PROSPECTUS SUPPLEMENT DATED MAY 22, 2000
(TO PROSPECTUS DATED MAY 22, 2000)
$200,980,445
(APPROXIMATE)
PAINEWEBBER MORTGAGE ACCEPTANCE CORPORATION IV
(DEPOSITOR)
LITTON LOAN SERVICING LP
(SERVICER)
HOME EQUITY ASSET BACKED CERTIFICATES, SERIES 2000-HE-1
The Home Equity Asset Backed Certificates, Series 2000-HE-1 will be issued in
11 classes. Only the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5,
Class M-1, Class M-2 and Class B 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 or second mortgages or deeds of trust on residential one- to
four-family properties.
o Credit enhancement will be provided by:
o the initial overcollateralization and the availability, if any, of excess
interest to be applied as distributions of principal to the certificates
to maintain the required level of overcollateralization as described in
this prospectus supplement; and
o with respect to the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5,
Class M-1 and Class M-2 certificates, the subordination of the subordinate
certificates in respect of the right to receive interest and principal.
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YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-12 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.
You should 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 M-1, Class M-2 and Class B
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 $201,458,575, before deducting
expenses, estimated at $415,000. See "Underwriting" in this prospectus
supplement.
The underwriter expects to deliver the Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5, Class M-1, Class M-2 and Class B certificates to purchasers on
or about May 25, 2000 in book-entry form through the facilities of The
Depository Trust Company, Clearstream Banking, societe anonyme and The Euroclear
System.
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 May 22, 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 May 1, 2000, except
where otherwise noted.
S-2
<PAGE>
TABLE OF CONTENTS
PAGE
----
Summary..............................................................S-5
Risk Factors........................................................S-12
Nature of Sub-prime Mortgage Loans May Increase Risk of Loss.....S-12
Violations of Federal and State Laws May Adversely
Affect Ability to Collect on Loans............................S-12
Credit Enhancement May Not Be Adequate...........................S-13
Inadequacy of Value of Properties Could Affect
Severity of Losses............................................S-14
Bankruptcy of Borrowers May Adversely Affect Distributions
on Certificates...............................................S-14
Geographic Concentration Could Increase Losses on the Loans......S-14
There are Risks Involving Unpredictability of Prepayments and
the Effect of Prepayments on Yields...........................S-15
Originators May Not Be Able to Repurchase or Replace Defective
Loans.........................................................S-15
Subordinate Mortgages May Provide Insufficient Security for the
Loans.........................................................S-16
There is a Risk That Mortgage Interest Rates Will Affect
the Offered Certificates......................................S-16
There Are Risks in Holding Subordinate Certificates..............S-17
Limited Liquidity May Adversely Affect Market Value of
Certificates..................................................S-18
Failure of Servicer to Perform May Adversely Affect
Distributions on Certificates.................................S-18
Forward-Looking Statements..........................................S-18
Defined Terms.......................................................S-19
Description of the Loans............................................S-19
General..........................................................S-19
Statistical Information..........................................S-20
Underwriting Guidelines.............................................S-25
New Century......................................................S-25
BNC..............................................................S-27
The Servicer........................................................S-28
Prepayment and Yield Considerations.................................S-30
General..........................................................S-30
Modeling Assumptions.............................................S-33
Description of the Offered Certificates.............................S-43
General..........................................................S-43
Book-Entry Certificates..........................................S-44
Allocation of Available Funds....................................S-47
Interest Distributions...........................................S-48
Pass-Through Rates...............................................S-49
Calculation of LIBOR.............................................S-51
Principal Distributions..........................................S-51
Allocation of Losses.............................................S-53
Application of Monthly Excess Cashflow Amounts...................S-53
Report to Certificateholders.....................................S-55
The Pooling and Servicing Agreement.................................S-57
General..........................................................S-57
Assignment of the Loans..........................................S-58
The Servicer.....................................................S-60
Payments on Loans; Deposits to Collection Account
and Distribution Account......................................S-60
Collection and Other Servicing Procedures; Loan Modifications....S-61
Advances.........................................................S-63
Servicing Fees and Other Compensation and Payment of Expenses....S-64
Realization on or Sale of Defaulted Loans........................S-64
Enforcement of Due-on-Sale Clauses...............................S-66
Maintenance of Insurance Policies and Errors and
S-3
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Omissions and Fidelity Coverage..............................S-67
Servicer Reports.................................................S-68
Pledge and Assignment of Servicer's Rights.......................S-69
Resignation of Servicer..........................................S-69
Events of Servicing Termination..................................S-70
Rights upon Event of Servicing Termination.......................S-71
Termination......................................................S-71
Optional Purchase of Defaulted Loans.............................S-71
Voting Rights....................................................S-72
Amendment........................................................S-72
The Trustee......................................................S-73
Certain Federal Income Tax Consequences.............................S-73
General..........................................................S-73
Taxation of Regular Interests....................................S-74
Taxation of the Basis Risk Arrangement...........................S-75
REMIC Taxes and Reporting........................................S-76
State Taxes.........................................................S-77
ERISA Considerations................................................S-77
Legal Investment....................................................S-80
Use of Proceeds.....................................................S-80
Underwriting........................................................S-81
Ratings.............................................................S-82
Legal Matters.......................................................S-82
Glossary of Terms...................................................S-83
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, Litton Loan Servicing
LP, as servicer, and NC Capital Corporation and
BNC Mortgage Inc., each as originators.
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.
Servicer................. Litton Loan Servicing LP, a Delaware limited
partnership. The servicer's address is 5373 W.
Alabama, Houston, Texas 77056, telephone number
(800) 888-9646. See "The Servicer" 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, telephone
number (212) 946-3200. See "The Trustee" in this
prospectus supplement.
Custodian................ U.S. Bank National Association, a national banking
association. The trustee's address is 180 East
Fifth Street, St. Paul, Minnesota 55101, telephone
number (800) 934-6802.
Originators.............. BNC Mortgage Inc., a Delaware corporation, and NC
Capital Corporation, a California corporation.
RELEVANT DATES
Cut-Off Date............. May 1, 2000.
Closing Date............. On or about May 25, 2000.
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Distribution Date........ The 25th day of each month or, if that day is not
a business day, the next business day, commencing
in June 2000.
Determination Date....... The 10th calendar day of each month or, if that
day is not a business day, then the immediately
preceding business day.
Collection Period........ With respect to any distribution date, the period
from the second day of the month preceding the
month in which the distribution date occurs
through the first day of the month in which the
distribution date occurs.
Interest Accrual Period.. For the offered certificates, other than the Class
A-1 certificates, the calendar month immediately
prior to the month in which the relevant
distribution date occurs. For the Class A-1
certificates, the period beginning on the prior
distribution date, or on the closing date in the
case of the first distribution date, and ending on
the day prior to the relevant distribution date.
OFFERED CERTIFICATES......... We are offering the Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5, Class M-1, Class M-2
and Class B certificates. 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 $86,000,000
o Class A-2 $42,857,815
o Class A-3 $17,000,000
o Class A-4 $10,000,000
o Class A-5 $21,021,742
o Class M-1 $10,478,647
o Class M-2 $ 7,335,053
o Class B $ 6,287,188
The certificates will consist of a total of 11
classes. The Class BB, Class X and Class R
certificates are not being offered through this
prospectus supplement and the accompanying
prospectus.
Interest Distributions...... On each distribution date, interest accrued during
the preceding interest accrual period will be due
on the offered
S-6
<PAGE>
certificates. The offered certificates will accrue
interest for each accrual period on their unpaid
principal balance.
The offered certificates will bear interest at the
following rates per annum:
CLASS PASS-THROUGH RATE
----- -----------------
A-1 one-month LIBOR + 0.15%, or
commencing on the first day of
the interest accrual period in
which the optional termination
date occurs, one-month LIBOR +
0.30%
A-2 8.270%
A-3 8.580%
A-4 8.870%
A-5 8.320%
M-1 8.830%
M-2 9.270%
B 9.500%
Commencing on the first day of the interest
accrual period in which the optional termination
date occurs, the interest rate on the offered
certificates, other than the Class A-1
certificates, will increase by 0.50% per annum.
The interest rates on the Class A-1, Class A-3,
Class A-4, Class A-5, Class M-1, Class M-2 and
Class B certificates will be subject to an
interest rate cap. The interest rate cap is
described in "Description of the Offered
Certificates -- Pass-Through Rates" in this
prospectus supplement.
Interest on the Class A-1 certificates will be
calculated on the basis of the actual number of
days elapsed in the accrual period and a 360-day
year. Interest on the Class A-2, Class A-3, Class
A-4, Class A-5, Class M-1, Class M-2 and Class B
certificates will be calculated on the basis of a
360-day year consisting of twelve 30-day months.
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 due distributions
of principal. See "Description of the Offered
Certificates -- Principal Distributions" in this
prospectus supplement for a detailed
S-7
<PAGE>
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 or second
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 an approximate
aggregate unpaid principal balance of
$210,257,198, subject to a variance of plus or
minus 5%.
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 May 1, 2000.
See "Description of the Loans" in the prospectus
supplement.
Loan Interest Rate....... The loan interest rate of each loan is the per
annum interest rate which the borrower is required
to pay under the terms of the related loan. The
loan interest rate borne by each loan is fixed as
of the date of origination of the loan. As of May
1, 2000, the weighted average loan interest rate
for the loans was approximately 10.103%.
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
"Description of the Offered Certificates --
Termination" in this prospectus supplement.
S-8
<PAGE>
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. This
transaction employs the following forms of credit
enhancement. See "Description of the Offered
Certificates" in this prospectus supplement.
Excess Interest. Because more interest is expected
to be paid by the mortgagors than is necessary to
pay the interest earned on the offered
certificates, we expect there to be excess
interest each month. Any excess interest will be
used to maintain overcollateralization, to pay
interest that was previously earned but not paid
to the offered certificates, and to reimburse the
offered certificates for losses and certain
shortfalls that they experienced previously.
Overcollateralization. On the closing date the
total principal balance of the loans is expected
to be approximately 4.10% greater than the total
principal balance of the certificates. This
overcollateralization will absorb losses on the
loans before such losses affect the certificates.
If the level of overcollateralization falls below
what is required under the pooling and servicing
agreement, any excess interest will be paid to the
offered certificates as principal. This will have
the effect of reducing the principal balance of
the certificates faster than the principal balance
of the loans so that the required level of
overcollateralization is reached.
Subordination. 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.
Application of Realized Losses. If, on any
distribution date after the balances of the
offered certificates have been reduced by the
amount of distributions on that date, the total
principal balance of the offered certificates is
greater than the total principal balance of the
loans, the principal balance of the offered
certificates that are lowest in order of payment
priority will be reduced by the amount of the
excess.
S-9
<PAGE>
REGISTRATION AND
DENOMINATIONS OF THE
CERTIFICATES................. The offered certificates initially will be issued
in book-entry form, in minimum denominations of
$25,000 and integral multiples of $1 in excess of
that amount. However, one certificate of each
class may be issued in any denomination as may be
necessary to represent the remainder of the
aggregate principal amount of certificates of that
class. The offered certificates are expected to be
issued as book-entry certificates. No person
acquiring an interest in the book-entry
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, in the United States,
or Clearstream Banking, societe anonyme or the
Euroclear System, in Europe. Transfers within DTC,
Clearstream Banking or Euroclear, as the case may
be, will be in accordance with the usual rules and
operating procedures of the relevant system. See
"Description of the Offered Certificates --
General" in this prospectus supplement.
LAST SCHEDULED
DISTRIBUTION DATE............ February 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, exclusive of the arrangement intended to
protect against basis risk for the Class A-1
certificates, as comprised of two or more real
estate mortgage investment conduits 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.
S-10
<PAGE>
LEGAL INVESTMENT............. The offered certificates will not constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984,
as amended. See "Legal Investment" in this
prospectus supplement.
CERTIFICATE RATINGS.......... On the closing date, the offered certificates must
have the following ratings by each of Moody's
Investors Service, Inc. and Standard & Poor's
Ratings Services:
CLASS MOODY'S S&P
----- ------- ---
A-1 Aaa AAA
A-2 Aaa AAA
A-3 Aaa AAA
A-4 Aaa AAA
A-5 Aaa AAA
M-1 Aa2 AA
M-2 A2 A
B Baa2 BBB
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
discussion of the primary factors on which the
ratings are based.
S-11
<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.
NATURE OF SUB-PRIME MORTGAGE LOANS MAY INCREASE RISK OF LOSS
The underwriting standards used to originate the loans to be included in
the trust do not conform to the underwriting guidelines of Fannie Mae or Freddie
Mac. In comparison to first lien mortgage loans that conform to the underwriting
guidelines of Fannie Mae or Freddie Mac, the loans have generally been
underwritten or reunderwritten with more lenient underwriting criteria. For
example, the loans may have been made to borrowers with:
o imperfect credit histories, ranging from minor delinquencies to
bankruptcies, or
o higher ratios of monthly mortgage payments to income or higher ratios
of total monthly credit payments to income.
Accordingly, the loans will likely experience higher, and possibly
substantially higher, rates of delinquencies, defaults and losses than the rates
experienced by loans underwritten according to Fannie Mae or Freddie Mac
guidelines. As a result, the risk that you will suffer losses could increase.
Furthermore, changes in the values of the properties may have a greater effect
on the delinquency, foreclosure, bankruptcy and loss experience of the loans
than on mortgage loans originated according to Fannie Mae or Freddie Mac
guidelines. 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. See "-- Credit Enhancement May Not Be Adequate" below, and
"Underwriting Guidelines" in this prospectus supplement.
VIOLATIONS OF FEDERAL AND STATE LAWS MAY ADVERSELY AFFECT ABILITY TO COLLECT
ON LOANS
Federal and state laws regulate the underwriting, origination, servicing
and collection of the loans. These laws have changed over time and have become
more restrictive or stringent with respect to specific activities of the
servicer and the originators. Actual or alleged violations of these Federal and
state laws may, among other things:
o limit the ability of the servicer to collect principal or interest on
the loans,
o provide the borrowers with a right to rescind the loans,
o entitle the borrowers to refunds of amounts previously paid or to
set-off those amounts against their loan obligations,
o result in a litigation proceeding being brought against the trust, and
S-12
<PAGE>
o subject the trust to liability for expenses, penalties and damages
resulting from the violations.
As a result, these violations or alleged violations could result in
shortfalls in the distributions due on your certificates. See "Risk Factors --
Violations of Federal and State Laws May Adversely Affect Ability to Collect on
Loans" and "Certain Legal Aspects of Residential Loans -- Consumer Protection
Laws" in the accompanying prospectus.
The originators will make representations and warranties with respect to
each loan relating to compliance with Federal and state laws at the time of
origination. The originators will be required to repurchase any loan for any
breaches of those representations and warranties and indemnify the trust for any
expenses incurred in connection with the breach. See "-- Originators May Not Be
Able to Repurchase or Replace Defective Loans" below.
CREDIT ENHANCEMENT MAY NOT BE ADEQUATE
Loan Delinquencies, Defaults and Losses. Delinquencies, if not advanced by
the servicer, defaults and losses on the loans will reduce the credit
enhancement available from the overcollateralization feature. If amounts
available from this credit enhancement are not adequate to protect against the
delinquencies, defaults and losses experienced on the loans, then delays or
shortfalls in payments of interest or principal due on the certificates will
occur.
Availability of Excess Interest for Overcollateralization. The loans are
expected to generate more interest than is needed to pay interest on the offered
certificates since the net weighted average interest rate on the loans is
expected to be higher than the weighted average pass-through rate on the offered
certificates. If the loans generate more interest than is needed to pay interest
on the offered certificates and certain expenses of the trust, the remaining
interest will be used to compensate for losses and delinquencies experienced by
the loans. After these financial obligations of the trust have been satisfied, a
certain portion of the available excess interest will be used to create and
maintain overcollateralization. We cannot assure you, however, that enough
excess interest will be generated to:
o compensate for interest losses or shortfalls in payments on the loans or
o maintain the required level of overcollateralization.
The excess interest available on any distribution date will be affected by
the following factors:
o Every time a loan is prepaid in full, excess interest will be reduced
because the loan will no longer be outstanding and generating interest
or, in the case of a partial prepayment, will be generating less
interest.
o Every time a loan is liquidated, excess interest will be reduced
because the loan will no longer be outstanding and generating interest.
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<PAGE>
o If the rates of delinquencies, defaults or losses on the loans are
higher than expected, excess interest will be reduced by the amount
necessary to compensate for any shortfalls in cash available on such
date to pay certificateholders.
o The pass-through rate of the Class A-1 certificates is based on
one-month LIBOR and therefore, any increase of one-month LIBOR will
have an effect on the amount of excess interest available.
Investors in the Class A certificates should realize that, under extreme
loss or delinquency scenarios, they may receive no distributions of principal.
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" and "-- Violations of
Federal and State Laws May Adversely Affect Ability to Collect on Loans" above.
GEOGRAPHIC CONCENTRATION COULD INCREASE LOSSES ON THE LOANS
Mortgaged properties located in California, Texas and Florida secure
approximately 30.19%, 8.90% and 7.41%, 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 hurricanes, 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
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be the case if the mortgaged properties were more geographically diversified.
See "Description of the Loans" in this prospectus supplement.
There are Risks Involving Unpredictability of Prepayments and the Effect of
Prepayments on Yields
Mortgagors may prepay their loans in whole or in part at any time. We
cannot predict the rate at which mortgagors 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, then your yield may be lower than you
anticipate.
o If you purchase your certificates at a premium and principal is repaid
faster than you anticipate, then your yield may be lower than you
anticipate.
o The rate of prepayments on the 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 Approximately 77.27% of the loans, by aggregate principal balance as of
the cut-off date, require the mortgagor to pay a penalty if the
mortgagor prepays the loan during certain periods after the loan was
originated. A prepayment penalty may discourage a mortgagor from
prepaying the loan during the applicable period. Prepayment
penalties will not be distributed to holders of the offered
certificates and will not be available as credit enhancement for the
offered certificates.
o The originators 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.
o The overcollateralization provisions are intended to result in an
accelerated rate of principal distributions to holders of the offered
certificates.
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.
ORIGINATORS MAY NOT BE ABLE TO REPURCHASE OR REPLACE DEFECTIVE LOANS.
NC Capital Corporation and BNC Mortgage Inc., the originators of the
loans, will make various representations and warranties related to the loans.
Those representations are
S-15
<PAGE>
summarized in "The Pooling and Servicing Agreement -- Assignment of the Loans"
in this prospectus supplement.
If NC Capital Corporation or BNC Mortgage Inc. fails to cure a material
breach of its representations and warranties with respect to any loan in a
timely manner, then that originator 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 NC Capital
Corporation or BNC Mortgage Inc. may not be capable of repurchasing or replacing
any defective loans, for financial or other reasons. Those companies are highly
leveraged specialty finance companies. Each of them 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, their financial condition would be
adversely affected, which would adversely affect their ability to repurchase or
replace defective loans. The inability of NC Capital Corporation or BNC Mortgage
Inc. 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.
SUBORDINATE MORTGAGES MAY PROVIDE INSUFFICIENT SECURITY FOR THE LOANS
Approximately 5.85% of the loans, by principal balance as of the cut-off
date, evidence a lien that is subordinate to the rights of the mortgagee under a
senior mortgage. The proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the outstanding principal balance of
these junior loans only to the extent that the claims of the related senior
mortgages have been satisfied in full, including any foreclosure costs. In
circumstances where the servicer determines that it would be uneconomical to
foreclose on the related property, the servicer may write off the entire
outstanding principal balance of the related loan as bad debt. The foregoing
considerations will be particularly applicable to junior loans that have high
combined loan-to-value ratios because in those cases, the servicer is more
likely to determine that foreclosure would be uneconomical. You should consider
the risk that to the extent losses on loans are not covered by available credit
enhancement, you will bear the losses.
THERE IS A RISK THAT MORTGAGE INTEREST RATES WILL AFFECT THE OFFERED
CERTIFICATES
The Class A-1 certificates will accrue interest at a pass-through rate
based on one-month LIBOR plus a specified margin, but are subject to a cap. The
cap on interest distributable to the Class A-1 certificates will be a rate based
on interest accrued on the principal balance of the loans, net of the servicing
fee and trustee fee, expressed as a percentage of the certificate principal
balance of the offered certificates. However, in no event will interest accrue
on the Class A-1 certificates at a rate greater than 11.00% per annum. The
offered certificates, other than the Class A-1 certificates, will accrue
interest at a fixed pass-through rate, and, except for the Class A-2
certificates, are also subject to a cap equal to a rate based on interest
accrued on the principal balance of the loans, net of the servicing fee and
trustee fee, expressed as a percentage of the certificate principal balance of
the offered certificates.
S-16
<PAGE>
The pass-through rate on the Class A-1 certificates adjusts monthly while
the mortgage interest rates on the loans are fixed. Consequently, the operation
of the interest rate cap may limit increases in the pass-through rate for
extended periods in a rising interest rate environment.
To the extent the pass-through rate on the Class A-1 certificates is
capped at the rate based on interest accrued on the loans, the holders of the
Class A-1 certificates will be entitled to receive any carryover amount from and
to the limited extent of funds available for such payments. However, there is no
assurance that those funds will be available or sufficient to pay such carryover
amount. The Class A-1 certificates will not be entitled to any carryover amounts
if the Pass-Through Rate is capped at 11.00% per annum.
If the accrual of interest on the offered certificates other than the
Class A-1 certificates is limited by the operation of the interest rate cap,
holders of those certificates will not be entitled to receive any carryover
amount and their yield would be adversely affected.
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 mortgagor, there may be a shortfall in distributions on the
certificates which will impact the subordinate certificates.
o The subordinate certificates are not expected to receive principal
distributions until, at the earliest, June, 2003.
o Losses resulting from the liquidation of defaulted loans will first
reduce the level of overcollateralization, if any, for the
certificates. If there is no overcollateralization, losses 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.
S-17
<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-1, Class M-2 and Class B certificates are subordinated
to the Class A 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-1, Class M-2 and Class B certificates by a plan investor may
constitute a non-exempt prohibited transaction or result in the imposition of
excise taxes or civil penalties. Accordingly, the Class M-1, Class M-2 and Class
B 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.
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" 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.
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 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:
(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.
S-18
<PAGE>
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-83 in this
prospectus supplement. We define capitalized terms we use in the accompanying
prospectus under the caption "Glossary of Terms" beginning on page 183 in the
prospectus.
DESCRIPTION OF THE LOANS
GENERAL
On or about May 25, 2000, PaineWebber Mortgage Acceptance Corporation IV,
the depositor, will acquire from Paine Webber Real Estate Securities Inc. a pool
of Loans, having an aggregate unpaid principal balance as of the Cut-Off Date of
approximately $210,257,198. The depositor will then transfer the Loans to the
trust pursuant to the Pooling and Servicing Agreement. The trust will be
entitled to all payments of principal and interest in respect of the Loans after
May 1, 2000, the Cut-Off Date.
Unless otherwise stated, the statistical information presented in this
prospectus supplement relates to the Loans as of May 1, 2000.
As of the close of business on April 30, 2000, 31 Loans, representing
approximately 1.18% of the Cut-Off Date Pool Balance, are 30-59 days past due.
In addition, 11 Loans, representing approximately 0.44% of the Cut-Off Date Pool
Balance are 60-89 days past due. As of the closing date, no Loan will be 90 days
or more past due.
The Loans are evidenced by Mortgage Notes, secured by mortgages or deeds
of trust on the Mortgaged Properties of which approximately 5.85%, by Cut-Off
Date Pool Balance, are second lien mortgages.
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 $80,682. As of the Cut-Off Date, the weighted average loan
interest rate of the Loans was approximately 10.103% per annum. As of the
Cut-Off Date, the weighted average CLTV of the Loans was approximately 75.23%.
As of the Cut-Off Date, the weighted average remaining term to maturity of the
Loans was approximately 321 months and the latest scheduled maturity date of any
Loan is January 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.
As of the Cut-Off Date, all of the Loans were secured by first or second
liens on Mortgaged Properties. Based on information supplied by the borrowers in
connection with their loan applications at origination, properties securing
approximately 91.15% of the Loans by Cut-Off Date Pool Balance, will be owner
occupied primary residences. Properties securing approximately 8.85% of the
Loans by Cut-Off Date Pool Balance will be non-owner occupied or second homes.
S-19
<PAGE>
Approximately 77.27% of the Loans by Cut-Off Date Pool Balance provide for
penalties if full or partial prepayment occurs during a period up to five years
after origination thereof. Each of the Loans is subject to a due-on-sale clause.
See "Certain Legal Aspects of Residential Loans" in the prospectus.
Except for approximately 0.14% of the Loans by Cut-Off Date Pool Balance,
the scheduled monthly payment on each Loan includes interest plus an amount that
will amortize the outstanding principal balance of the Loan over its remaining
term.
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 principal balance of the Loans as of
the Cut-Off Date. As a result, the statistical information presented below
regarding the characteristics of the Loans identified 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.
PRINCIPAL BALANCES
% OF
AGGREGATE CUT-OFF
NUMBER PRINCIPAL DATE POOL
RANGE OF PRINCIPAL BALANCES OF LOANS BALANCE BALANCE
- --------------------------- -------- --------- ---------
$ 0.01 - $ 25,000.00............ 156 $ 3,559,070 1.69%
$ 25,000.01 - $ 50,000.00............ 799 29,967,606 14.25
$ 50,000.01 - $ 75,000.00............ 591 36,423,884 17.32
$ 75,000.01 - $100,000.00............ 390 33,882,970 16.12
$100,000.01 - $125,000.00............ 245 27,409,389 13.04
$125,000.01 - $150,000.00............ 155 21,219,851 10.09
$150,000.01 - $175,000.00............ 100 16,122,857 7.67
$175,000.01 - $200,000.00............ 51 9,581,836 4.56
$200,000.01 - $225,000.00............ 39 8,334,622 3.96
$225,000.01 - $250,000.00............ 25 5,925,189 2.82
$250,000.01 or greater................ 55 17,829,925 8.48
----- ------------ -------
Total............................... 2,606 $210,257,198 100.00%
===== ============ =======
- ----------
As of the Cut-Off Date, the average unpaid principal balance of the Loans,
by Cut-Off Date Pool Balance, was approximately $80,682.
S-20
<PAGE>
LIEN PRIORITY
% OF
AGGREGATE CUT-OFF
NUMBER PRINCIPAL DATE POOL
LIEN PRIORITY OF LOANS BALANCE BALANCE
- ------------- -------- --------- ---------
First Lien............................ 2,302 $197,950,293 94.15%
304 12,306,905 5.85
Second Lien........................... ----- ------------ -------
Total............................... 2,606 $210,257,198 100.00%
===== ============ =======
LOAN INTEREST RATES
% OF
AGGREGATE CUT-OFF
NUMBER PRINCIPAL DATE POOL
RANGE OF LOAN INTEREST RATES OF LOANS BALANCE BALANCE
- ---------------------------- -------- --------- ---------
8.001% - 8.500%...................... 137 $17,264,199 8.21%
8.501% - 9.000%...................... 319 34,380,241 16.35
9.001% - 9.500%...................... 304 30,568,465 14.54
9.501% -10.000%...................... 480 45,522,500 21.65
10.001% -10.500%...................... 238 18,272,457 8.69
10.501% -11.000%...................... 329 23,193,472 11.03
11.001% -11.500%...................... 196 12,318,564 5.86
11.501% -12.000%...................... 186 9,753,258 4.64
12.001% -12.500%...................... 107 5,323,732 2.53
12.501% -13.000%...................... 131 6,307,107 3.00
13.001% -13.500%...................... 78 3,347,090 1.59
13.501% -14.000%...................... 61 2,492,793 1.19
14.001% -14.500%...................... 26 870,585 0.41
14.501% -15.000%...................... 10 515,100 0.24
15.001% -15.500%...................... 3 88,312 0.04
17.501% -18.000%...................... 1 39,325 0.02
----- ------------ -------
Total............................... 2,606 $210,257,198 100.00%
===== ============ =======
- ----------
As of the Cut-Off Date, the weighted average interest rate of the Loans,
by Cut-Off Date Pool Balance, was approximately 10.103% per annum.
S-21
<PAGE>
PROPERTY TYPES
% OF
AGGREGATE CUT-OFF
NUMBER PRINCIPAL DATE POOL
PROPERTY TYPE OF LOANS BALANCE BALANCE
- ------------- -------- --------- ---------
Single Family......................... 2,244 $177,496,908 84.42%
Two to Four Family.................... 121 12,994,190 6.18
Planned Unit Development.............. 92 9,395,719 4.47
Condominium........................... 94 7,278,627 3.46
Manufactured Housing.................. 55 3,091,753 1.47
----- ------------ -------
Total............................... 2,606 $210,257,198 100.00%
===== ============ =======
COMBINED LOAN-TO-VALUE RATIOS
% OF
AGGREGATE CUT-OFF
NUMBER PRINCIPAL DATE POOL
RANGE OF COMBINED LOAN-TO-VALUE RATIO OF LOANS BALANCE BALANCE
- ------------------------------------- -------- --------- ---------
5.001% - 10.000%..................... 1 $ 34,889 0.02%
15.001% - 20.000%..................... 9 339,390 0.16
20.001% - 25.000%..................... 14 654,871 0.31
25.001% - 30.000%..................... 20 766,931 0.36
30.001% - 35.000%..................... 26 1,445,580 0.69
35.001% - 40.000%..................... 41 2,156,342 1.03
40.001% - 45.000%..................... 52 3,302,989 1.57
45.001% - 50.000%..................... 71 4,433,182 2.11
50.001% - 55.000%..................... 73 4,084,887 1.94
55.001% - 60.000%..................... 117 8,353,584 3.97
60.001% - 65.000%..................... 198 14,808,893 7.04
65.001% - 70.000%..................... 278 20,653,441 9.82
70.001% - 75.000%..................... 386 31,826,234 15.14
75.001% - 80.000%..................... 573 46,659,321 22.19
80.001% - 85.000%..................... 380 35,270,441 16.77
85.001% - 90.000%..................... 367 35,466,225 16.87
----- ------------ -------
Total............................... 2,606 $210,257,198 100.00%
===== ============ =======
- ----------
As of the Cut-Off Date, the weighted average CLTV of the Loans, by Cut-Off
Date Pool Balance, was approximately 75.23%.
S-22
<PAGE>
GEOGRAPHIC DISTRIBUTION OF LOANS
% OF
AGGREGATE CUT-OFF
NUMBER PRINCIPAL DATE POOL
JURISDICTION OF LOANS BALANCE BALANCE
- ------------ -------- --------- ---------
California............................ 581 $ 63,482,526 30.19%
Texas................................. 303 18,711,494 8.90
Florida............................... 205 15,581,764 7.41
Illinois.............................. 137 10,258,899 4.88
Pennsylvania.......................... 124 7,716,811 3.67
Washington............................ 71 7,279,068 3.46
Ohio.................................. 91 6,311,057 3.00
Massachusetts......................... 67 6,299,981 3.00
Georgia............................... 90 6,258,802 2.98
Michigan.............................. 86 5,182,240 2.46
Minnesota............................. 47 4,646,696 2.21
Colorado.............................. 50 4,535,452 2.16
North Carolina........................ 52 4,337,868 2.06
Arizona............................... 61 4,249,991 2.02
Indiana............................... 56 4,058,366 1.93
Nevada................................ 34 3,271,490 1.56
South Carolina........................ 46 2,911,130 1.38
Louisiana............................. 46 2,738,615 1.30
Oklahoma.............................. 44 2,719,404 1.29
Tennessee............................. 44 2,716,077 1.29
Virginia.............................. 32 2,579,747 1.23
Oregon................................ 27 2,310,027 1.10
Hawaii................................ 17 2,123,830 1.01
Missouri.............................. 40 2,095,734 1.00
Connecticut........................... 17 1,851,008 0.88
Arkansas.............................. 37 1,835,474 0.87
New Mexico............................ 24 1,558,286 0.74
Wisconsin............................. 24 1,488,195 0.71
Utah.................................. 21 1,481,584 0.70
New Jersey............................ 12 1,287,028 0.61
Rhode Island.......................... 10 1,163,857 0.55
Maine................................. 11 1,109,867 0.53
Kansas................................ 13 827,849 0.39
Maryland.............................. 9 817,368 0.39
Mississippi........................... 18 774,184 0.37
Iowa.................................. 10 674,412 0.32
New Hampshire......................... 7 593,929 0.28
Idaho................................. 8 593,575 0.28
West Virginia......................... 9 470,474 0.22
Montana............................... 7 385,701 0.18
Kentucky.............................. 5 268,752 0.13
Alabama............................... 5 246,454 0.12
Delaware.............................. 3 153,034 0.07
New York.............................. 1 103,551 0.05
Alaska................................ 1 61,884 0.03
Wyoming............................... 1 58,275 0.03
North Dakota.......................... 1 50,550 0.02
District of Columbia.................. 1 24,836 0.01
----- ------------ -------
Total............................... 2,606 $210,257,198 100.00%
===== ============ =======
- ----------
No more than approximately 0.54% of the Loans, by Cut-Off Date Pool
Balance, will be secured by properties located in any one zip code.
S-23
<PAGE>
OCCUPANCY STATUS
% OF
AGGREGATE CUT-OFF
NUMBER PRINCIPAL DATE POOL
OCCUPANCY STATUS OF LOANS BALANCE BALANCE
- ---------------- -------- --------- ---------
Owner Occupied........................ 2,316 $191,640,089 91.15%
Investor Owned........................ 277 17,730,738 8.43
Second Home........................... 13 886,371 0.42
----- ------------ -------
Total............................... 2,606 $210,257,198 100.00%
===== ============ =======
LOAN AGE
% OF
AGGREGATE CUT-OFF
NUMBER PRINCIPAL DATE POOL
RANGE OF LOAN AGE (IN MONTHS) OF LOANS BALANCE BALANCE
- ----------------------------- -------- --------- ---------
4 - 5................................. 782 $ 63,312,548 30.11%
6 - 7................................. 1,707 138,137,392 65.70
8 - 9................................. 117 8,807,259 4.19
----- ------------ -------
Total............................... 2,606 $210,257,198 100.00%
===== ============ =======
As of the Cut-Off Date, the weighted age of the Loans, by Cut-Off Date
Pool Balance, was approximately 6 months.
REMAINING TERMS TO MATURITY
% OF
AGGREGATE CUT-OFF
RANGE OF REMAINING TERMS NUMBER PRINCIPAL DATE POOL
TO MATURITY (IN MONTHS) OF LOANS BALANCE BALANCE
----------------------- -------- --------- ---------
61 - 120............................. 71 $ 3,038,926 1.45%
121 - 180............................. 605 28,605,055 13.60
181 - 240............................. 127 8,304,401 3.95
241 - 300............................. 25 1,951,406 0.93
301 - 360............................. 1,778 168,357,410 80.07
----- ------------ -------
Total............................... 2,606 $210,257,198 100.00%
===== ============ =======
- ----------
As of the Cut-Off Date, the weighted average remaining term to maturity of
the Loans, by Cut-Off Date Pool Balance, was approximately 321 months.
S-24
<PAGE>
RANGE OF FICO CREDIT SCORE
% OF
AGGREGATE CUT-OFF
NUMBER PRINCIPAL DATE POOL
RANGE OF FICO CREDIT STORE OF LOANS BALANCE BALANCE
-------------------------- -------- --------- ---------
450 - 499............................. 107 $ 7,955,791 3.78%
500 - 519............................. 144 8,877,699 4.22
520 - 539............................. 215 15,349,490 7.30
540 - 559............................. 278 21,179,967 10.07
560 - 579............................. 256 21,464,614 10.21
580 - 599............................. 311 26,277,457 12.50
600 - 619............................. 303 25,040,071 11.91
620 - 639............................. 277 23,296,334 11.08
640 - 659............................. 238 20,222,738 9.62
660 - 679............................. 156 14,346,842 6.82
680 - 699............................. 121 10,226,313 4.86
700 - 719............................. 74 6,351,115 3.02
720 - 739............................. 57 4,451,236 2.12
740 - 759............................. 35 2,643,172 1.26
760 - 779............................. 17 1,474,849 0.70
780 - 799............................. 7 409,272 0.19
800 - 819............................. 4 212,407 0.10
Not Available......................... 6 477,828 0.23
----- ------------ -------
Total............................... 2,606 $210,257,198 100.00%
===== ============ =======
- ----------
As of the Cut-Off Date, the weighted average FICO score of the Loans, by
Cut-Off Date Pool Balance, was approximately 605.
The information set forth in the preceding section "Description of the
Loans" has been based on information provided by the originators 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.
UNDERWRITING GUIDELINES
NEW CENTURY
2,501 Loans, representing approximately 96.12% of the Cut-Off Date Pool
Balance were originated by NC Capital Corporation, referred to in this
prospectus supplement as "New Century."
Each applicant completes an application which includes information with
respect to the applicant's liabilities, income, credit history, employment
history and personal information. The underwriting guidelines require a credit
report on each applicant from a credit reporting company. The report typically
contains information relating to matters such as credit history
S-25
<PAGE>
with local and national merchants and lenders, installment debt payments and any
record of defaults, bankruptcies, repossessions or judgments. Mortgaged
properties that are to secure mortgage loans generally are appraised by
qualified independent appraisers. These appraisers inspect and appraise the
subject property and verify that the property is in acceptable condition.
Following each appraisal, the appraiser prepares a report which includes a
market value analysis based on recent sales of comparable homes in the area and,
when deemed appropriate, replacement cost analysis based on the current cost of
constructing a similar home. The underwriting guidelines require a review of the
appraisal by a qualified employee of New Century or by an appraiser retained by
New Century.
The Loans originated by New Century were originated in accordance with
either full documentation or stated income documentation residential loan
programs. Under each of the programs, New Century reviews the applicant's source
of income, calculates the amount of income from sources indicated on the loan
application or similar documentation, reviews the credit history of the
applicant, calculates the debt service-to-income ratio to determine the
applicant's ability to repay the loan, reviews the type and use of the property
being financed, and reviews the property. In determining the ability of the
applicant to repay the loan, a qualifying rate has been created under the
underwriting guidelines that generally is equal to the mortgage interest rate on
that loan, in the case of fixed-rate loans. In most cases, the maximum loan
amount for mortgage loans originated under the programs is $600,000. The
underwriting guidelines may permit loans on one- to four-family residential
properties to have:
o a loan-to-value ratio at origination of up to 90% with respect to first
liens loans and
o a combined loan-to-value ratio at origination of up to 90% with respect
to second lien loans.
In each case, the maximum loan-to-value ratio depends on, among other
things, the purpose of the mortgage loan, a mortgagor's credit history,
repayment ability and debt service-to-income ratio, as well as the type and use
of the property.
The underwriting guidelines require that the income of each applicant for
a mortgage loan under the full documentation program be verified. The specific
income documentation required for New Century's various programs is as follows:
o under the full documentation program, applicants usually are required
to submit one written form of verification of stable income for at
least 12 months; and
o under the stated income documentation program, an applicant may be
qualified based upon monthly income as stated on the mortgage loan
application if the applicant meets certain criteria.
All the foregoing programs require that, with respect to salaried
employees, there be a telephone verification of the applicant's employment.
Verification of the source of funds, if any, required to be deposited by the
applicant into escrow in the case of a purchase money loan is required.
S-26
<PAGE>
The underwriting guidelines of New Century have various risk categories
and criteria for grading the potential likelihood that an applicant will satisfy
the repayment obligations of a mortgage loan. The risk categories impose
limitations on, among other things, maximum loan-to-value ratios and combined
loan-to-value ratios, loan amounts, cash back to borrowers and debt-to-income
ratios. The risk categories also include parameters that establish the maximum
available derogatory mortgage and consumer credit history within such category.
The credit categories and criteria are guidelines only. On a case-by-case
basis, it may be determined that an applicant warrants a debt service-to-income
ratio exception, a pricing exception, a loan-to-value exception, an exception
from certain requirements of a particular risk category, etc. An exception may
be allowed if the application reflects compensating factors, such as:
o stability in the subject property,
o stability in the employment or field of employment,
o stability of income,
o debt to income ratio is 5% or more below limits,
o loan amounts below the program limits, or
o historical good or excellent credit history.
BNC
105 Loans, representing approximately 3.88% of the Cut-Off Date Pool
Balance were originated by BNC Mortgage Inc., referred to in this prospectus
supplement as "BNC." All of the Loans originated by BNC are first lien loans.
It is the responsibility of the underwriting department of BNC to review,
analyze and evaluate all required loan file documentation for compliance with
Federal and state regulations and to approve loans that conform to BNC as well
as investor underwriting standards and guidelines.
BNC is a California licensed mortgage banking company. BNC engages in the
business of making loans to finance the purchase of real property secured by
one-to-four family dwelling units, and loans to refinance existing loans secured
by one-to-four family dwelling units. These loans are originated through
mortgage loan brokers or other qualified and licensed originators.
Terms, conditions, interest rates, indices, fees and related matters for
loans are established, reviewed and amended from time to time by the Board of
Directors of BNC or by management. These terms, conditions, interest rates,
indices, fees and related matters are required to conform to applicable laws and
regulations, reflect safe and sound business practices, as well as current
market influences.
S-27
<PAGE>
The underwriting standards of BNC are the starting point from which BNC
reviews loan applications with the intent of making a loan approval or
declination decision. The process of underwriting loans involves the weighing of
many aspects of each loan application individually to evaluate:
o the property;
o the value of the property and the effect of the loan request on the
value;
o the creditworthiness of the borrower; and
o the ability of the borrower to repay the obligation.
Each property offered as security for a loan will be evaluated on its own
merits. The fair market value of the property will be determined by an
appraisal, performed by an appraiser acceptable to BNC who has inspected the
interior and exterior of the subject property. The most common method of
appraisal is to compare the property with recently sold, similar properties.
Acceptable property will be suitable for year round habitation, and will not
pose a health or safety hazard to the occupants. The appraisal will be reviewed
by the BNC appraisal department which will render an opinion of the accuracy of
the appraisal submitted.
When underwriting a purchase money loan, the lower of the purchase price
or the appraised value will be used. When underwriting a refinance loan, the
appraised value of the property, as verified by BNC's appraisal department will
be utilized.
Loan decisions are based on the present fair market value of the subject
property or sales price, whichever is lower, and the likelihood that the
property will retain an adequate value over the term of the loan. BNC will not
deny a loan solely on the basis of the dwelling's age or location, unless it is
determined to be at risk for substantial loss of value or marketability.
The underwriting guidelines of BNC have various risk categories and
criteria for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a mortgage loan. The risk categories impose limitations
on, among other things, maximum loan-to-value ratios and combined loan-to-value
ratios, loan amounts, cash back to borrowers and debt-to-income ratios. The risk
categories also include parameters that establish the maximum available
derogatory mortgage and consumer credit history within such category.
The credit categories and criteria are guidelines only. On a case-by-case
basis, it may be determined that an applicant warrants a debt service-to-income
ratio exception, a pricing exception, a loan-to-value exception, an exception
from certain requirements of a particular risk category, etc.
THE SERVICER
The information set forth in this section has been provided by Litton Loan
Servicing LP. 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.
S-28
<PAGE>
Litton Loan Servicing LP, the servicer, a Delaware limited partnership, is
a wholly-owned subsidiary of Credit-Based Asset Servicing and Securitization LLC
("C-BASS"). C-BASS is owned by Enhance Financial Services Group, Inc.
("Enhance"), Mortgage Guaranty Insurance Corporation ("MGIC") and C-BASS Holding
LLC. Litton Loan Servicing LP was formed in December 1996, with all of the
general and limited partnership interests owned by Enhance, MGIC and C-BASS
Holding LLC. As of October 1, 1998 Litton Loan Servicing, Inc., was a
wholly-owned subsidiary of Enhance and transferred its business to Litton Loan
Servicing LP. From and after October 1, 1998 all activities formerly conducted
by Litton Loan Servicing, Inc. are being conducted by Litton Loan Servicing LP.
The servicer currently employs approximately 202 individuals. The main office of
the servicer is located at 5373 W. Alabama, Houston, Texas 77056. The servicer
is currently a Fannie Mae and Freddie Mac approved servicer and an approved FHA
and VA lender with a servicing portfolio in excess of $4.238 billion. The
servicer specializes in servicing sub-performing mortgage loans and entering
into workouts with the related mortgagors. Recent transactions for which the
servicer acts as servicer include Merrill Lynch Mortgage Investors, Inc., Series
1998-GN3, Series 1999-H1, Series 1999-H2, Series 1999-NC1, Series 1999-CB1,
Series 1999-CB2, Series 1999-CB4, Series 2000-CB1, Series 2000-FF1, New Century
Mortgage Securities, Inc., Series 1999-NCC, Financial Asset Securities Corp.,
Series 1998-3, Series 1999-CB5 and Asset Backed Funding Corporation, Series
1999-1.
Fitch IBCA, Inc. assigned the servicer its RSS1 residential special
servicer rating on November 16, 1999. The rating is based on the servicer's
ability to manage and liquidate nonperforming residential mortgage loans and
real estate owned assets. This RSS1 rating is the highest special servicer
rating attainable from Fitch which reflects the servicer's sophisticated
proprietary default management technology, the financial strength of its
well-capitalized parent and its highly experienced management and staff.
Fitch assigned the servicer its RPS2 primary servicer rating for sub-prime
and high loan-to-value ratio product. The RPS2 rating is currently the highest
subprime primary servicer rating attainable from Fitch for any subprime
servicer, which is based on the strength of the servicer's loan administration
processes including new loan set-up procedures and related technology, loan
accounting/cash management and loan reporting. The RPS2 rating for high
loan-to-value ratio product is based on the servicer's intensive focus on early
collection and loss mitigation.
Delinquency and Foreclosure Experience. The following table sets forth the
delinquency and foreclosure experience of the mortgage loans serviced by the
servicer as of the dates indicated. The servicer's portfolio of mortgage loans
may differ significantly from the 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 mortgagor to make required payments. It should be
noted that the servicer's business emphasizes to a certain degree the
acquisition of servicing rights with respect to non-performing and subperforming
mortgage loans and the servicer has been an active participant in
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<PAGE>
the market for such servicing rights since 1997. The acquisition of these
servicing rights may have affected the delinquency and foreclosure experience of
the servicer.
<TABLE>
DELINQUENCY AND FORECLOSURE EXPERIENCE(1)
<CAPTION>
AS OF MARCH 31, 2000 AS OF DECEMBER 31, 1999 AS OF DECEMBER 31, 1998
--------------------------------- --------------------------------- ---------------------------------
% BY % BY % BY
NO. OF PRINCIPAL PRINCIPAL NO. OF PRINCIPAL PRINCIPAL NO. OF PRINCIPAL PRINCIPAL
LOANS BALANCE(2) BALANCE LOANS BALANCE(2) BALANCE LOANS BALANCE(2) BALANCE
------ ---------- --------- ------ ---------- --------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Current Loans 42,053 $3,064,917,106 72.31% 37,105 $2,580,776,677 69.98% 39,063 $2,489,678,138 78.01%
Period of
Delinquency(3)
30 Days 4,206 $ 312,191,038 7.37% 4,638 $ 323,122,291 8.76% 3,689 $ 233,734,152 7.32%
60-89 1,492 111,781,274 2.64% 1,886 $ 133,339,006 3.62% 1,497 87,944,512 2.76%
90 Days or more 2,046 $ 119,938,811 2.83% 2,056 $ 127,745,979 3.46% 2,578 $ 121,504,523 3.81%
------ -------------- ------- ------ -------------- ------- ------ -------------- -------
TOTAL DELINQUENCY 7,744 $ 543,911,123 12.83% 8,580 $ 584,207,276 15.84% 7,764 $ 443,183,187 13.89%
Foreclosures/Bankruptcy(4) 6,744 $ 532,645,102 12.57% 5,503 $ 433,109,387 11.74% 2,780 $ 197,668,255 6.19%
Real Estate Owned 1,435 $ 96,920,678 2.29% 1,264 $ 89,691,707 2.43% 1,009 $ 60,867,154 1.91%
------ -------------- ------- ------ -------------- ------- ------ -------------- -------
TOTAL PORTFOLIO 57,976 $4,238,394,009 100.00% 52,452 $3,687,785,047 100.00% 50,616 $3,191,396,734 100.00%
------ -------------- ------- ------ -------------- ------- ------ -------------- -------
<FN>
- ----------
(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 Real Estate Owned 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.
</FN>
</TABLE>
It is unlikely that the delinquency experience of the Loans will
correspond to the delinquency experience of the servicer's mortgage portfolio
set forth in the foregoing 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.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The yield on the Class A-1 certificates will be sensitive to fluctuations
in the level of One-Month LIBOR. The yield on the offered certificates will be
sensitive to the interest rate cap. In addition, because the rate and timing of
principal distributions on offered certificates depends primarily on the rate
and timing of principal payments, i.e., the prepayment experience
S-30
<PAGE>
of the Loans and the availability and amount of excess interest, the final
distribution of principal on your certificates could occur significantly earlier
than you anticipated. 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. You will bear entirely any reinvestment risk
resulting from the rate of prepayments on the Loans.
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 prepayment experience of the Loans, and
(2) under some circumstances, the rates or delinquencies, defaults or
losses experienced on 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 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 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.
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
S-31
<PAGE>
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 yield to maturity on the offered certificates will be adversely
affected if their pass-through rates are limited by the interest rate cap
described under "Description of the Offered Certificates -- Pass-Through Rates"
in this prospectus supplement.
The effective yield to holders of the Class A-2, Class A-3, Class A-4,
Class A-5, Class M-1, Class M-2 and Class B certificates will be lower than the
yield otherwise produced by their pass-through rates and purchase prices. This
is because while interest will accrue during each Interest Accrual Period, the
distribution of interest may not be made until the Distribution Dates following
the related Interest Accrual Period, and principal paid on any Distribution Date
will not bear interest during the period from the end of the related Interest
Accrual Period to the Distribution Date that follows.
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 February 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.
Prepayments on loans are commonly measured relative to a prepayment
standard or model. The model used in this prospectus supplement is the
Prepayment Assumption model. A 100% Prepayment Assumption assumes a CPR of 4.0%
per annum of the outstanding principal balance of the loans in the first month
of the life of the loans and an additional approximate 1.91% (precisely 21/11
multiplied by 1.00%) per annum in each month thereafter until the twelfth month.
Beginning in the twelfth month and in each month thereafter during the life of
the loans, a CPR of 25% per annum each month is assumed.
As used in the tables below, a 0% Prepayment Assumption assumes a
prepayment rate equal to 0% of the Prepayment Assumption, -- i.e., no
prepayments. Correspondingly, a 75% Prepayment Assumption assumes a prepayment
rate equal to 75% of the Prepayment
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<PAGE>
Assumption, and so forth. The 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 Prepayment Assumption or the
CPR.
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 remaining term to stated maturity such that the Loans
will fully amortize by their remaining term to stated maturity;
(3) (a) all Loans prepay monthly at the specified percentages of the
Prepayment Assumption,
(b) no optional or other early termination of the offered
certificates occurs, except with respect to the calculation of
the "Weighted Average Life-to-Call (Years)" figures in the
following tables, and
(c) no substitutions or repurchases of the Loans occur;
(4) all prepayments in respect of the Loans include 30 days' accrued
interest;
(5) the closing date for the offered certificates is May 25, 2000;
(6) each year will consist of twelve 30-day months, except with respect
to the Class A-1 certificates, for which interest will be calculated on the
basis of a 360 day year and the actual number of days elapsed;
(7) cash distributions are received by the holders of the offered
certificates on the 25th day of each month, commencing in June 2000;
(8) the pass-through rate for each class of offered certificates, other
than the Class A-1 certificates, is as described in this prospectus supplement;
the pass-through rate for the Class A-1 certificates remains constant at 6.760%
per annum;
(9) all Servicing Fees and Trustee Fees assumed to be deducted from the
interest collections in respect of the Loans equal in the aggregate 0.5154% of
the principal balances of the Loans;
(10) no reinvestment income from any account is earned and available for
distribution;
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<PAGE>
(11) the Targeted Overcollateralization Amount is initially equal to
4.10% of the Cut-Off Date Pool Balance; and
(12) the pool consists of Loans having the following characteristics:
ASSUMED LOAN CHARACTERISTICS
REMAINING
APRIL 30, 2000 AMORTIZATION SEASONING
SUB-POOL PRINCIPAL BALANCE LOAN RATE % TERM (MONTHS) (MONTHS)
- -------- ----------------- ----------- ------------- ---------
1 $14,574,758.07 10.9302% 169 5
2 $16,785,861.61 11.0267% 168 7
3 $ 8,302,518.72 10.1970% 234 6
4 $49,845,039.83 10.1753% 355 4
5 $30,465,477.09 9.9585% 353 6
6 $82,169,333.91 9.8022% 352 7
7 $ 7,429,946.19 9.6638% 352 8
The following tables indicate at the specified percentages of the
Prepayment Assumption the corresponding weighted average lives of each class of
certificates. All percentages in the following tables 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-34
<PAGE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION
CLASS A-1 CERTIFICATES
---------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150%
- ----------------- ---- ---- ---- ---- ---- ----
Initial Percent.................... 100 100 100 100 100 100
May 2001........................... 97 70 57 43 29 16
May 2002........................... 95 41 17 0 0 0
May 2003........................... 92 16 0 0 0 0
May 2004........................... 88 0 0 0 0 0
May 2005........................... 85 0 0 0 0 0
May 2006........................... 81 0 0 0 0 0
May 2007........................... 77 0 0 0 0 0
May 2008........................... 74 0 0 0 0 0
May 2009........................... 70 0 0 0 0 0
May 2010........................... 66 0 0 0 0 0
May 2011........................... 61 0 0 0 0 0
May 2012........................... 55 0 0 0 0 0
May 2013........................... 48 0 0 0 0 0
May 2014........................... 41 0 0 0 0 0
May 2015........................... 36 0 0 0 0 0
May 2016........................... 31 0 0 0 0 0
May 2017........................... 26 0 0 0 0 0
May 2018........................... 19 0 0 0 0 0
May 2019........................... 12 0 0 0 0 0
May 2020........................... 5 0 0 0 0 0
May 2021........................... 0 0 0 0 0 0
Weighted Average Life-to-Maturity
(Years) ......................... 12.12 1.81 1.24 0.95 0.77 0.65
Weighted Average Life-to-Call
(Years) ......................... 12.12 1.81 1.24 0.95 0.77 0.65
S-35
<PAGE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION
CLASS A-2 CERTIFICATES
---------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150%
- ----------------- ---- ---- ---- ---- ---- ----
Initial Percent.................... 100 100 100 100 100 100
May 2001........................... 100 100 100 100 100 100
May 2002........................... 100 100 100 90 48 9
May 2003........................... 100 100 71 17 0 0
May 2004........................... 100 93 36 0 0 0
May 2005........................... 100 60 11 0 0 0
May 2006........................... 100 41 0 0 0 0
May 2007........................... 100 26 0 0 0 0
May 2008........................... 100 21 0 0 0 0
May 2009........................... 100 13 0 0 0 0
May 2010........................... 100 4 0 0 0 0
May 2011........................... 100 0 0 0 0 0
May 2012........................... 100 0 0 0 0 0
May 2013........................... 100 0 0 0 0 0
May 2014........................... 100 0 0 0 0 0
May 2015........................... 100 0 0 0 0 0
May 2016........................... 100 0 0 0 0 0
May 2017........................... 100 0 0 0 0 0
May 2018........................... 100 0 0 0 0 0
May 2019........................... 100 0 0 0 0 0
May 2020........................... 100 0 0 0 0 0
May 2021........................... 96 0 0 0 0 0
May 2022........................... 84 0 0 0 0 0
May 2023........................... 70 0 0 0 0 0
May 2024........................... 55 0 0 0 0 0
May 2025........................... 38 0 0 0 0 0
May 2026........................... 19 0 0 0 0 0
May 2027........................... 0 0 0 0 0 0
Weighted Average Life-to-Maturity
(Years) ......................... 24.18 6.13 3.75 2.65 2.04 1.67
Weighted Average Life-to-Call
(Years) ......................... 24.18 6.13 3.75 2.65 2.04 1.67
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<PAGE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION
CLASS A-3 CERTIFICATES
---------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150%
- ----------------- ---- ---- ---- ---- ---- ----
Initial Percent.................... 100 100 100 100 100 100
May 2001........................... 100 100 100 100 100 100
May 2002........................... 100 100 100 100 100 100
May 2003........................... 100 100 100 100 29 0
May 2004........................... 100 100 100 92 12 0
May 2005........................... 100 100 100 38 0 0
May 2006........................... 100 100 87 8 0 0
May 2007........................... 100 100 57 0 0 0
May 2008........................... 100 100 53 0 0 0
May 2009........................... 100 100 39 0 0 0
May 2010........................... 100 100 24 0 0 0
May 2011........................... 100 89 8* 0 0 0
May 2012........................... 100 68 0 0 0 0
May 2013........................... 100 48 0 0 0 0
May 2014........................... 100 31 0 0 0 0
May 2015........................... 100 18* 0 0 0 0
May 2016........................... 100 6* 0 0 0 0
May 2017........................... 100 0 0 0 0 0
May 2018........................... 100 0 0 0 0 0
May 2019........................... 100 0 0 0 0 0
May 2020........................... 100 0 0 0 0 0
May 2021........................... 100 0 0 0 0 0
May 2022........................... 100 0 0 0 0 0
May 2023........................... 100 0 0 0 0 0
May 2024........................... 100 0 0 0 0 0
May 2025........................... 100 0 0 0 0 0
May 2026........................... 100 0 0 0 0 0
May 2027........................... 96 0 0 0 0 0
May 2028........................... 37 0 0 0 0 0
May 2029........................... 0 0 0 0 0 0
Weighted Average Life-to-Maturity
(Years) ......................... 27.81 13.14 8.26 4.90 3.17 2.38
Weighted Average Life-to-Call
(Years) ......................... 27.77 12.89 8.14 4.90 3.17 2.38
The percentages in the above table that are designated with "*" indicate
that the cash flows are contingent on the optional termination provision not
being exercised.
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<PAGE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION
CLASS A-4 CERTIFICATES
---------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150%
- ----------------- ---- ---- ---- ---- ---- ----
Initial Percent.................... 100 100 100 100 100 100
May 2001........................... 100 100 100 100 100 100
May 2002........................... 100 100 100 100 100 100
May 2003........................... 100 100 100 100 100 0
May 2004........................... 100 100 100 100 100 0
May 2005........................... 100 100 100 100 49 0
May 2006........................... 100 100 100 100 24 0
May 2007........................... 100 100 100 83 16* 0
May 2008........................... 100 100 100 83* 16* 0
May 2009........................... 100 100 100 77* 16* 0
May 2010........................... 100 100 100 63* 16* 0
May 2011........................... 100 100 100* 48* 15* 0
May 2012........................... 100 100 91* 35* 8* 0
May 2013........................... 100 100 71* 26* 2* 0
May 2014........................... 100 100 55* 16* 0 0
May 2015........................... 100 100* 43* 9* 0 0
May 2016........................... 100 100* 34* 3* 0 0
May 2017........................... 100 92* 27* 0 0 0
May 2018........................... 100 77* 19* 0 0 0
May 2019........................... 100 64* 12* 0 0 0
May 2020........................... 100 52* 7* 0 0 0
May 2021........................... 100 43* 3* 0 0 0
May 2022........................... 100 35* 0 0 0 0
May 2023........................... 100 27* 0 0 0 0
May 2024........................... 100 20* 0 0 0 0
May 2025........................... 100 12* 0 0 0 0
May 2026........................... 100 6* 0 0 0 0
May 2027........................... 100 0 0 0 0 0
May 2028........................... 100 0 0 0 0 0
May 2029........................... 51* 0 0 0 0 0
May 2030........................... 0 0 0 0 0 0
Weighted Average Life-to-Maturity
(Years) ......................... 29.04 20.85 15.18 11.00 6.18 2.80
Weighted Average Life-to-Call
(Years) ......................... 28.25 14.50 10.33 7.57 5.20 2.80
The percentages in the above table that are designated with "*" indicate
that the cash flows are contingent on the optional termination provision not
being exercised.
S-38
<PAGE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION
CLASS A-5 CERTIFICATES
---------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150%
- ----------------- ---- ---- ---- ---- ---- ----
Initial Percent.................... 100 100 100 100 100 100
May 2001........................... 100 100 100 100 100 100
May 2002........................... 100 100 100 100 100 100
May 2003........................... 100 100 100 100 100 93
May 2004........................... 99 91 90 91 95 93
May 2005........................... 98 84 81 79 80 65*
May 2006........................... 97 74 68 62 58 40*
May 2007........................... 94 63 54 46 39* 24*
May 2008........................... 86 39 27 23* 24* 15*
May 2009........................... 78 24 13 9* 13* 8*
May 2010........................... 70 15 6 3* 6* 3*
May 2011........................... 61 9 3* 1* 2* 0
May 2012........................... 52 5 1* 0 0 0
May 2013........................... 43 3 1* 0 0 0
May 2014........................... 35 2 0 0 0 0
May 2015........................... 31 1* 0 0 0 0
May 2016........................... 26 1* 0 0 0 0
May 2017........................... 22 0 0 0 0 0
May 2018........................... 18 0 0 0 0 0
May 2019........................... 14 0 0 0 0 0
May 2020........................... 11 0 0 0 0 0
May 2021........................... 8 0 0 0 0 0
May 2022........................... 7 0 0 0 0 0
May 2023........................... 5 0 0 0 0 0
May 2024........................... 3 0 0 0 0 0
May 2025........................... 2 0 0 0 0 0
May 2026........................... 1 0 0 0 0 0
May 2027........................... 0 0 0 0 0 0
Weighted Average Life-to-Maturity
(Years) ......................... 13.17 7.62 6.94 6.67 6.71 5.99
Weighted Average Life-to-Call
(Years) ......................... 13.17 7.60 6.87 6.36 5.61 4.70
The percentages in the above table that are designated with "*" indicate
that the cash flows are contingent on the optional termination provision not
being exercised.
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<PAGE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION
CLASS M-1 CERTIFICATES
---------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150%
- ----------------- ---- ---- ---- ---- ---- ----
Initial Percent.................... 100 100 100 100 100 100
May 2001........................... 100 100 100 100 100 100
May 2002........................... 100 100 100 100 100 100
May 2003........................... 100 100 100 100 100 100
May 2004........................... 100 100 85 62 44 55
May 2005........................... 100 97 68 46 30 19*
May 2006........................... 100 84 54 34 20 12*
May 2007........................... 100 72 43 25 14* 7*
May 2008........................... 100 61 34 18* 9* 3*
May 2009........................... 100 52 27 13* 6* 0
May 2010........................... 100 44 21 10* 3* 0
May 2011........................... 100 37 17* 7* 0 0
May 2012........................... 100 31 13* 5* 0 0
May 2013........................... 100 26 10* 1* 0 0
May 2014........................... 100 22 8* 0 0 0
May 2015........................... 100 18* 6* 0 0 0
May 2016........................... 100 15* 5* 0 0 0
May 2017........................... 100 13* 2* 0 0 0
May 2018........................... 100 11* 0 0 0 0
May 2019........................... 100 9* 0 0 0 0
May 2020........................... 100 7* 0 0 0 0
May 2021........................... 97 6* 0 0 0 0
May 2022........................... 89 5* 0 0 0 0
May 2023........................... 81 2* 0 0 0 0
May 2024........................... 71 0 0 0 0 0
May 2025........................... 61 0 0 0 0 0
May 2026........................... 49 0 0 0 0 0
May 2027........................... 37 0 0 0 0 0
May 2028........................... 23 0 0 0 0 0
May 2029........................... 7* 0 0 0 0 0
May 2030........................... 0 0 0 0 0 0
Weighted Average Life-to-Maturity
(Years) ......................... 25.67 10.67 7.46 5.69 4.83 4.54
Weighted Average Life-to-Call
(Years).......................... 25.56 9.80 6.82 5.19 4.43 4.21
The percentages in the above table that are designated with "*" indicate
that the cash flows are contingent on the optional termination provision not
being exercised.
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<PAGE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION
CLASS M-2 CERTIFICATES
---------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150%
- ----------------- ---- ---- ---- ---- ---- ----
Initial Percent.................... 100 100 100 100 100 100
May 2001........................... 100 100 100 100 100 100
May 2002........................... 100 100 100 100 100 100
May 2003........................... 100 100 100 100 100 100
May 2004........................... 100 100 85 62 44 31
May 2005........................... 100 97 68 46 30 19*
May 2006........................... 100 84 54 34 20 12*
May 2007........................... 100 72 43 25 14* 7*
May 2008........................... 100 61 34 18* 9* 0
May 2009........................... 100 52 27 13* 4* 0
May 2010........................... 100 44 21 10* 0 0
May 2011........................... 100 37 17* 7* 0 0
May 2012........................... 100 31 13* 1* 0 0
May 2013........................... 100 26 10* 0 0 0
May 2014........................... 100 22 8* 0 0 0
May 2015........................... 100 18* 4* 0 0 0
May 2016........................... 100 15* 0 0 0 0
May 2017........................... 100 13* 0 0 0 0
May 2018........................... 100 11* 0 0 0 0
May 2019........................... 100 9* 0 0 0 0
May 2020........................... 100 7* 0 0 0 0
May 2021........................... 97 4* 0 0 0 0
May 2022........................... 89 0 0 0 0 0
May 2023........................... 81 0 0 0 0 0
May 2024........................... 71 0 0 0 0 0
May 2025........................... 61 0 0 0 0 0
May 2026........................... 49 0 0 0 0 0
May 2027........................... 37 0 0 0 0 0
May 2028........................... 23 0 0 0 0 0
May 2029........................... 7* 0 0 0 0 0
May 2030........................... 0 0 0 0 0 0
Weighted Average Life-to-Maturity
(Years) ......................... 25.67 10.58 7.39 5.62 4.68 4.23
Weighted Average Life-to-Call
(Years) ......................... 25.56 9.80 6.82 5.17 4.33 3.94
The percentages in the above table that are designated with "*" indicate
that the cash flows are contingent on the optional termination provision not
being exercised.
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<PAGE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION
CLASS B CERTIFICATES
---------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150%
- ----------------- ---- ---- ---- ---- ---- ----
Initial Percent.................... 100 100 100 100 100 100
May 2001........................... 100 100 100 100 100 100
May 2002........................... 100 100 100 100 100 100
May 2003........................... 100 100 100 100 100 100
May 2004........................... 100 100 85 62 44 31
May 2005........................... 100 97 68 46 30 19*
May 2006........................... 100 84 54 34 20 11*
May 2007........................... 100 72 43 25 14* 0
May 2008........................... 100 61 34 18* 5* 0
May 2009........................... 100 52 27 13* 0 0
May 2010........................... 100 44 21 6* 0 0
May 2011........................... 100 37 17* 0 0 0
May 2012........................... 100 31 13* 0 0 0
May 2013........................... 100 26 7* 0 0 0
May 2014........................... 100 22 2* 0 0 0
May 2015........................... 100 18* 0 0 0 0
May 2016........................... 100 15* 0 0 0 0
May 2017........................... 100 13* 0 0 0 0
May 2018........................... 100 9* 0 0 0 0
May 2019........................... 100 4* 0 0 0 0
May 2020........................... 100 1* 0 0 0 0
May 2021........................... 97 0 0 0 0 0
May 2022........................... 89 0 0 0 0 0
May 2023........................... 81 0 0 0 0 0
May 2024........................... 71 0 0 0 0 0
May 2025........................... 61 0 0 0 0 0
May 2026........................... 49 0 0 0 0 0
May 2027........................... 37 0 0 0 0 0
May 2028........................... 23 0 0 0 0 0
May 2029........................... 0 0 0 0 0 0
Weighted Average Life-to-Maturity
(Years) ......................... 25.65 10.41 7.25 5.50 4.54 4.03
Weighted Average Life-to-Call
(Years) ......................... 25.56 9.80 6.82 5.16 4.27 3.81
The percentages in the above table that are designated with "*" indicate
that the cash flows are contingent on the optional termination provision not
being exercised.
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<PAGE>
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.
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 M-1, Class M-2, Class B, Class BB, Class X and Class R certificates.
Only the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class M-1, Class
M-2 and Class B 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 $86,000,000
A-2 $42,857,815
A-3 $17,000,000
A-4 $10,000,000
A-5 $21,021,742
M-1 $10,478,647
M-2 $ 7,335,053
B $ 6,287,188
The offered certificates will be issued in book-entry form as described
below. The offered certificates will be issued in minimum dollar denominations
of $25,000 and integral multiples of $1 in excess thereof, except that one
certificate of each class may be issued in a denomination which is not an
integral multiple thereof.
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 June 2000, to the persons in
whose names the certificates are registered at the close of business on the
Record Date.
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<PAGE>
BOOK-ENTRY CERTIFICATES
The offered certificates will be book-entry certificates. Persons
acquiring beneficial ownership interests in the offered certificates will hold
certificates through DTC in the United States, or Clearstream Banking or
Euroclear in Europe if they are participants of those systems, or indirectly
through organizations which are participants in those systems. 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.
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 the positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for Clearstream
Banking and The Chase Manhattan Bank will act as depositary for Euroclear.
Investors may hold beneficial interests in the book-entry certificates in
minimum denominations of $25,000. 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, Euroclear and Clearstream Banking.
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 and on the records of Clearstream Banking
or Euroclear, as appropriate.
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
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<PAGE>
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 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.
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 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. 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 and "Global
Clearance, Settlement and Tax Documentation Procedures -- Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I to this prospectus supplement.
Transfers between participants of DTC will occur in accordance with DTC
rules. Transfers between Clearstream Banking participants and Euroclear
participants will occur in accordance with their respective rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Banking participants or Euroclear participants, on the other, will be effected
in DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by the applicable depositary. However, these cross
market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will, if
the transaction meets its settlement requirements, deliver instructions to the
applicable depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream Banking participants and Euroclear participants may not deliver
instructions directly to the European depositaries.
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.
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<PAGE>
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. Distributions with
respect to certificates 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 applicable depositary. These distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. See "Federal Income Tax Consequences -- REMICs -- Taxation of
Certain Foreign Investors in the prospectus. 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. Clearstream Banking or Euroclear, as the case may be, will take
any other action permitted to be taken by a certificateholder under the Pooling
and Servicing Agreement on behalf of a Clearstream Banking participant or
Euroclear participant only in accordance with its relevant rules and procedures
and subject to the ability of the applicable depositary to effect such actions
on its behalf through DTC. DTC may take actions, at the direction of the related
participants of DTC, with respect to some book-entry certificates which conflict
with actions taken with respect to other book-entry certificates.
Definitive Certificates will be issued to beneficial owners of the
book-entry certificates, or their nominees, rather than to DTC, only if:
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<PAGE>
(a) DTC or the depositor advises the trustee in writing that DTC is no
longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the
book-entry certificates and the depositor or the trustee is unable
to locate a qualified successor,
(b) the depositor, at its sole option, with the consent of the
trustee, elects to terminate a book-entry system through DTC or
(c) 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 global certificate or
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, Clearstream Banking and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of book-entry certificates
among participants of DTC, Clearstream Banking and Euroclear, they are under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued at any time.
Neither the depositor, the servicer nor the trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
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 with respect to the Loans, net of
amounts reimbursable or payable to the servicer:
(1) the aggregate amount of Monthly Payments on the Loans due during the
related Collection Period and received by the trustee one business day prior to
the related Distribution Date, after deduction of the Servicing Fee and any
accrued and unpaid Servicing Fee, if any,
(2) certain unscheduled payments in respect of the Loans, including
prepayments (but excluding any prepayment penalties collected), received during
the related Prepayment Period and liquidation proceeds,
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<PAGE>
(3) payments from the servicer in connection with Advances and
Prepayment Interest Shortfalls for the related Distribution Date,
(4) the Purchase Price for any repurchased loan deposited to the
Collection Account during the related Prepayment Period,
(5) any Substitution Adjustment Amounts deposited in the Collection
Account during the related Prepayment Period, and
(6) on the Distribution Date on which the trust is to be terminated in
accordance with the Pooling and Servicing Agreement, the Termination Price.
INTEREST DISTRIBUTIONS
On each Distribution Date, the trustee will distribute the Interest
Remittance Amount in the following order of priority to the extent available:
first, to the trustee, the Trustee Fee;
second, concurrently, to the Class A-1, Class A-2, Class A-3, Class
A-4 and Class A-5 certificates, pro rata, the applicable Accrued
Certificate Interest for that Distribution Date;
third, concurrently, to the Class A-1, Class A-2, Class A-3, Class
A-4 and Class A-5 certificates, pro rata, the applicable Interest Carry
Forward Amount for the Class A-1, Class A-2, Class A-3, Class A-4 and
Class A-5 certificates, respectively;
fourth, to the Class M-1 certificates, the Accrued Certificate
Interest for the Class M-1 certificates for that Distribution Date;
fifth, to the Class M-2 certificates, the Accrued Certificate
Interest for the Class M-2 certificates for that Distribution Date;
sixth, to the Class B certificates, the Accrued Certificate
Interest for the Class B certificates for that Distribution Date; and
seventh, the amount, if any, of the Interest Remittance Amount
remaining after application with respect to the priorities set forth above
will be applied:
(A) if a Trigger Event is in effect, to make distributions of
principal to each class of offered certificates in the order
of priority described below under "Principal Distributions" in
the scenario where a Trigger Event is in effect, and
(B) as long as a Trigger Event is not in effect, as described
below under "-- Application of Monthly Excess Cashflow
Amounts."
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<PAGE>
If the Interest Remittance Amount and the Monthly Excess Cashflow Amount
are insufficient on any Distribution Date to distribute the aggregate Accrued
Certificate Interest on the Class A certificates entitled to distributions of
interest, any shortfall in available amounts will be allocated to the Class A
certificates pro rata in accordance with their Interest Percentages.
PASS-THROUGH RATES
Class A-1. Interest for each Distribution Date will accrue on the Class
A-1 certificates during the related Interest Accrual Period at a rate equal to
the lesser of:
(1) the pass-through rate for the Class A-1 certificates for that
Distribution Date and
(2) the Maximum Rate for that Distribution Date.
The pass through rate for the Class A-1 certificates for each Distribution
Date will be the sum of One-Month LIBOR as of the related LIBOR Determination
Date plus 0.15% on or prior to the Optional Termination Date and 0.30% following
the Optional Termination Date.
However, in no event will interest on the Class A-1 certificates accrue at
a rate greater than 11.00% per annum.
Class A-2. Interest for each Distribution Date will accrue on the Class
A-2 certificates during the related Interest Accrual Period at a rate equal to
8.270% per annum, or on each Distribution Date following the Optional
Termination Date, 8.770% per annum.
Class A-3. Interest for each Distribution Date will accrue on the Class
A-3 Certificates during the related Interest Accrual Period at a rate equal to
the lesser of:
(1) 8.580% per annum, or on each Distribution Date following the
Optional Termination Date, 9.080% per annum and
(2) the Maximum Rate for that Distribution Date.
Class A-4. Interest for each Distribution Date will accrue on the Class
A-4 Certificates during the related Interest Accrual Period at a rate equal to
the lesser of:
(1) 8.870% per annum, or on each Distribution Date following the
Optional Termination Date, 9.370% per annum and
(2) the Maximum Rate for that Distribution Date.
Class A-5. Interest for each Distribution Date will accrue on the Class
A-5 Certificates during the related Interest Accrual Period at a rate equal to
the lesser of:
(1) 8.320% per annum, or on each Distribution Date following the
Optional Termination Date, 8.820% per annum and
(2) the Maximum Rate for that Distribution Date.
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<PAGE>
Class M-1. Interest for each Distribution Date will accrue on the Class
M-1 Certificates during the related Interest Accrual Period at a rate equal to
the lesser of:
(1) 8.830% per annum, or on each Distribution Date following the
Optional Termination Date, 9.330% per annum and
(2) the Maximum Rate for that Distribution Date.
Class M-2. Interest for each Distribution Date will accrue on the Class
M-2 Certificates during the related Interest Accrual Period at a rate equal to
the lesser of:
(1) 9.270% per annum, or on each Distribution Date following the
Optional Termination Date, 9.770% per annum and
(2) the Maximum Rate for that Distribution Date.
Class B. Interest for each Distribution Date will accrue on the Class B
Certificates during the related Interest Accrual Period at a rate equal to the
lesser of:
(1) 9.500% per annum, or on each Distribution Date following the
Optional Termination Date, 10.000% per annum and
(2) the Maximum Rate for that Distribution Date.
With respect to the offered certificates, other than the Class A-1
certificates, interest in respect of any Distribution Date will accrue during
the related Interest Accrual Period on the basis of a 360-day year consisting of
twelve 30-day months. With respect to the Class A-1 certificates, interest in
respect of any Distribution Date will accrue during the related Interest Accrual
Period on the basis of a 360-day year and the actual number of days elapsed.
If on any Distribution Date, the Accrued Certificate Interest for the
Class A-1 certificates is based on the Maximum Rate, the holder of the Class A-1
certificates will be entitled to receive LIBOR Carryover Amounts from amounts
that would otherwise be distributed to the Class X certificates. The LIBOR
Carryover Amount is equal to the excess of:
(1) the amount of interest the Class A-1 certificates would have been
entitled to receive on that Distribution Date based on its applicable
pass-through rate without the application of the Maximum Rate, over
(2) the amount of interest the Class A-1 certificates received on
that Distribution Date based on the Maximum Rate,
together with the unpaid portion of any excess from prior Distribution Dates,
and accrued interest at the then applicable pass-through rate on the Class A-1
certificates.
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CALCULATION OF LIBOR
One-Month LIBOR for the first Distribution Date will be determined on the
LIBOR Determination Date, which is the second business day preceding the closing
date and for each subsequent Distribution Date will be determined on the second
business day prior to the immediately preceding Distribution Date. With respect
to each Distribution Date, One-Month LIBOR will equal the interbank offered rate
for one-month United States dollar deposits in the London market as quoted on
Telerate Page 3750 as of 11:00 A.M., London time, on the related LIBOR
Determination Date. "Telerate Page 3750" means the display designated as page
3750 on the Bridge Telerate, or such other page as may replace page 3750 on that
service for the purpose of displaying London interbank offered rates of major
banks. If that rate does not appear on that page, or any other page as may
replace that page on that service, or if the service is no longer offered, any
other service for displaying One-Month LIBOR or comparable rates as may be
selected by the trustee after consultation with the servicer, the rate will be
the Reference Bank Rate. The "Reference Bank Rate" will be determined on the
basis of the rates at which deposits in U.S. Dollars are offered by the
reference banks, which shall be three major banks that are engaged in
transactions in the London interbank market, selected by the trustee after
consultation with the servicer, as of 11:00 A.M., London time, on the related
LIBOR Determination Date to prime banks in the London interbank market for a
period of one month in amounts approximately equal to the Certificate Principal
Balance of the Class A-1 certificates. The trustee will request the principal
London office of each of the reference banks to provide a quotation of its rate.
If at least two quotations are provided, the rate will be the arithmetic mean of
the quotations. If on that date fewer than two quotations are provided as
requested, the rate will be the arithmetic mean of the rates quoted by one or
more major banks in New York City, selected by the trustee after consultation
with the servicer, as of 11:00 A.M., New York City time, on that date for loans
in U.S. dollars to leading European banks for a period of one month in amounts
approximately equal to the Certificate Principal Balance of the Class A-1
certificates. If no quotations can be obtained, the rate will be One-Month LIBOR
for the prior Distribution Date.
The establishment of One-Month LIBOR on each LIBOR Determination Date by
the trustee and the trustee's calculation of the rate of interest applicable to
the Class A-1 certificates for the related Interest Accrual Period shall, in the
absence of manifest error, be final and binding.
PRINCIPAL DISTRIBUTIONS
With respect to each Distribution Date prior to the Stepdown Date or on
which a Trigger Event is in effect, holders of the Class A certificates will in
the aggregate be entitled to receive 100% of the Principal Distribution Amount
for that Distribution Date. Amounts allocated to the Class A certificates will
be distributed first, to the Class A-5 certificates in an amount up to the Class
A-5 Lockout Distribution Amount for that Distribution Date, until the
Certificate Principal Balance of the Class A-5 certificates has been reduced to
zero, and then sequentially to the Class A-1, Class A-2, Class A-3, Class A-4,
Class A-5 certificates, without regard to the Class A-5 Lockout Distribution
Amount, in that order, until the respective Certificate Principal Balances are
reduced to zero. However, in the event that the aggregate Certificate Principal
Balance of all the Class A certificates immediately prior to a Distribution
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Date is greater than the Pool Balance as of the first day of the related
Collection Period, these amounts will be allocated to the Class A certificates,
pro rata. Once the Certificate Principal Balances of the Class A certificates
have been reduced to zero, the holders of the Class M-1 certificates will be
entitled to receive 100% of the Principal Distribution Amount for that
Distribution Date until the Certificate Principal Balance of the Class M-1
certificates has been reduced to zero. Similarly once the Certificate Principal
Balance of the Class M-1 certificates has been reduced to zero, the holders of
the Class M-2 certificates will be entitled to receive 100% of the Principal
Distribution Amount until the Certificate Principal Balance of the Class M-2
certificates has been reduced to zero. Finally, once the Certificate Principal
Balance of the Class M-2 certificates has been reduced to zero, the holders of
the Class B certificates will be entitled to receive 100% of the Principal
Distribution Amount until the Certificate Principal Balance of the Class B
certificates has been reduced to zero.
With respect to each Distribution Date on or after a Stepdown Date and as
long as a Trigger Event is not in effect, the holders of all classes of
certificates will be entitled to receive payments of principal, in the order of
priority and in the amounts set forth below:
first, the lesser of (x) the Principal Distribution Amount and (y)
the Class A Principal Distribution Amount, will be distributed
sequentially, to the Class A-5 certificates up to the Class A-5 Lockout
Distribution Amount for that Distribution Date and then to the Class A-1,
Class A-2, Class A-3, Class A-4 and Class A-5 certificates, in that order,
in each case, until the Certificate Principal Balance of each class has
been reduced to zero. However, in the event that the aggregate Certificate
Principal Balance of all the Class A certificates immediately prior to a
Distribution Date is greater than the Pool Balance as of the first day of
the related Collection Period, these amounts will be allocated to the
Class A certificates, pro rata;
second, the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the amount distributed to the Class A
certificates in priority first above and (y) the Class M-1 Principal
Distribution Amount, will be distributed to the Class M-1 certificates,
until the Certificate Principal Balance of the Class M-1 certificates has
been reduced to zero;
third, the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the sum of the amount distributed to the
Class A certificates in priority first above and the amount distributed to
the Class M-1 certificates in priority second above and (y) the Class M-2
Principal Distribution Amount, will be distributed to the Class M-2
certificates, until the Certificate Principal Balance of the Class M-2
certificates has been reduced to zero;
fourth, the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the sum of the amount distributed to the
Class A certificates pursuant to priority first above, the amount
distributed to the Class M-1 certificates pursuant to priority second
above and the amount distributed to the Class M-2 certificates pursuant to
priority third above and (y) the Class B Principal Distribution Amount,
will be distributed to the Class B certificates, until the Certificate
Principal Balance of the Class B certificates has been reduced to zero;
and
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fifth, any amount of the Principal Distribution Amount remaining
after making all of the distributions in priority first, second, third and
fourth above will be included as part of the Monthly Excess Cashflow
Amount and will be applied as described below under "-- Application of
Monthly Excess Cashflow Amounts."
ALLOCATION OF LOSSES
A Realized Loss may result with respect to any Liquidated Mortgage Loan,
if the unpaid principal balance of that Loan plus accrued and unpaid interest on
that unpaid principal balance at the Mortgage Interest Rate through the last day
of the month of liquidation is less than the net proceeds from the liquidation
of, and any insurance proceeds from, the Loan and the related Mortgaged
Property. A Liquidated Mortgage Loan is 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.
A Realized Loss 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 Loan secured by
the Mortgaged Property and reduces the secured debt to that value. In this case,
the trust, as the holder of the Loan, would become an unsecured creditor to the
extent of the difference between the outstanding principal balance of the Loan
and the reduced secured debt.
If a Loan is in default, or if default is reasonably foreseeable, the
servicer may permit a modification of the Loan to reduce its principal balance
and/or extend its term to a term not longer than the latest maturity date of any
other Loan. Any principal reduction resulting from a modification will
constitute a Realized Loss at the time of the reduction. An extension of the
term will not result in a Realized Loss unless coupled with a principal
reduction.
Realized Losses will, in effect, be absorbed first by the Class X and
Class BB certificates. This will occur through the application of the Monthly
Excess Interest Amount to fund the deficiency, as well as through a reduction in
the Overcollateralization Amount.
If, after giving effect to the distribution of the Principal Distribution
Amount on any Distribution Date the aggregate Certificate Principal Balance of
the offered certificates exceeds the Pool Balance as of the end of the related
Collection Period, such excess will be allocated against the Class B, Class M-2
and Class M-1 Certificates, in that order, until the respective Certificate
Principal Balances are reduced to zero. Any allocation of this excess in
reduction of a Certificate Principal Balance is referred to as an "Applied
Realized Loss Amount." Any reduction of a Certificate Principal Balance will not
be reversed or reinstated. However, on future Distribution Dates,
certificateholders of the related class may receive amounts in respect of prior
reductions in the related Certificate Principal Balances as described below.
These subsequent payments will be applied in the reverse of the order set forth
above.
APPLICATION OF MONTHLY EXCESS CASHFLOW AMOUNTS
The weighted average Net Mortgage Interest Rate for the Loans is generally
expected to be higher than the weighted average of the pass-through rates on the
offered certificates, thus generating excess interest collections which, in the
absence of losses, will not be necessary to
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fund interest distributions on the certificates. This excess interest for a
Collection Period, together with interest on the Overcollateralization Amount
itself, is referred to as the "Monthly Excess Interest Amount."
The required level of overcollateralization for any Distribution Date is
the Targeted Overcollateralization Amount. The Targeted Overcollateralization
Amount is initially 4.10% of the Cut-Off Date Pool Balance.
If Realized Losses not covered by an application of the Monthly Excess
Interest Amount occur, the Realized Losses will result in an
Overcollateralization Deficiency since the Pool Balance will be reduced without
a corresponding reduction of the aggregate Certificate Principal Balance of the
certificates. The cashflow priorities of the trust require that, in this
situation, an Extra Principal Distribution Amount be paid, subject to the
availability of any Monthly Excess Cashflow Amount in subsequent months, for the
purpose of re-establishing the Overcollateralization Amount at the required
Targeted Overcollateralization Amount.
On and after the Stepdown Date and assuming that a Trigger Event is not in
effect, the Targeted Overcollateralization Amount may be permitted to decrease
or "step-down." If the Targeted Overcollateralization Amount is permitted to
"step-down" on a Distribution Date, the Pooling and Servicing Agreement permits
a portion of the Principal Remittance Amount for that Distribution Date not to
be passed through as a distribution of principal on the offered certificates on
that Distribution Date. This has the effect of decelerating the amortization of
the certificates relative to the Pool Balance, which will reduce the actual
level of the Overcollateralization Amount to the new, lower Targeted
Overcollateralization Amount. This portion of the Principal Remittance Amount
not distributed as principal on the certificates therefore releases
overcollateralization from the trust. The amount of these releases are referred
to as "Overcollateralization Release Amounts."
On any Distribution Date, the sum of the Monthly Excess Interest Amount,
the Overcollateralization Release Amount and any portion of the Principal
Distribution Amount, without duplication, remaining after principal
distributions on the offered certificates is referred to as the "Monthly Excess
Cashflow Amount." The Monthly Excess Cashflow Amount, if any, is required to be
applied in the following order of priority on the related Distribution Date and
this application is referred to as the "Monthly Excess Cashflow Allocation":
(1) to fund any remaining applicable Accrued Certificate Interest for
that Distribution Date, pro rata, among the Class A-1, Class A-2, Class A-3,
Class A-4 and Class A-5 certificates;
(2) to fund the remaining Interest Carry Forward Amounts for the classes
of Class A certificates, if any, pro rata, among the Class A-1, Class A-2, Class
A-3, Class A-4 and Class A-5 certificates;
(3) to fund the Extra Principal Distribution Amount for that
Distribution Date;
(4) to fund any remaining Accrued Certificate Interest for that
Distribution Date for the Class M-1 certificates;
(5) to fund the Interest Carry Forward Amount for the Class M-1
certificates, if any;
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(6) to fund the Class M-1 Realized Loss Amortization Amount for that
Distribution Date;
(7) to fund any remaining Accrued Certificate Interest for that
Distribution Date for the Class M-2 certificates;
(8) to fund the Interest Carry Forward Amount for the Class M-2
certificates, if any;
(9) to fund the Class M-2 Realized Loss Amortization Amount for that
Distribution Date;
(10) to fund any remaining Accrued Certificate Interest for that
Distribution Date for the Class B certificates;
(11) to fund the Interest Carry Forward Amount for the Class B
certificates, if any;
(12) to fund the Class B Realized Loss Amortization Amount for that
Distribution Date;
(13) to fund the aggregate amount of any LIBOR Carryover Amount, if any;
(14) to pay any Special Servicing Fees for that Distribution Date or
which remain unpaid from any previous Distribution Date; and
(15) to fund distributions to the holders of the Class BB, Class X and
Class R Certificates in the amounts specified in the Pooling and Servicing
Agreement.
REPORT 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) the Overcollateralization Amount, the Overcollateralization Release
Amount, the Overcollateralization Deficiency and the Targeted
Overcollateralization Amount as of the related Distribution Date and the Monthly
Excess Interest Amount and the Monthly Excess Cash Flow Amount for the related
Distribution Date;
(4) the aggregate amount of servicing compensation received by the
servicer during the related Collection Period;
(5) the aggregate amount of Advances for the related Collection Period;
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(6) the Pool Balance at the close of business at the end of the related
Collection Period;
(7) the number, weighted average remaining term to maturity and weighted
average Mortgage Interest Rate of the Loans as of the related due date;
(8) the number and aggregate unpaid principal balance of Loans:
(a) 30 to 59 days past due on a contractual basis,
(b) 60 to 89 days past due on a contractual basis,
(c) 90 or more days past due on a contractual basis,
(d) as to which foreclosure proceedings have been commenced,
and
(e) in bankruptcy as of the close of business on the last day of
the calendar month preceding the related Distribution Date.
(9) 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;
(10) 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 last day of the preceding
Collection Period;
(11) the aggregate amount of principal prepayments made during the
related Prepayment Period;
(12) the aggregate amount of prepayment penalties collected during the
related Collection Period and the amounts allocable to the Class BB certificates
and the Class X certificates;
(13) the aggregate amount of Realized Losses incurred during the related
Collection Period and the cumulative amount of Realized Losses;
(14) the Certificate Principal Balance of each class of certificates,
after giving effect to the distributions, and allocations of Realized Losses
made on the related Distribution Date, separately identifying any reduction of
the Certificate Principal Balance due to allocations of Realized Losses;
(15) the Accrued Certificate Interest in respect of each class of offered
certificates for the related Distribution Date and the respective portions, if
any, remaining unpaid following the distributions made in respect of the
certificates on the related Distribution Date;
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(16) the aggregate amount of any Prepayment Interest Shortfalls for the
related Distribution Date, to the extent not covered by payments of Compensating
Interest by the servicer;
(17) the amount of the Trustee Fee paid;
(18) the LIBOR Carryover Amount for the Class A-1 certificates, if any,
after giving effect to distributions on the related Distribution Date;
(19) any Overcollateralization Deficiency after giving effect to the
distribution of principal on the related Distribution Date;
(20) whether a Trigger Event has occurred and is continuing, and the
cumulative Realized Losses, as a percentage of the original Pool Balance;
(21) the Available Funds for the related Distribution Date;
(22) the rate at which interest accrues for each class of certificates
for the related Distribution Date;
(23) the liquidation report for such Distribution Date; and
(24) the aggregate principal balance of Loans purchased by the
originators or the servicer during the related Collection Period.
THE POOLING AND SERVICING AGREEMENT
GENERAL
The certificates will be issued pursuant to the Pooling and Servicing
Agreement, among the depositor, the servicer, the trustee and the originators.
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.
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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
custodian, U.S. Bank National Association, as the trustee's agent, the Mortgage
Notes endorsed to the trustee on behalf of the certificateholders, the mortgages
and other related documents.
Each 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;
(3) the Mortgage Note and the mortgage and any other agreement executed
and delivered by a borrower in connection with a Loan 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 and holder of the Loan and the indebtedness evidenced by each
Mortgage Note;
(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 without limitation the defense of usury;
(9) the Loan has been closed and the proceeds of the Loan have been
fully disbursed and there is no requirement for future advances thereunder; and
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(10) the Mortgage Note and mortgage are on forms acceptable to Freddie
Mac or Fannie Mae.
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 that breached the
representation and warranty 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 and may not be made unless an opinion of counsel is provided to the
effect that such substitution will not disqualify any of the REMICs comprising
the trust as a REMIC or result in a prohibited transaction tax under the Code,
or
(2) purchase the Loan at the Purchase Price. The Purchase Price is 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 through the end of the calendar month in which the purchase is
effected, plus the amount of any unreimbursed Advances and Servicing Advances
made by the servicer with respect to that defective Loan.
The Purchase Price will be deposited in the Collection Account on or prior
to the next succeeding Determination Date after the purchase obligation arises.
The obligation of the originators 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 originators will be required to remit on or prior to the next
succeeding Determination Date after the purchase obligation arises the
Substitution Adjustment Amount. 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 60 days following the closing date, the custodian 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 trustee, depositor and the
servicer. If the defect results from the failure by an originator in its
obligations to deliver documents to Paine Webber Real Estate Securities Inc.,
that 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.
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THE SERVICER
Litton Loan Servicing LP 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 the acceptance or administration
of its obligations and duties under the Pooling and Servicing Agreement.
However, the servicer will not be indemnified for any loss, liability or expense
incurred by reason of its wilful misfeasance, bad faith or 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.
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 Servicing Agreement. Upon
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, reimbursement for Advances and Servicing Advances, 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 one
business day 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 two business days 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 adjusted to the
Mortgage Interest Rate less the Servicing Fee Rate;
(3) all net proceeds from the liquidation of Loans;
(4) all insurance 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 express requirements of law or in
accordance with prudent and customary servicing practices;
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(5) all condemnation proceeds affecting any Mortgaged Property which are
not released to the borrower in accordance with the servicer's normal servicing
procedures, the loan documents or applicable law;
(6) 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;
(7) the net receipts from the REO Property and any interest gained from
these receipts, and the proceeds from the disposition of the REO Property, net
of any payment to the servicer;
(8) any prepayment penalties and premiums collected; and
(9) any amounts payable in connection with the purchase of any Loan and
the Substitution Adjustment Amount, if any.
The servicer will not be required to deposit into the Collection Account
any payments in the nature of late payment charges, prepayment charges that are
not 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. 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 investments managed or
advised by the trustee or its affiliate, 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. Subject to the terms of the Pooling and Servicing Agreement, the
servicer will have full power and authority, acting alone, 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 diligently collect all payments called for under the terms and provisions of
the Loans when each payment becomes due and payable until the principal and
interest on all Loans are paid in full. The servicer will be obligated to follow
loan collection procedures as it would normally follow with respect to loans
comparable to the Loans, to the extent these procedures are consistent with the
requirements set forth under the Pooling and Servicing Agreement.
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Consistent with the terms of the Pooling and Servicing Agreement, the
servicer may:
(1) waive, modify or vary any term of any Loan;
(2) consent to the postponement of strict compliance with any term of
any Loan; or
(3) in any manner grant indulgence to any borrower,
if in the servicer's reasonable and prudent determination the waiver,
modification, postponement or indulgence is not materially adverse to the
certificateholders.
Unless the borrower is in default with respect to a Loan or a default is,
in the judgment of the servicer, imminent and the servicer has obtained the
prior written consent of the trustee, the servicer may not permit any
modification with respect to any Loan that would:
(1) change the Mortgage Interest Rate,
(2) defer or forgive the payment of any principal or interest payments,
(3) reduce the outstanding principal amount, except for actual payments
of principal, or
(4) extend the final maturity date with respect to the related Loan.
However, the servicer may not permit any modification with respect to any Loan
that would both:
(1) effect an exchange or reissuance of the related Loan under Section
1.860G-2(b) of the U.S. Treasury regulations; and
(2) cause any REMIC constituting part of the trust to fail to qualify as
a REMIC under the Code or the imposition of any tax on "prohibited transactions"
or "contributions" after the closing date.
Consistent with the above, the servicer may not waive any prepayment
penalty or portion of the prepayment penalty required by the terms of the
related Mortgage Note unless:
(1) the servicer determines that the waiver of a prepayment penalty or
portion of a prepayment penalty would maximize recovery of liquidation proceeds
for the related Loan, taking into account the value of the related prepayment
penalty, or
(2) (A) the enforceability of a prepayment penalty is limited (i) by
bankruptcy, insolvency, moratorium, receivership, or other similar law relating
to creditors' rights generally or (ii) due to acceleration in connection with a
foreclosure or other involuntary payment, or
(B) the enforceability is otherwise limited or prohibited by
applicable law.
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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 during the
related Collection Period on the Loans, other than Balloon Payments, and that
were not received by the related Determination Date. With respect to Balloon
Loans, with respect to which the Balloon Payment is not made when due, Advances
will be in an amount equal to an assumed monthly payment that would have been
due on the related due date based on the original principal amortization
schedule for the Balloon Loan.
The Servicer will not make any Advances of principal or interest with
respect to REO Properties.
Advances are required to be made only to the extent they are deemed by the
servicer to be recoverable from related late collections, insurance proceeds or
liquidation proceeds. The purpose of making Advances is to maintain a regular
cash flow to the certificateholders, rather than to guarantee or insure against
losses. The servicer will not be required, however, to make any Advances with
respect to reductions in the amount of the Monthly Payments on the Loans due to
bankruptcy proceedings or the application of the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended. Subject to the recoverability standard, the
servicer's obligation to make Advances will continue until the earlier of the
time as the trust acquires title to the related Mortgaged Property or the Loan
is paid in full by the mortgagor or disposed of by the trust.
All Advances will be reimbursable to the servicer from late collections,
insurance proceeds and liquidation proceeds from the Loan as to which the
unreimbursed Advance was made. In addition, any Advances previously made in
respect of any Loan that are deemed by the servicer to be nonrecoverable from
related late collections, insurance proceeds or liquidation proceeds may be
reimbursed to the servicer out of any funds in the Collection Account prior to
the distributions on the certificates. In the event the servicer fails in its
obligation to make any Advance, the trustee, in its capacity as successor
servicer, will be obligated to make the Advance, to the extent required in 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
reasonable and customary "out-of-pocket" costs and expenses incurred in the
performance of its servicing obligations, including, but not limited to, the
cost of:
(1) the preservation, restoration and protection of the Mortgaged
Properties,
(2) any enforcement or judicial proceedings, including foreclosures,
and
(3) the management and liquidation of Mortgaged Properties acquired
in satisfaction of the related mortgage.
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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. In addition, any Servicing Advances
previously made in respect of any Loan that are deemed by the servicer to be
nonrecoverable may be reimbursed to the servicer out of any funds in the
Collection Account prior to the distributions on the certificates.
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
service-related fees, other than prepayment penalties, including assumption
fees, modification fees, extension fees and late payment charges, to the extent
collected from mortgagors, together with any interest or other income earned on
funds held in the Collection Account and any escrow accounts. The servicer is
obligated to offset any Prepayment Interest Shortfall on any Distribution Date
by paying Compensating Interest with respect to prepayments in full, 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.
The Servicer, in its capacity as a special servicer, is also entitled to a
Special Servicing Fee in connection with Loans that are 90 or more days
Delinquent. The Special Servicing Fee is equal to $150 per Loan 90 or more days
Delinquent, payable monthly for eighteen consecutive months commencing in the
first month after the Cut-off Date in which payments on the Loan are 90 or more
days Delinquent, unless the Loan becomes less than 90 days Delinquent or is
liquidated or repurchased. The servicer will remain entitled to receive any
Special Servicing Fees owed but not paid from previous Distribution Dates.
REALIZATION ON OR SALE OF DEFAULTED LOANS
The servicer will be required to take such action as it deems to be in the
best interest of the certificateholders:
(1) in the event that any payment due under any Loan is not paid when
it becomes due and payable, or
(2) in the event the borrower fails to perform any other covenant or
obligation under the Loan and this failure continues beyond any applicable grace
period.
In connection with any foreclosure or other conversion, the servicer will
exercise the rights and powers vested in it under the Pooling and Servicing
Agreement. The servicer will use the same degree of care and skill as prudent
mortgage servicers would exercise or use under the circumstances in the conduct
of their own affairs. The servicer's actions must be consistent with applicable
regulations, including, without limitation, advancing funds for the payment of
taxes and insurance premiums with respect to first lien Loans.
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If title to any Mortgaged Property is acquired in foreclosure or by deed
in lieu of foreclosure, the deed or certificate of sale will be required to be
issued to the trustee on behalf of the certificateholders. If the trustee is not
authorized or permitted to hold title to real property in the state where the
REO Property is located, or would be adversely affected under the "doing
business" or tax laws of that state by holding title to the REO Property, the
deed or certificate of sale will be taken in the name of the person as is
consistent with an opinion of counsel obtained by the servicer at the cost and
expense of the trust from an attorney duly licensed to practice law in the state
where the REO Property is located. Any person or persons holding title to the
REO Property other than the trustee must acknowledge in writing that title to
the REO Property is being held as nominee for the benefit of the trustee.
If the trust acquires any Mortgaged Property in connection with a default
or imminent default on a Loan, that Mortgaged Property will be required to be
disposed of by or on behalf of the trust prior to the close of the third
calendar year beginning after the year of its acquisition by the trust unless:
(1) the trustee received an opinion of counsel to the effect that the
holding by the trust of that property subsequent to that period will not:
(a) cause any of the trust REMICs to be subject to the tax on
prohibited transactions imposed by Section 860F(a)(1) of the
Code or
(b) cause any of the trust REMICs to fail to qualify as a REMIC
at any time that any certificates are outstanding, or
(2) the servicer applied for, prior to the expiration of the period, an
extension of the period in the manner contemplated by Section 856(e)(3) of the
Code, in which case the original period will be extended by the applicable
extension period.
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.
With respect to any Loan as to which the servicer has received actual
notice of, or has actual knowledge of, the presence of any toxic or hazardous
substance on the related Mortgaged Property, the servicer may not:
(1) obtain title to the related Mortgaged Property as a result of or
in lieu of foreclosure or otherwise, or
(2) otherwise acquire possession of, or take any other action with
respect to, the related Mortgaged Property,
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if, as a result of taking action, the trust would be considered to hold title
to, to be a mortgagee-in-possession of, or to be an owner or operator of the
related Mortgaged Property within the meaning of the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended from time to time,
or any comparable law, unless the servicer has also previously determined, based
on its reasonable judgment and a prudent report prepared by a person who
regularly conducts environmental audits using customary industry standards,
that:
(A) the related Mortgaged Property is in compliance with
applicable environmental laws. If the related Mortgaged Property is
not in compliance with applicable environmental laws, the servicer
must determine whether it would be in the best economic interest of
the certificateholders to take any actions as are necessary to bring
the Mortgaged Property into compliance with applicable environmental
laws; and
(B) there are no circumstances present at the related
Mortgaged Property relating to the use, management or disposal of
any hazardous substances, hazardous materials, hazardous wastes, or
petroleum-based materials for which investigation, testing,
monitoring, containment, clean-up or remediation could be required
under any federal, state or local law or regulation. If any of the
above materials are present for which action could be required to be
taken, the servicer must determine that it would be in the best
economic interest of the certificateholders to take any actions with
respect to the affected Mortgaged Property.
The cost of the environmental audit report contemplated by the Pooling and
Servicing Agreement must be advanced by the servicer as a Servicing Advance.
If the servicer determines that it is in the best economic interest of the
certificateholders to take any actions as are necessary to bring any Mortgaged
Property into compliance with applicable environmental laws, or to take any
action with respect to the containment, clean-up or remediation of hazardous
substances, hazardous materials, hazardous wastes, or petroleum-based materials
affecting any Mortgaged Property, then the servicer must take the action as it
deems to be in the best economic interest of the certificateholders. The cost of
any related compliance, containment, cleanup or remediation must be advanced by
the servicer as a Servicing Advance.
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. An opinion of
counsel will be required to be delivered to the trustee and the depositor to
conclusively establish the reasonableness of this belief. In that event, the
servicer will make reasonable efforts to 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
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applicable law or the mortgage or Mortgage Note. The servicer is also authorized
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 for each Loan fire and hazard
insurance with extended coverage as is customary in the area where the Mortgaged
Property is located. The amount of the coverage must be at least equal to the
lesser of:
(1) the amount necessary to fully compensate for any damage or loss to
the improvements which are a part of the Mortgaged Property on a replacement
cost basis or
(2) the principal balance of the Loan.
In each case above, 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 an area identified in the Federal
Register by the Flood Emergency Management Agency as having special flood
hazards and flood insurance has been made available, the servicer will cause to
be maintained a flood insurance policy meeting the requirements of the current
guidelines of the Federal Insurance Administration with a generally acceptable
insurance carrier. The amount of this coverage must not be less than the least
of:
(1) the principal balance of the Loan,
(2) the maximum insurable value of the improvements securing the Loan
or
(3) the maximum amount of insurance which is available under the
National Flood Insurance Act of 1968, as amended.
The servicer will also maintain on each REO Property for the benefit of
the certificateholders:
(1) fire and hazard insurance with extended coverage in an amount which
is at least equal to the replacement cost of the improvements which are a part
of the Mortgaged Property,
(2) public liability insurance and
(3) to the extent required and available under the National Flood
Insurance Act of 1968, as amended, flood insurance in an amount as provided
above for Mortgaged Properties.
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 with loss payable to the servicer and must provide for at
least 30 days prior
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written notice to the servicer of any cancellation, reduction in the amount of
or material change in coverage.
The servicer must maintain a blanket fidelity bond and an errors and
omissions insurance policy at its own expense. This policy must have broad
coverage with financially responsible companies on all officers, employees or
other persons acting in any capacity with regard to the loans to handle funds,
money, documents and papers relating to the Loans. The blanket fidelity bond and
errors and omissions insurance must be in the form of the Mortgage Banker's
Blanket Bond and must protect and insure the servicer against losses, including
forgery, theft, embezzlement, fraud, errors and omissions and negligent acts of
the persons mentioned above. The blanket fidelity bond must also protect and
insure the servicer against losses in connection with the failure to maintain
any insurance policies required pursuant to the Pooling and Servicing Agreement
and the release or satisfaction of a Loan without having obtained payment in
full of the indebtedness under the Loan. The minimum coverage under any bond and
insurance policy must be at least equal to the corresponding amounts required by
Fannie Mae or by Freddie Mac.
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 90 days following
the end of the servicer's fiscal year, stating that:
(1) a review of the activities of the servicer during the preceding
fiscal year, or shorter period in the case of the first report, and of
performance under the Pooling and Servicing Agreement has been made under the
officers' supervision, and
(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 including the steps being taken by the servicer to remedy
each 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 90 days following the end of the
servicer's fiscal year stating that:
(1) it has obtained a letter of representation regarding certain matters
from the management of the servicer. These matters include an assertion that the
servicer has complied with certain minimum residential mortgage loan servicing
standards, identified 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, with respect to the
servicing of residential mortgage loans during the most recently completed
fiscal year and
(2) on the basis of an examination conducted by the firm in accordance
with standards established by the American Institute of Certified Public
Accountants, the
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representation is fairly stated in all material respects, subject to any
exceptions and other qualifications that may be appropriate.
Immediately upon receipt of the report, the servicer shall furnish a copy
of the report to the trustee, the depositor and each Rating Agency. 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.
PLEDGE AND ASSIGNMENT OF SERVICER'S RIGHTS
On the closing date, the servicer will pledge and assign all of its right,
title and interest in, to and under the rights granted to it in the Pooling and
Servicing Agreement to First Union National Bank, as the representative of
certain lenders to the servicer. In the event that an Event of Servicing
Termination as described below under "-- Events of Servicing Termination"
occurs, the trustee and the depositor have agreed to the appointment of First
Union National Bank or its designee as the successor servicer, provided that at
the time of such appointment First Union National Bank or such designee meets
the requirements of a successor servicer described in the Pooling and Servicing
Agreement, including being acceptable to the Rating Agencies, and that First
Union National Bank or such designee agrees to be subject to the terms of the
Pooling and Servicing Agreement.
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 are in
material conflict by reason of applicable law with any other activities carried
on by it or its subsidiaries or affiliates, or
(2) upon satisfaction of the following conditions:
(a) the servicer has proposed a successor servicer to the
trustee in writing and the proposed successor servicer is
reasonably acceptable to the trustee; and
(b) each Rating Agency has delivered a letter to the trustee prior
to the appointment of the successor servicer stating that the
proposed appointment of the successor servicer as servicer
pursuant to the Pooling and Servicing Agreement will not
result in the reduction or withdrawal of the then current
rating of the offered certificates or the ratings that are in
effect.
No resignation will become effective until a successor servicer or, in the
case of (1) above, the trustee has assumed the servicer's responsibilities and
obligations in accordance with the Pooling and Servicing Agreement or the
trustee has designated a successor servicer in accordance with the requirements
set forth under the Pooling and Servicing Agreement.
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If the servicer is removed or resigns, 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 established housing and home finance institution,
bank or other mortgage loan or home equity loan servicer having a net worth of
at least $50,000,000.
All reasonable costs and expenses, including attorneys' fees, associated
with the transfer of the servicing to the successor servicer upon the
resignation or removal of the predecessor servicer will be payable by the
predecessor servicer, or if the predecessor servicer is the trustee, the initial
servicer.
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 or
Distribution Account the required amounts or remit to the trustee any payment
which continues unremedied for one business day following written notice to the
servicer;
(2) any failure of the servicer to make any Advance or to cover any
Prepayment Interest Shortfalls, as described in this prospectus supplement,
which failure continues unremedied for one business day;
(3) any failure by the servicer to observe or perform in any material
respect any other of its covenants or agreements in the Pooling and Servicing
Agreement, which continues unremedied for 30 days after the first date on which
(x) the servicer has knowledge of such failure or (y) written notice of such
failure is given to the servicer;
(4) insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, and certain actions by or on behalf of the
servicer indicating its insolvency or inability to pay its obligations;
(5) receipt by the trustee of a letter of resignation of the servicer
executed by the servicer and First Union National Bank, as representative of
certain lenders to the servicer under the terms of a credit agreement among the
servicer, certain affiliates of the servicer, First Union National Bank and
certain other financial institutions; or
(6) cumulative Realized Losses or Delinquencies as of any Distribution
Date exceed the amount specified in the Pooling and Servicing Agreement.
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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 51% 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 51% of the
Voting Rights described below under "-- Voting Rights" evidenced by the offered
certificates so agree 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 the final payment or other liquidation of
the last Loan included in the trust and 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 accrued interest for each Loan at the related
Mortgage Interest Rate to but not including the first day of the month in which
the purchase price is distributed plus the amount of any unreimbursed Advances
and Servicing Advances made by the Servicer. 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 60 days or more, the
servicer may, at its option, purchase the Loan from the trust at the Purchase
Price for that Loan.
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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 98%
and will be allocated among the classes of the offered certificates in the
proportion that the aggregate Certificate Principal Balance of all the
certificates of the 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 BB and Class X Certificates will be 2%. 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. The Class R certificates will not have any
Voting Rights.
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,
(2) to correct or supplement any provisions which may be defective or
inconsistent with any other provisions or
(3) to make any other provisions with respect to matters or questions
arising under the Pooling and Servicing Agreement, which shall not be
inconsistent with the provisions of the Pooling and Servicing Agreement.
However, any of the actions listed in clause (1) through (3) above may not
adversely affect in any respect the interests of any certificateholder, as
evidenced by:
(A) 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
(B) 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 any 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
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(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.
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, New York, New York 10001, Attention: Capital
Markets Fiduciary Services 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. 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 trust 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:
(1) that constitutes a specific liability of the trustee under the
Pooling and Servicing Agreement or is incurred in the ordinary course of the
trustee's performance in accordance with the provisions of the Pooling and
Servicing Agreement, or
(2) 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 as a result of a breach, or by reason of reckless disregard, of the
trustee's obligations and duties under the Pooling and Servicing Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The Pooling and Servicing Agreement provides that the trust will comprise
multiple REMICs organized in a tiered REMIC structure consisting of one or more
lower tier REMICs and one upper tier REMIC. Each lower tier REMIC will issue
uncertificated regular interests and those interests will be held entirely by
the REMIC immediately above it in the tiered structure. Each of the lower tier
REMICs and the upper tier REMIC will designate a single class of interests as
the residual interest in that REMIC. The Class R certificate will represent
beneficial ownership of the residual interests in each of the REMICs. Elections
will be made to treat each lower tier REMIC and the upper tier REMIC as a REMIC
for federal income tax purposes. Except to the extent described in the next
paragraph with respect to the Class A-1 certificates, each class of offered
certificates will represent beneficial ownership of the corresponding class of
regular interests issued by the upper tier REMIC. The trust will also include a
grantor trust which will hold the regular interest in the upper tier REMIC
represented by the Class A-1 certificates and the right of that class to receive
LIBOR Carryover Amounts as described in the next paragraph.
The Class A-1 certificates will represent beneficial ownership of the
corresponding class of regular interests issued by the upper tier REMIC and the
right to receive LIBOR Carryover
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Amounts otherwise distributable to the Class BB and Class X certificates as part
of the Monthly Excess Cashflow Amount. Holders of Class A-1 certificates must
allocate their basis between their regular interest and their right to receive
such basis risk payments as set forth below under "-- Taxation of the Basis Risk
Arrangement."
Upon the issuance of the offered certificates, Cadwalader, Wickersham &
Taft, special counsel to the depositor, will deliver its opinion to the effect
that, assuming compliance with the Pooling and Servicing Agreement, for federal
income tax purposes, each lower tier REMIC and the upper tier REMIC will qualify
as a REMIC within the meaning of Section 860D of the Code and the portion of the
trust that holds the regular interest represented by the Class A-1 certificates
and the right to receive LIBOR Carryover Amounts will be treated as a grantor
trust under subpart E, Part 1 of Subchapter J of the Code.
TAXATION OF REGULAR INTERESTS
For federal income tax reporting purposes, the classes of offered
certificates may be treated as having been issued with original issue discount.
The Prepayment Assumption that will be used in determining the rate of accrual
of original issue discount, premium and market discount, if any, for federal
income tax purposes will be based on the assumption that subsequent to the date
of any determination the Loans will prepay at a constant rate of 25% CPR. No
representation is made that the Loans will prepay at such rate or at any other
rate.
The IRS has issued OID regulations under Sections 1271 to 1275 of the Code
generally addressing the treatment of debt instruments issued with original
issue discount. Purchasers of the offered certificates should be aware that the
OID Regulations do not adequately address certain issues relevant to, or are not
applicable to, securities such as the offered certificates. Because of the
uncertainty concerning the application of Section 1272(a)(6) of the Code to such
certificates, and because the rules of the OID Regulations are limited in their
application in ways that could preclude their application to such certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert that
the offered certificates should be treated as issued with original issue
discount or should be governed by the rules applicable to debt instruments
having contingent payments or by some other manner not yet set forth in
regulations. Prospective purchasers of the offered certificates are advised to
consult their tax advisors concerning the tax treatment of such certificates.
The offered certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code, generally in the same proportion that the assets in the trust would
be so treated. In addition, interest on the offered certificates will be treated
as "interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Code, generally to the extent that the offered certificates
are treated as "real estate assets" under Section 856(c)(4)(A) of the Code. See
"Federal Income Tax Consequences -- REMICs -- Characterization of Investments in
REMIC Securities" in the prospectus. If more than 95% of the regular interests
and income qualify for these treatments, the regular interests will qualify for
such treatments in their entirety. However, no portion of a Class A-1
certificate holder's basis or income allocable to the basis risk arrangement
described below will qualify for such treatment.
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TAXATION OF THE BASIS RISK ARRANGEMENT
General. Each holder of a Class A-1 certificate will be treated for
federal income tax purposes as having entered into a notional principal contract
pursuant to its rights to receive payment with respect to LIBOR Carryover
Amounts on the date it purchases its certificates. The rights to receive such
payments is referred to as the "Basis Risk Arrangement" and are beneficially
owned by holders of Class A-1 certificates in the portion of the trust,
exclusive of the REMICs, which is treated as a grantor trust for federal income
tax purposes. The IRS has issued final regulations under Section 446 of the Code
relating to notional principal contracts, referred to as "Swap Regulations."
In general, the holders of the Class A-1 certificates must allocate the
price they pay for he Class A-1 certificates between their regular interest in
the upper tier REMIC and the Basis Risk Arrangement based on their relative fair
market values. To the extent rights to receive payments are determined to have a
value on the closing date that is greater than zero, a portion of such purchase
price will be allocable to such rights, and such portion will be treated as a
cap premium paid by the holders of the Class A-1 certificates. A holder of a
Class A-1 certificate will be required to amortize the cap premium under a level
payment method as if the cap premium represented the present value of a series
of equal payments made over the life of the Basis Risk Arrangement, adjusted to
take into account decreases in notional principal amount, discounted at a rate
equal to the rate used to determine the amount of the cap premium or some other
reasonable rate. Prospective purchasers of Class A-1 certificates should consult
their own tax advisors regarding the appropriate method of amortizing any cap
premium. The Swap Regulations treat a nonperiodic payment made under a cap
contract as a loan for federal income tax purposes if the payment is
"significant." It is not known whether any cap premium would be treated in part
as a loan under the Swap Regulations.
Under the Swap Regulations:
(1) all taxpayers must recognize periodic payments with respect to a
notional principal contract under the accrual method of accounting, and
(2) any periodic payments received under the Basis Risk Arrangement must
be netted against payments, if any, deemed made as a result of the cap premiums
over the recipient's taxable year, rather than accounted for on a gross basis.
Net income or deduction with respect to net payments under a notional
principal contract for a taxable year should constitute ordinary income or
ordinary deduction. The IRS could contend the amount is capital gain or loss,
but such treatment is unlikely, at least in the absence of further regulations.
Any regulations requiring capital gain or loss treatment presumably would apply
only prospectively. Individuals may be limited in their ability to deduct any
such net deduction and should consult their tax advisors prior to investing in
the Class A-1 certificates.
Any amount of proceeds from the sale, redemption or retirement of a Class
A-1 certificate that is considered to be allocated to rights under the Basis
Risk Arrangement would be considered a "termination payment" under the Swap
Regulations. It is anticipated that the
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trustee will account for any termination payments for reporting purposes in
accordance with the Swap Regulations, as described below.
Termination Payments. Any amount of sales proceeds that is considered to
be allocated to the selling beneficial owner's rights under the Basis Risk
Arrangement in connection with the sale or exchange of a Class A-1 certificate
would be considered a "termination payment" under the Swap Regulations allocable
to that Class A-1 certificate. A holder of a Class A-1 certificate will have
gain or loss from such a termination of the Basis Risk Arrangement equal to:
(1) any termination payment it received or is deemed to have received
minus
(2) the unamortized portion of any cap premium paid (or deemed paid) by
the beneficial owner upon entering into or acquiring its interest in the Basis
Risk Arrangement.
Gain or loss realized upon the termination of the Basis Risk Arrangement
will generally be treated as capital gain or loss. Moreover, in the case of a
bank or thrift institution, Code Section 582(c) would likely not apply to treat
such gain or loss as ordinary.
Application of the Straddle Rules. The Class A-1 certificates,
representing beneficial ownership of the corresponding regular interest and the
Basis Risk Arrangement, may constitute positions in a straddle, in which case,
the straddle rules of Code Section 1092 would apply. A selling beneficial
owner's capital gain or loss with respect to such regular interest would be
short-term because the holding period would be tolled under the straddle rules.
Similarly, capital gain or loss realized in connection with the termination of
the Basis Risk Arrangement would be short-term. If the holder of a Class A-1
certificate incurred or continued indebtedness to acquire or hold such Class A-1
certificate, the holder would generally be required to capitalize a portion of
the interest paid on such indebtedness until termination of the Basis Risk
Arrangement.
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.
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The responsibility for filing annual federal information returns and other
reports will be borne by the trustee. See "Federal Income Tax Consequences --
REMICs -- Taxes That May Be Imposed on the REMIC Pool -- 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.
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.
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The U.S. Department of Labor has granted PaineWebber Incorporated
Prohibited Transaction Exemption 90-36, 55 Fed. Reg. 25903 (1990). This
Prohibited Transaction Exemption 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:
(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 Rating Services, Fitch IBCA,
Inc. 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, Moody's
Investors Services, Inc. or Fitch IBCA, 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:
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(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;
(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 certificates, but not the
Class M-1, Class M-2 and Class B 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 certificate, a fiduciary of a Plan should make
its own determination as to the availability of the exemptive relief provided in
the exemption or the availability of any other prohibited transaction
exemptions, including PTE 83-1, and whether the conditions of any exemption will
be applicable to the Class A certificates. Any fiduciary of a Plan considering
whether to purchase a Class A 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-1, Class M-2 and Class B certificates are subordinated
to the Class A certificates with respect to certain losses, the purchase and
holding of the Class M-1, Class M-2 and Class B certificates by or on behalf of
a Plan may result in "prohibited transactions" within the meaning of ERISA and
Code Section 4975. Any transferee of the Class M-1, Class M-2 and Class B
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-1, Class M-2 and Class B 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
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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-1, Class M-2 and Class B certificates by the transferee are covered by
Sections I and III of PTE 95-60. The Pooling and Servicing Agreement will
provide that any attempted or purported transfer in violation of these transfer
restrictions will be null and void and will vest no rights in any purported
transferee.
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 offered 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.
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RATINGS
It is a condition to the original issuance of the Class A certificates
that they receive the following ratings by Moody's Investors Service, Inc.
and Standard & Poor's Ratings Services:
CLASS MOODY'S S&P
----- ------- ---
A-1 Aaa AAA
A-2 Aaa AAA
A-3 Aaa AAA
A-4 Aaa AAA
A-5 Aaa AAA
M-1 Aa2 AA
M-2 A2 A
B Baa2 BBB
Explanations of the significance of the ratings may be obtained from
Moody's Investor's Service Inc., 99 Church Street, New York, New York 10007 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.
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
"60+ DAY DELINQUENT LOAN" means each Loan with respect to which any
portion of a Monthly Payment is, as of the last day of the prior Collection
Period, two months or more past due, without giving effect to any grace period,
each Loan in foreclosure, all REO Property and each Loan for which the mortgagor
has filed for bankruptcy after the closing date.
"ACCRUED CERTIFICATE INTEREST" means for each class of offered
certificates and each Distribution Date, an amount equal to the interest accrued
during the related Interest Accrual Period on the Certificate Principal Balance
of such class of certificates, minus each class's Interest Percentage of
shortfalls caused by the Relief Act for that Distribution Date.
"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, net of the Servicing Fee that were due during the
related Collection Period on the Loans, other than Balloon Payments, and that
were not received by the related Determination Date. With respect to Balloon
Loans, with respect to which the Balloon Payment is not made when due, Advances
will be in an amount equal to an assumed monthly payment that would have been
due on the related due date based on the original principal amortization
schedule for the Balloon Loan.
"AGGREGATE NET INTEREST AMOUNT" means for any Distribution Date, the
aggregate of the following amount for each Loan, the product of:
(1) one-twelfth of the Net Mortgage Interest Rate for that Loan and
(2) the Principal Balance of that Loan as of the first day of the
related Collection Period.
"APPLIED REALIZED LOSS AMOUNT" means with respect to any class of
certificates, the amount by which the Certificate Principal Balance of that
class is reduced as a result of the allocation of Realized Losses to that class.
"AVAILABLE FUNDS" means with respect to any Distribution Date, an amount
equal to the sum of the following amounts with respect to the Loans, net of
amounts reimbursable or payable to the servicer:
(1) the aggregate amount of Monthly Payments on the Loans due during the
related Collection Period and received by the trustee one business day prior to
the related Distribution Date, after deduction of the Servicing Fee and any
accrued and unpaid Servicing Fee, if any,
(2) certain unscheduled payments in respect of the Loans, including
prepayments (but excluding any prepayment penalties collected), received during
the related Prepayment Period,
(3) payments from the servicer in connection with Advances and
Prepayment Interest Shortfalls for the related Distribution Date,
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(4) the Purchase Price for any repurchased loan deposited to the
Collection Account during the related Prepayment Period,
(5) any Substitution Adjustment Amounts deposited in the Collection
Account during the related Prepayment Period, and
(6) on the Distribution Date on which the trust is to be terminated in
accordance with the Pooling and Servicing Agreement, the Termination Price.
"BALLOON LOAN" means any Loan that provides for the payment of the
unamortized principal balance of the Loan in a single payment at the maturity of
the Loan that is substantially greater than the preceding Monthly Payment.
"BALLOON PAYMENT" means with respect to any Balloon Loan, the payment of
the unamortized principal balance of the that Loan in a single payment at the
maturity of the Loan that is substantially greater than the preceding Monthly
Payment.
"CERTIFICATE PRINCIPAL BALANCE" means with respect to any class of
certificates and any Distribution Date, will equal 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; and
(2) that class's pro rata share of any Applied Realized Loss Amount for
previous Distribution Dates.
"CLASS A CERTIFICATES" means any of the Class A-1, Class A-2, Class A-3,
Class A-4 or Class A-5 certificates.
"CLASS A INTEREST CARRY FORWARD AMOUNT" for any Distribution Date is the
sum of the Interest Carry Forward Amounts for the Class A certificates for that
Distribution Date.
"CLASS A PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution Date
as long as a Trigger Event is not in effect, the excess of:
(1) the sum of the Certificate Principal Balances of the Class A
certificates immediately prior to such Distribution Date over
(2) the lesser of:
(A) the product of (i) approximately 68.80% and (ii) the Pool
Balance as of the last day of the related Collection Period and
(B) the Pool Balance as of the last day of the related Collection
Period minus the product of (i) 0.50% and (ii) the Pool Balance on the
Cut-off Date.
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"CLASS A-5 LOCKOUT DISTRIBUTION AMOUNT" for any Distribution Date, is the
product of:
(1) the applicable Class A-5 Lockout Percentage for the Distribution
Date and
(2) the Class A-5 Lockout Pro Rata Distribution Amount for the
Distribution Date.
"CLASS A-5 LOCKOUT PERCENTAGE" for each Distribution Date is as follows:
DISTRIBUTION DATES LOCKOUT PERCENTAGE
------------------ ------------------
June 2000 - May 2003 0%
June 2003 - May 2005 45%
June 2005 - May 2006 80%
June 2006 - May 2007 100%
June 2007 and thereafter 300%
"CLASS A-5 LOCKOUT PRO RATA DISTRIBUTION AMOUNT" for any Distribution Date
is an amount equal to the product of:
(1) a fraction, the numerator of which is the Certificate Principal
Balance of the Class A-5 certificates immediately prior to that Distribution
Date and the denominator of which is the aggregate Certificate Principal Balance
of all the Class A certificates immediately prior to that Distribution Date and
(2) the Principal Distribution Amount for that Distribution Date.
"CLASS B APPLIED REALIZED LOSS AMOUNT" means, as to the Class B
certificates and as of any Distribution Date, the lesser of:
(1) the Certificate Principal Balance of the Class B certificates after
taking into account the distribution of the Principal Distribution Amount on
that Distribution Date, but prior to the application of the Class B Applied
Realized Loss Amount, if any, on that Distribution Date, and
(2) the Applied Realized Loss Amount as of such Distribution Date.
"CLASS B PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution Date
as long as a Trigger Event is not in effect, the excess of:
(1) the sum of:
(A) the sum of the Certificate Principal Balances of the
Class A certificates, after taking into account the payment of the
Class A Principal Distribution Amount on that Distribution Date,
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(B) the Certificate Principal Balance of the Class M-1
certificates, after taking into account the payment of the Class M-1
Principal Distribution Amount on that Distribution Date,
(C) the Certificate Principal Balance of the Class M-2
certificates, after taking into account the payment of the Class M-2
Principal Distribution Amount on that Distribution Date, and
(D) the Certificate Principal Balance of the Class B
certificates immediately prior to that Distribution Date, over
(2) the lesser of:
(A) the product of (i) approximately 91.80% and (ii) the
Pool Balance as of the last day of the related Collection Period
and
(B) the Pool Balance as of the last day of the related
Collection Period minus the product of (i) 0.50% and (ii) the Pool
Balance on the Cut-off Date.
"CLASS B REALIZED LOSS AMORTIZATION AMOUNT" means, as to the Class B
certificates and as of any Distribution Date, the lesser of:
(1) the Unpaid Realized Loss Amount for the Class B certificates as
of that Distribution Date and
(2) the excess of:
(A) the Monthly Excess Cashflow Amount over
(B) the sum of the amounts described in clauses (1) through
(11) of the Monthly Excess Cashflow Allocation for that Distribution
Date as described under "Description of the Offered Certificates --
Application of Monthly Excess Cash Flow Amounts."
"CLASS M-1 APPLIED REALIZED LOSS AMOUNT" means, as to the Class M-1
certificates and as of any Distribution Date, the lesser of:
(1) the Certificate Principal Balance of the Class M-1 certificates,
after taking into account the distribution of the Principal Distribution Amount
on that Distribution Date, but prior to the application of the Class M-1 Applied
Realized Loss Amount, if any, on that Distribution Date, and
(2) the excess of:
(A) the Applied Realized Loss Amount as of that
Distribution Date over
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(B) the sum of the Class M-2 Applied Realized Loss Amount
and the Class B Applied Realized Loss Amount, in each case as of
that Distribution Date.
"CLASS M-1 PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date as long as a Trigger Event is not in effect, the excess of:
(1) the sum of:
(A) the sum of the Certificate Principal Balances of the
Class A certificates, after taking into account the payment of the
Class A Principal Distribution Amount on that Distribution Date, and
(B) the Certificate Principal Balance of the Class M-1
Certificates immediately prior to such Distribution Date, over
(2) the lesser of:
(A) the product of (i) approximately 78.80% and (ii) the
Pool Balance as of the last day of the related Collection Period
and
(B) the Pool Balance as of the last day of the related
Collection Period minus the product of (i) 0.50% and (ii) the Pool
Balance on the Cut-off Date.
"CLASS M-1 REALIZED LOSS AMORTIZATION AMOUNT" means, as to the Class M-1
certificates and as of any Distribution Date, the lesser of:
(1) the Unpaid Realized Loss Amount for the Class M-1 certificates as
of that Distribution Date and
(2) the excess of:
(A) the Monthly Excess Cashflow Amount over
(B) the sum of the amounts described in clauses (1) through
(5) of the Monthly Excess Cashflow Allocation for that Distribution
Date as described under "Description of the Offered Certificates
-- Application of Monthly Excess Cash Flow Amounts."
"CLASS M-2 APPLIED REALIZED LOSS AMOUNT" means, as to the Class M-2
certificates and as of any Distribution Date, the lesser of:
(1) the Certificate Principal Balance of the Class M-2 certificates,
after taking into account the distribution of the Principal Distribution Amount
on that Distribution Date, but prior to the application of the Class M-2 Applied
Realized Loss Amount, if any, on that Distribution Date, and
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(2) the excess of:
(A) the related Applied Realized Loss Amount as of that
Distribution Date over
(B) the Class B Applied Realized Loss Amount as of that
Distribution Date.
"CLASS M-2 PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution
Date as long as a Trigger Event is not in effect, the excess of:
(1) the sum of:
(A) the sum of the Certificate Principal Balances of the
Class A certificates, after taking into account the payment of the
Class A Principal Distribution Amount on that Distribution Date,
(B) the Certificate Principal Balance of the Class M-1
certificates, after taking into account the payment of the Class M-1
Principal Distribution Amount on that Distribution Date, and
(C) the Certificate Principal Balance of the Class M-2
Certificates immediately prior to that Distribution Date, over
(2) the lesser of:
(A) the product of (i) approximately 85.80% and (ii) the
Pool Balance as of the last day of the related Collection Period
and
(B) the Pool Balance as of the last day of the related
Collection Period minus the product of (i) 0.50% and (ii) the Pool
Balance on the Cut-off Date.
"CLASS M-2 REALIZED LOSS AMORTIZATION AMOUNT" means, as to the Class M-2
certificates and as of any Distribution Date, the lesser of:
(1) the Unpaid Realized Loss Amount for the Class M-2 certificates as
of that Distribution Date and
(2) the excess of:
(A) the Monthly Excess Cashflow Amount over
(B) the sum of the amounts described in clauses (1) through
(8) of the Monthly Excess Cashflow Allocation for that Distribution
Date as described under "Description of the Offered Certificates --
Application of Monthly Excess Cash Flow Amounts."
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"CLTV" for any loan is the combined loan-to-value ratio, which is
calculated by dividing the sum of:
(1) the unpaid principal balance of the loan as of the Cut-Off Date;
and
(2) with respect to second lien loans only, the outstanding first lien
balance of the loan as of the date of origination of the related loan, by
the lower of the purchase price of the property or the appraised value of the
property at origination.
"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.
"COLLECTION PERIOD" means with respect to any Distribution Date the period
from the second day of the calendar month preceding the month in which that
Distribution Date occurs through the first day of the month in which that
Distribution Date occurs.
"COMPENSATING INTEREST" for any Distribution Date is an amount equal to
the lesser of:
(A) the aggregate of the Prepayment Interest Shortfalls for the related
Distribution Date resulting from principal prepayments in full during the
related Collection Period and
(B) 50% of the servicer's aggregate Servicing Fees received in the
related Collection Period.
"CPR" means constant prepayment rate.
"CUSTODIAL AGREEMENT" means the custodial agreement among the trustee,
the servicer and U.S. Bank National Association, as custodian.
"CUT-OFF DATE" means May 1, 2000.
"CUT-OFF DATE POOL BALANCE" means the Pool Balance as of the Cut-Off Date.
"DEFICIENT VALUATION" means the difference between the outstanding
principal balance of a Loan and the amount of the Loan that is still secured by
the related Mortgaged Property after the bankruptcy court in a personal
bankruptcy of the related mortgagor establishes the value of the Mortgaged
Property to be an amount less than the then outstanding principal balance of the
Loan secured by that Mortgaged Property.
"DEFINITIVE CERTIFICATE" means any certificate represented by a physical
certificate and not a book-entry certificate.
"DELINQUENT" means with respect to any Loan, that the Monthly Payment due
on a due date is not paid by the close of business on the next scheduled due
date for the Loan. Thus, for example, a Loan for which the mortgagor failed to
make the Monthly Payment due on March 1,
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2000 will be reported as Delinquent on April 2, 2000, if the Monthly Payment is
not received as of the close of business on April 1, 2000.
"DETERMINATION DATE" means with respect to any Distribution Date, the 10th
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 10th day.
"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
June 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 5%
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 the same due date as the defective Loan;
(4) have a remaining term to maturity not more than one year earlier and
not later 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;
(6) have been underwritten or re-underwritten in accordance with the
same underwriting criteria and guidelines as the defective Loans being replaced;
(7) must be of the same or better credit quality as the defective Loan
being replaced; and
(8) satisfy certain other conditions specified in the Pooling and
Servicing Agreement.
"EXTRA PRINCIPAL DISTRIBUTION AMOUNT" means:
(1) as of any Distribution Date on which a Trigger Event exists, the
Monthly Excess Interest Amount for that Distribution Date, and
(2) as of any Distribution Date as long as a Trigger Event is not in
effect, the lesser of:
(a) the Monthly Excess Interest Amount for that Distribution
Date and
(b) the Overcollateralization Deficiency for that Distribution
Date.
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"INTEREST ACCRUAL PERIOD" means for any Distribution Date, the period:
(1) with respect to each class of offered certificates, other than the
Class A-1 certificates, from and including the first day of each month,
commencing May 1, 2000, to and including the last day of that month on the basis
of a 360-day year consisting of twelve 30-day months, and
(2) with respect to the Class A-1 certificates, from the preceding
Distribution Date, or in the case of the first Distribution Date, from the
closing date, to the day prior to the current Distribution Date on the basis of
a 360-day year and the actual number of days elapsed.
"INTEREST CARRY FORWARD AMOUNT" means for any class of offered
certificates and any Distribution Date the sum of:
(1) the excess, if any, of the Accrued Certificate Interest for that
class for the prior Distribution Date, over the amount in respect of interest
actually distributed for that class on the prior Distribution Date,
(2) interest on that excess at the applicable pass-through rate (x) with
respect to the offered certificates, other than the Class A-1 certificates, on
the basis of a 360-day year consisting of twelve 30-day months and (y) with
respect to the Class A-1 certificates, on the basis of the actual number of days
elapsed since the prior Distribution Date, and
(3) any unpaid amounts in respect of (1) and (2) above for that class.
"INTEREST PERCENTAGE" means, with respect to any class of certificates and
any Distribution Date, the ratio, expressed as a decimal carried to six places,
of the Accrued Certificate Interest for that class to the Accrued Certificate
Interest for all classes, in each case with respect to that Distribution Date.
"INTEREST REMITTANCE AMOUNT" means, as of any Determination Date, the sum,
without duplication, of:
(1) all interest collected or advanced with respect to the related
Collection Period on the Loans, less the Servicing Fee, certain amounts
available for reimbursement of Advances and Servicing Advances as described
above under "The Pooling and Servicing Agreement -- Advances" and certain other
reimbursable expenses pursuant to the Pooling and Servicing Agreement,
(2) all Compensating Interest paid by the servicer on that
Determination Date with respect to the Loans and
(3) the portion of any payment in connection with any substitution,
Purchase Price, Termination Price, liquidation proceeds, net of certain
expenses, or insurance proceeds relating to interest with respect to the Loans
received during the related Prepayment Period.
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"LIBOR CARRYOVER AMOUNT" means with respect to any Distribution Date on
which the Accrued Certificate Interest for the Class A-1 certificates is based
on the Maximum Rate, an amount equal to the excess of:
(1) the amount of interest the Class A-1 certificates would have been
entitled to receive on that Distribution Date based on its applicable
pass-through rate without the application of the Maximum Rate, over
(2) the amount of interest the Class A-1 certificates received on
that Distribution Date based on the Maximum Rate,
together with the unpaid portion of any excess from prior Distribution Dates,
and accrued interest at the then applicable pass-through rate on the Class A-1
certificates.
"LIBOR DETERMINATION DATE" is the second business day prior to the
immediately preceding Distribution Date, or prior to the closing date in the
case of the first Distribution Date.
"LIQUIDATED MORTGAGE 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 Mortgage Loan have been recovered.
"LOAN" means any of the mortgage loans included in the trust.
"MAXIMUM RATE" means for any class of offered certificates, other than the
Class A-2 certificates and for any Distribution Date, the rate expressed as a
percentage and annualized on a 30/360 basis and converted in the case of the
Class A-1 Certificates to an annual rate for each month based on the actual
number of days elapsed, equivalent to a fraction:
(A) the numerator of which is the Aggregate Net Interest Amount
for that Distribution Date; and
(B) the denominator of which is the aggregate of the Certificate
Principal Balances of the offered certificates immediately prior to that
Distribution Date.
"MONTHLY EXCESS CASHFLOW AMOUNT" means with respect to any Distribution
Date, the sum of the Monthly Excess Interest Amount, the Overcollateralization
Release Amount and any portion of the Principal Distribution Amount, without
duplication, remaining after principal distributions on the offered
certificates.
"MONTHLY EXCESS INTEREST AMOUNT" means with respect to any Collection
Period, the excess of the interest collections on the Loans at the Net Mortgage
Interest Rate for each Loan over the aggregate amount of interest required to be
paid to the certificates at the applicable pass-through rates.
"MONTHLY PAYMENT" means with respect to each Loan, the scheduled monthly
payment of principal and interest on that Loan which is payable by the related
mortgagor under the related Mortgage Note.
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"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 MORTGAGE INTEREST 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.
"ONE-MONTH LIBOR" means with respect to any Distribution Date, the
interbank offered rate for one-month United States dollar deposits in the London
market as quoted on Telerate Page 3750 as of 11:00 A.M., London time, on the
related LIBOR Determination Date. If that rate does not appear on that page, or
any other page as may replace that page on that service, or if the service is no
longer offered, any other service for displaying One-Month LIBOR or comparable
rates as may be selected by the trustee after consultation with the servicer,
the rate will be the Reference Bank Rate.
"OPTIONAL TERMINATION DATE" means the first Distribution Date on which the
aggregate 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.
"OVERCOLLATERALIZATION AMOUNT" means, as of any Distribution Date the
excess, if any, of:
(1) the Pool Balance as of the last day of the related Collection
Period over
(2) the aggregate Certificate Principal Balance of all classes of
offered certificates, after taking into account all distributions of principal
on that Distribution Date.
"OVERCOLLATERALIZATION DEFICIENCY" means, as of any Distribution Date, the
excess, if any, of:
(1) the Targeted Overcollateralization Amount for that Distribution
Date over
(2) the Overcollateralization Amount for such Distribution Date,
calculated for this purpose after taking into account the reduction on that
Distribution Date of the Certificate Principal Balances of all classes of
certificates resulting from the distribution of the Principal Distribution
Amount, but not the Extra Principal Distribution Amount, on that Distribution
Date, but prior to taking into account any Applied Realized Loss Amounts on that
Distribution Date.
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"OVERCOLLATERALIZATION RELEASE AMOUNT" means, with respect to any
Distribution Date on or after the Stepdown Date and on which a Trigger Event is
not in effect, the lesser of:
(1) the Principal Remittance Amount for such Distribution Date and
(2) the excess, if any, of:
(A) the Overcollateralization Amount for that Distribution
Date, assuming that 100% of the Principal Remittance Amount is
applied as a principal payment on the certificates on that
Distribution Date, over
(B) the Targeted Overcollateralization Amount for that
Distribution Date.
"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 investment in entities specified in clauses (1) and (2) above.
"POOL BALANCE" means with respect to any date, the aggregate principal
balance of the Loans as of that date.
"POOLING AND SERVICING AGREEMENT" is a pooling and servicing agreement
among the depositor, the originators, the servicer and the trustee.
"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.
"PREPAYMENT INTEREST SHORTFALL" means with respect to any Determination
Date and each Loan as to which a principal prepayment in full was applied during
the prior calendar month, an amount equal to the interest at the Mortgage
Interest Rate for the related Loan, net of the Servicing Fee Rate, on the amount
of the principal prepayment for the number of days commencing on the date on
which the principal prepayment is applied and ending on the last day of the
prior calendar month.
"PREPAYMENT PERIOD" means with respect to any Distribution Date the
calendar month preceding the month in which that Distribution Date occurs.
"PRINCIPAL DISTRIBUTION AMOUNT" means as of any Distribution Date, the sum
of:
(1) the Principal Remittance Amount, minus the Overcollateralization
Release Amount, if any, and
(2) the Extra Principal Distribution Amount, if any.
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"PRINCIPAL REMITTANCE AMOUNT" means, with respect to any Distribution
Date, to the extent of funds available, the amount equal to the sum, less
certain amounts available for reimbursement of Advances and Servicing Advances
as described under "The Pooling and Servicing Agreement-Advances" and certain
other reimbursable expenses pursuant to the Pooling and Servicing Agreement of
the following amounts, without duplication, with respect to the Loans and the
immediately preceding Collection Period:
(1) each payment of principal on a Loan due during such Collection
Period and received by the servicer on or prior to the related Determination
Date, including any Advances with respect thereto,
(2) all full and partial principal prepayments received by the Servicer
during the related Prepayment Period,
(3) the liquidation proceeds, net of certain expenses, allocable to
principal actually collected by the servicer during the related Prepayment
Period,
(4) the portion of the Purchase Price allocable to principal of all
repurchased defective Loans with respect to the related Prepayment Period,
(5) any Substitution Adjustment Amounts received on or prior to the
previous Determination Date and not yet distributed, and
(6) on the Distribution Date on which the trust is to be terminated in
accordance with the Pooling and Servicing Agreement, that portion of the
Termination Price in respect of principal.
"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 all accrued and unpaid interest, computed at the Mortgage
Interest Rate through the end of the calendar month in which the purchase is
effected, plus the amount of any unreimbursed Advances and Servicing Advances
made by the servicer with respect to that defective Loan.
"RATING AGENCY" means any of Moody's Investors Service, Inc., Standard &
Poor's Ratings Services or any of their respective successors in interest.
"REALIZED LOSS" means with respect to any Loan:
(1) the amount of any Deficient Valuation with respect to that Loan;
(2) any reduction in the principal balance of that Loan resulting
from a Servicer Modification; or
(3) the unpaid principal balance of that Loan plus accrued and unpaid
interest at the Mortgage Interest Rate through the last day of the month of
liquidation, less the net proceeds from the liquidation of, and any insurance
proceeds from, the Loan and the related Mortgaged Property.
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"REALIZED LOSS AMORTIZATION AMOUNT" means each of the Class M-1 Realized
Loss Amortization Amount, the Class M-2 Realized Loss Amortization Amount and
the Class B Realized Loss Amortization Amount.
"RECORD DATE" means with respect to any Distribution Date:
(1) with respect to the offered certificates, other than the Class A-1
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, and
(2) with respect to the Class A-1 certificates, the business day
immediately preceding that Distribution Date; provided, however, that if any
Class A-1 certificate becomes a Definitive Certificate, the Record Date for that
certificate will be the last business day of the month immediately preceding the
month in which the related Distribution Date occurs.
"REFERENCE BANK RATE" with respect to any Distribution Date will be the
rates at which deposits in U.S. Dollars are offered by the reference banks,
which shall be major banks that are engaged in transactions in the London
interbank market, selected by the trustee, as of 11:00 A.M., London time, on the
related LIBOR Determination Date to prime banks in the London interbank market
for a period of one month in amounts approximately equal to the Certificate
Principal Balance of the Class A-1 certificates. If at least two quotations are
provided, the rate will be the arithmetic mean of the quotations. If on that
date fewer than two quotations are provided, the rate will be the arithmetic
mean of the rates quoted by one or more major banks in New York City, selected
by the trustee, as of 11:00 A.M., New York City time, on that date for loans in
U.S. dollars to leading European banks for a period of one month in amounts
approximately equal to the Certificate Principal Balance of the Class A-1
certificates. If no quotations can be obtained, the rate will be One-Month LIBOR
for the prior Distribution Date.
"RELIEF ACT" means the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
"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.
"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
"SENIOR CERTIFICATES" means any of the Class A-1, Class A-2, Class A-3,
Class A-4 and Class A-5 certificates.
"SENIOR ENHANCEMENT PERCENTAGE" for any Distribution Date is the
percentage obtained by dividing:
(1) the sum of (x) the aggregate Certificate Principal Balance of the
Subordinated Certificates and (y) the Overcollateralization Amount, in each case
before taking into account the distribution of the Principal Distribution Amount
on that Distribution Date by
(2) the Pool Balance as of the last day of the related Collection
Period.
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"SENIOR SPECIFIED ENHANCEMENT PERCENTAGE" on any date of determination
thereof means approximately 31.20%.
"SERVICER MODIFICATION" means a modification by the servicer of a Loan
that is in default or default is reasonably foreseeable, to reduce its principal
balance and/or extend its term to a term not longer than the latest maturity
date of any other Loan.
"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 at the first day
of the applicable Collection Period.
"SERVICING FEE RATE" is the rate, equal to 0.50% per annum.
"SPECIAL SERVICING FEE" means in connection with Loans that are 90 or more
days Delinquent, the fee payable to the servicer in an amount equal to $150 per
Loan, payable monthly for eighteen consecutive months commencing in the first
month after the Cut-off Date in which payments on the Loan are 90 or more days
Delinquent, unless the Loan becomes less than 90 days Delinquent or is
liquidated or repurchased.
"STEPDOWN DATE" means the later to occur of:
(i) the Distribution Date in June 2003; and
(ii) the first Distribution Date on which the Senior Enhancement
Percentage is greater than or equal to the Senior Specified Enhancement
Percentage.
"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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"TARGETED OVERCOLLATERALIZATION AMOUNT" means as of any Distribution
Date,
(A) prior to the Stepdown Date, 4.10% of the initial Pool Balance; and
(B) on or after the Stepdown Date, the lesser of:
(1) 4.10% of the initial Pool Balance and
(2) the greater of (x) 8.20% of the Pool Balance as of the last
day of the related Collection Period and (y) 0.50% of the
initial Pool Balance.
"TELERATE PAGE 3750" means with respect to any Distribution Date, the
display designated as page 3750 on the Bridge Telerate, or such other page as
may replace page 3750 on that service for the purpose of displaying London
interbank offered rates of major banks.
"TERMINATION PRICE" means with respect to each Loan to be purchased on the
Optional Termination Date an amount generally equal to par plus accrued interest
for that Loan at the related Mortgage Interest Rate to but not including the
first day of the month in which the purchase price is distributed plus the
amount of any unreimbursed Advances and Servicing Advances made by the servicer.
"TRIGGER EVENT" will have occurred on a Distribution Date if the six-month
rolling average of 60+ Day Delinquent Loans equals or exceeds 45% of the Senior
Enhancement Percentage; provided, that if the Certificate Principal Balance of
the Senior Certificates has been reduced to zero, a Trigger Event will have
occurred if the six-month rolling average of 60+ Day Delinquent Loans equals or
exceeds 25%.
"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 0.0154% per annum.
"UNPAID REALIZED LOSS AMOUNT" means for any class of Subordinated
Certificates and as to any Distribution Date, the excess of:
(1) the cumulative amount of related Applied Realized Loss Amounts with
respect to that class for all prior Distribution Dates over
(2) the cumulative amount of related Realized Loss Amortization Amounts
with respect to that class for all prior Distribution Dates.
"WEIGHTED AVERAGE LIFE" refers to the average amount of time that will
elapse from the date of issuance of a security to the date of distribution to
the investor thereof of each dollar distributed in reduction of principal of the
security, assuming no losses.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the offered certificates will be
offered globally (the "Global Securities") and will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, Clearstream Banking or Euroclear. The Global
Securities will be tradable as home market instruments in both the European and
U.S. domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream Banking and Euroclear will be conducted in the ordinary way
in accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice -- i.e., seven calendar day settlement.
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream Banking or Euroclear
and DTC participants holding certificates will be effected on a
delivery-against-payment basis through the respective depositaries of
Clearstream Banking and Euroclear and as DTC participants.
Non-U.S. holders of Global Securities will be subject to U.S.
withholding taxes unless such holders meet certain requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or
their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect participants in DTC. As a result, Clearstream Banking and
Euroclear will hold positions on behalf of their participants through their
respective depositaries, which in turn will hold such positions in accounts as
DTC participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to conventional eurobonds, except that there
will be no temporary global security and no "lock-up" or restricted period.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
Banking or Euroclear accounts will follow the settlement procedures applicable
to conventional eurobonds, except that there will be no temporary global
security and no `lock-up' or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
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SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
Trading between Clearstream Banking and/or Euroclear Participants.
Secondary market trading between Clearstream Banking participants or Euroclear
participants will be settled using the procedures applicable to conventional
eurobonds in same-day funds.
Trading between DTC seller and Clearstream Banking or Euroclear purchaser.
When Global Securities are to be transferred from the account of a DTC
participant to the account of a Clearstream Banking participant or a Euroclear
participant, the purchaser will send instructions to Clearstream Banking or
Euroclear through a Clearstream Banking participant or Euroclear Participant at
least one business day prior to settlement. Clearstream Banking or Euroclear
will instruct the respective depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of either a 360-day year comprised
of 30-day months or the actual number of days in such accrual period and a year
assumed to consist of 360 days, as applicable. For transactions settling on the
31st of the month, payment will include interest accrued to and excluding the
first day of the following month. Payment will then be made by the respective
depositary of the DTC participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will be
credited by the clearing system, in accordance with its usual procedures, to the
Clearstream Banking Participant's or Euroclear Participant's account. The
securities credit will appear the next day -- European time -- and the cash debt
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date, which would be the preceding day when settlement occurred
in New York. If settlement is not completed on the intended value date -- i.e.,
the trade fails -- the Clearstream Banking or Euroclear cash debt will be valued
instead as of the actual settlement date.
Clearstream Banking participants and Euroclear participants will need to
make available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream Banking or Euroclear.
Under this approach, they may take on credit exposure to Clearstream Banking or
Euroclear until the Global Securities are credited to their accounts one day
later.
As an alternative, if Clearstream Banking or Euroclear has extended a line
of credit to them, Clearstream Banking participants or Euroclear participants
can elect not to preposition funds and allow that credit line to be drawn upon
the finance settlement. Under this procedure, Clearstream Banking participants
or Euroclear participants purchasing Global Securities would incur overdraft
charges for one day, assuming they cleared the overdraft when the Global
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Securities were credited to their accounts. However, interest on the Global
Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges, although
this result will depend on each Clearstream Banking participant's or Euroclear
participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
participants can employ their usual procedures for sending Global Securities to
the respective European depositary for the benefit of Clearstream Banking
participants or Euroclear participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC participants a
cross-market transaction will settle no differently than a trade between two DTC
participants.
Trading between Clearstream Banking or Euroclear Seller and DTC Purchaser.
Due to time zone differences in their favor, Clearstream Banking participants
and Euroclear participants may employ their customary procedures for
transactions in which Global Securities are to be transferred by the respective
clearing system, through the respective depositary, to a DTC participant. The
seller will send instructions to Clearstream Banking or Euroclear through a
Clearstream Banking participant or Euroclear participant at least one business
day prior to settlement. In these cases Clearstream Banking or Euroclear will
instruct the respective depositary, as appropriate, to deliver the Global
Securities to the DTC participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of either a
360-day year comprised of 30-day months or the actual number of days in such
accrual period and a year assumed to consist of 360 days, as applicable. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of the Clearstream Banking participant or
Euroclear participant the following day, and receipt of the cash proceeds in the
Clearstream Banking participant's or Euroclear participant's account would be
back-valued to the value date, which would be the preceding day, when settlement
occurred in New York. Should the Clearstream Banking participant or Euroclear
participant have a line of credit with its respective clearing system and elect
to be in debt in anticipation of receipt of the sale proceeds in its account,
the back-valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended value date -- i.e., the
trade fails -- receipt of the cash proceeds in the Clearstream Banking
participant's or Euroclear participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream Banking or Euroclear and that
purchase Global Securities from DTC participants for delivery to Clearstream
Banking participants or Euroclear participants should note that these trades
would automatically fail on the sale side unless affirmative action were taken.
At least three techniques should be readily available to eliminate this
potential problem:
(a) borrowing through Clearstream Banking or Euroclear for one
day, until the purchase side of the day trade is reflected in their
Clearstream Banking or Euroclear accounts, in accordance with the clearing
system's customary procedures;
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(b) borrowing the Global Securities in the U.S. from a DTC
participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in their Clearstream
Banking or Euroclear account in order to settle the sale side of the
trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant is
at least one day prior to the value date for the sale to the Clearstream
Banking participant or Euroclear participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream Banking or Euroclear, or through DTC if the holder has an address
outside the U.S., will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest, including original issue discount, on
registered debt issued by U.S. Persons, unless:
(i) each clearing system, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or
business in the chain of intermediaries between such beneficial owner and
the U.S. entity required to withhold tax complies with applicable
certification requirements and
(ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are beneficial owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the beneficial owners or
his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
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U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Except as discussed below, Form W-8 and Form 1001 are
effective for three calendar years and Form 4224 is effective for one calendar
year.
Final withholding regulations (the "New Regulations") effective January 1,
2001 affect the documentation required from non-U.S. Persons having validly
existing IRS Forms, such as IRS Form W-8, 1001 or 4224. The New Regulations
replace a number of current tax certification forms (including IRS Forms W-9,
1001 and 4224, as discussed above) with a new series of IRS Forms W-8 and
generally standardize the period of time for which withholding agents can rely
on such forms (although certain of the new forms may remain valid indefinitely
if the beneficial owner provides a United States taxpayer identification number
and the information on the form does not change). Existing forms and statements
will remain valid until the earlier of their expiration or December 31, 2000.
The term "U.S. Person" means:
(i) a citizen or resident of the United States,
(ii) a corporation, partnership or other entity treated as a
corporation or partnership for United States federal income tax purposes
organized in or under the laws of the United States or any state thereof
or the District of Columbia (unless, in the case of a partnership,
Treasury regulations provide otherwise),
(iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or
(iv) a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and one
or more United States persons have authority to control all substantial
decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in Treasury
regulations, certain trusts in existence on August 20, 1996, and treated as
United States persons prior to such date, that elect to continue to be treated
as U.S. persons will also be a U.S. Person. This summary does not deal with all
aspects of U.S. Federal income tax withholding that may be relevant to foreign
holders of the Global Securities. Investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of the
Global Securities.
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PROSPECTUS
MAY 22, 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
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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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TABLE OF CONTENTS
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
Year 2000 Non-Compliance May Adversely Affect Payments on the Securities..27
Defined Terms...............................................................28
The Trust Funds.............................................................28
Residential Loans.........................................................28
Agency Securities.........................................................36
Stripped Agency Securities................................................41
Additional Information Concerning the Trust Funds.........................41
Use of Proceeds.............................................................44
Yield Considerations........................................................44
Maturity and Prepayment Considerations......................................46
The Depositor...............................................................49
Residential Loans...........................................................49
Underwriting Standards....................................................49
Representations by Unaffiliated Sellers; Repurchases......................50
Sub-Servicing.............................................................51
Description of the Securities...............................................51
General...................................................................51
Assignment of Assets of the Trust Fund....................................53
Deposits to the Trust Account.............................................57
Pre-Funding Account.......................................................57
Payments on Residential Loans.............................................57
Payments on Agency Securities.............................................59
Distributions.............................................................59
Principal and Interest on the Securities..................................61
Available Distribution Amount.............................................62
Subordination.............................................................63
Advances..................................................................65
Statements to Holders of Securities.......................................66
Book-Entry Registration of Securities.....................................68
Collection and Other Servicing Procedures.................................71
Realization on Defaulted Residential Loans................................72
Retained Interest, Administration Compensation and Payment of Expenses....74
Evidence as to Compliance.................................................75
Certain Matters Regarding the Master Servicer, the Depositor and the
Trustee.................................................................75
Deficiency Events.........................................................79
Events of Default.........................................................80
Amendment.................................................................85
Termination...............................................................86
Voting Rights.............................................................86
Description of Primary Insurance Coverage...................................86
Primary Credit Insurance Policies.........................................87
FHA Insurance and VA Guarantees...........................................88
Primary Hazard Insurance Policies.........................................90
Description of Credit Support...............................................92
Pool Insurance Policies...................................................93
Special Hazard Insurance Policies.........................................95
Bankruptcy Bonds..........................................................98
Reserve Funds.............................................................98
Cross-Support Provisions..................................................99
Letter of Credit..........................................................99
Insurance Policies and Surety Bonds.......................................99
Excess Spread............................................................100
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Overcollateralization....................................................100
Certain Legal Aspects of Residential Loans.................................100
General..................................................................100
Mortgage Loans...........................................................101
Cooperative Loans........................................................102
Tax Aspects of Cooperative Ownership.....................................103
Manufactured Housing Contracts Other Than Land Contracts.................104
Foreclosure on Mortgages.................................................106
Foreclosure on Cooperative Shares........................................109
Repossession with respect to Manufactured Housing Contracts that are
not Land Contracts.....................................................111
Rights of Redemption with respect to Residential Properties..............112
Notice of Sale; Redemption Rights with respect to Manufactured Homes.....112
Anti-Deficiency Legislation, Bankruptcy Laws and Other Limitations on
Lenders................................................................112
Junior Mortgages.........................................................115
Consumer Protection Laws.................................................116
Enforceability of Certain Provisions.....................................118
Prepayment Charges and Prepayments.......................................119
Subordinate Financing....................................................120
Applicability of Usury Laws..............................................120
Alternative Mortgage Instruments.........................................121
Environmental Legislation................................................122
Soldiers' and Sailors' Civil Relief Act of 1940..........................123
Federal Income Tax Consequences............................................124
General..................................................................124
REMICs...................................................................125
General..................................................................125
Taxation of Owners of Regular Securities.................................129
Taxation of Owners of Residual Securities................................139
Taxes That May Be Imposed on the REMIC Pool..............................149
Liquidation of the REMIC Pool............................................150
Administrative Matters...................................................150
Limitations on Deduction of Certain Expenses.............................151
Taxation of Certain Foreign Investors....................................152
Backup Withholding.......................................................153
Reporting Requirements...................................................154
Grantor Trust Funds......................................................155
Classification of Grantor Trust Funds....................................155
Standard Securities......................................................155
Stripped Securities......................................................159
Reporting Requirements and Backup Withholding............................163
Partnership Trust Funds..................................................164
Classification of Partnership Trust Funds................................164
Characterization of Investments in Partnership Securities and Debt
Securities.............................................................164
Taxation of Debt Holder of Securities....................................164
Taxation of Owners of Partnership Securities.............................165
State and Other Tax Consequences...........................................171
ERISA Considerations.......................................................171
Legal Investment...........................................................176
Plans of Distribution......................................................179
Incorporation of Certain Information by Reference..........................180
Legal Matters..............................................................181
Financial Information......................................................181
Rating.....................................................................181
Glossary of Terms..........................................................183
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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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<PAGE>
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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<PAGE>
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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<PAGE>
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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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.
YEAR 2000 NON-COMPLIANCE MAY ADVERSELY AFFECT PAYMENTS ON THE SECURITIES
The depositor is aware of the issues associated with the programming code
in existing computer systems as year 2000 approaches, the "year 2000 problem" is
pervasive and complex. Virtually every computer operation will be affected in
some way by the rollover of the two digit year value to 00. The issue is whether
computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize this information
could generate erroneous data or cause a system to fail. You could be adversely
affected if the computer systems of the master servicer or any special servicer
are not fully year 2000 compliant and this non-compliance disrupts the
collection or distribution of receipts on the related mortgage loans.
DTC has informed members of the financial community that it has developed
and is implementing a program for the year 2000 problem. The purpose of this
program is to make its systems, as they relate to the timely payment of
distributions, including principal and interest payments, to holders of
securities, book-entry deliveries, and settlement of trades within DTC, continue
to function appropriately on and after January 1, 2000. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, DTC's ability to perform its services properly is also dependent
on other parties, including but not limited to, its participating organizations,
through which you will hold your certificates, as well as the computer systems
of third party service providers. DTC has informed the financial community that
it is contacting and will continue to contact third party vendors from whom DTC
acquires services to:
o impress on them the importance of these services being year 2000
compliant; and
o determine the extent of their efforts for year 2000 remediation, and,
as appropriate, testing, of their services.
In addition, DTC stated that it is in the process of developing
contingency plans as it deems appropriate.
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If problems associated with the year 2000 problem arose with respect to
DTC and the services described above, you could experience delays or shortfalls
in the payments due 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 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;
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(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
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.
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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 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;
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o rowhouses;
o individual condominium units;
o individual units in planned-unit developments; and
o individual units in de minimus 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.
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:
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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.
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
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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."
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.
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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%.
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.
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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.
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.
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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:
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
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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 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.
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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;
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
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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 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:
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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.
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
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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
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,
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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 properties 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.
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
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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.
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,
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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
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.
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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 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.
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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.
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
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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 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
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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 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 --
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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.
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.
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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.
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;
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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.
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
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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
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.
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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 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;
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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.
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;
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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
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
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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
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.
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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 Date.
These payments will not include payments due on or before the Cut-Off Date and
exclusive of any amounts representing a Retained Interest:
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(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;
(11) any amounts required to be transferred to the Trust Account
pursuant to any guaranteed investment contract; and
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(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 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
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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.
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
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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 securities evidencing interests in a
trust fund that includes residential loans, by the amount of any Realized Losses
allocated to the securities.
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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;
(2) any principal and/or interest advances made with respect to the
distribution date, if applicable;
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(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 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
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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 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
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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 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.
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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;
(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;
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(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.
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
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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 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.
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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.
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.
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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 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.
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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 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
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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.
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
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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
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.
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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 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
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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
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.
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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.
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
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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,
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.
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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 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
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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.
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.
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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 agreement after the giving of
written notice of the failure in accordance with the procedures
described in the agreement;
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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" 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 the 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
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. ss. 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 IBCA, 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 IBCA, 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 an underwriter and a
Plan when the person who has discretionary authority or renders investment
advice with respect to the investment of Plan assets in the certificates is
(a) a 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.
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
(1) because a person is deemed to be a Party in Interest with respect
to an investing Plan,
(2) by virtue of providing services to the Plan, or
(3) 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
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(5) PTCE 96-23, regarding transactions effected by an "in-house asset
manager."
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 ss.
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,
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(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 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.ss.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. ss. 1.5
concerning "safety and soundness" and retention of credit information), certain
"Type IV securities," defined in 12 C.F.R. ss. 1.2(l) to include certain
"residential mortgage-related securities." As so defined, "residential
mortgage-related security" means, in relevant part, "mortgage related security"
within the meaning of SMMEA. The National Credit Union Administration 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. ss. 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" --
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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 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.
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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 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
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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 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.
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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,
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
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(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. 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 individual retirement accounts and annuities and Keogh
plans, which are subject to ERISA, and bank collective investment funds and
insurance company general and separate accounts in which the plans, accounts or
arrangements are invested.
"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 LOANS" are loans made to refinance existing loans or loans made
to a borrower who was a tenant in a building prior to its conversion to
cooperative ownership.
"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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<PAGE>
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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<PAGE>
"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.
<PAGE>
================================================================================
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
Summary...................................................S-5
Risk Factors.............................................S-12
Forward-Looking Statements...............................S-18
Defined Terms............................................S-19
Description of the Loans.................................S-19
Underwriting Guidelines..................................S-25
The Servicer.............................................S-28
Prepayment and Yield Considerations......................S-30
Description of the Offered Certificates..................S-43
The Pooling and Servicing Agreement......................S-57
Certain Federal Income Tax Consequences..................S-73
State Taxes..............................................S-77
ERISA Considerations.....................................S-77
Legal Investment.........................................S-80
Use of Proceeds..........................................S-80
Underwriting.............................................S-81
Ratings..................................................S-82
Legal Matters............................................S-82
Glossary of Terms........................................S-83
PROSPECTUS
Page
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Summary of Terms............................................6
Risk Factors...............................................17
Defined Terms..............................................28
The Trust Funds............................................28
Use of Proceeds............................................44
Yield Considerations.......................................44
Maturity and Prepayment Considerations.....................46
The Depositor..............................................49
Residential Loans..........................................49
Description of the Securities..............................51
Description of Primary Insurance Coverage..................86
Description of Credit Support..............................92
Certain Legal Aspects of Residential Loans................100
Federal Income Tax Consequences...........................124
State and Other Tax Consequences..........................171
ERISA Considerations......................................171
Legal Investment..........................................176
Plans of Distribution.....................................179
Incorporation of Certain Information by Reference.........180
Legal Matters.............................................181
Financial Information.....................................181
Rating....................................................181
Glossary of Terms.........................................183
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
AUGUST 20, 2000.
<PAGE>
========================================
$200,980,445 (APPROXIMATE)
HOME EQUITY ASSET
BACKED CERTIFICATES,
SERIES 2000-HE-1
PAINEWEBBER MORTGAGE ACCEPTANCE
CORPORATION IV
(DEPOSITOR)
LITTON LOAN SERVICING LP
(SERVICER)
- ----------------------------------------
PROSPECTUS SUPPLEMENT
- ----------------------------------------
PAINEWEBBER INCORPORATED
MAY 22, 2000
========================================
