prepayment 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 REMIC status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for that year and after that year. In that event, the 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 regulations have
been issued. Any 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 REMIC status are not satisfied. The
agreement pursuant to which each REMIC Pool is formed will include provisions
designed to maintain the trust fund's status as a REMIC under the REMIC
Provisions. We do not anticipate 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
REMIC Securities would be 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 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 on those loans. Interest,
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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 those 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 in the
REMIC, and will be "permitted assets" within the meaning of Section 860L(c) for
a financial asset securitization investment trust. The determination as to the
percentage of the REMIC Pool's assets that constitute assets described in the
foregoing sections of the Code will be made with respect to each calendar
quarter based on the average adjusted basis of each category of the assets held
by the REMIC Pool during that calendar quarter. The REMIC will report those
determinations to holders of securities in the manner and at the times required
by applicable Treasury regulations. The SBJPA of 1996 repealed the reserve
method of bad debts of domestic building and loan associations and mutual
savings banks, and thus 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 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 the 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 that property, to the
extent not invested in assets described in the foregoing sections, otherwise
would receive the same treatment as the mortgage loans for purposes of all of
the foregoing sections. The REMIC Regulations do provide, however, that payments
on mortgage loans held pending distribution are considered part of the mortgage
loans for purposes of Section 856(c)(4)(A) of the Code. Furthermore, foreclosure
property will qualify as "real estate assets" under Section 856(c)(4)(A) of the
Code.
Tiered REMIC Structures. For certain series of REMIC Securities,
tiered REMICs may be effected by two or more separate elections being made to
treat designated portions of the related trust fund as REMICs for federal income
tax purposes. When any series of REMIC Securities is issued, Cadwalader,
Wickersham & Taft will deliver an opinion. This opinion will generally be to the
effect that, assuming compliance with all provisions of the related agreement
governing the REMIC Securities, 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.
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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 those 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 Regular
Securityholder. In addition, principal payments on a Regular Security will
generally 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 the 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. Original issue discount is determined 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 income. The
following discussion is based in part on the OID Regulations and in part on the
legislative history 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
certain issues are not addressed in the regulations, it is anticipated that the
trustee will apply the methodology described in the conference committee report
to the 1986 Act. We cannot assure you 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 in the OID Regulations 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 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 a particular class is sold to the public,
excluding bond houses, brokers and underwriters. Although unclear under the OID
Regulations, it is anticipated that the trustee will treat the issue price of a
class as to which there is no substantial sale as of the issue date or that is
retained by the depositor as the fair market value of the class as of the issue
date. The issue price of a Regular Security also includes any amount paid by an
initial Regular Securityholder for
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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 that 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 those 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 provided
that 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 related prospectus
supplement, because the underlying mortgage loans provide for remedies if a
default occurs, 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 those Regular Securities includes all
distributions of interest as well as principal on them. 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 the 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, 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
distributions should be determined in accordance with 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 related prospectus supplement. Holders
generally must report de minimis original issue discount pro rata as principal
payments are received, and that 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" below.
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
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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 Code 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
(1) 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
(2) 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:
(1) the yield to maturity of the Regular Security at the issue date,
(2) events, including actual prepayments, that have occurred prior to
the end of the accrual period, and
(3) 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 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. An increase in
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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 those Regular
Securities.
In the case of a Non-Pro Rata Security, we anticipate that the trustee
will determine the yield to maturity of this type of Security based on 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 its unpaid principal balance:
(1) the remaining unaccrued original issue discount allocable to the
security, or to that portion, will accrue at the time of distribution, and
(2) the accrual of original issue discount allocable to each remaining
security of that class will be adjusted by reducing the present value of the
remaining payments on that class and the adjusted issue price of that class to
the extent attributable to the portion of the unpaid principal balance of that
security 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. You are advised to consult your 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 must include in gross income the daily portions of the original
issue discount on the Regular Security reduced pro rata by a fraction,
(1) the numerator of which is the excess of its purchase price over
the adjusted issue price and
(2) the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price.
Alternatively, a subsequent purchaser may elect to treat all 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:
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(1) the issue price does not exceed the original principal balance by
more than a specified amount and
(2) 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 the rate is subject to a fixed multiple that is
greater that 0.65 but not more than 1.35. This floating rate may also be
increased or decreased by a fixed spread or subject to a fixed cap or floor, or
a cap or floor that is not reasonably expected as of the issue date to affect
the yield of the instrument significantly. An objective rate is any rate, other
than a qualified floating rate, that is determined using a single fixed formula
and that is based on objective financial or economic information, provided that
the information is not
(1) within the control of the issuer or a related party or
(2) 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 this type of 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, these regulations
may lead to different timing of income inclusion than would be the case under
the OID Regulations. Furthermore, application of these 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 bearing the following
interest rates will qualify as a regular interest in a REMIC:
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(1) (a) a rate that qualifies as a variable rate under the OID
Regulations that is tied to current values of a variable rate, or
(b) 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
(c) a positive or negative multiple of that 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 a
rate that is subject to one or more caps or floors, or
(2) one or more 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.
Accordingly, 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." The yield to maturity and future
payments on the Regular Security will generally 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
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, we anticipate 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
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:
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(1) is exceeded by the then-current principal amount of the Regular
Security, or
(2) in the case of a Regular Security having original issue discount,
is exceeded by the adjusted issue price of that Regular Security at the time of
purchase.
Any purchaser generally will be required to recognize ordinary income
to the extent of accrued market discount on Regular Security as distributions
includible in the stated redemption price at maturity of the Regular Securities
are received, in an amount not exceeding any distribution. Any 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 the regulations are issued, market discount would
accrue either:
(1) on the basis of a constant interest rate, or
(2) in the ratio of stated interest allocable to the relevant period
to the sum of the interest for the period plus the remaining interest as of the
end of the 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 the period plus the
remaining original issue as of the end of the period.
Any 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. Any 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 on that security. The deferred portion of interest expense in any
taxable year generally will not exceed the accrued market discount on the
Regular Security for the year. Any 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 the
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
an 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 the market discount is less
than 0.25% of the remaining stated redemption price at maturity of the Regular
Security multiplied by the weighted average maturity of the Regular Security,
determined as described 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. Therefore
investors should consult their own tax advisors regarding the application of
these rules. Investors should also consult Revenue Procedure 92-67 concerning
the
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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 a Regular Security
as a "capital asset" within the meaning of Code Section 1221, the Regular
Securityholder may elect under Code Section 171 to amortize the premium under
the constant yield method. This election will apply to all debt obligations
acquired by the Regular Securityholder at a premium held in that taxable year or
after that taxable year, 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 Section 1272(a)(6).
However, the conference committee report to the 1986 Act indicates a
Congressional intent that the same rules that apply to the accrual of market
discount on installment obligations will also apply to amortizing bond premium
under Code Section 171 on installment obligations such as the Regular
Securities. It is unclear whether the alternatives to the constant interest
method described above under "--Market Discount" are available. Amortizable bond
premium will be treated as an offset to interest income on a Regular Security,
rather than as a separate deductible item. See "--Election to Treat All Interest
Under the Constant Yield Method" below regarding an alternative manner in which
the Code Section 171 election may be deemed to be made.
Election to Treat All Interest Under the Constant Yield Method. A
holder of a debt instrument such as a Regular Security may elect to treat all
interest that accrues on the instrument using the constant yield method, with
none of the interest being treated as qualified stated interest. For purposes of
applying the constant yield method to a debt instrument subject to this
election:
(1) "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
(2) 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 this election on
an instrument by instrument basis or for a class or group of debt instruments.
However, if the holder makes this 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. You should
consult your own tax advisors regarding the advisability of making this type of
an election.
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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 those 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. However, the holder of a Regular Security 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 a loss with
respect to principal sustained during the taxable year on account of any Regular
Securities becoming wholly or partially worthless. 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 Regular Securities becoming wholly worthless. Although the
matter is not free from doubt, the non-corporate Regular Securityholders should
be allowed a bad debt deduction at a time when the principal balance of the
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
losses only after all the mortgage loans remaining in the trust fund 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
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 if the class is terminated.
Regular Securityholders are urged to consult their own tax advisors regarding
the appropriate timing, amount and character of any loss sustained with respect
to 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. You are advised to consult your tax advisors regarding the
treatment of losses on Regular Securities.
Sale or Exchange of Regular Securities. If a Regular Securityholder
sells or exchanges a Regular Security, the Regular Securityholder will recognize
gain or loss equal to the difference,
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if any, between the amount received and its adjusted basis in the Regular
Security. The adjusted basis of a Regular Security generally will equal
(1) the cost of the Regular Security to the seller,
(2) increased by any original issue discount or market discount
previously included in the seller's gross income with respect to the Regular
Security and
(3) 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. Gain will be treated as ordinary income:
(1) 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 the transaction,
(2) in the case of a non-corporate taxpayer, to the extent the
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
(3) to the extent that the 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 the 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 the holder with respect to the 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 those 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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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, 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 the quarter and by allocating each daily portion among the Residual
Holders in proportion to their respective holdings of Residual Securities in the
REMIC Pool on that 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:
(1) the limitations on deductibility of investment interest expense
and expenses for the production of income do not apply,
(2) all bad loans will be deductible as business bad debts, and
(3) the limitation on the deductibility of interest and expenses
related to tax-exempt income will apply.
The REMIC Pool's gross income includes:
(1) interest, original issue discount income and market discount
income, if any, on the mortgage loans,
(2) reduced by amortization of any premium on the mortgage loans,
(3) plus income from amortization of issue premium, if any, on the
Regular Securities,
(4) plus income on reinvestment of cash flows and reserve assets, and
(5) plus any cancellation of indebtedness income if realized losses
are allocated to the Regular Securities.
The REMIC Pool's deductions include:
(1) interest and original issue discount expense on the Regular
Securities,
(2) servicing fees on the mortgage loans,
(3) other administrative expenses of the REMIC Pool, and
(4) 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.
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The taxable income recognized by a Residual Holder in any taxable year
will be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium with respect to the mortgage loans, on the one hand, and
the timing of deductions for interest, including original issue discount, or
income from amortization of issue premium on the Regular Securities, on the
other hand. If an interest in the mortgage loans is acquired by the REMIC Pool
at a discount, and one or more of the 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. The discount on the mortgage loans which is
includible in income may exceed the deduction allowed upon distributions on
those Regular Securities on account of any unaccrued original issue discount
relating to those Regular Securities. When more than one class of Regular
Securities distributes 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
those classes are not issued with substantial discount or are issued at a
premium.
If taxable income attributable to 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 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. By contrast, 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 any mismatching or unrelated deductions against which to offset income,
subject to the discussion of "excess inclusions" below under "-- Limitations on
Offset or Exemption of REMIC Income." The timing of any mismatching of income
and deductions described in this paragraph, if present with respect to a series
of securities, may have a significant adverse effect on 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 the Residual Holders for
those periods in accordance with generally accepted accounting principles. You
should consult your own accountants concerning the accounting treatment of your
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 the Residual Security. The
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,
(1) first, by a cash distribution from the REMIC Pool, and
(2) second, by the amount of loss of the REMIC Pool reportable by the
Residual Holder.
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Any loss that is disallowed on account of this limitation may be carried over
indefinitely with respect to the Residual Holder as to whom a loss was
disallowed and may be used by the 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. This 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 the 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 a residual
interest as zero rather than a 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 a residual interest to induce the
transferee to acquire the interest. Residual Holders should consult their own
tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Holder, other than an original holder, in the Residual Security is greater than
the corresponding portion of the REMIC Pool's basis in the mortgage loans, the
Residual Holder will not recover a portion of that basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by the 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 on 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. 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 in this prospectus,
and "-- Premium," below.
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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 the
mortgage loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in the mortgage loans is generally the fair market value of the mortgage
loans immediately after the transfer of the mortgage loans to the REMIC Pool.
The REMIC Regulations provide that in the REMIC Pool's basis in the mortgage
loans is equal in the aggregate to the issue prices of all regular and residual
interests in the REMIC Pool. The accrued portion of the 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 their unpaid principal balances, the REMIC Pool will be considered
to have acquired the mortgage loans at a premium equal to the amount of the
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 of the mortgage loans 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
borrowers 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 those mortgage loans may be
deductible in accordance with a reasonable method regularly employed by the
holder of the mortgage loans. The allocation of a premium pro rata among
principal payments should be considered a reasonable method. However, the
Internal Revenue Service may argue that a premium should be allocated in a
different manner, such as allocating the 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 each quarterly period of:
(1) 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
(2) the adjusted issue price of the Residual Security at the beginning
of each 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 the daily accruals of REMIC income described in this paragraph for all
prior quarters, decreased by any distributions made with respect to the Residual
Security prior to the beginning of each quarterly period.
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Accordingly, the portion of the REMIC Pool's taxable income that will be treated
as excess inclusions will be a larger portion of 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 the 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 that
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 and the portion of the REMIC taxable income 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
(1) could not be offset by net operating losses of its shareholders,
(2) would constitute unrelated business taxable income for tax-exempt
shareholders, and
(3) 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. The elimination of this special rule is 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 the 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, a tax would be imposed
in an amount equal to the product of:
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(1) the present value of the total anticipated excess inclusions with
respect to a Residual Security for periods after the transfer and
(2) 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. This 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. This tax generally would be imposed on the
transferor of the Residual Security, except that where a transfer is through an
agent, including a broker, nominee, or other middleman, for a Disqualified
Organization, the tax would instead be imposed on the agent. However, a
transferor of a Residual Security would in no event be liable for this 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 the
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 in the second
succeeding paragraph, 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 that entity, then a tax is imposed on that
entity equal to the product of:
(1) the amount of excess inclusions that are allocable to the interest
in the Pass-Through Entity during the period that interest is held by the
Disqualified Organization, and
(2) the highest marginal federal corporate income tax rate. That 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 the tax if it received an
affidavit from the record holder that it is not a Disqualified Organization or
stating the holder's taxpayer identification number and, during the period the
person is the record holder of the Residual Security, the Pass-Through Entity
does not have actual knowledge that the affidavit is false.
For taxable years beginning on or after January 1, 1998, if an
"electing large partnership," as defined in the immediately succeeding
paragraph, holds a Residual Security, all interests in the electing large
partnership are treated as held by Disqualified Organizations for purposes of
the tax imposed on 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 the affidavits are false, is not available to an electing
large partnership.
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For these purposes,
(1) "Disqualified Organization" means:
(a) the United States,
(b) any state or political subdivision of the United States or
any state,
(c) any foreign government,
(d) any international organization,
(e) any agency or instrumentality of any of the foregoing,
(f) 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
(g) any organization, other than a farmers' cooperative
described in Code Section 531, that is exempt from taxation
under the Code unless the organization is subject to the tax
on unrelated business income imposed by Code Section 511;
However, the 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
the governmental entity.
(2) "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 the interest, be treated as a
Pass-Through Entity; and
(3) 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 applicable agreement with respect to a series will provide that no
legal or beneficial interest in a Residual Security may be transferred or
registered unless:
(1) the proposed transferee furnished to the transferor and the
trustee an affidavit providing its taxpayer identification number and stating
that the transferee is the beneficial owner of the Residual Security and is not
a Disqualified Organization and is not purchasing the Residual Security on
behalf of a Disqualified Organization, i.e., as a broker, nominee or middleman
of the Disqualified Organization; and
(2) the transferor provides a statement in writing to the trustee that
it has no actual knowledge that the affidavit is false.
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Moreover, the related 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 the restrictions on
transfer. Each Residual Holder will be deemed to have agreed, as a condition of
ownership of a Residual Security, to any amendments to the related 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 depositor or the trustee may charge
a fee for computing and providing this 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 in the following sentence, to a Residual Holder, other
than a Residual Holder who is not a U.S. Person, 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:
(1) 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
(2) the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which taxes accrue on the
anticipated excess inclusions in an amount sufficient to satisfy the accrued
taxes on each excess inclusion.
The anticipated excess inclusions and the present value rate are
determined in the same manner as set forth above under "--Disqualified
Organizations." The REMIC Regulations explain that a significant purpose to
impede the assessment or collection of tax exists if the transferor, at the time
of the transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. A safe harbor is provided if:
(1) the transferor
(a) conducted, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee,
(b) found that the transferee historically paid its debts as
they came due, and
(c) found no significant evidence to indicate that the
transferee would not continue to pay its debts as they came
due in the future, and
(2) 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
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flows generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due.
The agreement with respect to each series of Securities 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."
In addition to the two conditions set forth above for the transferor
of a noneconomic residual interest to be presumed not to have knowledge that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC, recently proposed Treasury regulations would add a
third condition for the transferor to be presumed to lack this knowledge. This
third condition would require that the present value of the anticipated tax
liabilities associated with holding the noneconomic residual interest not exceed
the sum of:
(1) the present value of any consideration given to the transferee to
acquire the interest;
(2) the present value of the expected future distributions on the
interest; and
(3) the present value of the anticipated tax savings associated with
holding the interest as the REMIC generates losses.
For purposes of the computations under this third condition, the transferee is
assumed to pay tax at a rate of 35%. Further, present values generally are
computed using a discount rate equal to the applicable Federal rate set forth in
Section 1274(d) of the Code compounded semiannually. However, a lower rate may
be used if the transferee can demonstrate that it regularly borrows, in the
course of its trade or business, substantial funds at that lower rate from
unrelated third parties. In some situations, to satisfy this third condition,
the transferor of a noneconomic residual interest may have to pay more
consideration to the transferee than would otherwise be the case if the proposed
regulations were not applicable. If adopted, the proposed regulations would
apply to the transfer of a noneconomic residual interest made on or after
February 4, 2000. Prospective investors should consult their own tax advisors as
to the applicability and effect of the proposed regulations.
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, unless that 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:
(1) the future value of expected distributions equals at least 30% of
the anticipated excess inclusions after the transfer, and
(2) 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.
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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 securities 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 a transfer may be made.
Sale or Exchange of a Residual Security. If the sale or exchange of a
Residual Security occurs, 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 a Residual Holder in a 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 the adjusted basis on that
distribution date. Income will be treated as gain from the sale or exchange of
the Residual Holder's Residual Security. As a result, 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 the Residual Security as a capital asset
under Code Section 1221, then it will recognize a capital loss at that time in
the amount of the remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as
ordinary income
(1) 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 the transaction or
(2) in the case of a non-corporate taxpayer, to the extent that
taxpayer has made an election under Code Section 163(d)(4) to have net capital
gains taxed as investment income at ordinary income rates.
In addition, gain or loss recognized from the sale of a Residual Security by
certain banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except
as provided in Treasury regulations yet to be issued, the wash sale rules of
Code Section 1091 will apply to dispositions of Residual Securities. These wash
sale rules will apply 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 the sale or disposition of the Residual
Security, 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 mark to market regulations under Code Section 475 relating
to the requirement that a
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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:
(1) 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,
(2) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold,
(3) the receipt of compensation for services, or
(4) the receipt of gain from disposition of cash flow investments
other than pursuant to a qualified liquidation.
Regardless of clauses (1) and (4) above, 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
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(1) a default or reasonably foreseeable default,
(2) an assumption of the mortgage loan,
(3) the waiver of a due-on-sale or due-on-encumbrance clause, or
(4) the conversion of an interest rate by a borrower 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
(1) during the three months following the Startup Day,
(2) made to a qualified Reserve Fund by a Residual Holder,
(3) in the nature of a guarantee,
(4) made to facilitate a qualified liquidation or clean-up call, and
(5) as otherwise permitted in Treasury regulations yet to be issued.
We do not anticipate that there will be any contributions to the REMIC Pool
after the Startup Day.
Net Income from Foreclosure Property. The REMIC Pool will be subject
of federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to real
estate investment trusts. Generally, property acquired by deed in lieu of
foreclosure would be treated as "foreclosure property" until the close of the
third calendar year following the year of acquisition, with a possible
extension. Net income from foreclosure property generally means gain from the
sale of a foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust. We do not anticipate 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 the adoption is
deemed to occur, and sells all of its assets, other than cash, within a 90-day
period beginning on that 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
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partnership. The form for the 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 the
Residual Holder, the Residual Holder or the 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 these 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:
(1) 3% of the excess, if any, of adjusted gross income over $128,950
for 2000, $64,475 in the case of a married individual filing a separate return,
as adjusted for inflation for subsequent years, or
(2) 80% of the amount of itemized deductions otherwise allowable for
the year.
In the case of a REMIC Pool, these 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. These
investors who hold REMIC Securities either directly or indirectly through
certain Pass-Through Entities may have their pro rata share of expenses
allocated to them as additional gross income, but may be subject to a limitation
on deductions. In addition, these expenses are not deductible at all for
purposes of computing the alternative minimum tax, and may cause investors of
this type 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, this
additional gross income and limitation on deductions will apply to the allocable
portion of these expenses to holders of Regular Securities, as well as holders
of Residual Securities, where Regular Securities are issued in a manner that is
similar to pass-through certificates in a fixed investment trust. Generally, all
these expenses will be allocable to the Residual Securities. In general, the
allocable portion will be determined based on the ratio that a REMIC Holder'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-
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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, will be considered "portfolio interest"
and, therefore, generally will not be subject to 30% United States withholding
tax, provided that the non-U.S. Person:
(1) 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
(2) provides the trustee, or the person who would otherwise be
required to withhold tax from the 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 the signed 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 the non-U.S. Person. In the latter case, the 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 IRS recently issued final New Regulations which would provide
alternative methods of satisfying the beneficial ownership certification
requirement described above. The New Regulations will be effective January 1,
2001, current withholding certificates will remain valid until the earlier of
December 31, 2000, or the 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:
(1) the certification described above be provided by the partners
rather than by the foreign partnership and
(2) 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
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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:
(1) the mortgage loans were issued after July 18, 1984 and
(2) the trust fund or segregated pool of assets in that trust fund, 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" in
this prospectus. 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 non-U.S. Persons, 30% or lower treaty rate withholding will
not apply. Instead, the amounts paid to the 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, those amounts generally will be taken into account
for purposes of withholding only when paid or otherwise distributed, or when the
Residual security is disposed of, under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See
"--Tax-Related Restrictions on Transfer of Residual Securities--Foreign
Investors" above concerning the disregard of certain transfers having "tax
avoidance potential." Investors who are non-U.S. Persons should consult their
own tax advisors regarding the specific tax consequences to them of owning
Residual Securities.
Backup Withholding
Distributions made on the Regular Securities, and proceeds from the
sale of the Regular Securities to or through certain brokers, may be subject to
a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments." Reportable payments include interest distributions, original issue
discount, and, under certain circumstances, principal distributions, unless the
Regular Holder complies with certain reporting and/or certification procedures.
These reporting and/or certification procedures include the provision of its
taxpayer identification number to the trustee, its agent or the broker who
effected the sale of the Regular Security, or the 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 will 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.
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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
o corporations,
o non-calendar year taxpayers,
o securities or commodities dealers,
o real estate investment trusts,
o investment companies,
o common trust funds,
o thrift institutions and
o charitable trusts,
may request 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 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 as, as described under
"--Limitations on Deduction of Certain Expenses" above, allocable to the
holders. Furthermore, under the 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."
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Grantor Trust Funds
Classification of Grantor Trust Funds
With respect to each series of Grantor Trust Securities, Cadwalader,
Wickersham & Taft will deliver an opinion. The opinion will be to the effect
that, assuming compliance with all provisions of the applicable agreement, the
related Grantor Trust Fund will be classified as a grantor trust under subpart
E, part I of subchapter J of the Code and not as a partnership, an association
taxable as a corporation, or a "taxable mortgage pool" within the meaning of
Code Section 7701(i). Accordingly, each holder of a Grantor Trust Security
generally will be treated as the beneficial owner of an undivided interest in
the mortgage loans included in the Grantor Trust Fund.
Standard Securities
General. Where there is no Retained Interest with respect to the
mortgage loans underlying the securities of a series, and where these securities
are not designated as "Stripped Securities," the holder of each security in the
series, referred to in this Prospectus 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. As a
result, the holder of these securities 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, in accordance with the holder's method
of accounting, its pro rata share of the entire income from the mortgage loans
represented by its Standard Security, including
(1) interest at the coupon rate on the mortgage loans,
(2) original issue discount, if any,
(3) prepayment fees,
(4) assumption fees, and
(5) late payment charges received by the servicer.
A holder of securities generally will be able to deduct its share of
the servicing fee and all administrative and other expenses of the trust fund in
accordance with its method of accounting, provided that the 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 administrative and other expenses of the Grantor Trust Fund, to the
extent that the 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:
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(1) 3% of the excess, if any, of adjusted gross income over $126,600
for 1999 $63,300 in the case of a married individual filing a separate return,
in each case, as adjusted for inflation in subsequent years, or
(2) 80% of the amount of itemized deductions otherwise allowable for
that year.
As a result, 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 that security.
Securities with respect to interest at the pass-through rate or as
discount income on those Standard Securities. In addition, the expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause the 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 that 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. Interest income on the assets will be
considered "interest on obligations secured by mortgages on real property" to
that 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 in the REMIC, which is principally secured by an interest
in real property" within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Grantor Trust Fund consist of "qualified
mortgages" within the meaning of Code Section 860G(a)(3).
(4) A Standard Security owned by a "financial asset securitization
investment trust" within the meaning of Code Section 860L(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 the
treatment must be reduced by the amount of the Buydown
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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. We cannot assure you
that the treatment described above is proper. Accordingly, we urge you to
consult your own tax advisors concerning the effects of these arrangements on
the characterization of your investment for federal income tax purposes.
Premium and Discount. We advise you to consult with your tax advisors
as to the federal income tax treatment of premium and discount arising either at
the time of initial issuance of Standard Securities or subsequent acquisition.
Premium. The treatment of premium incurred at the time of 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 holder'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 borrowers, other than individuals, originated after
July 1, 1982, and mortgages of individuals originated after March 2, 1984. Under
the OID Regulations, an 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 the income.
Unless indicated otherwise in the related prospectus supplement, no prepayment
assumption will be assumed for purposes of the 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 the mortgage loans acquired by a
holder of securities are purchased at a price equal to the then unpaid principal
amount of those mortgage loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of those
mortgage loans, i.e., points, will be includible by the related holder.
Market Discount. Holders of securities 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 in those sections will not
apply. Rather, the holder will accrue market discount pro rata over the life of
the mortgage loans,
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unless the constant yield method is elected. The related prospectus supplement
will specify what, if any, prepayment assumption will be assumed for purposes of
accrual.
Recharacterization of Servicing Fees. If the servicing fees paid to a
servicer were deemed to exceed reasonable servicing compensation, the amount of
excess would represent neither income nor a deduction to holders of securities.
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 the applicable 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. This guidance
provides safe harbors for servicing deemed to be reasonable and requires
taxpayers to demonstrate that the value of servicing fees in excess of these
applicable 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 those 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 those mortgage loans as "stripped
coupons" and "stripped bonds." Subject to the de minimis rule discussed below
under "--Stripped Securities," each stripped bond or stripped coupon could be
considered for this purpose as a non-interest bearing obligation issued on the
date of issue of the Standard Securities, and the original issue discount rules
of the Code would apply to the holder of those securities. While holders of
securities would still be treated as owners of beneficial interests in a grantor
trust for federal income tax purposes, the corpus of the trust could be viewed
as excluding the portion of the mortgage loans the ownership of which is
attributed to the servicer, or as including the portion as a second class of
equitable interest. Applicable Treasury regulations treat an arrangement of this
type 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, a recharacterization should not have any significant
effect on the timing or amount of income reported by a holder of securities,
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. If a sale or exchange of a
Standard Security occurs, a holder of securities 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 holder'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
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distributions other than accrued interest received on those securities. 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 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:
(1) 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 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 part of that transaction or
(2) in the case of a non-corporate taxpayer, to the extent the
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 the taxpayers (39.6%) for
capital assets held for more than one year. The maximum tax rate for
corporations is the same with respect to both ordinary income and capital gains.
Stripped Securities
General. Pursuant to Code Section 1286, the separation of ownership of
the right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, securities that are subject to those rules will be referred to as
"Stripped Securities." The securities will be subject to those rules if:
(1) 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,
(2) 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"), and
(3) 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
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servicing fees paid to a servicer, to the extent that those 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 holders of Stripped Securities, the
servicing fees will be allocated to the classes of Stripped Securities in
proportion to the distributions to the 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 in that
section.
Code Section 1286 treats a stripped bond or a stripped coupon
generally as an obligation issued on the date that the stripped interest is
purchased. Although the treatment of Stripped Securities for federal income tax
purposes is not clear in certain respects, particularly where Stripped
Securities are issued with respect to a mortgage pool containing variable-rate
mortgage loans, the depositor has been advised by counsel that:
(1) 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
(2) 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 applicable 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 those
regulations, a Stripped Security that represents a right to payments of both
interest and principal may be viewed either as issued with original issue
discount or market discount, as described below, at a de minimis original issue
discount, or, presumably, at a premium. This treatment indicates that the
interest component of a Stripped Security of this type 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 a Stripped Security will be required to account
for any discount as market discount rather than original issue discount if
either:
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(1) the initial discount with respect to the Stripped Security was
treated as zero under the de minimis rule, or
(2) no more than 100 basis points in excess of reasonable servicing is
stripped off the related mortgage loans. Any market discount would be reportable
as described above under "--REMICs--Taxation of Owners of Regular
Securities--Market Discount," without regard to the de minimis rule described in
this prospectus, assuming that a prepayment assumption is employed in that
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
(1) "real estate assets" within the meaning of Code Section
856(c)(4)(A),
(2) "obligation[s]. . . principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A), and
(3) "loans. . . secured by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C)(v).
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 those mortgage
loans qualify for this tax treatment. The application of these 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 that income. Based in part on the issue
discount required to be included in the income of a holder of a Stripped
Security 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 of the Stripped Security. The stated
redemption price at maturity will include the aggregate amount of the payments
to be made on the Stripped Security to the holder of securities, 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 holder's recognition of original issue
discount will be either accelerated or decelerated and the amount of the
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each mortgage loan represented
by the holder's Stripped Security. While the matter is not free from doubt, the
holder
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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 that Stripped Security to recognize a loss, which may be a
capital loss, equal to that 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
those 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, those regulations may lead to different timing of income
inclusion that would be the case under the OID Regulations. Furthermore,
application of those 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 holder's adjusted basis
in that 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, the subsequent purchaser will be required
for federal income tax purposes to accrue and report the excess as if it were
original issue discount in the manner described above. It is not clear for this
purpose whether the assumed prepayment rate that is to be used in the case of a
holder of securities other than an original holder of securities 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 the classes of Stripped
Securities should be treated separately or aggregated for purposes of the rules
described above.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities discussed above are not the only possible interpretations of
the applicable Code provisions. For example, the holder of securities may be
treated as the owner of:
(1) one installment obligation consisting of the Stripped Security's
pro rata share of the payments attributable to principal on each mortgage loan
and a second installment obligation consisting of the respective Stripped
Security's pro rata share of the payments attributable to interest on each
mortgage loan,
(2) as many stripped bonds or stripped coupons as there are scheduled
payments of principal and/or interest on each mortgage loan, or
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(3) 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 to that Stripped Security.
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 the related Stripped Security,
or classes of Stripped Securities in the aggregate, represent the same pro rata
portion of principal and interest on each 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 these regulations
states that they are premised on the assumption that an aggregation approach is
appropriate for determining whether original issue discount on a stripped bond
or stripped coupon is de minimis, and solicits comments on appropriate rules for
aggregating stripped bonds and stripped coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped
Securities and the resultant differing treatment of income recognition, holders
of securities 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 holder of Grantor Trust Securities at any time
during that calendar year, information, prepared on the basis described above,
as is necessary to enable the holder of those securities to prepare its federal
income tax returns. The information will include the amount of original issue
discount accrued on Grantor Trust Securities held by persons other than holders
of securities 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 holder of
Grantor Trust Securities, other than an original holder of securities that
purchased at the issue price. In particular, in the case of Stripped Securities,
the reporting will be based on a representative initial offering price of each
class of Stripped Securities or some price as set forth in the related
prospectus supplement. The trustee will also file original issue discount
information with the Internal Revenue Service. If a holder of securities fails
to supply an accurate taxpayer identification number or if the Secretary of the
Treasury determines that a holder of securities 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 Grantor
Trust 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 any lower rate as may be provided for interest
by an applicable tax treaty. Accrued original issue discount recognized by the
holder of Grantor
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Trust Securities on the sale or exchange of that security also will be subject
to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount
paid by the trustee or other withholding agent to a non-U.S. Person evidencing
ownership interest in mortgage loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and these 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 applicable
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:
(1) 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
(2) 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). However, 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 Holder of Securities
Treatment of the Debt Securities as Indebtedness. The Depositor will
agree, and the holders of securities 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.
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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 Fund.
As a result, the timing and amount of income allocable to holders of the 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:
(1) income reportable on Debt Securities is not required to be
reported under the accrual method unless the holder otherwise uses the accrual
method and
(2) 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--Sale or
Exchange of Regular Securities" above.
Taxation of Owners of Partnership Securities
Treatment of the Partnership Trust Fund as a Partnership. The
prospectus supplement may specify that the Depositor will agree, and the holders
of securities will agree by their purchase of securities, to treat the
Partnership Trust Fund:
(1) 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 holders of securities, including the
depositor, and the Debt Securities, if any, being debt of the partnership or
(2) if a single beneficial owner owns all of the Partnership
Securities in a trust fund, the trust fund will be ignored for federal income
tax purposes and the assets and Debt Securities of the trust fund will be
treated as assets and indebtedness of this beneficial 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. A characterization of this
type would not result in materially adverse tax consequences to holders of
securities 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 holder of securities
will be required to separately take into account each holder's allocated share
of income, gains, losses, deductions and credits of the Partnership Trust Fund.
We anticipate 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
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primarily of interest and original issue discount accruing with respect to the
Debt Securities and servicing and other fees.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement,
i.e., the applicable governing agreement and related documents. The partnership
agreement will provide, in general, that the holders of securities will be
allocated taxable income of the Partnership Trust Fund for each Due Period equal
to the sum of:
(1) the interest that accrues on the Partnership Securities in
accordance with their terms for the Due Period, including interest accruing at
the applicable pass-through rate for the applicable Due Period and interest on
amounts previously due on the Partnership Securities but not yet distributed;
(2) 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
(3) any other amounts of income payable to the holders of securities
for the applicable Due Period.
That 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. No assurance can be given that the IRS would
not require a greater amount of income to be allocated to securities. Moreover,
even under the foregoing method of allocation, holders of securities 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 that amount. Thus, cash basis holders will in
effect be required to report income from the Partnership Securities on the
accrual basis and holders of securities may become liable for taxes on
Partnership Trust Fund income even if they have not received cash from the
Partnership Trust Fund to pay these taxes.
All of the taxable income allocated to a holder of securities that is
a pension, profit-sharing or employee benefit plan or other tax-exempt entity,
including an individual retirement account, will constitute "unrelated business
taxable income" generally taxable to a holder under the Code.
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 holder of securities would be miscellaneous itemized deductions subject
to the limitations described above under "--Grantor Trust Funds--Standard
Securities -- General." Accordingly, these deductions might be disallowed to the
individual in whole or in part and might result in the holder of the securities
being taxed on an amount of income that exceeds the amount of cash actually
distributed to the holder of the securities over the life of the Partnership
Trust Fund.
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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." Regardless of that description, it is intended that the Partnership
Trust Fund will make all tax calculations relating to income and allocations to
holders of securities on an aggregate basis with respect to all mortgage loans
held by the Partnership Trust Fund rather than on a mortgage loan-by-mortgage
loan basis. If the IRS required calculations to be made separately for each
mortgage loan, the Partnership Trust Fund might be required to incur additional
expense, but we believe that there would not be a material adverse effect on
holders of securities.
Discount and Premium. The prospectus supplement may provide that the
mortgage loans will have been issued with original discount. However, 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" in this
prospectus. As previously 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
discount in income currently as it accrues over the life of the mortgage loans
or to offset any premium against interest income on the mortgage loans. As
indicated above, a portion of any market discount income or premium deduction
may be allocated to holders of securities.
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. A termination of this
type 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. The interests
in a new Partnership Trust Fund would be deemed distributed to the partners of
the old partnership in liquidation of the old partnership, which would not
constitute a sale or exchange. The Partnership Trust Fund will not comply with
certain technical requirements that might apply when 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 holder'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 a 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
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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 the Partnership Securities. If a sale
or other disposition of some of the Partnership Securities occurs, the holder
may be required to allocate a portion of the 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 similar 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 holder of securities 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 to those securities, the excess will
generally give rise to a capital loss if the retirement of the Partnership
Securities occurs.
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 holders of securities in proportion to the principal amount of Partnership
Securities owned by them as of the close of the last day of the related Due
Period. As a result, a holder purchasing Partnership Securities may be allocated
tax items attributable to periods before the actual transaction, which will
affect its tax liability and tax basis.
The use of this 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 holders of
securities. 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 holder
of Partnership Securities, no gain will be recognized to that holder of
securities to the extent that the amount of any money distributed with respect
to that holder's security exceeds the adjusted basis of that holder's interest
in the security. To the extent that the amount of money distributed exceeds that
holder's adjusted basis, gain will be currently recognized. In the case of any
distribution to a holder of securities, no loss will be recognized except if a
distribution in liquidation of a holder's interest occurs. Any gain or loss
recognized by a holder of securities will be capital gain or loss.
Section 754 Election. If a holder of Partnership Securities sells its
securities at a profit or loss, the purchasing holder of Partnership Securities
will have a higher or lower basis, as applicable, in the securities than the
selling holder of securities had. The tax basis of the Partnership Trust Fund's
assets would not be adjusted to reflect that higher or lower basis unless
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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
that election. As a result, holders of Partnership Securities 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. The 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 on IRS Form 1065 with the IRS for
each taxable year of the Partnership Trust Fund and will report each holder'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 those nominees will be required to
forward the 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 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. This information includes:
(1) the name, address and taxpayer identification number of the
nominee and
(2) as to each beneficial owner:
(x) the name, address and identification number of the
beneficial owner,
(y) whether the beneficial owner is a U.S. 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 the beneficial owner
throughout the year.
In addition, brokers and financial institutions that hold Partnership
Securities through a nominee are required to furnish directly to the trustee
information as to themselves and their ownership of Partnership Securities. A
clearing agency registered under Section 17A of the Exchange Act is not required
to furnish any information statement of this type 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.
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The person specified in the applicable agreement as the tax matters
partner will be responsible for representing the holders of securities 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 holders of securities, and, under certain
circumstances, a holder of securities 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 holder's returns and adjustments
of items not related to the income and losses of the Partnership Trust Fund.
Tax Consequences to Foreign Holders of Partnership Securities. 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. This is so because there is no clear
authority dealing with that issue under facts substantially similar to those
described in this prospectus. 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 the 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, the 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 relating to 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 holder of securities 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 ON 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.
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences" in this prospectus, potential investors should
consider the state and local tax consequences of the acquisition, ownership, and
disposition of the securities offered under this prospectus. 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 under this prospectus.
ERISA CONSIDERATIONS
Title I of ERISA and Section 4975 of the Code impose certain
requirements on Plans and on persons who are fiduciaries with respect to the
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 in this prospectus. 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 who have certain specified relationships to the Plan. In addition,
Section 406(b) of ERISA and Section 4975(c)(1)(E) and (F) of the Code impose
certain prohibitions on Parties in Interest who are fiduciaries with respect to
the Plan. Certain Parties in Interest that participate in a prohibited
transaction may be subject to a penalty imposed under Section 502(i) of ERISA or
an excise tax pursuant to Sections 4975(a) and (b) of the Code, unless a
statutory or administrative exemption is available.
Certain transactions involving a trust fund might be deemed to
constitute prohibited transactions under ERISA and Section 4975 of the Code with
respect to a Plan that purchases securities if the residential loans, agency
securities, mortgage securities and other assets included in the trust fund are
deemed to be assets of the Plan. The U.S. Department of Labor has promulgated
regulations at 29 C.F.R. Section 2510.3-101 defining the term "plan assets" for
purposes of applying the general fiduciary responsibility provisions of ERISA
and the prohibited transaction provisions of ERISA and the Code. Under these
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." "Benefit Plan Investors" include Plans, as well as any
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"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 in these
regulations, neither Plans nor persons investing plan assets should acquire or
hold securities in reliance on the availability of any exception under the
regulations.
In addition, the 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 notes of this type, but would not, by reason of the
purchase, include the underlying assets of the related trust fund. However,
without regard to whether notes of this type are treated as an equity interest
for these purposes, the purchase or holding of notes by or on behalf of a Plan
could be considered to result in a prohibited transaction. A prohibited
transaction may result 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
the Plan, or if the depositor, the master servicer, any sub-servicer or any
trustee has investment authority with respect to the assets of the Plan.
Any person who has discretionary authority or control respecting the
management or disposition of plan assets, and any person who provides investment
advice with respect to the 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 United States
Department of Labor issued an individual exemption, Prohibited Transaction
Exemption 90-36, referred to as the "Exemption," on June 25, 1990 to PaineWebber
Incorporated. The Exemption generally exempts from the application of the
prohibited transaction provisions of Section 406 of ERISA, and the excise taxes
and civil penalties imposed on the 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 pass-through certificates, such as a senior class
of certificates, underwritten by an underwriter, provided that certain
conditions set forth in the Exemption are satisfied. For purposes of this
Section "ERISA Considerations," the term "underwriter" shall include:
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(1) PaineWebber Incorporated,
(2) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
PaineWebber Incorporated and
(3) 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 under the Exemption:
(1) 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;
(2) 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;
(3) 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. or Fitch, Inc.;
(4) the trustee cannot be an affiliate of any other member of the
"restricted group." The "restricted group" consists of any underwriter, the
depositor, the trustee, the master servicer, any sub-servicer, the obligor on
credit support and any borrower with respect to assets of the trust fund
constituting more than 5% of the aggregate unamortized principal balance of the
assets of the trust fund in the related trust fund as of the date of initial
issuance of the certificates;
(5) (a) the sum of all payments made to and retained by the
underwriter(s) must represent not more than reasonable compensation for
underwriting the certificates;
(b) the sum of all payments made to and retained by the depositor
pursuant to the assignment of the assets of the trust fund to the
related trust fund must represent not more than the fair market value
of those obligations; and
(c) 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 that person's services and reimbursement of that
person's reasonable expenses in connection with those services;
(6) 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:
(1) the trust fund must consist solely of assets of the type that have
been included in other investment pools;
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(2) certificates evidencing interests in such other investment pools
must have been rated in one of the three highest categories of one of Standard &
Poor's Ratings Services, Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co. or Fitch, Inc. for at least one year prior to the acquisition of
certificates by or on behalf of a Plan or with plan assets; and
(3) certificates evidencing interests in those 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 its certificate. However, to the extent that
certificates are subordinate, the Exemption will not apply to an investment by a
Plan. In addition, the Exemption will not apply to an investment by a Plan
during a Funding Period unless certain additional conditions specified in the
related prospectus supplement are satisfied. Furthermore, any certificates
representing a beneficial ownership in unsecured obligations will not satisfy
the general conditions of the Exemption.
If the general conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a) and 407(a) of ERISA, as well as the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code, in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of
certificates by Plans. However, no exemption is provided from the restrictions
of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or
holding of a certificate on behalf of an "Excluded Plan" by any person who has
discretionary authority or renders investment advice with respect to the assets
of the "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 PaineWebber or another
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 borrower with respect to 5% or less of the fair market
value of the assets of the trust fund or
(b) an affiliate of that 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.
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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, although prospective investors should consult the relevant
prospectus supplement in this regard. Satisfaction of these conditions 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
the 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 a person of that type, solely as a result of the Plan's
ownership of certificates.
Before purchasing a certificate, a fiduciary of a Plan should itself
confirm:
(1) that the certificates constitute "certificates" for purposes of
the Exemption and
(2) that the specific and general conditions and other applicable
requirements set forth in the Exemption would be satisfied. In addition to
making its own determination as to the availability of the exemptive relief
provided in the Exemption, the Plan fiduciary should consider its general
fiduciary obligations under ERISA in determining whether to purchase any
certificates on behalf of a Plan.
In addition to the Exemption, a Plan fiduciary or other investor using
plan assets should consider the availability of certain class exemptions granted
by the U.S. Department of Labor. These class exemptions may provide relief from
certain of the prohibited transaction provisions of ERISA and the related excise
tax provisions of the Code, including
(1) PTCE 83-1, regarding transactions involving mortgage pool
investment trusts;
(2) PTCE 84-14, regarding transactions effected by a "qualified
professional asset manager";
(3) PTCE 90-1, regarding transactions by insurance company pooled
separate accounts;
(4) PTCE 91-38, regarding investments by bank collective investment
funds; and
(5) PTCE 96-23, regarding transactions effected by an "in-house asset
manager."
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In addition, based on the reasoning of the United States Supreme
Court's decision in John Hancock Life Ins. Co. v. Harris Trust and Sav. Bank,
510 U.S. 86 (1993), under certain circumstances assets in the general account of
an insurance company may be deemed to be plan assets for certain purposes, and
under such reasoning a purchase of investor certificates with assets of an
insurance company's general account might be subject to the prohibited
transaction rules described above. Insurance companies investing assets of their
general accounts should also consider the potential effects of the enactment of
Section 401(c) of ERISA, PTCE 95-60, Labor Department Regulation 29 CFR Section
2550.401c-1, and the fact that the Exemption (discussed above) has been
designated by the Department of Labor as an "Underwriter Exemption" for purposes
of Section V(h) of Prohibited Transaction Exemption 95-60.
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 that investment and the
availability of the Exemption or any class exemption in connection with that
investment. We cannot assure you 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 in the Exemption or
class exemption were satisfied, that the 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.
LEGAL INVESTMENT
The prospectus supplement relating to each series of securities will
specify which, if any, of the classes of securities offered constitute "mortgage
related securities" for purposes of SMMEA. Any class of securities offered by
this prospectus 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 these 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,
(1) state-chartered savings banks,
(2) commercial banks, savings and loan associations and insurance
companies,
(3) 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
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of Columbia and Puerto Rico, whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality of the United States constitute legal investments for these
types of entities.
Pursuant to SMMEA, a number of states enacted legislation, on or before the
October 3, 1991 cutoff for these legislative 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 on existing state law, and not SMMEA.
Accordingly, the investors affected by this type of legislation will be
authorized to invest in securities qualifying as "mortgage related securities"
only to the extent provided in the legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows:
(1) 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 by these "mortgage
related securities", federal credit unions may invest in these "mortgage related
securities", and
(2) national banks may purchase these "mortgage related securities"
for their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. Section 24 (Seventh),
subject in each case to regulations the applicable federal regulatory authority
may prescribe. In this connection, the Office of the Comptroller of the Currency
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. Section 1.5 concerning "safety and soundness" and retention of credit
information), certain "Type IV securities," defined in 12 C.F.R. Section 1.2(l)
to include certain "residential mortgage-related securities." As so defined,
"residential mortgage-related security" means, in relevant part, "mortgage
related security" within the meaning of SMMEA. The National Credit Union
Administration 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 National Credit Union Administration to
participate in the "investment pilot program" described in 12 C.F.R. Section
703.140. The Office of Thrift Supervision has issued Thrift Bulletin 13a
(December 1, 1998), "Management of Interest Rate Risk, Investment Securities and
Derivatives Activities," which thrift institutions subject to the jurisdiction
of the Office of Thrift Supervision should consider before investing in the
securities.
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, which has been
adopted by the Board of Governors of the Federal Reserve System, the Federal
Deposit
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Insurance Corporation, the Comptroller of the Currency and the Office of Thrift
Supervision effective May 26, 1998, and by the National Credit Union
Administration, 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. 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
federal and state authorities before purchasing any securities. A review should
be conducted, as certain series or classes may be deemed unsuitable investments,
or may otherwise be restricted, under these rules, policies or guidelines and 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,
(1) "prudent investor" provisions,
(2) percentage-of-assets limits,
(3) provisions which may restrict or prohibit investment in securities
which are not "interest bearing" or "income paying," and,
(4) 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 determining
(1) whether and to what extent the securities constitute legal
investments or are subject to investment, capital or other restrictions and,
(2) if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to the investor.
PLANS OF DISTRIBUTION
The securities offered by this prospectus 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
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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 for a sale. The related prospectus supplement will specify whether
the securities will be distributed in a firm commitment underwriting, subject to
the terms and conditions of the underwriting agreement, by PaineWebber
Incorporated acting as underwriter with other underwriters, if any, named in the
related underwriting agreement. If it is a firm commitment underwriting, the
related 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 related prospectus supplement will describe any
compensation paid by the depositor to the underwriters.
Alternatively, the related 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 on the difference between its purchase price and the sales price. The
prospectus supplement with respect to any series offered other than through
underwriters will contain information regarding the nature of the offering and
any agreements to be entered into between the depositor and purchasers of
securities of the related series.
The depositor will indemnify PaineWebber Incorporated 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 of any liability.
The related prospectus supplement relating to securities of a
particular series offered by this prospectus will specify whether the depositor
or any other person or persons specified in the prospectus supplement may
purchase some or all of the securities from the underwriter or underwriters or
other person or persons specified in the related prospectus supplement. A
purchaser may thereafter from time to time offer and sell, pursuant to this
prospectus and the related prospectus supplement, some or all of the securities
so purchased, directly, through one or more underwriters to be designated at the
time of the offering of these securities, through dealers acting as agent and/or
principal or in any other manner as may be specified in the related prospectus
supplement. The related offering may be restricted in the manner specified in
the related prospectus supplement. The related transactions may be effected at
market prices prevailing at the time of sale, at negotiated prices or at fixed
prices. Any underwriters and dealers participating in the purchaser's offering
of the related securities may receive compensation in the form of underwriting
discounts or commissions from a purchaser and dealers may receive commissions
from the investors purchasing the related securities for whom they may act as
agent. The discounts or commissions will not exceed those customary in those
types of transactions involved. Any dealer that participates in the distribution
of the related securities may be deemed to be an "underwriter" within the
meaning of the Securities Act of
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1933. Any commissions and discounts received by a dealer and any profit on the
resale or the securities by that dealer might be deemed to be underwriting
discounts and commissions under the Securities Act of 1933.
In the ordinary course of business, PaineWebber Incorporated and the
depositor, or their affiliates, may engage in various securities and financing
transactions. These financing transactions include repurchase agreements to
provide interim financing of the depositor's residential loans pending the sale
of residential loans or interests in residential loans, 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 the related 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. Holders of securities should
consult with their legal advisors in this regard prior to any 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 by this
prospectus. 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.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to each series of securities offered by this prospectus,
there are incorporated in this prospectus 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 the 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 series of
securities, if written or oral request of any person is made, a copy of any or
all reports incorporated in this prospectus by reference. The depositor will be
required to provide these reports only to the extent reports relate to one or
more of classes of the related series of securities, other than the exhibits to
these documents, unless these exhibits are specifically incorporated by
reference in these documents. Requests should be directed in writing to
PaineWebber Mortgage Acceptance Corporation IV, 1285 Avenue of the Americas, New
York, New York 10019, Attention: General Counsel, or by telephone at (212)
713-2000.
The depositor filed a registration statement relating to the
securities with the SEC. This prospectus is part of the registration statement,
but the registration statement includes additional information.
Copies of the registration statement may be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549, if payment of the
prescribed charges is made, or may be examined free of charge at the SEC's
offices, 450 Fifth Street N.W., Washington, D.C. 20549 or at the regional
offices of the Commission located at Suite 1300, 7 World Trade Center, New York,
New York 10048 and Suite 1400, Citicorp Center, 500 West Madison Street,
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Chicago, Illinois 60661-2511. The SEC also maintains a site on the World Wide
Web at "http://www.sec.gov" at which you can view and download copies of
reports, proxy and information statements and other information filed
electronically through the Electronic Data Gathering, Analysis and Retrieval --
EDGAR -- system. The depositor filed the registration statement, including all
exhibits to the registration statement, through the EDGAR system and therefore
these materials should be available by logging onto the SEC's Web site. The SEC
maintains computer terminals providing access to the EDGAR system at each of the
offices referred to above.
LEGAL MATTERS
The validity of the securities and certain federal income tax matters
in connection with the securities will be passed on 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
It will be a condition to the issuance of the securities of each
series offered by this prospectus and by the related 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 specified in the
related prospectus supplement.
Any rating would be based on, among other things, the adequacy of the
value of the assets of the trust fund and any credit enhancement with respect to
the related class. A rating will reflect the specified Rating Agency's
assessment solely of the likelihood that holders of a class of securities of the
related class will receive payments to which holders of securities are entitled
by their terms. The rating will not constitute
(1) an assessment of the likelihood that principal prepayments on the
related residential loans will be made,
(2) the degree to which the rate of prepayments might differ from that
originally anticipated or
(3) the likelihood of early optional termination of the series of
securities. The 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.
The rating will not address the possibility that prepayment at higher or lower
rates than anticipated by an investor may cause the investor to experience a
lower than anticipated yield.
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The rating will not address that an investor purchasing a security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
We cannot assure you that any 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. A rating may be lowered or withdrawn due to any erosion in the adequacy
of the value of the assets of the trust fund or any credit enhancement with
respect to a series. The 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 the 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 the related series.
These criteria are sometimes based on an actuarial analysis of the behavior of
mortgage loans in a larger group. The foregoing analysis is often the basis on
which each rating agency determines the amount of credit enhancement required
with respect to each class. We cannot assure you that the historical data
supporting any actuarial analysis will accurately reflect future experience. In
addition, we cannot assure you 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. We cannot assure you
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 and 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 borrowers of scheduled
payments of principal and interest on the residential loans. Accordingly, the
rates of delinquencies, foreclosures and losses with respect to any trust fund
may be affected. To the extent that these losses are not covered by credit
enhancement, these losses will be borne, at least in part, by the holders of one
or more classes of the security of the related series.
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GLOSSARY OF TERMS
"Accrual Securities" are one or more classes of securities with
respect to which accrued interest will not be distributed but rather will be
added to the security principal balance of the securities on each distribution
date for the period described in the related prospectus supplement.
"Accrued Security Interest" is the interest accruing with respect to
each class of securities related to a series, in an amount equal to interest on
the outstanding security principal balance, or notional amount with respect to
interest-only securities, 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 the series.
"Available Distribution Amount" is the amount which will be available
for distribution on the securities of each series on each distribution date as
may be specified in the related prospectus supplement and generally includes:
(1) the total amount of all cash on deposit in the related Trust
Account as of a determination date specified in the related prospectus
supplement, exclusive of amounts payable on future distribution dates and
amounts payable to the master servicer, any applicable sub-servicer, the trustee
or another person as expenses of the trust fund;
(2) any principal and/or interest advances made with respect to the
distribution date, if applicable;
(3) any principal and/or interest payments made by the master servicer
out of its servicing fee in respect of interest shortfalls resulting from
principal prepayments, if applicable; and
(4) all net income received in connection with the operation of any
residential property acquired on behalf of the holders of securities through
deed in lieu of foreclosure or repossession, if applicable.
"Available Subordination Amount" is an amount equal to the difference
between
(1) the applicable percentage amount of the aggregate initial
principal balance of the residential loans in the related trust fund as
specified in the related prospectus supplement and
(2) the amounts paid to the holders of senior securities that but for
the subordination provisions would have been payable to the holders of
subordinate securities.
"Bankruptcy Bond" is a bond insuring residential loans which covers
(1) certain losses resulting from
(a) an extension of the maturity of a residential loan, or
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(b) a reduction by the bankruptcy court of the principal balance
of or the interest rate on a residential loan, and
(2) the unpaid interest on the amount of a principal reduction during
the pendency of a proceeding under the United States Bankruptcy Code, 11 U.S.C.
Sections 101 et seq.
"Buydown Funds" are funds paid on the related Buydown Loans.
"Buydown Loans" are residential loans subject to temporary buydown
plans. The monthly payments made by the borrower in the early years of the
Buydown Loan will be less than the scheduled payments on the Buydown Loan.
Generally, the borrower under a Buydown Loan will be eligible for a reduced
interest rate on the loan.
"Cash Flow Value" is the security principal balance of the securities
of the related series which, based on certain assumptions, including the
assumption that no defaults occur on the assets of the trust fund, can be
supported by either:
(1) the future scheduled payments on the assets of the trust fund,
with the interest on the assets adjusted to the Net Interest Rate;
(2) the proceeds of the prepayment of the assets of the trust fund,
together with reinvestment earnings on the assets of the trust fund, if any, at
the applicable Assumed Reinvestment Rate; or
(3) amounts available to be withdrawn from any Reserve Fund for the
series, as further specified in the related prospectus supplement relating to a
series of securities.
"CERCLA" is the Comprehensive Environmental Response, Compensation and
Liability Act, as amended.
"Code" is the Internal Revenue Code of 1986, as amended.
"Collateral Value" is
(1) with respect to a residential property or cooperative unit, it is
the lesser of:
(a) the appraised value determined in an appraisal obtained by
the originator at origination of the loan; and
(b) the sales price of the property.
(2) with respect to residential property securing a Refinance Loan, it
is the appraised value of the residential property determined at the time of the
origination of the Refinance Loan.
"Conservation Act" is the Asset Conservation, Lender Liability and
Deposit Insurance Act of 1996, as amended.
"Cooperative" is a private cooperative housing corporation, the shares
of which secure Cooperative Loans.
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"Cooperative Loans" are loans secured primarily by shares in a
Cooperative which with the related proprietary lease or occupancy agreement give
the owners the right to occupy a particular dwelling unit in the Cooperative.
"Cut-Off Date" is the date specified in the related prospectus
supplement which generally represents the first date after which payments on the
residential loans in a pool will begin to be paid to the trust.
"Debt Securities" are securities which represent indebtedness of a
Partnership Trust Fund for federal income tax purposes.
"Definitive Security" is a physical certificate representing a
security issued in the name of the beneficial owner of the security rather than
DTC.
"Deposit Period" is the period specified in the related prospectus
supplement which is generally the period commencing on the day following the
determination date immediately preceding the related determination date and
ending on the related determination date.
"Due Period" is the period of time specified in the related prospectus
supplement.
"Equity Certificates" are certificates, with respect to a series of
notes where the issuer is an owner trust, issued under an owner trust agreement
which evidence the equity ownership of the related trust.
"FHA Insurance" is insurance issued by the FHA to insure residential
loans as authorized under the United States Housing Act of 1934, as amended. The
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.
"FHLMC Certificates" are mortgage participation certificates issued by
the FHLMC.
"Financial Intermediary" is an entity that maintains the Security
Owner's account and records the Security Owner's ownership of securities on that
account.
"FNMA Certificates" are guaranteed mortgage pass-through securities
issued by the FNMA.
"Garn-St. Germain Act" is the Garn-St. Germain Depository Institutions
Act of 1982, enacted on October 15, 1982.
"GNMA Certificates" are fully modified pass-through mortgage-backed
certificates guaranteed by the GNMA.
"Grantor Trust Securities" are securities which represent interests in
a grantor trust as to which no REMIC election will be made.
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"Home Equity Loans" are one- to four-family first or junior lien
closed end home equity loans for property improvement, debt consolidation or
home equity purposes.
"Home Improvement Contracts" are home improvement installment sales
contracts and installment loan agreements which may be unsecured or secured by a
lien on the related mortgaged property or a manufactured home. This lien may be
subordinated to one or more senior liens on the related mortgaged property.
"Insurance Instrument" is any Primary Hazard Insurance Policy or
Primary Credit Insurance Policy.
"Insurance Proceeds" are all proceeds of any Primary Credit Insurance
Policy, any FHA Insurance, any VA Guarantee, any Bankruptcy Bond and any Pool
Insurance Policy, minus proceeds that represent reimbursement of the master
servicer's costs and expenses incurred in connection with presenting claims
under the related insurance policies.
"Land Contracts" are Manufactured Housing Contracts that are secured
by mortgages on the related mortgaged property.
"Liquidation Proceeds" are cash proceeds received by foreclosure,
eminent domain, condemnation or otherwise, excluding any proceeds from any
insurance policies along with the net proceeds on a monthly basis with respect
to any properties acquired for the benefit of the security holders by deed in
lieu of foreclosure or repossession.
"Loan-to-Value Ratio" is the ratio at a given time, 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.
"Lockout Period" is a period after the origination of certain
residential loans during which prepayments are entirely prohibited or require
payment of a prepayment penalty if a prepayment in full or in part occurs.
"Manufactured Housing Contracts" are manufactured housing conditional
sales contracts and installment loan agreements which may be secured by a lien
on:
(1) new or used manufactured homes;
(2) the real property and any improvements on the real property which
may include the related manufactured home if deemed to be part of the real
property under applicable state law; or
(3) in certain cases, a new or used manufactured home which is not
deemed to be a part of the related real property under applicable state law.
"Multifamily Loans" are mortgage loans secured by first or junior
liens on multifamily residential properties consisting of five or more dwelling
units.
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"Net Interest Rate" with respect to any residential loan is the rate
specified in the related prospectus supplement which is generally the interest
rate on the residential loan minus the sum of the fee rate payable to the
servicer and the trustee and Retained Interest Rate with respect to any mortgage
loan.
"Non-Pro Rata Security" is a Regular Security on which principal is
distributed in a single installment or by lots of specified principal amounts if
requested by a holder of securities or by random lot.
"OID Regulations" are sections 1271-1273 and 1275 of the Code and the
Treasury regulations issued under those sections that set forth the rules
governing original issue discount.
"Participants" are participating organizations through which a
Security Owner can hold its book-entry security.
"Partnership Securities" are securities which represent interests in a
Partnership Trust Fund.
"Partnership Trust Fund" is a trust fund which is treated as a
partnership or, if owned by a single beneficial owner, ignored for federal
income tax purposes.
"Plans" are retirement plans and other employee benefit plans and
arrangements, including for this purpose individual retirement accounts and
annuities and Keogh plans, which are subject to ERISA or Section 4975 of the
Code, and bank collective investment funds and insurance company general and
separate accounts holding assets of such plans, accounts or arrangements.
"Pool Insurance Policy" is an insurance policy, which provides
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, subject to any limitations specified in the related prospectus
supplement.
"Prepayment Assumption" is the assumed rate of prepayment of the
mortgage loans as set forth in the related prospectus supplement.
"Prepayment Period" is a period that may be particularly specified in
the related prospectus supplement which may commence on:
(1) the first day of the preceding calendar month with respect to
securities that have monthly distribution dates, or
(2) the first day of the month in which the immediately preceding
distribution date occurred with respect to securities with distribution dates
that occur less frequently than monthly, or the first day of the month in which
the Cut-Off Date occurred with respect to the first Prepayment Period;
and will end in both cases on the last day of the preceding calendar month.
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"Primary Credit Insurance Policy" is an insurance policy which covers
losses on residential loans up to an amount equal to the excess of the
outstanding principal balance of a defaulted residential loan, plus accrued and
unpaid interest on the related defaulted residential loan and designated
approved expenses, over a specified percentage of the Collateral Value of the
related residential property.
"Primary Hazard Insurance Policy" is an insurance policy which
provides coverage on residential loans of the standard form of fire and hazard
insurance policy with extended coverage customary in the state in which the
residential property is located.
"PTCE" is the Prohibited Transaction Class Exemption.
"Qualified Insurer" is a private mortgage guaranty insurance company
duly qualified under applicable laws and approved as an insurer by FHLMC, FNMA,
or any successor entity, which has a claims-paying ability acceptable to the
rating agency or agencies.
"Realized Loss" is the amount of loss realized on a defaulted
residential loan that is finally liquidated. This amount generally equals 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 residential loans for which the principal
balances were reduced in connection with bankruptcy proceedings, the amount of
that reduction.
"Refinance Loan" 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.
"Regular Securities" are securities which constitute one or more
classes of regular interests with respect to each REMIC Pool.
"Regular Securityholder" is a holder of a Regular Security.
"Relief Act" is the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended.
"REMIC Pool" is an entity or portion of an entity as to which a REMIC
election will be made.
"REMIC Provisions" are Sections 860A through 860G of the Code.
"REMIC Regulations" are the REMIC Provisions and the Treasury
regulations issued under the REMIC provisions.
"REMIC Securities" are securities which represent interests in a trust
fund, or a portion of a trust fund, that the trustee will elect to have treated
as a REMIC under the REMIC Provisions of the Code.
"Reserve Fund" is an account which includes a combination of specified
amounts of cash, a combination of one or more irrevocable letters of credit, or
one or more United States government securities and other high quality
investments, or any other instrument satisfactory to the rating agency or
agencies, which will be applied and maintained in the manner and under the
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conditions specified in the prospectus supplement. In addition or in
alternative, an account 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.
"Residual Securities" are Securities which constitute one or more
classes of residual interests with respect to each REMIC Pool.
"Restricted Group" consist of any underwriter, the depositor, the
trustee, the master servicer, any subservicer, the obligor on credit support and
any borrower with respect to assets of the trust fund constituting more than 5%
of the aggregate unamortized principal balance of the assets of the trust fund
as of the date of initial issuance of the certificates.
"Retained Interest" are interest payments relating to residential
loans, including any mortgage securities, or agency securities included in the
trust fund which are retained by the depositor, any of its affiliates or its
predecessor in interest.
"Retained Interest Rate" is the rate at which interest payments
relating to residential loans, including any mortgage securities or agency
securities retained by the Depositor, any of it affiliates or its predecessor in
interest, are calculated.
"SBJPA of 1996" is the Small Business Job Protection Act of 1996.
"Security Owner" is a person who has beneficial ownership interests in
a security.
"Security Register" is a record where exchanges or transfers of
securities are registered by the Security Registrar.
"Security Registrar" is one who registers exchanges or transfers of
securities in the Security Register.
"SMMEA" is the Secondary Mortgage Market Enhancement Act of 1984, as
amended.
"Startup Day" is the date the REMIC securities are issued.
"Stripped Agency Securities" are GNMA Certificates, FNMA Certificates
or FHLMC Certificates issued in the form of certificates which represent:
(1) undivided interests in all or part of either the principal
distributions, but not the interest distributions, or the interest
distributions, but not the principal distributions, of the certificates; or
(2) interests in some specified portion of the principal or interest
distributions, but not all distributions, on an underlying pool of mortgage
loans or other GNMA Certificates, FNMA Certificates or FHLMC Certificates.
"Title V" is Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980, enacted in March 1980.
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"Trust Accounts" are one or more accounts included in each trust fund
established and maintained on behalf of the holders of securities into which the
master servicer or the trustee will be required to, deposit all payments and
collections received or advanced with respect to assets of the related trust
fund. A Trust Account may be maintained as an interest bearing or a non-interest
bearing account, or funds held in the Trust Account may be invested in certain
short-term high-quality obligations
"Unaffiliated Sellers" are sellers of residential loans to the
depositor that are not affiliated with the depositor.
"U.S. Person" is
(1) A citizen or resident of the United States,
(2) a corporation or partnership or other entity created or organized
in or under the laws of the United States, any State of the United States or the
District of Columbia, unless, in the case of a partnership, Treasury regulations
are adopted that provide otherwise, including any entity treated as a
corporation or partnership for federal income tax purposes,
(3) an estate that is subject to U.S. federal income tax regardless of
the source of its income, or
(4) a trust if a court within the United States is able to exercise
primary supervision over the administration of that trust, and one or more U.S.
Persons have the authority to control all substantial decisions of that 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.
"VA Guarantee" is a guarantee of residential loans by the VA under the
Serviceman's Readjustment of 1944, as amended.
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YOU SHOULD RELY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS SUPPLEMENT AND THE ATTACHED PROSPECTUS. WE HAVE NOT AUTHORIZED
ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THESE CERTIFICATES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED.
TABLE OF CONTENTS
Prospectus Supplement
Page
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Summary.............................................S-5
Risk Factors.......................................S-11
Forward-Looking Statements.........................S-15
Defined Terms......................................S-16
Description of the Loans...........................S-16
Underwriting Guidelines............................S-23
The Servicer.......................................S-29
Description of the Offered Certificates............S-31
Prepayment and Yield Considerations................S-46
The Pooling and Servicing Agreement................S-57
Certain Federal Income Tax Consequences............S-70
State Taxes........................................S-71
ERISA Considerations...............................S-72
Legal Investment...................................S-75
Use of Proceeds....................................S-75
Underwriting.......................................S-76
Ratings............................................S-77
Legal Matters......................................S-78
GLOSSARY OF TERMS..................................S-79
PROSPECTUS
Page
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Summary of Terms......................................6
Risk Factors.........................................17
Defined Terms........................................27
The Trust Funds......................................27
Use of Proceeds......................................43
Yield Considerations.................................43
Maturity and Prepayment Considerations...............45
The Depositor........................................48
Residential Loans....................................49
Description of the Securities........................51
Description of Primary Insurance Coverage............85
Description of Credit Support........................91
Certain Legal Aspects of Residential Loans...........99
Federal Income Tax Consequences.....................123
State and Other Tax Consequences....................170
ERISA Considerations................................170
Legal Investment....................................175
Plans of Distribution...............................177
Incorporation of Certain Information by Reference...179
Legal Matters.......................................180
Financial Information...............................180
Rating..............................................180
Glossary of Terms...................................182
DEALERS WILL BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS OF THESE CERTIFICATES AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS. IN ADDITION, ALL DEALERS SELLING THESE CERTIFICATES
WILL DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS UNTIL OCTOBER 20, 2000.
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$168,829,357 (APPROXIMATE)
PaineWebber Mortgage Acceptance Corporation IV
(Depositor)
Provident Funding Associates, L.P.
(Originator and Servicer)
Mortgage Pass-Through Certificates,
Series 2000-1
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PROSPECTUS SUPPLEMENT
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PaineWebber Incorporated
JULY 21, 2000
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