<PAGE>
SUPPLEMENT
(To Prospectus dated February 9, 1994 and Prospectus Supplement dated February
17, 1994)
THE PRUDENTIAL HOME MORTGAGE SECURITIES COMPANY, INC. [LOGO]
Seller
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1994-10
INTEREST PAYABLE MONTHLY, COMMENCING IN DECEMBER 1995
VARIABLE RATE(1) CLASS A-2 CERTIFICATES
(1) ON THE CLASS A-2 NOTIONAL AMOUNT
------------------------
The Series 1994-10 Mortgage Pass-Through Certificates (the "Series 1994-10
Certificates") are the Series 1994-10 Certificates described in the accompanying
Prospectus Supplement dated February 17, 1994 (the "Prospectus Supplement") and
the accompanying Prospectus dated February 9, 1994 (the "Prospectus"). The
Series 1994-10 Certificates consist of one class of senior certificates (the
"Class A Certificates") and one class of subordinated certificates (the "Class B
Certificates"). The Class A Certificates consist of three subclasses (each, a
"Subclass") of Certificates designated as the Class A-1, Class A-2 and Class A-R
Certificates. The Class B Certificates are not divided into subclasses. Only the
Class A-2 Certificates are being offered hereby. The Series 1994-10 Certificates
evidence in the aggregate the entire beneficial ownership interest in a trust
fund (the "Trust Estate") established by The Prudential Home Mortgage Securities
Company, Inc. (the "Seller") and consisting of a pool of fixed interest rate,
conventional, monthly pay, fully amortizing, one- to four-family, residential
first mortgage loans having original terms to stated maturity of approximately
30 years (the "Mortgage Loans"), together with certain related property. Certain
of the Mortgage Loans may be secured primarily by shares issued by cooperative
housing corporations. The Mortgage Loans are serviced by The Prudential Home
Mortgage Company, Inc. (in its capacity as servicer, the "Servicer," otherwise
"PHMC"). See "Description of the Mortgage Loans" herein and in the Prospectus
Supplement.
PROSPECTIVE INVESTORS IN THE CLASS A-2 CERTIFICATES SHOULD CONSIDER THE
FACTORS DISCUSSED UNDER "RISK FACTORS AND SPECIAL CONSIDERATIONS" HEREIN ON PAGE
S1-3.
The credit enhancement for the Series 1994-10 Certificates is provided
through the use of a "shifting interest" type subordination, which has the
effect of allocating all or a disproportionate amount of principal prepayments
and other unscheduled receipts of principal to the Class A Certificates for at
least nine years beginning on the first Distribution Date. See "Summary
Information-- Credit Enhancement" and "--Effects of Prepayments on Investment
Expectations," "Description of the Certificates" and "Prepayment and Yield
Considerations" in the Prospectus Supplement.
THE YIELD TO MATURITY OF THE CLASS A-2 CERTIFICATES WILL BE HIGHLY SENSITIVE
TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) ON THE
MORTGAGE LOANS, WHICH MAY BE PREPAID AT ANY TIME WITHOUT PENALTY. INVESTORS
SHOULD CONSIDER THE ASSOCIATED RISKS THAT A FASTER THAN ANTICIPATED RATE OF
PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS, PARTICULARLY
THOSE MORTGAGE LOANS WITH A HIGHER RATE OF INTEREST, COULD RESULT IN AN ACTUAL
YIELD THAT IS LOWER THAN ANTICIPATED AND THAT A RAPID RATE OF PAYMENTS IN
RESPECT OF PRINCIPAL (INCLUDING PREPAYMENTS) COULD RESULT IN THE FAILURE OF
INVESTORS TO FULLY RECOVER THEIR INITIAL INVESTMENTS. See "Sensitivity of the
Pre-Tax Yield and Weighted Average Life of the Class A-2 Certificates" herein
and "Description of the Certificates--Principal (Including Prepayments)" and
"Prepayment and Yield Considerations" in the Prospectus Supplement and in the
Prospectus.
(CONTINUED ON NEXT PAGE)
------------------------
THESE SECURITIES DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE PRUDENTIAL
HOME MORTGAGE SECURITIES COMPANY, INC. OR ANY AFFILIATE THEREOF. NEITHER
THESE SECURITIES NOR THE UNDERLYING MORTGAGE LOANS WILL BE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
SUPPLEMENT, THE PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Class A-2 Certificates will be purchased from the Seller by Lehman
Brothers Inc. (the "Underwriter") and will be offered by the Underwriter from
time to time in negotiated transactions or otherwise at varying prices to be
determined, in each case, at the time of sale.
Proceeds to the Seller are expected to be approximately 0.34% of the Pool
Scheduled Principal Balance as of the Distribution Date in December 1995 without
giving effect to partial principal prepayments or net partial liquidation
proceeds received on or after the Determination Date in November 1995, plus
accrued interest from November 1, 1995 to (but not including) November 20, 1995,
before deducting expenses payable by the Seller estimated to be $45,000. See
"Underwriting" herein.
The Class A-2 Certificates are offered when, as and if delivered to and
accepted by the Underwriter, subject to prior sale, withdrawal or modification
of the offer without notice, the approval of counsel and other conditions. It is
expected that the Class A-2 Certificates will be available for delivery at the
offices of Lehman Brothers Inc., New York, New York on or about November 20,
1995.
------------------------
LEHMAN BROTHERS
November 16, 1995
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Class A-2 Certificates may not be appropriate investments for individual
investors. The Class A-2 Certificates are offered in the minimum denominations
described herein under "Description of the Certificates." It is intended that
the Class A-2 Certificates not be directly or indirectly held or beneficially
owned in amounts lower than such minimum denominations.
There is currently no secondary market for the Class A-2 Certificates and
there can be no assurance that a secondary market will develop or, if it does
develop, that it will provide Certificateholders with liquidity of investment at
any particular time or for the life of the Class A-2 Certificates. The
Underwriter intends to act as a market maker in the Class A-2 Certificates,
subject to applicable provisions of federal and state securities laws and other
regulatory requirements, but is under no obligation to do so and any such market
making may be discontinued at any time. There can be no assurance that any
investor will be able to sell a Class A-2 Certificate at a price equal to or
greater than the price at which such Certificate was purchased.
Distributions in respect of interest are made on the 25th day of each month
or the next succeeding business day to the holders of record of the Class A-2
Certificates on the last business day of the preceding month, to the extent that
their allocable portion of the Pool Distribution Amount (as defined in the
Prospectus Supplement) is sufficient therefor. Interest will accrue monthly on
the Class A-2 Certificates at a per annum rate equal to the weighted average of
the Net Mortgage Interest Rates (as defined herein) of the Mortgage Loans as of
the first day of such period minus 7.55%, on the Class A-2 Notional Amount (as
defined herein), less any Non-Supported Interest Shortfall (as defined in the
Prospectus Supplement) and other losses allocable to the Class A-2 Certificates
as described in the Prospectus Supplement under "Description of the
Certificates--Interest." The Class A-2 Certificates have no Class A Subclass
Principal Balance and are not entitled to principal distributions. Distributions
on the Class A-2 Certificates will be made pro rata among Certificateholders of
such Subclass based on their Percentage Interests (as defined herein).
This Supplement does not contain complete information regarding the Class
A-2 Certificates and should be read only in conjunction with the Prospectus
Supplement and the Prospectus. Sales of the Class A-2 Certificates may not be
consummated unless the purchaser has received this Supplement, the Prospectus
Supplement and the Prospectus. Capitalized terms used herein that are not
otherwise defined shall have the meanings ascribed thereto in the Prospectus
Supplement or the Prospectus, as applicable.
UNTIL FEBRUARY 15, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A-2
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER THIS SUPPLEMENT, THE PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER THIS SUPPLEMENT, THE
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
S1-2
<PAGE>
GENERAL
The following is qualified in its entirety by reference to the detailed
information appearing in the Prospectus Supplement and in the Prospectus, both
of which should be read in conjunction with this Supplement. Capitalized terms
used in this Supplement and not otherwise defined herein have the meanings
assigned in the Prospectus Supplement or in the Prospectus. See "Index of
Significant Prospectus Supplement Definitions" in the Prospectus Supplement and
"Index of Significant Definitions" in the Prospectus.
The Series 1994-10 Certificates were issued on February 25, 1994. The Class
A-2 Certificates were not offered to the public at the time of the issuance of
the Series 1994-10 Certificates.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The yield to maturity of the Class A-2 Certificates will be directly related
to the rate of payments of principal on the Mortgage Loans in the Trust Estate,
particularly with respect to those Mortgage Loans with higher rates of interest.
The rate of principal payments on the Mortgage Loans will in turn be affected by
the amortization schedules of the Mortgage Loans, the rate of principal
prepayments (including partial prepayments and those resulting from refinancing)
thereon by mortgagors, liquidations of defaulted Mortgage Loans, repurchases by
the Seller of Mortgage Loans as a result of defective documentation or breaches
of representations and warranties, optional repurchase by the Seller of
defaulted Mortgage Loans and optional purchase by the Servicer of all of the
Mortgage Loans in connection with the termination of the Trust Estate. See
"Description of the Mortgage Loans--Optional Repurchase of Defaulted Mortgage
Loans" and "Pooling and Servicing Agreement--Optional Termination" in the
Prospectus Supplement and "The Trust Estates--Mortgage Loans--Assignment of
Mortgage Loans to the Trustee," "--Optional Repurchases" and "The Pooling and
Servicing Agreement--Termination; Purchase of Mortgage Loans" in the Prospectus.
Mortgagors are permitted to prepay the Mortgage Loans, in whole or in part, at
any time without penalty.
The rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing rates for similar mortgage loans fall below the Mortgage Interest
Rates on the Mortgage Loans, the rate of prepayment would generally be expected
to increase. Conversely, if interest rates on similar mortgage loans rise above
the Mortgage Interest Rates on the Mortgage Loans, the rate of prepayment would
generally be expected to decrease.
The yield to maturity on the Class A-2 Certificates may be affected by the
geographic concentration of the Mortgaged Properties securing the Mortgage
Loans. As of October 17, 1995, Mortgaged Properties located in the following
states secured at least 5.00% of the Aggregate Unpaid Principal Balance of the
Mortgage Loans: California (72.25%) and New York (7.02%). In recent years,
California and several other regions in the United States have experienced
significant declines in housing prices. In addition, California, as well as
certain other regions, has experienced natural disasters, including earthquakes,
hurricanes and flooding, which may adversely affect property values. Any direct
damage to the Mortgaged Properties caused by such disasters, deterioration in
housing prices in California (and to a lesser extent the other states in which
the Mortgaged Properties are located) or the deterioration of economic
conditions in such regions which adversely affects the ability of borrowers to
make payments on the Mortgage Loans may increase the likelihood of losses on the
Mortgage Loans. Such losses, if they occur, may increase the likelihood of
liquidations and prepayments which may have an adverse effect on the yield to
maturity of the Class A-2 Certificates. See "Description of the Mortgage Loans"
herein.
AN INVESTOR THAT PURCHASES CLASS A-2 CERTIFICATES, WHICH ARE INTEREST ONLY
CERTIFICATES AND HAVE NO PRINCIPAL BALANCE, SHOULD CONSIDER THE RISK THAT A
FASTER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS WILL
RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN SUCH INVESTOR'S EXPECTED YIELD AND
MAY RESULT IN THE FAILURE OF SUCH INVESTOR TO FULLY RECOVER ITS INITIAL
INVESTMENT. See "Sensitivity of the Pre-Tax Yield and Weighted Average Life of
the Class A-2 Certificates" herein and "Prepayment and Yield Considerations" in
the Prospectus Supplement.
The Seller and the Servicer are each either a direct or indirect,
wholly-owned subsidiary of Residential Services Corporation of America, which is
a direct, wholly-owned subsidiary of The Prudential Insurance Company of
America, a mutual insurance company organized under the laws of the State of New
Jersey ("Prudential Insurance"). On March 15, 1995, Prudential Insurance
announced its intention to sell Residential Services Corporation of America,
including all of its subsidiary operations. Such sale may be effected through
the sale of either the stock or assets of Residential Services Corporation of
America or such subsidiary operations, including the Seller and the Servicer.
However, Prudential Insurance has not entered into an agreement for the sale of
Residential Services Corporation of America, the Seller or the Servicer as of
the date of this Supplement.
S1-3
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The Class A-2 Certificates will be offered in fully registered, certificated
form in minimum denominations of $143,000,000 initial Class A-2 Notional Amount
and any amount in excess thereof; however, prior to the sale of the Class A-2
Certificates by the Underwriter, the Underwriter as holder of 100% Percentage
Interest in the Class A-2 Certificates may consent to amend the Pooling and
Servicing Agreement to provide that with respect to the initial transfer by the
Underwriter of the Class A-2 Certificates such minimum denomination may be lower
than $143,000,000 initial Class A-2 Notional Amount. However, any such amendment
will provide that any subsequent transfer of the Class A-2 Certificates must
either be in minimum denominations of at least $143,000,000 initial Class A-2
Notional Amount or to a transferee that after such transfer will hold Class A-2
Certificates in an amount at least equal to $143,000,000 initial Class A-2
Notional Amount. The Class A-2 Certificates have no Class A Subclass Principal
Balance.
Distributions of interest to holders of Class A-2 Certificates will be made
monthly, to the extent of such Subclass' entitlement thereto, on the 25th day of
each month or, if such day is not a business day, on the succeeding business day
(each, a "Distribution Date"), beginning in December 1995.
Distributions (other than the final distribution in retirement of the Class
A-2 Certificates, as described in the Prospectus Supplement) will be made by
check mailed to the address of the person entitled thereto as it appears on the
Certificate Register. However, with respect to any holder of Class A-2
Certificates evidencing at least a 25% Percentage Interest, distributions will
be made on the Distribution Date by wire transfer in immediately available
funds, provided that the Servicer, or the paying agent acting on behalf of the
Servicer, shall have been furnished with appropriate wiring instructions not
less than seven business days prior to the related Distribution Date. The
"Percentage Interest" represented by a Class A-2 Certificate will be equal to
the percentage obtained by dividing the initial Class A-2 Notional Amount of
such Class A-2 Certificate by the aggregate initial Class A-2 Notional Amount.
The Class A-2 Certificates will be entitled to a distribution in respect of
interest each month in an amount up to such Subclass' Class A Subclass Interest
Accrual Amount. The Class A Subclass Interest Accrual Amount for the Class A-2
Certificates will equal the product of (i) 1/12th of the difference between (a)
the weighted average of the Net Mortgage Interest Rates of the Mortgage Loans
(based on the Scheduled Principal Balances of the Mortgage Loans as of such
Distribution Date) and (b) 7.55% and (ii) the Class A-2 Notional Amount.
The Class A Subclass Interest Accrual Amount for the Class A-2 Certificates
will be reduced by the portion of (i) any Non-Supported Interest Shortfall
allocable to such Subclass and (ii) the interest portion of Excess Special
Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses allocable to
such Subclass as described under "Description of the Certificates--Interest" in
the Prospectus Supplement.
The "Net Mortgage Interest Rate" on each Mortgage Loan is equal to the
Mortgage Interest Rate on such Mortgage Loan as stated in the related Mortgage
Note minus the Servicing Fee rate of 0.20% per annum. See "Pooling and Servicing
Agreement--Servicing Compensation and Payment of Expenses" in the Prospectus
Supplement.
The "Class A-2 Notional Amount" with respect to each Distribution Date will
be equal to the Pool Scheduled Principal Balance, as defined under "Description
of the Certificates--Principal (Including Prepayments)" in the Prospectus
Supplement, as of such Distribution Date. The Class A-2 Notional Amount with
respect to the Distribution Date in October 1995 was approximately $257,756,604.
The Class A-2 Notional Amount with respect to the Distribution Date in December
1995 will be equal to the Class A-2 Notional Amount with respect to the
Distribution Date in October 1995, less the difference between the Pool
Scheduled Principal Balance with respect to the Distribution Date in October
1995 and the Pool Scheduled Principal Balance with respect to the Distribution
Date in December 1995. A notional amount does not entitle a holder to receive
distributions of principal on the basis of such notional amount, but is solely
used for the purpose of computing the amount of interest accrued on a Subclass.
The initial Class A-2 Notional Amount was approximately $286,567,485.
The Prospectus Supplement and the Prospectus contain significant additional
information concerning the characteristics of the Class A-2 Certificates.
Investors are urged to read "Description of the Certificates" in the Prospectus
Supplement and in the Prospectus.
S1-4
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
As of October 17, 1995, the Mortgage Loans in the Trust Estate consisted of
fixed interest rate, conventional, monthly pay, fully amortizing, one- to
four-family, residential first mortgage loans originated or acquired by PHMC for
its own account or for the account of an affiliate having original terms to
stated maturity of approximately 30 years. The "Unpaid Principal Balance" of a
Mortgage Loan as of October 17, 1995 is its unpaid principal balance as of such
date assuming no delinquencies. As of October 17, 1995, the Mortgage Loans
included 1,083 promissory notes, having an aggregate Unpaid Principal Balance
(the "Aggregate Unpaid Principal Balance") of approximately $256,126,477,
secured by first liens (the "Mortgages") on one- to four-family residential
properties (the "Mortgaged Properties") and having the additional
characteristics described below and in the Prospectus.
No Mortgage Loan is a Buy-Down Loan. See "The Trust Estates--Mortgage Loans"
in the Prospectus. No Mortgage Loan was originated pursuant to PHMC's relocation
mortgage program. See "PHMC--Mortgage Loan Production Sources" in the
Prospectus.
Each of the Mortgage Loans is subject to a due-on-sale clause. See "Certain
Legal Aspects of the Mortgage Loans--'Due-on-Sale' Clause" and "Servicing of the
Mortgage Loans--Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted
Mortgage Loans" in the Prospectus.
As of October 17, 1995, each Mortgage Loan had an Unpaid Principal Balance
of not less than $35,966 or more than $984,559, and the average Unpaid Principal
Balance of the Mortgage Loans was approximately $236,497. The latest stated
maturity date of any of the Mortgage Loans was February 1, 2024; however, the
actual date on which any Mortgage Loan is paid in full may be earlier than the
stated maturity date due to unscheduled payments of principal. Based on
information supplied by the mortgagors in connection with their loan
applications at origination, 1,031 of the Mortgaged Properties, which secure
approximately 95.48% of the Aggregate Unpaid Principal Balance of the Mortgage
Loans, were owner occupied primary residences and 52 of the Mortgaged
Properties, which secure approximately 4.52% of the Aggregate Unpaid Principal
Balance of the Mortgage Loans, were non-owner occupied or second homes. See
"PHMC--Mortgage Loan Underwriting" in the Prospectus.
As of October 17, 1995, none of the Mortgage Loans was a Subsidy Loan. See
"The Trust Estates--Mortgage Loans" and "PHMC--Mortgage Loan Underwriting" in
the Prospectus.
S1-5
<PAGE>
Set forth below is a description of certain additional characteristics of
the Mortgage Loans as of October 17, 1995 (except as otherwise indicated).
MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF UNPAID UNPAID
MORTGAGE PRINCIPAL PRINCIPAL
MORTGAGE INTEREST RATES LOANS BALANCE BALANCE
- ------------------------------------------ --------- --------------- ---------------
<S> <C> <C> <C>
7.750%.................................... 433 $103,869,106.01 40.56 %
7.875%.................................... 365 86,560,606.34 33.80
8.000%.................................... 171 38,750,858.71 15.13
8.125%.................................... 61 14,303,141.41 5.58
8.250%.................................... 36 7,987,178.86 3.12
8.375%.................................... 13 3,075,140.51 1.20
8.500%.................................... 2 521,637.59 0.20
8.625%.................................... 1 253,080.50 0.10
9.000%.................................... 1 805,726.92 0.31
--------- --------------- -------
Total............................. 1,083 $256,126,476.85 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
As of October 17, 1995, the weighted average Mortgage Interest Rate of the
Mortgage Loans was approximately 7.880% per annum. The Net Mortgage Interest
Rate of each Mortgage Loan is equal to the Mortgage Interest Rate of such
Mortgage Loan minus the Servicing Fee rate of 0.20% per annum. As of October 17,
1995, the weighted average Net Mortgage Interest Rate of the Mortgage Loans was
approximately 7.680% per annum.
REMAINING MONTHS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF UNPAID UNPAID
MORTGAGE PRINCIPAL PRINCIPAL
REMAINING STATED TERM (MONTHS) LOANS BALANCE BALANCE
- ------------------------------------------ --------- --------------- ---------------
<S> <C> <C> <C>
327....................................... 1 $ 805,726.92 0.31 %
332....................................... 1 72,975.27 0.03
333....................................... 4 1,064,032.36 0.42
334....................................... 6 1,671,982.99 0.65
335....................................... 9 1,595,088.89 0.62
336....................................... 10 2,577,723.08 1.01
337....................................... 14 3,341,177.01 1.30
338....................................... 348 81,075,655.00 31.65
339....................................... 651 155,727,176.78 60.81
340....................................... 39 8,194,938.55 3.20
--------- --------------- -------
Total............................. 1,083 $256,126,476.85 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
As of October 17, 1995, the weighted average remaining term to stated maturity
of the Mortgage Loans was approximately 339 months.
YEARS OF ORIGINATION
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF UNPAID UNPAID
MORTGAGE PRINCIPAL PRINCIPAL
YEAR OF ORIGINATION LOANS BALANCE BALANCE
- ------------------------------------------ --------- --------------- ---------------
<S> <C> <C> <C>
1992...................................... 1 $ 805,726.92 0.31 %
1993...................................... 1,061 251,286,107.89 98.11
1994...................................... 21 4,034,642.04 1.58
--------- --------------- -------
Total............................. 1,083 $256,126,476.85 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
As of October 17, 1995, the earliest month and year of origination of any
Mortgage Loan was December 1992 and the latest month and year of origination of
any Mortgage Loan was January 1994.
S1-6
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF UNPAID UNPAID
MORTGAGE PRINCIPAL PRINCIPAL
ORIGINAL LOAN-TO-VALUE RATIO LOANS BALANCE BALANCE
- ------------------------------------------ --------- --------------- ---------------
<S> <C> <C> <C>
50.0% or less............................. 66 $ 11,768,551.12 4.59 %
50.1-55.0%................................ 34 6,648,475.54 2.60
55.1-60.0%................................ 44 11,195,719.44 4.37
60.1-65.0%................................ 59 16,969,456.57 6.63
65.1-70.0%................................ 144 31,907,885.17 12.46
70.1-75.0%................................ 185 37,910,047.70 14.80
75.1-80.0%................................ 338 82,644,689.44 32.26
80.1-85.0%................................ 34 9,419,274.22 3.68
85.1-90.0%................................ 179 47,662,377.65 18.61
--------- --------------- -------
Total............................. 1,083 $256,126,476.85 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
As of October 17, 1995, the minimum and maximum Loan-to-Value Ratios at
origination of the Mortgage Loans were 17.0% and 90.0%, respectively, and the
weighted average Loan-to-Value Ratio at origination of the Mortgage Loans was
approximately 74.6%. The Loan-to-Value Ratio of a Mortgage Loan is calculated
using the lesser of (i) the appraised value of the related Mortgaged Property,
as established by an appraisal obtained by the originator from an appraiser at
the time of origination and (ii) the sale price for such property. In some
instances, the Loan-to-Value Ratio may be based on an appraisal that was
obtained by the originator more than four months prior to origination, provided
that (i) a recertification of the original appraisal is obtained and (ii) the
original appraisal was obtained no more than twelve months prior to origination.
For the purpose of calculating the Loan-to-Value Ratio of any Mortgage Loan that
is the result of the refinancing (including a refinancing for "equity take-out"
purposes) of an existing mortgage loan, the appraised value of the related
Mortgaged Property is generally determined by reference to an appraisal obtained
in connection with the origination of the replacement loan. See "The Trust
Estates-- Mortgage Loans" in the Prospectus. As of October 17, 1995, 120 of the
Mortgage Loans having Loan-to-Value Ratios at origination in excess of 80%,
representing approximately 13.17% of the Aggregate Unpaid Principal Balance of
the Mortgage Loans, were originated without primary mortgage insurance. See
"PHMC--Mortgage Loan Underwriting" in the Prospectus.
MORTGAGE LOAN DOCUMENTATION LEVELS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF UNPAID UNPAID
MORTGAGE PRINCIPAL PRINCIPAL
DOCUMENTATION LEVELS LOANS BALANCE BALANCE
- ------------------------------------------ --------- --------------- ---------------
<S> <C> <C> <C>
Full Documentation........................ 536 $150,702,869.54 58.84 %
Asset & Mortgage Verification............. 455 87,785,850.17 34.27
Income & Mortgage Verification............ 26 7,404,146.02 2.89
Asset Verification........................ 12 2,119,224.27 0.83
Mortgage Verification..................... 43 6,813,480.04 2.66
Preferred Processing...................... 11 1,300,906.81 0.51
--------- --------------- -------
Total............................. 1,083 $256,126,476.85 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
Documentation levels vary depending upon several factors, including loan amount,
Loan-to-Value Ratio and the type and purpose of the Mortgage Loan. Asset, income
and mortgage verifications were obtained for Mortgage Loans processed with "full
documentation." In the case of "preferred processing," neither asset, income nor
mortgage verifications were obtained. However, for all of the Mortgage Loans,
verification of the borrower's employment, a credit report on the borrower and a
property appraisal were obtained. See "PHMC--Mortgage Loan Underwriting" in the
Prospectus.
S1-7
<PAGE>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
ORIGINAL NUMBER OF UNPAID UNPAID
MORTGAGE LOAN MORTGAGE PRINCIPAL PRINCIPAL
PRINCIPAL BALANCE LOANS BALANCE BALANCE
-------------------- --------- --------------- ---------------
<S> <C> <C> <C>
Less than or equal to $200,000............ 331 $ 39,980,650.44 15.61 %
$200,001-$250,000......................... 301 67,273,590.01 26.28
$250,001-$300,000......................... 215 57,711,997.79 22.53
$300,001-$350,000......................... 110 34,973,075.47 13.65
$350,001-$400,000......................... 61 22,437,924.93 8.76
$400,001-$450,000......................... 25 10,343,221.57 4.04
$450,001-$500,000......................... 21 9,993,739.95 3.90
$500,001-$550,000......................... 3 1,527,011.69 0.60
$550,001-$600,000......................... 4 2,363,157.80 0.92
$600,001-$650,000......................... 3 1,879,468.51 0.73
$650,001-$700,000......................... 1 687,791.72 0.27
$700,001-$750,000......................... 1 727,309.62 0.28
$750,001-$800,000......................... 1 768,244.85 0.30
$800,001-$850,000......................... 2 1,598,645.00 0.62
$900,001-$950,000......................... 1 912,290.77 0.36
$950,001-$1,000,000....................... 3 2,948,356.73 1.15
--------- --------------- -------
Total............................. 1,083 $256,126,476.85 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
As of October 17, 1995, the average Unpaid Principal Balance of the Mortgage
Loans was approximately $236,497. As of October 17, 1995, the weighted average
Loan-to-Value Ratio at origination and the maximum Loan-to-Value Ratio at
origination of the Mortgage Loans which had original principal balances in
excess of $600,000 were approximately 63.9% and 72.2%, respectively. See "The
Trust Estates--Mortgage Loans" and "PHMC--Mortgage Loan Underwriting" in the
Prospectus.
MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF UNPAID UNPAID
MORTGAGE PRINCIPAL PRINCIPAL
PROPERTY LOANS BALANCE BALANCE
- ------------------------------------------ --------- --------------- ---------------
<S> <C> <C> <C>
Single-family detached.................... 1,023 $245,912,625.60 96.01 %
Two- to four-family units................. 4 1,182,053.34 0.46
Condominiums.............................. 51 8,442,150.85 3.30
Townhouses................................ 4 418,770.42 0.16
Planned Unit Developments................. 1 170,876.64 0.07
Cooperative Units......................... 0 0.00 0.00
--------- --------------- -------
Total............................. 1,083 $256,126,476.85 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
S1-8
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF UNPAID UNPAID
MORTGAGE PRINCIPAL PRINCIPAL
GEOGRAPHIC AREA LOANS BALANCE BALANCE
- ------------------------------------------ --------- --------------- ---------------
<S> <C> <C> <C>
Arizona................................... 14 $ 2,145,289.64 0.84 %
California................................ 698 185,042,329.98 72.25
Colorado.................................. 9 1,588,295.96 0.62
Conneticut................................ 15 4,371,007.07 1.71
District of Columbia...................... 4 1,269,983.90 0.50
Florida................................... 55 7,195,141.64 2.81
Georgia................................... 7 887,654.79 0.35
Hawaii.................................... 5 2,701,729.71 1.05
Illinois.................................. 13 1,936,372.50 0.76
Indiana................................... 1 236,203.40 0.09
Kansas.................................... 1 240,730.34 0.09
Maine..................................... 1 80,935.95 0.03
Maryland.................................. 6 1,083,566.45 0.42
Massachusetts............................. 18 3,871,812.99 1.51
Michigan.................................. 5 594,614.56 0.23
Missouri.................................. 1 238,115.36 0.09
Nevada.................................... 18 3,725,747.73 1.45
New Hampshire............................. 2 188,929.20 0.07
New Jersey................................ 56 9,899,347.90 3.87
New Mexico................................ 3 605,666.69 0.24
New York.................................. 102 17,977,516.26 7.02
North Carolina............................ 1 68,897.99 0.03
Oklahoma.................................. 1 58,263.42 0.02
Oregon.................................... 4 998,017.94 0.39
Pennsylvania.............................. 4 562,752.85 0.22
Rhode Island.............................. 2 415,889.44 0.16
Tennessee................................. 1 181,207.55 0.07
Texas..................................... 11 2,314,523.91 0.90
Utah...................................... 1 265,832.43 0.10
Vermont................................... 4 1,121,928.11 0.44
Virginia.................................. 9 1,345,858.28 0.53
Washington................................ 9 2,637,573.77 1.03
Wyoming................................... 2 274,739.14 0.11
--------- --------------- -------
Total............................. 1,083 $256,126,476.85 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
As of October 17, 1995, no more than approximately 1.38% of the Aggregate Unpaid
Principal Balance of the Mortgage Loans was secured by Mortgaged Properties
located in any one zip code.
S1-9
<PAGE>
ORIGINATORS OF MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF UNPAID UNPAID
MORTGAGE PRINCIPAL PRINCIPAL
ORIGINATOR LOANS BALANCE BALANCE
- ------------------------------------------ --------- --------------- ---------------
<S> <C> <C> <C>
PHMC or Affiliate......................... 206 $ 47,412,334.45 18.51 %
Other Originators......................... 877 208,714,142.40 81.49
--------- --------------- -------
Total............................. 1,083 $256,126,476.85 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
PURPOSES OF MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF UNPAID UNPAID
MORTGAGE PRINCIPAL PRINCIPAL
LOAN PURPOSE LOANS BALANCE BALANCE
- ------------------------------------------ --------- --------------- ---------------
<S> <C> <C> <C>
Purchase.................................. 251 $ 51,205,966.98 19.99 %
Rate/term refinance....................... 668 170,499,998.77 66.57
Equity take out refinance................. 164 34,420,511.10 13.44
--------- --------------- -------
Total............................. 1,083 $256,126,476.85 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
In general, in the case of a Mortgage Loan made for "rate/term" refinance
purposes, substantially all of the proceeds are used to pay in full the
principal balance of a previous mortgage loan of the mortgagor with respect to a
Mortgaged Property and to pay origination and closing costs associated with such
refinancing. However, in the case of a Mortgage Loan made for "equity take out"
refinance purposes, all or a portion of the proceeds are generally retained by
the mortgagor for uses unrelated to the Mortgaged Property. The amount of such
proceeds retained by the mortgagor may be substantial. See "The Trust
Estates--Mortgage Loans" and "PHMC--Mortgage Loan Underwriting" in the
Prospectus.
DELINQUENCY STATUS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE
ACTUAL UNPAID
NUMBER OF UNPAID PRINCIPAL
MORTGAGE PRINCIPAL BALANCE OF THE
STATUS LOANS(1) BALANCE(1) MORTGAGE LOANS(2)
- --------------------------------------- --------- --------------- ------------------
<S> <C> <C> <C>
30 to 59 days.......................... 2 $ 498,319.28 0.19 %
60 to 89 days.......................... 2 398,508.08 0.16
90 days or more........................ 1 108,935.39 0.04
Loans in Foreclosure................... 1 294,226.79 0.12
REO Mortgage Loans..................... 0 0.00 0.00
-
--------------- ---
Total.......................... 6 $ 1,299,989.54 0.51 %
-
-
--------------- ---
--------------- ---
</TABLE>
- ------------
(1) Reflects the number of delinquent Mortgage Loans and the actual unpaid
principal balances of such Mortgage Loans based on information available to
the Servicer as of October 17, 1995.
(2) As of October 17, 1995.
The indicated periods of delinquency are based on the number of days past due,
based on a 30-day month. No Mortgage Loan is considered delinquent for these
purposes until one month has passed since its contractual due date.
On January 17, 1994, southern California experienced an earthquake (the
"Earthquake") and thereafter a number of aftershocks. As a result of the
Earthquake, Los Angeles and Ventura Counties (the "Earthquake Counties") were
declared federal disaster areas eligible for federal disaster assistance. In
addition to the Earthquake Counties, other counties may have been affected by
the Earthquake. As of October 17, 1995, approximately
S1-10
<PAGE>
8.45% of the Aggregate Unpaid Principal Balance of the Mortgage Loans was
secured by Mortgaged Properties that are located in the Earthquake Counties. The
Seller has not undertaken the physical inspection of any Mortgaged Properties.
As a result, there can be no assurance that material damage to any Mortgaged
Property in the affected region has not occurred.
As of January 16, 1995 and March 16, 1995, as a result of flooding, 38 and
49 counties in California, respectively, (the "January Flood Counties" and
"March Flood Counties," respectively, and together, the "Flood Counties") were
declared federal disaster areas eligible for federal disaster assistance. As of
October 17, 1995, approximately 67.67% of the Aggregate Unpaid Principal Balance
of the Mortgage Loans was secured by Mortgaged Properties that are located in
the January Flood Counties and approximately 54.33% of the Aggregate Unpaid
Principal Balance of the Mortgage Loans was secured by Mortgaged Properties that
are located in the March Flood Counties. The Seller has not undertaken the
physical inspection of any Mortgaged Properties. As a result, there can be no
assurance that material damage to any Mortgaged Property in the affected region
has not occurred.
As of October 12, 1995, as a result of a hurricane affecting Georgia,
Alabama and Florida (the "Hurricane"), 28, 20 and 11 counties, in Georgia,
Alabama and Florida, respectively (the "Hurricane Counties") were declared
federal disaster areas eligible for federal disaster assistance. As of October
17, 1995, 0.54% of the Aggregate Unpaid Principal Balance of the Mortgage Loans
was secured by Mortgage Properties that are located in the Hurricane Counties.
The Seller has not undertaken the physical inspection of any Mortgaged
Properties. As a result, there can be no assurance that material damage to any
Mortgaged Property in the affected region has not occurred.
Based on information available to the Servicer as of October 17, 1995, 3 of
the delinquent loans shown in the preceding table, representing approximately
0.24% of the Aggregate Unpaid Principal Balance of the Mortgage Loans or
approximately $607,194, were secured by Mortgaged Properties located in the
Earthquake Counties, the Hurricane Counties or the Flood Counties.
ORIGINATION, DELINQUENCY AND FORECLOSURE EXPERIENCE
During the year ended December 31, 1994 and the six months ended June 30,
1995, PHMC originated or purchased, for its own account or for the account of an
affiliate, conventional mortgage loans having an aggregate principal balance of
approximately $16,201,648,701 and $3,999,414,620, respectively.
Certain information concerning PHMC's delinquency, foreclosure and loan loss
experience on certain categories of the mortgage loans included in PHMC's
mortgage loan servicing portfolio for the years ended December 31, 1991,
December 31, 1992 and December 31, 1993 is set forth in "Origination,
Delinquency and Foreclosure Experience--Delinquency and Foreclosure Experience"
in the Prospectus Supplement. The following tables set forth such information as
of December 31, 1994 and June 30, 1995.
S1-11
<PAGE>
TOTAL PROGRAM LOANS
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1994 JUNE 30, 1995
--------------------- ---------------------
BY DOLLAR BY DOLLAR
BY NO. AMOUNT BY NO. AMOUNT
OF LOANS OF LOANS OF LOANS OF LOANS
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Total Portfolio of Program Loans........ 379,075 $62,175,544 400,369 $63,231,863
-------- ----------- -------- -----------
-------- ----------- -------- -----------
Period of Delinquency(1)
30 to 59 days......................... 3,548 $ 548,524 3,570 $ 526,515
60 to 89 days......................... 797 128,053 750 115,898
90 days or more....................... 1,418 308,124 1,037 190,166
-------- ----------- -------- -----------
Total Delinquent Loans.................. 5,763 $ 984,701 5,357 $ 832,579
-------- ----------- -------- -----------
-------- ----------- -------- -----------
Percent of Portfolio.................... 1.52% 1.58% 1.34% 1.32%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1994 JUNE 30, 1995
----------------- -----------------
<S> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Foreclosures(2)................................ $ 354,028 $ 352,148
Foreclosure Ratio(3)........................... 0.57% 0.56%
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1994 JUNE 30, 1995
----------------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
Net Gain (Loss)(4)............................. $ (195,088) $ (71,981)
Net Gain (Loss) Ratio(5)....................... (0.31)% (0.11)%
</TABLE>
- -------------
(1) The indicated periods of delinquency are based on the number of days past
due, based on a 30-day month. No mortgage loan is considered delinquent for
these purposes until one month has passed since its contractual due date. A
mortgage loan is no longer considered delinquent once foreclosure
proceedings have commenced.
(2) Includes loans in the applicable portfolio for which foreclosure proceedings
had been instituted or with respect to which the related property had been
acquired as of the dates indicated.
(3) Foreclosures as a percentage of total loans in the applicable portfolio at
the end of each period.
(4) Does not include gain or loss with respect to loans in the applicable
portfolio for which foreclosure proceedings had been instituted but not
completed as of the dates indicated, or for which the related properties
have been acquired in foreclosure proceedings but not yet sold.
(5) Net gain (loss) as a percentage of total loans in the applicable portfolio
at the end of each period.
S1-12
<PAGE>
FIXED PROGRAM LOANS
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1994 JUNE 30, 1995
--------------------- ---------------------
BY DOLLAR BY DOLLAR
BY NO. AMOUNT BY NO. AMOUNT
OF LOANS OF LOANS OF LOANS OF LOANS
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Total Portfolio of Fixed Program
Loans.................................. 307,975 $48,602,956 330,362 $50,153,906
-------- ----------- -------- -----------
-------- ----------- -------- -----------
Period of Delinquency(1)
30 to 59 days......................... 2,708 $ 389,236 2,753 $ 372,873
60 to 89 days......................... 591 87,687 562 76,927
90 days or more....................... 965 188,414 730 119,058
-------- ----------- -------- -----------
Total Delinquent Loans.................. 4,264 $ 665,337 4,045 $ 568,858
-------- ----------- -------- -----------
-------- ----------- -------- -----------
Percent of Fixed Program Loan
Portfolio.............................. 1.38% 1.37% 1.22% 1.13%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1994 JUNE 30, 1995
----------------- -----------------
-----------------
<S> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Foreclosures(2)................................... $ 208,253 $ 212,188
Foreclosure Ratio(3).............................. 0.43% 0.42%
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1994 JUNE 30, 1995
----------------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
Net Gain (Loss)(4)................................ $ (133,569) $ (53,876)
Net Gain (Loss) Ratio(5).......................... (0.27)% (0.11)%
</TABLE>
- -------------
(1) The indicated periods of delinquency are based on the number of days past
due, based on a 30-day month. No mortgage loan is considered delinquent for
these purposes until one month has passed since its contractual due date. A
mortgage loan is no longer considered delinquent once foreclosure
proceedings have commenced.
(2) Includes loans in the applicable portfolio for which foreclosure proceedings
had been instituted or with respect to which the related property had been
acquired as of the dates indicated.
(3) Foreclosures as a percentage of total loans in the applicable portfolio at
the end of each period.
(4) Does not include gain or loss with respect to loans in the applicable
portfolio for which foreclosure proceedings had been instituted but not
completed as of the dates indicated, or for which the related properties
have been acquired in foreclosure proceedings but not yet sold.
(5) Net gain (loss) as a percentage of total loans in the applicable portfolio
at the end of each period.
S1-13
<PAGE>
FIXED NON-RELOCATION PROGRAM LOANS
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1994 JUNE 30, 1995
--------------------- ---------------------
BY DOLLAR BY DOLLAR
BY NO. AMOUNT OF BY NO. AMOUNT OF
OF LOANS LOANS OF LOANS LOANS
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Total Portfolio of Fixed Non-relocation
Program Loans.......................... 262,159 $41,589,441 281,157 $42,693,467
-------- ----------- -------- -----------
-------- ----------- -------- -----------
Period of Delinquency(1)
30 to 59 days......................... 2,424 $ 350,629 2,463 $ 335,362
60 to 89 days......................... 539 80,843 527 72,634
90 days or more....................... 903 179,493 682 112,506
-------- ----------- -------- -----------
Total Delinquent Loans.................. 3,866 $ 610,965 3,672 $ 520,502
-------- ----------- -------- -----------
-------- ----------- -------- -----------
Percent of Fixed Non-relocation Program
Loan Portfolio......................... 1.47% 1.47% 1.31% 1.22%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1994 JUNE 30, 1995
----------------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
Foreclosures(2)................................... $ 199,379 $ 201,751
Foreclosure Ratio(3).............................. 0.48% 0.47%
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1994 JUNE 30, 1995
----------------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
Net Gain (Loss)(4)................................ $ (131,834) $ (53,183)
Net Gain (Loss) Ratio(5).......................... (0.32)% (0.12)%
</TABLE>
- ------------
(1) The indicated periods of delinquency are based on the number of days past
due, based on a 30-day month. No mortgage loan is considered delinquent for
these purposes until one month has passed since its contractual due date. A
mortgage loan is no longer considered delinquent once foreclosure
proceedings have commenced.
(2) Includes loans in the applicable portfolio for which foreclosure proceedings
had been instituted or with respect to which the related property had been
acquired as of the dates indicated.
(3) Foreclosures as a percentage of total loans in the applicable portfolio at
the end of each period.
(4) Does not include gain or loss with respect to loans in the applicable
portfolio for which foreclosure proceedings had been instituted but not
completed as of the dates indicated, or for which the related properties
have been acquired in foreclosure proceedings but not yet sold.
(5) Net gain (loss) as a percentage of total loans in the applicable portfolio
at the end of each period.
S1-14
<PAGE>
HISTORICAL PREPAYMENTS
The prepayment model used in the Prospectus Supplement is the Standard
Prepayment Assumption ("SPA"). See "Prepayment and Yield Considerations" in the
Prospectus Supplement. An alternative model is a conditional (also known as a
constant) prepayment rate ("CPR"). CPR represents a rate of payment of
unscheduled principal on mortgage loans, expressed as an annualized percentage
of the outstanding principal balance of such mortgage loans at the beginning of
each period. CPR DOES NOT PURPORT TO BE A HISTORICAL DESCRIPTION OF PREPAYMENT
EXPERIENCE OR A PREDICTION OF THE ANTICIPATED RATE OF PREPAYMENT OF ANY POOL OF
MORTGAGE LOANS, INCLUDING THE MORTGAGE LOANS.
The Series 1994-10 Certificates were issued on February 25, 1994. Set forth
below are the approximate annualized prepayment rates of the Mortgage Loans
underlying the Series 1994-10 Certificates as a percentage of CPR as of the
Distribution Dates occurring in the indicated months.
HISTORICAL PREPAYMENT RATES
<TABLE>
<CAPTION>
MONTH PERCENTAGE OF CPR
- ---------------------------------------- ------------------
<S> <C>
March 1994.............................. 25.65%
April 1994.............................. 16.82%
May 1994................................ 4.14%
June 1994............................... 2.61%
July 1994............................... 2.81%
August 1994............................. 0.69%
September 1994.......................... 4.74%
October 1994............................ 1.42%
November 1994........................... 3.03%
December 1994........................... 4.28%
<CAPTION>
MONTH PERCENTAGE OF CPR
- ---------------------------------------- ------------------
<S> <C>
January 1995............................ 1.50%
February 1995........................... 1.56%
March 1995.............................. 1.93%
April 1995.............................. 1.83%
May 1995................................ 1.90%
June 1995............................... 3.97%
July 1995............................... 6.62%
August 1995............................. 6.99%
September 1995.......................... 10.90%
October 1995............................ 6.46%
</TABLE>
The prepayment rates described above were calculated based upon the weighted
average Mortgage Interest Rate of the Mortgage Loans for the applicable month
and an assumed weighted average remaining term to maturity for the Mortgage
Loans equal to the weighted average remaining term to maturity at the date of
the initial issuance of the Series 1994-10 Certificates with respect to March
1994, reduced by one month for each month thereafter. The prepayment history of
the Mortgage Loans underlying the Series 1994-10 Certificates is relatively
short and cannot be relied upon as an indicator of the rate of prepayments on
the Mortgage Loans to be experienced over the life of the Class A-2
Certificates. Further, the rate of prepayment of a pool of mortgage loans during
any period should be considered in light of the amount of time elapsed since the
origination of such mortgage loans and the absolute levels of, and changes in,
prevailing market interest rates during such period. For a further discussion of
the factors affecting the rate of prepayments on mortgage loans, see "Prepayment
and Yield Considerations" in the Prospectus Supplement. INVESTORS ARE URGED TO
MAKE AN INDEPENDENT DECISION AS TO THE APPROPRIATE PREPAYMENT ASSUMPTIONS TO BE
USED IN DECIDING WHETHER TO PURCHASE A CLASS A-2 CERTIFICATE.
S1-15
<PAGE>
SENSITIVITY OF THE PRE-TAX YIELD AND WEIGHTED
AVERAGE LIFE OF THE CLASS A-2 CERTIFICATES
The Prospectus Supplement and the Prospectus contain important information
concerning factors that will affect the yield and weighted average life of the
Class A-2 Certificates. Investors are urged to read "Prepayment and Yield
Considerations" in the Prospectus Supplement and the Prospectus.
THE YIELD TO INVESTORS IN THE CLASS A-2 CERTIFICATES, WHICH ARE INTEREST
ONLY CERTIFICATES AND HAVE NO PRINCIPAL BALANCE, WILL BE HIGHLY SENSITIVE TO
BOTH THE TIMING OF RECEIPT OF PREPAYMENTS AND THE OVERALL RATE OF PRINCIPAL
PREPAYMENT ON THE MORTGAGE LOANS, PARTICULARLY WITH RESPECT TO THOSE MORTGAGE
LOANS WITH HIGHER RATES OF INTEREST, WHICH OVERALL RATE MAY FLUCTUATE
SIGNIFICANTLY FROM TIME TO TIME. AN INVESTOR IN THE CLASS A-2 CERTIFICATES
SHOULD FULLY CONSIDER THE ASSOCIATED RISKS, INCLUDING THE RISK THAT A RAPID RATE
OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) COULD RESULT IN THE FAILURE OF
SUCH INVESTOR TO FULLY RECOVER ITS INITIAL INVESTMENT.
For purposes of the table set forth below, the weighted average life of a
Class A-2 Certificate is the average amount of time that will elapse from
November 20, 1995 until each dollar in reduction of the principal balance of the
Series 1994-10 Certificates is distributed to the holders thereof. The weighted
average life of the Class A-2 Certificates will be influenced by, among other
things, the rate and timing of principal payments on the Mortgage Loans, which
may be in the form of scheduled amortization or prepayments.
The following table has been prepared on the basis of the characteristics of
the Mortgage Loans included in the Trust Estate as of October 17, 1995, as
described above under "Description of the Mortgage Loans," adjusted to reflect
calculated payments of principal on November 1, 1995 assuming a constant
prepayment rate equal to 0% CPR for the month of October 1995. This adjustment
has the effect of reducing the remaining terms to stated maturity of each
Mortgage Loan by one month from the table shown on page S1-6. The table
indicates the sensitivity to various rates of prepayment on the Mortgage Loans
of the pre-tax yield to maturity, on a corporate bond equivalent ("CBE") basis,
and of the weighted average life of the Class A-2 Certificates at various
percentages of CPR. Such calculations are based on distributions made in
accordance with "Description of the Certificates" herein and in the Prospectus
Supplement, on the assumptions described in clauses (i), (iii) and (v) of the
third full paragraph on page S-40 of the Prospectus Supplement, and on the
further assumptions that (i) the Class A-2 Certificates will be purchased on
November 20, 1995 for an aggregate purchase price equal to approximately
$897,344, which includes accrued interest from November 1, 1995 to (but not
including) November 20, 1995, (ii) distributions to holders of Class A-2
Certificates will be made on the 25th day of each month commencing in December
1995, (iii) scheduled monthly payments of principal and interest on the Mortgage
Loans will be timely received on the first day of each month (with no defaults)
commencing in December 1995, (iv) principal prepayments on the Mortgage Loans
will be received on the last day of each month commencing in November 1995 at
the respective percentages of CPR set forth in the table and there are no
Prepayment Interest Shortfalls and (v) the Class A-2 Notional Amount applicable
to the Distribution Date occurring in December 1995 will be approximately
$255,920,520.
SENSITIVITY OF THE PRE-TAX YIELD AND WEIGHTED AVERAGE LIFE
OF THE CLASS A-2 CERTIFICATES TO PREPAYMENTS
<TABLE>
<CAPTION>
PERCENTAGES OF CPR
-------------------------------------------------------
2% 5% 10% 15% 20% 25% 30%
------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Pre-Tax Yield to Maturity (CBE)......... 36.22% 32.70% 26.72% 20.55% 14.20% 7.64% 0.85%
Weighted Average Life (years)........... 15.36 11.57 7.73 5.57 4.24 3.37 2.76
</TABLE>
The pre-tax yields set forth in the preceding table were calculated by (i)
determining the monthly discount rates which, when applied to the assumed stream
of cash flows to be paid on the Class A-2 Certificates, would cause the
discounted present value of such assumed stream of cash flows to equal an
assumed purchase price for the Class A-2 Certificates of approximately $897,344
which includes accrued interest from November 1, 1995 to (but not including)
November 20, 1995, and (ii) converting such monthly rates to corporate bond
equivalent rates. Such calculation does not take into account the interest rates
at which an investor may be able to reinvest funds received by such investor as
distributions on the Class A-2 Certificates and consequently does not purport to
reflect the return on any investment in the Class A-2 Certificates when such
reinvestment rates are considered.
S1-16
<PAGE>
The weighted average lives of the Class A-2 Certificates set forth in the
preceding table were determined by (i) multiplying the amount of each
distribution in reduction of the principal balance of the Series 1994-10
Certificates by the number of years from November 20, 1995 to the related
Distribution Date, (ii) adding the results and (iii) dividing the sum by the
aggregate distribution in reduction of the principal balance of the Series
1994-10 Certificates referred to in clause (i).
NOTWITHSTANDING THE ASSUMED PREPAYMENT RATES REFLECTED IN THE PRECEDING
TABLE, IT IS HIGHLY UNLIKELY THAT THE MORTGAGE LOANS WILL PREPAY AT ANY CONSTANT
RATE, THAT THE MORTGAGE LOANS WILL PREPAY AT THE SAME RATE OR THAT THE MORTGAGE
LOANS WILL NOT EXPERIENCE ANY LOSSES. The Mortgage Loans currently included in
the Trust Estate may be changed as a result of permitted substitutions. As a
result of these factors, the pre-tax yield and weighted average life of the
Class A-2 Certificates are likely to differ from those shown in such table, even
if all of the Mortgage Loans prepay at the indicated percentages of CPR.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An election has been made to treat the Trust Estate as a REMIC (the "REMIC")
for federal income tax purposes. The Class A-1 and Class A-2 Certificates and
the Class B Certificates are designated as the regular interests in the REMIC
and the Class A-R Certificate is designated as the residual interest in the
REMIC.
The Class A-2 Certificates are treated as "qualifying real property loans"
for mutual savings banks and domestic building and loan associations, "regular
interests in a REMIC" for domestic building and loan associations and "real
estate assets" for real estate investment trusts, to the extent described in the
Prospectus.
The Class A-2 Certificates generally are treated as debt instruments
originated on the date of original issuance of the Series 1994-10 Certificates
for federal income tax purposes. Holders of the Class A-2 Certificates will be
required to report income thereon in accordance with the accrual method of
accounting. Although not free from doubt, the Seller believes that, under both
the OID Regulations and proposed OID regulations dated December 31, 1992, the
Class A-2 Certificates are considered to have been issued with original issue
discount in an amount equal to the excess of all distributions of interest
expected to be received thereon over their issue price (including accrued
interest). Any "negative" amounts of original issue discount on the Class A-2
Certificates attributable to rapid prepayments will not be deductible currently,
but may be offset against future positive accruals of original issue discount,
if any. The holder of a Class A-2 Certificate may be entitled to a loss
deduction to the extent it becomes certain that such holder will not recover a
portion of its basis in such Certificate, assuming no further prepayments. The
Seller makes no representation as to the timing or amount of such losses, if
any, or how any such losses will be reported to the holders. See "Certain
Federal Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Original Issue Discount" in the
Prospectus. The adjusted issue price of a Class A-2 Certificate as of the date
of purchase by an investor is its original issue price, plus original issue
discount accrued since the date of original issuance of the Series 1994-10
Certificates, less distributions made, and losses, if any, incurred, on the
Class A-2 Certificates since the date of original issuance of the Series 1994-10
Certificates. A purchase price for a Class A-2 Certificate that is less than or
greater than the adjusted issue price of such Class A-2 Certificate will result
in market discount or acquisition premium, respectively, to the beneficial owner
thereof, as discussed in the Prospectus under "Certain Federal Income Tax
Consequences-- Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates--Market Disount" and "--Acquisition Premium".
The Prepayment Assumption that is to be used in determining the rate of
accrual of original issue discount is set forth in the Prospectus Supplement
under "Federal Income Tax Considerations--Regular Certificates." No
representation is made as to the actual rate at which the Mortgage Loans will
prepay.
See "Summary Information--Federal Income Tax Status" and "Federal Income Tax
Considerations" in the Prospectus Supplement and "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates" in the
Prospectus.
S1-17
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement and a terms
agreement (together, the "Underwriting Agreement") among the Seller, PHMC and
Lehman Brothers Inc., as underwriter (the "Underwriter"), the Class A-2
Certificates offered hereby are being purchased from the Seller by the
Underwriter on or about November 20, 1995. The Underwriter is committed to
purchase all of the Class A-2 Certificates offered hereby if any Class A-2
Certificates are purchased. The Underwriter has advised the Seller that it
proposes to offer the Class A-2 Certificates, from time to time, for sale in
negotiated transactions or otherwise at prices determined at the time of sale.
Proceeds to the Seller from the sale of the Class A-2 Certificates are expected
to be approximately 0.34% of the Pool Scheduled Principal Balance of the
Mortgage Loans as of the Distribution Date in December 1995 without giving
effect to partial principal prepayments or net partial liquidation proceeds
received on or after the Determination Date in November 1995, plus accrued
interest from November 1, 1995 to (but not including) November 20, 1995. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of the Class A-2 Certificates may be deemed to be underwriters, and
any discounts or commissions received by them and any profit on the resale of
Class A-2 Certificates by them may be deemed to be underwriting discounts or
commissions under the Securities Act of 1933, as amended (the "Securities Act").
The Underwriting Agreement provides that the Seller and PHMC will indemnify
the Underwriter against certain civil liabilities under the Securities Act or
contribute to payments which the Underwriter may be required to make in respect
thereof.
SECONDARY MARKET
There will not be any secondary market for the Class A-2 Certificates
offered hereby prior to the offering thereof. The Underwriter intends to act as
a market maker in the Class A-2 Certificates, subject to applicable provisions
of federal and state securities laws and other regulatory requirements, but is
under no obligation to do so. There can be no assurance that a secondary market
in the Class A-2 Certificates will develop or, if such a market does develop,
that it will provide holders of Class A-2 Certificates with liquidity of
investment at any particular time or for the life of the Class A-2 Certificates.
ERISA CONSIDERATIONS
As described in the Prospectus under "ERISA Considerations," ERISA and the
Code impose certain duties and restrictions on any person which is an employee
benefit plan within the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") or Code Section 4975 or any
person utilizing the assets of such employee benefit plan (an "ERISA Plan") and
certain persons who perform services for ERISA Plans. Comparable duties and
restrictions may exist under federal, state or local laws ("Similar Law"), which
are, to a material extent, similar to the foregoing sections of ERISA or the
Code, on governmental plans and certain persons who perform services for
governmental plans. For example, unless exempted, investment by an ERISA Plan in
the Class A-2 Certificates may constitute a prohibited transaction under ERISA,
the Code or Similar Law. There are certain exemptions issued by the United
States Department of Labor (the "DOL") that may be applicable to an investment
by an ERISA Plan in the Class A-2 Certificates, including the individual
administrative exemption described below and Prohibited Transaction Class
Exemption 83-1 ("PTE 83-1"). For a further discussion of PTE 83-1, including the
necessary conditions to its applicability, and other important factors to be
considered by an ERISA Plan contemplating investing in the Class A-2
Certificates, see "ERISA Considerations" in the Prospectus.
On February 22, 1991, the DOL issued to the Underwriter an individual
administrative exemption, Prohibited Transaction Exemption 91-14, 56 Fed. Reg.
7413 (the "Exemption"), from certain of the prohibited transaction rules of
ERISA with respect to the initial purchase, the holding and the subsequent
resale by an ERISA Plan of certificates in pass-through trusts that meet the
considerations and requirements of the Exemption. The Exemption might apply to
the acquisition, holding and resale of the Class A-2 Certificates by an ERISA
Plan, provided that specified conditions are met.
Among the conditions which would have to be satisfied for the Exemption to
apply to the acquisition by an ERISA Plan of the Class A-2 Certificates, is the
condition that the ERISA Plan investing in the Class A-2 Certificates be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act.
S1-18
<PAGE>
Before purchasing a Class A-2 Certificate, a fiduciary of an ERISA 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
such exemption will be applicable to the Class A-2 Certificates. Any fiduciary
of an ERISA Plan considering whether to purchase a Class A-2 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
such investment. See "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT
The Class A-2 Certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 (the
"Enhancement Act") so long as they are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization. As such, the Class A-2 Certificates are legal investments for
certain entities to the extent provided in the Enhancement Act. However,
institutions subject to the jurisdiction of the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Office of Thrift Supervision, the National
Credit Union Administration or state banking or insurance authorities should
review applicable rules, supervisory policies and guidelines of these agencies
before purchasing a Class A-2 Certificate, as such Certificates may be deemed to
be unsuitable investments under one or more of these rules, policies and
guidelines and certain restrictions may apply to investments in the Class A-2
Certificates. It should also be noted that certain states recently have enacted,
or have proposed enacting, legislation limiting to varying extents the ability
of certain 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 Class A-2 Certificates constitute
legal investments for such investors. See "Legal Investment" in the Prospectus.
LEGAL MATTERS
The validity of the Class A-2 Certificates and certain tax matters with
respect thereto will be passed upon for the Seller by Cadwalader, Wickersham &
Taft, New York, New York. Certain legal matters will be passed upon for the
Underwriter by Brown & Wood, New York, New York.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Class A-2 Certificates
will be applied by the Seller to the purchase from an affiliate of the Class A-2
Certificates.
RATINGS
The Class A-2 Certificates have been rated "Aa2" by Moody's and "AA" by
Fitch. See "Ratings" in the Prospectus Supplement for a further discussion of
the ratings of the Certificates.
The ratings of Moody's and Fitch do not address the possibility that, as a
result of principal prepayments, Certificateholders may receive a lower than
anticipated yield or the possibility that, as a result of prepayments, investors
in the Class A-2 Certificates may fail to fully recoup their initial investment.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by PHMSC with respect to the Trust Estate pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of the offering of the Class A-2 Certificates. PHMSC will provide or cause to be
provided without charge to each person to whom this Supplement is delivered in
connection with the offering of the Class A-2 Certificates a list identifying
all filings with respect to a Trust Estate pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act since PHMSC's latest fiscal year covered by its
annual report on Form 10-K and a copy of any or all documents or reports
incorporated herein by reference, in each case to the extent such documents or
reports relate to the Class A-2 Certificates, other than the exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such documents). Requests to PHMSC should be directed to: The Prudential Home
Mortgage Securities Company, Inc., 5325 Spectrum Drive, Frederick, Maryland
21701, telephone number (301) 846-8199.
S1-19
<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 9, 1994)
$271,633,000
(APPROXIMATE)
THE PRUDENTIAL HOME MORTGAGE SECURITIES COMPANY, INC. [LOGO]
SELLER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1994-10
PRINCIPAL AND INTEREST PAYABLE MONTHLY, COMMENCING IN MARCH 1994
---------------------
The Series 1994-10 Mortgage Pass-Through Certificates (the "Series
1994-10 Certificates") will consist of one class of senior certificates (the
"Class A Certificates") and one class of subordinated certificates (the "Class B
Certificates"). The Class A Certificates are entitled to a certain priority,
relative to the Class B Certificates, in right of distributions on the Mortgage
Loans. The Class A Certificates will consist of three subclasses (each, a
"Subclass") of Certificates designated as the Class A-1, Class A-2 and Class A-R
Certificates. The Class A Certificates, other than the Class A-2 Certificates,
are the only Series 1994-10 Certificates being offered hereby and are referred
to herein collectively as the "Offered Certificates."
The Series 1994-10 Certificates will evidence in the aggregate the
entire beneficial ownership interest in a trust fund (the "Trust Estate")
established by The Prudential Home Mortgage Securities Company, Inc. (the
"Seller") and consisting of a pool of fixed interest rate, conventional, monthly
pay, fully amortizing, one- to four-family, residential first mortgage loans
having original terms to stated maturity of approximately 30 years (the
"Mortgage Loans"), together with certain related property. Certain of the
Mortgage Loans may be secured primarily by shares issued by cooperative housing
corporations. The Mortgage Loans will be serviced by The Prudential Home
Mortgage Company, Inc. (in its capacity as servicer, the "Servicer," otherwise
"PHMC"). See "Description of the Mortgage Loans" herein. The Class A
Certificates will initially evidence in the aggregate an approximate 94.75%
undivided interest in the principal balance of the Mortgage Loans. The remaining
approximate 5.25% undivided interest in the principal balance of the Mortgage
Loans will be evidenced by the Class B Certificates.
Distributions in respect of interest and of principal will be made on
the 25th day of each month or, if such day is not a business day, on the
succeeding business day (each a "Distribution Date"), commencing in March 1994,
to the holders of Offered Certificates, as described herein. The amount of
interest accrued on any Subclass of Offered Certificates will be reduced by any
prepayment interest shortfalls and certain other shortfalls in the collection of
interest from mortgagors, as well as certain losses, as described herein under
"Description of the Certificates--Interest." Distributions in reduction of the
principal balance of the Class A Certificates on any Distribution Date will be
allocated among the Subclasses of the Class A Certificates in the manner
described herein under "Description of the Certificates--Principal (Including
Prepayments)." Distributions to each Subclass of Offered Certificates will be
made pro rata among Certificateholders of such Subclass.
(CONTINUED ON NEXT PAGE)
--------------------------
THESE SECURITIES DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE PRUDENTIAL
HOME MORTGAGE SECURITIES COMPANY, INC. OR ANY AFFILIATE THEREOF. NEITHER
THESE SECURITIES NOR THE UNDERLYING MORTGAGE LOANS WILL BE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------
- --------------------
INITIAL SUBCLASS
SUBCLASS PRINCIPAL PASS-THROUGH
DESIGNATION BALANCE (1) RATE
Class A-1........... $ 271,632,000 7.55 %
- --------------------
- --------------------
INITIAL SUBCLASS
SUBCLASS PRINCIPAL PASS-THROUGH
DESIGNATION BALANCE (1) RATE
Class A-R........... $ 1,000 7.55 %
(1) Approximate. The initial Subclass Principal Balances are subject to
adjustment as described herein.
The Offered Certificates are being offered by Kidder, Peabody & Co.
Incorporated (the "Underwriter") from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the Seller from the sale of the Offered Certificates will be
approximately 102.640625% of the aggregate initial principal balance of the
Class A Certificates plus accrued interest thereon at the rate of 7.55% per
annum from February 1, 1994 to (but not including) February 25, 1994, before
deducting expenses payable by the Seller estimated to be $325,000. The price to
be paid to the Seller for the Offered Certificates has not been allocated
between the Subclasses of Offered Certificates. See "Underwriting" herein.
The Offered Certficates are offered by the Underwriter, subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to certain other conditions. The Underwriter reserves the right to withdraw,
cancel or modify such offer and to
<PAGE>
reject any order in whole or in part. It is expected that the Class A-1
Certificates will be ready for delivery on or about February 25, 1994 through
the facilities of The Depository Trust Company and, in the case of the Class A-R
Certificate, at the office of Kidder, Peabody & Co. Incorporated, 60 Broad
Street, New York, New York 10004, against payment therefor in immediately
available funds.
KIDDER, PEABODY P CO.
INCORPORATED
------------------------------
The date of this Prospectus Supplement is February 17, 1994.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
THE YIELD TO MATURITY OF THE OFFERED CERTIFICATES WILL BE SENSITIVE IN
VARYING DEGREES TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS, WHICH MAY BE MADE AT ANY TIME WITHOUT PENALTY) ON THE MORTGAGE
LOANS. INVESTORS IN THE OFFERED CERTIFICATES SHOULD CONSIDER THE ASSOCIATED
RISKS, INCLUDING, IN THE CASE OF OFFERED CERTIFICATES PURCHASED AT A DISCOUNT,
THE RISK THAT A SLOWER THAN ANTICIPATED RATE OF PAYMENTS IN RESPECT OF PRINCIPAL
(INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS COULD RESULT IN AN ACTUAL YIELD
THAT IS LOWER THAN ANTICIPATED. A FASTER THAN ANTICIPATED RATE OF PAYMENTS IN
RESPECT OF PRINCIPAL (INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS COULD RESULT
IN AN ACTUAL YIELD THAT IS LOWER THAN ANTICIPATED FOR INVESTORS PURCHASING
OFFERED CERTIFICATES AT A PREMIUM. INVESTORS PURCHASING OFFERED CERTIFICATES AT
A PREMIUM SHOULD ALSO CONSIDER THE RISK THAT A RAPID RATE OF PAYMENTS IN RESPECT
OF PRINCIPAL (INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS COULD RESULT IN THE
FAILURE OF SUCH INVESTORS TO FULLY RECOVER THEIR INITIAL INVESTMENTS. SEE
"DESCRIPTION OF THE CERTIFICATES--INTEREST" AND "--PRINCIPAL (INCLUDING
PREPAYMENTS)" HEREIN AND "PREPAYMENT AND YIELD CONSIDERATIONS" HEREIN AND IN THE
PROSPECTUS.
The Class A-1 Certificates will be issued only in book-entry form (the
"Book-Entry Certificates") and purchasers thereof will not be entitled to
receive definitive certificates except in the limited circumstances set forth
herein. The Book-Entry Certificates will be registered in the name of Cede &
Co., as nominee of The Depository Trust Company, which will be the "holder" or
"Certificateholder" of such Certificates, as such terms are used herein. See
"Description of the Certificates" herein.
The Offered Certificates may not be an appropriate investment for individual
investors. Each Subclass of Offered Certificates is offered in minimum
denominations described herein under "Summary Information--Forms of
Certificates; Denominations." It is intended that the Offered Certificates not
be directly or indirectly held or beneficially owned in amounts lower than such
minimum denominations.
There is currently no secondary market for the Offered Certificates and
there can be no assurance that a secondary market will develop or, if such a
market does develop, that it will provide Certificateholders with liquidity of
investment at any particular time or for the life of the Offered Certificates.
The Underwriter intends to act as a market maker in the Offered Certificates,
subject to applicable provisions of federal and state securities laws and other
regulatory requirements, but is under no obligation to do so and any such market
making may be discontinued at any time. There can be no assurance that any
investor will be able to sell an Offered Certificate at a price equal to or
greater than the price at which such Certificate was purchased. THE CLASS A-R
CERTIFICATE MAY NOT BE PURCHASED BY OR TRANSFERRED TO (I) A "DISQUALIFIED
ORGANIZATION," (II) EXCEPT UNDER CERTAIN LIMITED CIRCUMSTANCES, A PERSON WHO IS
NOT A "U.S. PERSON," (III) A PLAN OR (IV) ANY PERSON OR ENTITY WHO THE
TRANSFEROR KNOWS OR HAS REASON TO KNOW WILL BE UNWILLING OR UNABLE TO PAY WHEN
DUE FEDERAL, STATE OR LOCAL TAXES WITH RESPECT THERETO. See "ERISA
Considerations" and "Description of the Certificates--Restrictions on Transfer
of the Class A-R Certificate" herein and "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Residual Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates" in the Prospectus.
An election will be made to treat the Trust Estate as a real estate mortgage
investment conduit (the "REMIC") for federal income tax purposes. As described
more fully herein and in the Prospectus, the Class A-1 and Class A-2
Certificates and the Class B Certificates will constitute the "regular
interests" in the REMIC and the Class A-R Certificate will constitute the
"residual interest" in the REMIC. PROSPECTIVE INVESTORS ARE CAUTIONED THAT THE
CLASS A-R CERTIFICATEHOLDER'S REMIC TAXABLE INCOME AND THE TAX LIABILITY THEREON
WILL EXCEED, AND MAY SIGNIFICANTLY EXCEED, CASH DISTRIBUTIONS TO SUCH HOLDER
DURING CERTAIN PERIODS, IN WHICH EVENT SUCH HOLDER MUST HAVE SUFFICIENT
ALTERNATIVE SOURCES OF FUNDS TO PAY SUCH TAX LIABILITY. See "Summary
Information--Federal Income Tax Status" and "Federal Income Tax Considerations"
herein and "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for REMIC Certificates" in the Prospectus.
The Class A Certificates, other than the Class A-2 Certificates, represent
two Subclasses of a Class of a separate Series of Certificates being offered by
the Seller pursuant to the Prospectus dated February 9, 1994 accompanying this
Prospectus Supplement. Any prospective investor should not purchase any Offered
Certificates described herein unless it shall have received the Prospectus and
this Prospectus Supplement. The Prospectus shall not be considered complete
without this Prospectus Supplement. The Prospectus contains important
information regarding this offering which is not contained herein, and
prospective investors are urged to read, in full, the Prospectus and this
Prospectus Supplement.
--------------------------
Until May 24, 1994, all dealers effecting transactions in the Offered
Certificates, whether or not participating in this distribution, may be required
to deliver this Prospectus Supplement and the Prospectus. This is in addition to
the obligation of dealers to deliver this Prospectus Supplement and the
Prospectus when acting as underwriters and with respect to their unsold
allotments or subcriptions.
--------------------------
S-2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary Information..................................................................................................... S-4
Description of the Certificates......................................................................................... S-14
Denominations......................................................................................................... S-14
Definitive Form....................................................................................................... S-14
Book-Entry Form....................................................................................................... S-14
Distributions......................................................................................................... S-15
Interest.............................................................................................................. S-17
Principal (Including Prepayments)..................................................................................... S-19
CALCULATION OF AMOUNT TO BE DISTRIBUTED TO THE CLASS A CERTIFICATES................................................. S-19
ALLOCATION OF AMOUNT TO BE DISTRIBUTED TO THE CLASS A CERTIFICATES.................................................. S-22
Additional Rights of the Class A-R Certificateholder.................................................................. S-22
Periodic Advances..................................................................................................... S-22
Restrictions on Transfer of the Class A-R Certificate................................................................. S-23
Reports............................................................................................................... S-23
Subordination of Class B Certificates................................................................................. S-24
ALLOCATION OF LOSSES................................................................................................ S-24
Description of the Mortgage Loans....................................................................................... S-27
Mandatory Repurchase or Substitution of Mortgage Loans................................................................ S-33
Optional Repurchase of Defaulted Mortgage Loans....................................................................... S-33
Origination, Delinquency and Foreclosure Experience..................................................................... S-34
Loan Origination...................................................................................................... S-34
Delinquency and Foreclosure Experience................................................................................ S-34
Prepayment and Yield Considerations..................................................................................... S-38
Pooling and Servicing Agreement......................................................................................... S-42
General............................................................................................................... S-42
Voting................................................................................................................ S-43
Trustee............................................................................................................... S-43
Servicing Compensation and Payment of Expenses........................................................................ S-43
Optional Termination.................................................................................................. S-43
Federal Income Tax Considerations....................................................................................... S-44
Regular Certificates.................................................................................................. S-44
Residual Certificate.................................................................................................. S-44
ERISA Considerations.................................................................................................... S-45
Legal Investment........................................................................................................ S-46
Secondary Market........................................................................................................ S-46
Underwriting............................................................................................................ S-46
Legal Matters........................................................................................................... S-47
Use of Proceeds......................................................................................................... S-47
Ratings................................................................................................................. S-47
Index of Significant Prospectus Supplement Definitions.................................................................. S-48
</TABLE>
S-3
<PAGE>
SUMMARY INFORMATION
THE FOLLOWING IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND IN THE
ACCOMPANYING PROSPECTUS (THE "PROSPECTUS"). CAPITALIZED TERMS USED IN THIS
PROSPECTUS SUPPLEMENT AND NOT OTHERWISE DEFINED HEREIN HAVE THE MEANINGS
ASSIGNED IN THE PROSPECTUS. SEE "INDEX OF SIGNIFICANT PROSPECTUS SUPPLEMENT
DEFINITIONS" HEREIN AND "INDEX OF SIGNIFICANT DEFINITIONS" IN THE PROSPECTUS.
<TABLE>
<S> <C>
Title of Securities............... Mortgage Pass-Through Certificates, Series 1994-10 (the "Series
1994-10 Certificates" or the "Certificates").
Seller............................ The Prudential Home Mortgage Securities Company, Inc. (the
"Seller"). See "The Seller" in the Prospectus.
Servicer.......................... The Prudential Home Mortgage Company, Inc. (in its capacity as
servicer, the "Servicer," otherwise, "PHMC"). See "Servicing of
the Mortgage Loans" and "PHMC--General" in the Prospectus.
Trustee........................... First Trust National Association, a national banking association
(the "Trustee"). See "Pooling and Servicing Agreement--Trustee"
in this Prospectus Supplement.
Rating of Certificates............ It is a condition to the issuance of the Class A Certificates
that they shall have been rated at least "Aa2" by Moody's
Investors Service, Inc. ("Moody's") and at least "AA" by Fitch
Investors Service, Inc. ("Fitch"). The ratings by Moody's and
Fitch are not recommendations to buy, sell or hold such
Certificates and may be subject to revision or withdrawal at any
time by the assigning rating agency. The ratings do not address
the possibility that, as a result of principal prepayments,
holders of such Certificates may receive a lower than anticipated
yield. See "--Effects of Prepayments on Investment Expectations"
below and "Ratings" in this Prospectus Supplement.
Description of Certificates....... The Series 1994-10 Certificates will consist of the Class A
Certificates and the Class B Certificates. The Class A
Certificates represent a type of interest referred to in the
Prospectus as "Senior Certificates" and the Class B Certificates
represent a type of interest referred to in the Prospectus as
"Subordinated Certificates." As these designations suggest, the
Class A Certificates are entitled to a certain priority, relative
to the Class B Certificates, in right of distributions on the
Mortgage Loans underlying the Series 1994-10 Certificates. See
"--Distributions of Principal and Interest" below.
Initially, the Class A Certificates will evidence in the
aggregate an approximate 94.75% (approximately $271,633,000)
undivided interest in the aggregate initial principal balance of
the Mortgage Loans and the Class B Certificates will evidence in
the aggregate an approximate 5.25% (approximately $15,050,950)
undivided interest in the aggregate initial principal balance of
the Mortgage Loans. The relative interests in the aggregate
outstanding principal balance of the Mortgage Loans represented
by the Class A and Class B Certificates are subject to change
over time because of the disproportionate allocation of certain
unscheduled principal payments to the Class A Certificates for a
specified period and the allocation of certain losses and certain
shortfalls first to the Class B Certificates prior to the
allocation of such losses and shortfalls to the Class A
Certificates, as discussed in "--Distributions of Principal and
Interest" and "--Credit Enhancement" below.
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
The Class A Certificates will consist of three subclasses,
designated as the Class A-1, Class A-2 and Class A-R
Certificates. The Class A-2 Certificates and the Class B
Certificates are not offered hereby and may be retained or sold
by the Seller. The Class A Certificates, other than the Class A-2
Certificates, are referred to in this Prospectus Supplement as
the "Offered Certificates."
The Offered Certificates have the approximate aggregate initial
principal balances set forth on the cover of this Prospectus
Supplement. Any difference between the aggregate principal
balance of the Class A Certificates as of the date of issuance of
the Series 1994-10 Certificates and the approximate aggregate
initial principal balance of the Class A Certificates as of the
date of this Prospectus Supplement will not, with respect to the
Class A Certificates, exceed 5% of the aggregate initial
principal balance of such Class A Certificates stated on the
cover of this Prospectus Supplement and will be allocated solely
to the Class A-1 Certificates.
Forms of Certificates;
Denominations................... The Offered Certificates will be issued either in book-entry form
or in fully registered, certificated form ("Definitive
Certificates"). The following table sets forth the original
certificate form, the minimum denomination and the incremental
denomination of each subclass of the Offered Certificates. It is
intended that the Offered Certificates not be directly or
indirectly held or beneficially owned in amounts lower than such
minimum denominations.
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FORM AND DENOMINATIONS OF OFFERED CERTIFICATES
<CAPTION>
ORIGINAL
CERTIFICATE MINIMUM INCREMENTAL
SUBCLASS FORM DENOMINATION DENOMINATION
- ----------------------------------------------------------- ------------- ------------ -------------
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Class A-1.................................................. Book-Entry $ 100,000 $ 1,000
Class A-R.................................................. Definitive $ 1,000 N/A
- ----------------------------------------------------------------------------------------------------
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BOOK-ENTRY FORM. The Class A-1 Certificates will be issued as
Book-Entry Certificates, through the facilities of The Depository
Trust Company ("DTC"), except as described below. The Class A-1
Certificates are therefore sometimes referred to in this
Prospectus Supplement as the "Book- Entry Certificates." An
investor in the Book-Entry Certificates will not receive a
Definitive Certificate representing its ownership interest in
such Book-Entry Certificates, except under extraordinary
circumstances, which are discussed in "Description of the
Certificates--Book-Entry Form" in this Prospectus Supplement.
Instead, DTC will effect payments and transfers by means of its
electronic recordkeeping services, acting through certain
participating organizations. This may result in certain delays in
receipt of distributions by an investor and may restrict an
investor's ability to pledge its securities. The rights of
investors in the Book-Entry Certificates may generally only be
exercised through DTC and its participating organizations. See
"Description of the Certificates--Denominations" and
"--Book-Entry Form" in this Prospectus Supplement.
DEFINITIVE FORM. The Class A-R Certificate will be issued as a
Definitive Certificate. See "Description of the
Certificates--Denominations" and "--Definitive Form" in this
Prospectus Supplement.
Mortgage Loans.................... MORTGAGE LOAN DATA. The Mortgage Loans, which are the source of
distributions to holders of the Series 1994-10 Certificates, are
expected to consist of conventional, fixed interest rate, monthly
pay, fully amortizing, one- to four-family, residential first
mortgage loans, having original terms
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to stated maturity of approximately 30 years, which may include
loans secured by shares issued by cooperative housing
corporations. The Mortgage Loans are expected to have the further
specifications set forth in the following table and under the
heading "Description of the Mortgage Loans" in this Prospectus
Supplement.
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SELECTED MORTGAGE LOAN DATA
(AS OF THE CUT-OFF DATE)
Cut-Off Date: February 1, 1994
Number of Mortgage Loans: 1,175
Aggregate Unpaid Principal
Balance (1): $286,683,950
Range of Unpaid Principal $36,974 to $999,312
Balances (1):
Average Unpaid Principal
Balance (1): $243,986
Range of Interest Rates: 7.750% to 9.000%
Weighted Average Interest Rate (1): 7.881%
Range of Remaining Terms to Stated
Maturity: 347 months to 360 months
Weighted Average Remaining Term to
Stated Maturity (1): 359 months
Range of Original Loan-to-Value
Ratios: 17.08% to 90.00%
Weighted Average Original Loan-to-
Value Ratio (1): 74.19%
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Geographic Concentration of
Mortgaged Properties Securing
Mortgage Loans in Excess of 5% of
the Aggregate Unpaid Principal
Balance (1): California 72.59%
New York 6.56%
- ------------
(1) Approximate.
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CHANGES TO POOL. A number of Mortgage Loans may be removed from
the pool, or a substitution may be made for certain Mortgage
Loans, in advance of the issuance of the Series 1994-10
Certificates (which is expected to occur on or about February 25,
1994). This may result in changes in certain of the pool
characteristics set forth in the table above and elsewhere in
this Prospectus Supplement. See "Description of the Mortgage
Loans" in this Prospectus Supplement.
Subsequent to the issuance of the Series 1994-10 Certificates,
certain Mortgage Loans may be removed from the pool through
repurchase or, under certain circumstances, substitution by the
Seller, if the Mortgage Loans are discovered to have defective
documentation or if they otherwise do not conform to the
standards established by the Seller's representations and
warranties concerning the Mortgage Loans. See "Description of the
Mortgage Loans--Mandatory Repurchase or Substitution of Mortgage
Loans" in this Prospectus Supplement. The Seller may also
repurchase defaulted Mortgage Loans. See "Description of the
Mortgage Loans-- Optional Repurchase of Defaulted Mortgage Loans"
in this Prospectus Supplement.
The Servicer is entitled, subject to certain conditions relating
to the then-remaining size of the pool, to purchase all
outstanding Mortgage Loans in
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the pool and thereby effect early retirement of the Series
1994-10 Certificates. See "Pooling and Servicing
Agreement--Optional Termination" in this Prospectus Supplement.
Distributions of Principal and
Interest........................ DISTRIBUTIONS IN GENERAL. Distributions on the Series 1994-10
Certificates will be made on the 25th day of each month or, if
such day is not a business day, on the succeeding business day
(each such date is referred to in this Prospectus Supplement as a
"Distribution Date"), commencing in March 1994, to holders of
record at the close of business on the last business day of the
preceding month who are entitled to such distributions. In the
case of the Book-Entry Certificates, the holder of record will be
Cede & Co. ("Cede"), as nominee of DTC.
The amount available for distribution on any Distribution Date is
primarily a function of (i) the amount remitted by mortgagors of
the Mortgage Loans in payment of their scheduled installments of
principal and interest, (ii) the amount of prepayments made by
the mortgagors and (iii) proceeds from liquidations of defaulted
Mortgage Loans.
On any Distribution Date, holders of the Class A Certificates
will be entitled to receive all amounts due them before any
distributions are made to holders of the Class B Certificates on
that Distribution Date. The amount that is available to be
distributed on any Distribution Date will be allocated first to
pay interest due holders of the Class A Certificates and then, if
the amount available for distribution exceeds the amount of
interest due holders of the Class A Certificates, to reduce the
outstanding principal balance of the Class A Certificates.
Principal will be distributed to holders of the Offered
Certificates as described under the heading "Description of the
Certificates--Principal (Including Prepayments)--Allocation of
Amount to be Distributed to the Class A Certificates" in this
Prospectus Supplement.
After all amounts due on the Class A Certificates for any
Distribution Date have been paid, the amount remaining will be
distributed to pay interest and principal due to the holders of
Class B Certificates.
If any mortgagor is delinquent in the payment of principal or
interest on a Mortgage Loan in any month, the Servicer will
advance such payment unless the Servicer determines that the
delinquent amount will not be recoverable by it from liquidation
proceeds or other recoveries on the related Mortgage Loan. See
"Description of the Certificates--Periodic Advances" in this
Prospectus Supplement.
INTEREST DISTRIBUTIONS. The amount of interest to which holders
of the Offered Certificates will be entitled each month is
calculated based on the outstanding principal balance of that
subclass, as of the related Distribution Date. Interest will
accrue during each month on each such subclass according to the
following formula: 1/12th of 7.55% multiplied by the outstanding
principal balance of such subclass as of the related Distribu-
tion Date.
When mortgagors prepay principal or when principal is recovered
through foreclosures or other liquidations of defaulted Mortgage
Loans, a full month's interest for the month of payment or
recovery may not be paid or recovered, resulting in interest
shortfalls. A shortfall that results from principal prepayments
IN FULL will be offset from aggregate servicing fees that would
otherwise be payable to the Servicer on any Distribution Date,
but only to the extent of servicing fees payable with respect to
that Distribution Date. Aggregate shortfalls in collections of
interest resulting from principal
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prepayments in full, to the extent they exceed the aggregate
servicing fees (the "Non-Supported Interest Shortfall"), will be
allocated pro rata between the classes of the Series 1994-10
Certificates, based on their then-outstanding principal balances
and will be allocated pro rata among the subclasses of Class A
Certificates, based on interest accrued.
Any shortfalls of interest that result from the timing of PARTIAL
principal prepayments or liquidations of defaulted Mortgage Loans
will not be offset by the servicing fees and will not be
allocated pro rata among all classes and subclasses of the Series
1994-10 Certificates, but instead will be borne first by the
Class B Certificates and then by the Class A Certificates. See
"Description of the Certificates--Subordination of Class B
Certificates" in this Prospectus Supplement.
The amount of interest required to be distributed to holders of
the Series 1994-10 Certificates will also be reduced by a portion
of certain special hazard losses, fraud losses and bankruptcy
losses attributable to interest. See "--Credit
Enhancement--Extent of Loss Coverage" below and "Description of
the Certificates--Interest" in this Prospectus Supplement.
To the extent that the amount available for distribution on any
Distribution Date is insufficient to permit the distribution of
the applicable amount of accrued interest on the Class A
Certificates (net of any Non-Supported Interest Shortfall, other
shortfalls and losses allocable to the Class A Certificates as
described above), the amount of interest available to be
distributed will be allocated among the outstanding subclasses of
Class A Certificates pro rata in accordance with their respective
entitlements to interest, and the amount of any deficiency will
be added to the amount of interest that the Class A Certificates
are entitled to receive on subsequent Distribution Dates. No
interest will accrue on such deficiencies.
Interest on the Class A Certificates will be calculated on the
basis of a 360-day year consisting of twelve 30-day months.
See "Description of the Certificates--Interest" in this
Prospectus Supplement.
PRINCIPAL DISTRIBUTIONS. The aggregate amount of principal to
which the holders of the Class A Certificates are entitled each
month will be comprised of a percentage of the scheduled payments
of principal on the Mortgage Loans and a percentage of certain
unscheduled payments of principal on the Mortgage Loans. The
percentage of scheduled payments will be equal, on each
Distribution Date, to the fraction that represents the ratio of
the then-outstanding principal balance of the Class A
Certificates to the aggregate outstanding principal balance of
the Mortgage Loans (based on their amortization schedules then in
effect). The percentage of certain unscheduled payments will be
equal to the percentage described in the preceding sentence plus
an additional amount equal to a percentage of the principal
otherwise distributable to the holders of the Class B
Certificates. During the five years beginning on the first
Distribution Date, the percentage of certain unscheduled
principal payments otherwise distributable to the holders of the
Class B Certificates that is instead distributable to the holders
of the Class A Certificates will be equal to 100%, and such
percentage will likely decline during the subsequent four years,
as described under the
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heading "Description of the Certificates--Principal (Including
Prepayments)--Calculation of Amount to be Distributed to the
Class A Certificates" in this Prospectus Supplement, until in
year ten and each year thereafter such percentage is equal to
zero. On each Distribution Date, the Class B Certificates will
collectively be entitled to receive the percentages of the
scheduled and certain unscheduled payments of principal on the
Mortgage Loans equal, in each case, to 100% less the applicable
percentage for the Class A Certificates described above.
The amount that is available for distribution to the holders of
the Class A Certificates on any Distribution Date as a
distribution of principal is the amount remaining after deducting
the amount of interest distributable on the Class A Certificates
from the total amount collected that is available to be
distributed to holders of the Series 1994-10 Certificates on such
Distribution Date. Principal will be distributed to the holders
of the Class A Certificates in accordance with the payment
priorities described under the heading "Description of the
Certificates--Principal (Including Prepayments)--Allocation of
Amount to be Distributed to the Class A Certificates" in this
Prospectus Supplement.
Credit Enhancement................ DESCRIPTION OF "SHIFTING-INTEREST" SUBORDINATION. The rights of
the holders of the Class B Certificates to receive distributions
will be subordinated to the rights of the holders of the Class A
Certificates to receive distributions, to the extent described
herein. This subordination provides a certain amount of
protection to the holders of the Class A Certificates (to the
extent of the subordination of the Class B Certificates) against
delays in the receipt of scheduled payments of interest and
principal and against losses associated with the liquidation of
defaulted Mortgage Loans and certain losses resulting from the
bankruptcy of a mortgagor.
The protection afforded the holders of the Class A Certificates
by means of this subordination will be effected in two ways: (i)
by the preferential right of the holders of the Class A
Certificates to receive, prior to any distribution being made on
any Distribution Date in respect of the Class B Certificates, the
amounts of interest and principal due the holders of the Class A
Certificates on such date and, if necessary, by the right of such
holders to receive future distributions on the Mortgage Loans
that would otherwise have been allocated to the holders of the
Class B Certificates and (ii) by the allocation to the Class B
Certificates, until their principal balance has been reduced to
zero, of certain losses resulting from the liquidation of
defaulted Mortgage Loans or the bankruptcy of mortgagors prior to
the allocation of such losses to the Class A Certificates.
In addition, in order to increase the period during which the
principal balance of the Class B Certificates remains available
as credit enhancement to the Class A Certificates, a
disproportionate amount of prepayments and certain unscheduled
recoveries with respect to the Mortgage Loans will be allocated
to the Class A Certificates. This allocation has the effect of
accelerating the amortization of the Class A Certificates while,
in the absence of losses in respect of the liquidation of
defaulted Mortgage Loans or losses resulting from the bankruptcy
of mortgagors, increasing the respective percentage interest in
the principal balance of the Mortgage Loans evidenced by the
Class B Certificates.
EXTENT OF LOSS COVERAGE. Realized losses on Mortgage Loans,
other than losses that are (i) attributable to "special hazards"
not insured against
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under a standard hazard insurance policy, (ii) incurred on
defaulted Mortgage Loans as to which there was fraud in the
origination of such Mortgage Loans or (iii) attributable to
certain actions which may be taken by a bankruptcy court in
connection with a Mortgage Loan, including a reduction by a
bankruptcy court of the principal balance of or the interest rate
on a Mortgage Loan or an extension of its maturity, will not be
allocated to the Class A Certificates until the date on which the
aggregate principal balance of the Class B Certificates (which
balance is expected initially to be approximately $15,050,950)
has been reduced to zero.
With respect to any Distribution Date subsequent to the first
Distribution Date, the availability of the credit enhancement
provided by the Class B Certificates will be affected by the
prior reduction of the principal balance of the Class B
Certificates. Reduction of the principal balance of the Class B
Certificates will result from (i) the prior allocation of losses
due to the liquidation of defaulted Mortgage Loans, including
losses due to special hazards and fraud losses up to the
respective limits referred to below, (ii) the prior allocation of
bankruptcy losses up to the limit referred to below and (iii) the
prior receipt of principal distributions by the holders of such
Certificates.
As of the date of issuance of the Series 1994-10 Certificates,
the amount of losses attributable to special hazards, fraud and
bankruptcy that will be absorbed solely by the holders of the
Class B Certificates will be approximately 1.31%, 2.00% and
0.07%, respectively, of the aggregate principal balance of the
Mortgage Loans as of the Cut-Off Date (approximately $3,752,405,
$5,733,679 and $189,000, respectively). If losses due to special
hazards, fraud or bankruptcy exceed any of such amounts prior to
the principal balance of the Class B Certificates being reduced
to zero, such losses will be shared pro rata by the Class A
Certificates and the Class B Certificates based on their
then-outstanding principal balances with respect to the principal
portion of such losses and based on their accrued interest with
respect to the interest portion of such losses. After the
principal balance of the Class B Certificates has been reduced to
zero, such losses will be borne solely by the Class A
Certificates. Any losses borne by the Class A Certificates will
be shared pro rata by the subclasses of Class A Certificates
based on their then-outstanding principal balances with respect
to the principal portion of such losses, and based on their
accrued interest, with respect to the interest portion of such
losses. See "Description of the Certificates-- Interest" and
"--Subordination of Class B Certificates--Allocation of Losses"
in this Prospectus Supplement. Under certain circumstances, the
limits set forth above may be reduced as described under
"Description of the Certificates--Subordination of Class B
Certificates--Allocation of Losses" in this Prospectus
Supplement.
Effects of Prepayments on
Investment Expectations......... The actual rate of prepayment of principal on the Mortgage Loans
cannot be predicted. The investment performance of the Offered
Certificates may vary materially and adversely from the
investment expectations of investors due to prepayments on the
Mortgage Loans being higher or lower than anticipated by
investors. The actual yield to the holder of an Offered
Certificate may not be equal to the yield anticipated at the time
of purchase of the Certificate or, notwithstanding that the
actual yield is equal to the yield anticipated at that time, the
total return on investment expected by the investor or the
expected weighted average life of the Certificate may not be
realized. These effects are
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summarized below. IN DECIDING WHETHER TO PURCHASE ANY OFFERED
CERTIFICATES, AN INVESTOR SHOULD MAKE AN INDEPENDENT DECISION AS
TO THE APPROPRIATE PREPAYMENT ASSUMPTIONS TO BE USED.
YIELD. If an investor purchases an Offered Certificate at an
amount equal to its unpaid principal balance (that is, at "par"),
the effective yield to that investor (assuming that there are no
interest shortfalls and assuming the full return of the
purchaser's invested principal) will approximate the pass-through
rate on that Certificate. If an investor pays less or more than
the unpaid principal balance of the Certificate (that is, buys
the Certificate at a "discount" or "premium," respectively),
then, based on the assumptions set forth in the preceding
sentence, the effective yield to the investor will be higher or
lower, respectively, than the stated interest rate on the
Certificate, because such discount or premium will be amortized
over the life of the Certificate. Any deviation in the actual
rate of prepayments on the Mortgage Loans from the rate assumed
by the investor will affect the period of time over which, or the
rate at which, the discount or premium will be amortized and,
consequently, will change the investor's actual yield from that
anticipated. The timing of receipt of prepayments may also affect
the investor's actual yield. AN INVESTOR THAT PURCHASES ANY
OFFERED CERTIFICATES AT A DISCOUNT SHOULD CONSIDER THE RISK THAT
A SLOWER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS ON THE
MORTGAGE LOANS WILL RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN
SUCH INVESTOR'S EXPECTED YIELD. AN INVESTOR THAT PURCHASES ANY
OFFERED CERTIFICATES AT A PREMIUM SHOULD CONSIDER THE RISK THAT A
FASTER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS ON THE
MORTGAGE LOANS WILL RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN
SUCH INVESTOR'S EXPECTED YIELD AND SHOULD CONSIDER THE RISK THAT
A RAPID RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS COULD
RESULT IN THE FAILURE OF SUCH INVESTOR TO FULLY RECOVER ITS
INITIAL INVESTMENT.
REINVESTMENT RISK. As stated above, if a Certificate is
purchased at an amount equal to its unpaid principal balance,
fluctuations in the rate of distributions of principal will
generally not affect the yield to maturity of that Certificate.
However, the total return on any investor's investment, includ-
ing an investor who purchases at par, will be reduced to the
extent that principal distributions received on its Certificate
cannot be reinvested at a rate as high as the stated interest
rate of the Certificate. Investors in the Offered Certificates
should consider the risk that rapid rates of prepayments on the
Mortgage Loans may coincide with periods of low prevailing market
interest rates. During periods of low prevailing market interest
rates, mortgagors may be expected to prepay or refinance Mortgage
Loans that carry interest rates higher than then-current interest
rates for mortgage loans. Consequently, the amount of principal
distributions available to an investor for reinvestment at such
low prevailing interest rates may be relatively large.
Conversely, slow rates of prepayments on the Mortgage Loans may
coincide with periods of high prevailing market interest rates.
During such periods, it is less likely that mortgagors will elect
to prepay or refinance Mortgage Loans and, therefore, the amount
of principal distributions available to an investor for
reinvestment at such high prevailing interest rates may be
relatively small.
WEIGHTED AVERAGE LIFE VOLATILITY. One indication of the impact
of varying prepayment rates on a security is the change in its
weighted average life. The "weighted average life" of an Offered
Certificate is the average
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amount of time that will elapse between the date of issuance of
the Certificate and the date on which each dollar in reduction of
the principal balance of the Certificate is distributed to the
investor. Low rates of prepayment may result in the extension of
the weighted average life of a Certificate; high rates may result
in the shortening of such weighted average life. In general, if
the weighted average life of a Certificate purchased at par is
extended beyond that initially anticipated, such Certificate's
market value may be adversely affected even though the yield to
maturity on the Certificate is unaffected. The weighted average
lives of the Offered Certificates, under various prepayment
scenarios, are displayed in the table appearing under the heading
"Prepayment and Yield Considerations" in this Prospectus
Supplement.
Federal Income Tax Status......... An election will be made to treat the Trust Estate as a real
estate mortgage investment conduit (the "REMIC") for federal
income tax purposes. The Class A-1 and Class A-2 Certificates and
the Class B Certificates will be designated as the regular
interests in the REMIC, and the Class A-R Certificate will be
designated as the residual interest in the REMIC.
The Regular Certificates (as defined herein) generally will be
treated as newly originated debt instruments for federal income
tax purposes. Beneficial owners of the Regular Certificates will
be required to report income thereon in accordance with the
accrual method of accounting. It is anticipated that the Class
A-1 Certificates will be issued at a premium for federal income
tax purposes. The Class A-2 Certificates, which are not offered
hereby, will be treated as issued with original issue discount
for federal income tax purposes.
The holder of the Class A-R Certificate will be required to
include the taxable income or loss of the REMIC in determining
its federal taxable income. It is anticipated that all or a
substantial portion of the taxable income of the REMIC includible
by the Class A-R Certificateholder will be treated as "excess
inclusion" income subject to special limitations for federal
income tax purposes. FURTHER, SIGNIFICANT RESTRICTIONS APPLY TO
THE TRANSFER OF THE CLASS A-R CERTIFICATE. THE CLASS A-R
CERTIFICATE WILL BE CONSIDERED A "NONECONOMIC RESIDUAL INTEREST,"
CERTAIN TRANSFERS OF WHICH MAY BE DISREGARDED FOR FEDERAL INCOME
TAX PURPOSES.
See "Description of the Certificates--Restrictions on Transfer of
the Class A-R Certificate" and "Federal Income Tax
Considerations" in this Prospectus Supplement and "Certain
Federal Income Tax Consequences--Federal Income Tax Consequences
for REMIC Certificates" in the Prospectus.
ERISA Considerations.............. A fiduciary of any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Internal Revenue Code of 1986, as amended
(the "Code") or a governmental plan, subject to any federal,
state or local law ("Similar Law"), which is, to a material
extent, similar to the foregoing provisions of ERISA or the Code
(collectively, a "Plan"), should carefully review with its legal
advisors whether the purchase or holding of Class A Certificates
could give rise to a transaction prohibited or not otherwise
permissible under ERISA, the Code or Similar Law. THE CLASS A-R
CERTIFICATE MAY NOT BE PURCHASED BY OR TRANSFERRED TO A PLAN. See
"ERISA Considerations" in this Prospectus Supplement and in the
Prospectus.
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Legal Investment.................. The Offered Certificates will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 so long as they are rated in one of the
two highest rating categories by at least one nationally
recognized statistical rating organization. As such, the Offered
Certificates are legal investments for certain entities to the
extent provided in such act. However, there are regulatory
requirements and considerations applicable to regulated financial
institutions and restrictions on the ability of such institutions
to invest in certain types of mortgage related securities.
Prospective purchasers of the Offered Certificates should consult
their own legal, tax and accounting advisors in determining the
suitability of and consequences to them of the purchase,
ownership and disposition of the Offered Certificates. See "Legal
Investment" in this Prospectus Supplement.
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DESCRIPTION OF THE CERTIFICATES
DENOMINATIONS
The Class A-1 Certificates will be issued in minimum denominations of
$100,000 initial principal balance and integral multiples of $1,000 initial
principal balance in excess thereof. The Class A-R Certificate will be issued as
a single Certificate with a denomination of $1,000 initial principal balance.
DEFINITIVE FORM
Offered Certificates issued in fully registered, certificated form are
referred to herein as "Definitive Certificates." The Class A-R Certificate will
be issued as a Definitive Certificate. Distributions of principal of, and
interest on, the Definitive Certificates will be made by the Servicer, or a
paying agent on behalf of the Servicer, directly to holders of the Definitive
Certificates in accordance with the procedures set forth in the Pooling and
Servicing Agreement. The Definitive Certificates will be transferable and
exchangeable at the offices of the Trustee or the certificate registrar. No
service charge will be imposed for any registration of transfer or exchange, but
the Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection therewith.
BOOK-ENTRY FORM
The Class A-1 Certificates will be issued in book-entry form and are
referred to herein as "Book-Entry Certificates." The Book-Entry Certificates
initially will be represented by one or more physical certificates registered in
the name of Cede & Co. ("Cede"), as nominee of DTC, which will be the "holder"
or "Certificateholder" of such Certificates, as such terms are used herein. No
person acquiring an interest in the Book-Entry Certificates (a "Beneficial
Owner") will be entitled to receive a Definitive Certificate representing such
person's interest in the Book-Entry Certificates, except as set forth below.
Unless and until Definitive Certificates are issued to Beneficial Owners in
respect of the Book-Entry Certificates under the limited circumstances described
herein, all references to actions taken by Certificateholders or holders shall,
in the case of the Book-Entry Certificates, refer to actions taken by DTC upon
instructions from its Participants, and all references herein to distributions,
notices, reports and statements to Certificateholders or holders shall, in the
case of the Book-Entry Certificates, refer to distributions, notices, reports
and statements to DTC or Cede, as the registered holder of the Book-Entry
Certificates, as the case may be, for distribution to Beneficial Owners in
accordance with DTC procedures.
DTC is a limited purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York UCC and a "clearing agency" registered
pursuant to Section 17A of the Securities Exchange Act of 1934, as amended. DTC
was created to hold securities for its participating organizations
("Participants") and to facilitate the clearance and settlement of securities
transactions among Participants through electronic book-entries, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers (including the Underwriter), banks, trust
companies and clearing corporations. Indirect access to the DTC system also is
available to banks, brokers, dealers, trust companies and other institutions
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("Indirect Participants").
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Certificates among Participants on whose behalf it acts with respect
to the Book-Entry Certificates and to receive and transmit distributions of
principal of, and interest on, the Book-Entry Certificates. Participants and
Indirect Participants with which Beneficial Owners have accounts with respect to
the Book-Entry Certificates similarly are required to make book-entry transfers
and receive and transmit such payments on behalf of their respective Beneficial
Owners.
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Beneficial Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Book-Entry Certificates may do so only through Participants and Indirect
Participants. In addition, Beneficial Owners will receive all distributions of
principal and interest from the Servicer, or a paying agent on behalf of the
Servicer, through Participants. DTC will forward such distributions to its
Participants, which thereafter will forward them to Indirect Participants or
Beneficial Owners. Beneficial Owners will not be recognized by the Trustee, the
Servicer or any paying agent as Certificateholders, as such term is used in the
Pooling and Servicing Agreement, and Beneficial Owners will be permitted to
exercise the rights of Certificateholders only indirectly through DTC and its
Participants.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Beneficial
Owner to pledge Book-Entry Certificates to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Book-Entry Certificates, may be limited due to the lack of a Definitive
Certificate for such Book-Entry Certificates. In addition, under a book-entry
format, Beneficial Owners may experience delays in their receipt of payments,
since distributions will be made by the Servicer, or a paying agent on behalf of
the Servicer, to Cede, as nominee for DTC.
DTC has advised the Seller that it will take any action permitted to be
taken by a Certificateholder under the Pooling and Servicing Agreement only at
the direction of one or more Participants to whose accounts with DTC the
Book-Entry Certificates are credited. Additionally, DTC has advised the Seller
that it will take such actions with respect to specified Voting Interests only
at the direction of and on behalf of Participants whose holdings of Book-Entry
Certificates evidence such specified Voting Interests. DTC may take conflicting
actions with respect to Voting Interests to the extent that Participants whose
holdings of Book-Entry Certificates evidence such Voting Interests authorize
divergent action.
Neither the Seller, 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, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests. In the event of the
insolvency of DTC or a Participant or Indirect Participant in whose name
Book-Entry Certificates are registered, the ability of the Beneficial Owners of
such Book Entry Certificates to obtain timely payment may be impaired. In
addition, in such event, if the limits of applicable insurance coverage by the
Securities Investor Protection Corporation are exceeded or if such coverage is
otherwise unavailable, ultimate payment of amounts distributable with respect to
such Book-Entry Certificates may be impaired.
Book-Entry Certificates will be converted to Definitive Certificates and
re-issued to Beneficial Owners or their nominees, rather than to DTC or its
nominee, only if (i) the Servicer advises the Trustee in writing that DTC is no
longer willing or able to discharge properly its responsibilities as depository
with respect to the Book-Entry Certificates and the Servicer is unable to locate
a qualified successor, (ii) the Servicer, at its option, elects to terminate the
book-entry system through DTC or (iii) after the occurrence of a dismissal or
resignation of the Servicer under the Pooling and Servicing Agreement,
Beneficial Owners representing not less than 51% of the Voting Interests of the
Book-Entry Certificates advise the Trustee through DTC, in writing, that the
continuation of a book-entry system through DTC (or a successor thereto) is no
longer in the Beneficial Owners' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee will be required to notify all Beneficial Owners through
Participants of the availability of Definitive Certificates. Upon surrender by
DTC of the physical certificates representing the Book-Entry Certificates and
receipt of instructions for re-registration, the Trustee will reissue the
Book-Entry Certificates as Definitive Certificates to Beneficial Owners. The
procedures relating to payment on and transfer of those Class A Certificates
initially issued as Definitive Certificates will thereafter apply to those
Book-Entry Certificates that have been reissued as Definitive Certificates.
DISTRIBUTIONS
Distributions of interest and in reduction of principal balance to holders
of Class A Certificates of each Subclass will be made monthly, to the extent of
each Subclass' entitlement thereto, on the 25th day of each month or, if such
day is not a business day, on the succeeding business day (each, a "Distribution
Date"), beginning in March 1994, in an aggregate amount equal to the Class A
Distribution Amount. The "Determination Date" with respect to each Distribution
Date will be the 17th day of each month, or if such day is not a business day,
the preceding business
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<PAGE>
day. Distributions will be made on each Distribution Date to holders of record
(which, in the case of the Book-Entry Certificates, will be Cede, as nominee for
DTC) at the close of business on the last business day of the preceding month
(each, a "Record Date"), except that the final distribution in respect of each
Class A Certificate of any Subclass will only be made upon presentation and
surrender of such Class A Certificate at the office or agency appointed by the
Trustee and specified in the notice of final distribution in respect of such
Subclass of Class A Certificates.
The aggregate amount available for distribution to Certificateholders on
each Distribution Date will be the Pool Distribution Amount. The "Pool
Distribution Amount" for a Distribution Date will be the sum of all previously
undistributed payments or other receipts on account of principal (including
principal prepayments and Liquidation Proceeds in respect of principal, if any)
and interest on or in respect of the Mortgage Loans received by the Servicer
after the Cut-Off Date (except for amounts due on or prior to the Cut-Off Date),
or received by the Servicer on or prior to the Cut-Off Date but due after the
Cut-Off Date, in either case received on or prior to the business day preceding
the Determination Date in the month in which such Distribution Date occurs, plus
(i) all Periodic Advances made by the Servicer, and (ii) all other amounts
required to be placed in the Certificate Account by the Servicer pursuant to the
Pooling and Servicing Agreement, but excluding the following:
(a)
amounts received as late payments of principal or interest respecting
which the Servicer previously has made one or more unreimbursed
Periodic Advances;
(b)
to the extent permitted by the Pooling and Servicing Agreement, that
portion of Liquidation Proceeds with respect to a Mortgage Loan which
represents any unreimbursed Periodic Advances;
(c)
those portions of each payment of interest on a particular Mortgage
Loan which represent the applicable Servicing Fee, as adjusted in
respect of Prepayment Interest Shortfalls as described under "--Interest"
below;
(d)
all amounts representing scheduled payments of principal and interest
due after the Due Date occurring in the month in which such
Distribution Date occurs;
(e)
all principal prepayments in full and all proceeds of any Mortgage
Loans, or property acquired in respect thereof, liquidated,
foreclosed, purchased or repurchased pursuant to the Pooling and Servicing
Agreement, other than Partial Liquidation Proceeds, received on or after the
Due Date occurring in the month in which such Distribution Date occurs, and
all partial principal prepayments and Partial Liquidation Proceeds received
by the Servicer on or after the Determination Date occurring in the month in
which such Distribution Date occurs, and all related payments of interest on
such amounts;
(f)
to the extent permitted by the Pooling and Servicing Agreement, that
portion of Liquidation Proceeds or insurance proceeds with respect to
a Mortgage Loan which represents any unpaid Servicing Fee to which the
Servicer is entitled;
(g)
all amounts representing certain expenses reimbursable to the Servicer
and other amounts permitted to be retained by the Servicer or
withdrawn by the Servicer from the Certificate Account pursuant to the
Pooling and Servicing Agreement;
(h)
all amounts in the nature of late fees, assumption fees, prepayment
fees and similar fees which the Servicer is entitled to retain as
additional servicing compensation;
(i)
reinvestment earnings on payments received in respect of the Mortgage
Loans;
(j)
Net Foreclosure Profits; and
(k)
any recovery of an amount in respect of principal which had previously
been allocated as a Realized Loss to any of the Series 1994-10
Certificates.
On each Distribution Date, the Pool Distribution Amount will be allocated
among the Classes of Certificates and distributed to the holders of record of
such Certificates as of the related Record Date as follows (the "Pool
Distribution Amount Allocation"):
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FIRST, to the Subclasses of Class A Certificates, pro rata based on
their respective Class A Subclass Interest Accrual Amounts, in an aggregate
amount up to the sum of the Class A Subclass Interest Accrual Amounts with
respect to such Distribution Date;
SECOND, to the Subclasses of Class A Certificates, pro rata based on
their respective unpaid Class A Subclass Interest Shortfall Amounts, in an
aggregate amount up to the sum of the previously unpaid Class A Subclass
Interest Shortfall Amounts;
THIRD, to the Subclasses of Class A Certificates, in an aggregate amount
up to the Class A Optimal Principal Amount, such distribution to be
allocated among such Subclasses in accordance with the priorities set forth
below under "--Principal (Including Prepayments)--Allocation of Amount to be
Distributed to the Class A Certificates;" and
FOURTH, to the Class B Certificates first in an amount up to their Class
B Interest Accrual Amount with respect to such Distribution Date, then in an
amount up to their previously unpaid interest shortfall amount and finally
in an amount up to their optimal principal amount.
The "Class A Distribution Amount" for any Distribution Date will be equal to
the sum of the amounts distributed in accordance with priorities FIRST through
THIRD of the Pool Distribution Amount Allocation set forth above.
The undivided percentage interest (the "Percentage Interest") represented by
any Class A Certificate of a Subclass in distributions to such Subclass will be
equal to the percentage obtained by dividing the initial principal balance of
such Certificate by the aggregate initial principal balance of all Certificates
of such Subclass.
INTEREST
The amount of interest that will accrue on each Subclass of Class A
Certificates during each month is referred to herein as the "Class A Subclass
Interest Accrual Amount" for such Subclass. The Class A Subclass Interest
Accrual Amount for each Subclass of Class A Certificates, other than the Class
A-2 Certificates, will equal the product of (i) 1/12th of 7.55% and (ii) the
outstanding Class A Subclass Principal Balance of such Subclass.
The Class A Subclass Interest Accrual Amount for the Class A-2 Certificates
will equal the product of (i) 1/12th of the difference between (a) the weighted
average of the Net Mortgage Interest Rates of the Mortgage Loans as of the first
day of such month and (b) 7.55% and (ii) the Class A-2 Notional Amount.
Each Class A Subclass Interest Accrual Amount will be reduced by the portion
of (i) any Non-Supported Interest Shortfall allocable to such Subclass and (ii)
the interest portion of Excess Special Hazard Losses, Excess Fraud Losses and
Excess Bankruptcy Losses allocable to such Subclass.
The amount of interest that will accrue on the Class B Certificates during
each month is referred to herein as the "Class B Interest Accrual Amount." The
Class B Interest Accrual Amount will equal the product of (i) 1/12th of 7.55%
and (ii) the outstanding Class B Principal Balance. The Class B Interest Accrual
Amount will be reduced by (i) the portion of any Non-Supported Interest
Shortfall allocable to the Class B Certificates and (ii) the interest portion of
Excess Special Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses
allocable to the Class B Certificates as described below.
The "Class A Subclass Principal Balance" of a Subclass of Class A
Certificates as of any Determination Date will be the principal balance of such
Subclass on the date of initial issuance of the Class A Certificates less (i)
all amounts previously distributed to holders of Certificates of such Subclass
in reduction of the principal balance of such Subclass and (ii) such Subclass'
pro rata share of the principal portion of Excess Special Hazard Losses, Excess
Fraud Losses and Excess Bankruptcy Losses previously allocated to the holders of
Class A Certificates in the manner described herein under "--Subordination of
Class B Certificates--Allocation of Losses." After the Cross-Over Date, the
Class A Subclass Principal Balance of a Subclass may be subject to further
reduction in an amount equal to such Subclass' pro rata share of the difference,
if any, between (a) the Class A Principal Balance as of such Determination Date
without regard to this provision and (b) the Adjusted Pool Amount for the
preceding Distribution Date. Any pro rata allocation among the Subclasses of
Class A Certificates described in this paragraph will be made among the
Subclasses of Class A Certificates on the basis of their then-outstanding Class
A Subclass Principal Balances immediately prior to the preceding Distribution
Date.
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<PAGE>
The "Class A Principal Balance" as of any Determination Date will be equal
to the sum of the Class A Subclass Principal Balances of the Subclasses of Class
A Certificates as of such date.
The "Class B Principal Balance" as of any Determination Date will be the
lesser of (a) the principal balance on the date of initial issuance of the Class
B Certificates less (i) all amounts previously distributed to holders of the
Class B Certificates in reduction of the principal balance thereof and (ii) the
principal portion of Excess Special Hazard Losses, Excess Fraud Losses and
Excess Bankruptcy Losses previously allocated to the holders of the Class B
Certificates in the manner described under "--Subordination of Class B
Certificates--Allocation of Losses" and (b) the Adjusted Pool Amount as of the
preceding Distribution Date less the Class A Principal Balance as of such
Determination Date.
With respect to any Distribution Date, the "Adjusted Pool Amount" will equal
the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans minus the sum
of (i) all amounts in respect of principal received in respect of the Mortgage
Loans (including amounts received as Periodic Advances, principal prepayments
and Liquidation Proceeds in respect of principal) and distributed to holders of
the Series 1994-10 Certificates on such Distribution Date and all prior
Distribution Dates and (ii) the principal portion of all Realized Losses (other
than Debt Service Reductions) incurred on the Mortgage Loans from the Cut-Off
Date through the end of the month preceding such Distribution Date.
The "Net Mortgage Interest Rate" on each Mortgage Loan will be equal to the
Mortgage Interest Rate on such Mortgage Loan as stated in the related mortgage
note minus the Servicing Fee rate of 0.20% per annum. See "Pooling and Servicing
Agreement--Servicing Compensation and Payment of Expenses" herein.
The "Class A-2 Notional Amount" with respect to each Distribution Date will
be equal to the Pool Scheduled Principal Balance, as defined under "--Principal
(Including Prepayments)" below, as of such Distribution Date. The Class A-2
Notional Amount with respect to the first Distribution Date will be
approximately $286,683,950 less any partial principal prepayments received in
February 1994. A notional amount does not entitle a holder to receive
distributions of principal on the basis of such notional amount, but is solely
used for the purpose of computing the amount of interest accrued on a Subclass.
An interest shortfall resulting from principal prepayments in full of
Mortgage Loans (a "Prepayment Interest Shortfall") will be offset to the extent
of the aggregate Servicing Fees relating to mortgagor payments or other
recoveries distributed on the related Distribution Date. To the extent that the
aggregate Prepayment Interest Shortfalls with respect to a Distribution Date
exceed the aggregate Servicing Fees relating to mortgagor payments or other
recoveries distributed on such Distribution Date, the resulting interest
shortfall (the "Non-Supported Interest Shortfall") will be allocated to (i) the
Class A Certificates according to the percentage obtained by dividing the
then-outstanding Class A Principal Balance by the sum of the then-outstanding
Class A Principal Balance and Class B Principal Balance and (ii) the Class B
Certificates according to the percentage obtained by dividing the
then-outstanding Class B Principal Balance by the sum of the then-outstanding
Class A Principal Balance and Class B Principal Balance. Such allocation of the
Non-Supported Interest Shortfall will reduce the amount of interest due to be
distributed to holders of the Class A Certificates then entitled to
distributions in respect of interest. Such allocation of the Non-Supported
Interest Shortfall will also reduce the amount of interest due to be distributed
to the holders of the Class B Certificates. Any such reduction in respect of
interest will be allocated among the Subclasses of Class A Certificates pro rata
on the basis of their respective Class A Subclass Interest Accrual Amounts for
such Distribution Date. See "Servicing of the Mortgage Loans--Adjustment to
Servicing Fee in Connection with Prepaid Mortgage Loans" in the Prospectus.
Interest shortfalls resulting from the timing of the receipt of partial
principal prepayments and Partial Liquidation Proceeds will not be offset by
Servicing Fees and will, on each Distribution Date occurring prior to the
Cross-Over Date, be allocated to the Class B Certificates before being borne by
the Class A Certificates. See "--Subordination of Class B Certificates" below.
On each Distribution Date occurring on or after the Cross-Over Date, any
interest shortfalls resulting from the timing of the receipt of partial
principal prepayments and Partial Liquidation Proceeds will be considered a
Non-Supported Interest Shortfall and will be allocated to the Class A
Certificates as described above.
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<PAGE>
The interest portion of any Excess Special Hazard Losses, Excess Fraud
Losses or Excess Bankruptcy Losses will be allocated between the Class A and
Class B Certificates pro rata based on the interest accrued on each such Class
and among the Subclasses of Class A Certificates pro rata on the basis of their
respective Class A Subclass Interest Accrual Amounts for such Distribution Date.
Allocations of the interest portion of Realized Losses (other than Excess
Special Hazard Losses, Excess Fraud Losses or Excess Bankruptcy Losses) to the
Class B Certificates will result from the priority of distributions to the Class
A Certificateholders of the Pool Distribution Amount as described above under
"--Distributions."
On each Distribution Date on which the Pool Distribution Amount equals or
exceeds the sum of the Class A Subclass Interest Accrual Amounts, distributions
in respect of interest to each Subclass of Class A Certificates will equal such
Subclass' Class A Subclass Interest Accrual Amount, and any excess will then be
allocated first to pay previously unpaid Class A Subclass Interest Shortfall
Amounts. Such amounts will be allocated among the Subclasses of Class A
Certificates pro rata in accordance with their respective unpaid Class A
Subclass Interest Shortfall Amounts immediately prior to such Distribution Date.
If, on any Distribution Date, the Pool Distribution Amount is less than the
sum of the Class A Subclass Interest Accrual Amounts, the amount of interest
currently distributed on the Class A Certificates will equal the Pool
Distribution Amount and will be allocated among the Subclasses of Class A
Certificates pro rata in accordance with each such Subclass' Class A Subclass
Interest Accrual Amount. Amounts so allocated will be distributed in respect of
interest to each Subclass of Class A Certificates. Any difference between the
portion of the Pool Distribution Amount distributed in respect of current
interest to each Subclass of Class A Certificates and the Class A Subclass
Interest Accrual Amount for such Subclass with respect to the related
Distribution Date (as to each Subclass, the "Class A Subclass Interest Shortfall
Amount") will be added to the amount to be distributed on subsequent
Distribution Dates to the extent that the Pool Distribution Amount is sufficient
therefor. No interest will accrue on the unpaid Class A Subclass Interest
Shortfall Amounts.
On each Distribution Date on which the Pool Distribution Amount is less than
the sum for such Distribution Date of (i) the sum of the Class A Subclass
Interest Accrual Amounts with respect to each Subclass of Class A Certificates,
(ii) the sum of the unpaid Class A Subclass Interest Shortfall Amounts with
respect to each Subclass of Class A Certificates and (iii) the Class A Optimal
Principal Amount (collectively with the amounts described in clauses (i) and
(ii), the "Class A Optimal Amount"), the Class B Certificates will not be
entitled to any distributions of interest or principal.
PRINCIPAL (INCLUDING PREPAYMENTS)
The principal balance of a Class A Certificate of any Subclass (other than a
Class A-2 Certificate) at any time is equal to the product of the Class A
Subclass Principal Balance of such Subclass and such Certificate's Percentage
Interest, and represents the maximum specified dollar amount (exclusive of (i)
any interest that may accrue on such Class A Certificate and (ii) in the case of
the Class A-R Certificate, any additional amounts to which a holder of the Class
A-R Certificate may be entitled as described below under "--Additional Rights of
the Class A-R Certificateholder") to which the holder thereof is entitled from
the cash flow on the Mortgage Loans at such time, and will decline to the extent
of distributions in reduction of the principal balance of, and allocations of
losses to, such Certificate. The approximate initial Class A Subclass Principal
Balance of each Subclass of Class A Certificates (other than the A-2
Certificates) is set forth on the cover of this Prospectus Supplement. The Class
A-2 Certificates will have no Class A Subclass Principal Balance.
CALCULATION OF AMOUNT TO BE DISTRIBUTED TO THE CLASS A CERTIFICATES
Distributions in reduction of the principal balance of the Class A
Certificates (other than the Class A-2 Certificates) will be made on each
Distribution Date pursuant to priority THIRD of the Pool Distribution Amount
Allocation, in an aggregate amount (the "Class A Principal Distribution Amount")
up to the Class A Optimal Principal Amount.
The "Class A Optimal Principal Amount" with respect to each Distribution
Date will be an amount equal to the sum of (i) the Class A Percentage of (A) all
scheduled payments of principal due on each outstanding Mortgage Loan (including
each defaulted Mortgage Loan, other than a Liquidated Loan, with respect to
which the related Mortgaged Property has been acquired by the Trust Estate) on
the first day of the month in which the Distribution Date occurs, less (B) if
the Bankruptcy Loss Amount is zero, the principal portion of Debt Service
Reductions, (ii) the
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Class A Prepayment Percentage of the Scheduled Principal Balance of each
Mortgage Loan which, during the month preceding the month of such Distribution
Date was repurchased by the Seller, as described under the heading "The Trust
Estates--Mortgage Loans" in the Prospectus, (iii) the Class A Prepayment
Percentage of (A) the aggregate net Liquidation Proceeds (other than net Partial
Liquidation Proceeds) on all Mortgage Loans that became Liquidated Loans during
such preceding month (excluding the portion thereof, if any, constituting Net
Foreclosure Profits, as defined under "--Additional Rights of the Class A-R
Certificateholder" below), less the amounts allocable to principal of any
unreimbursed Periodic Advances previously made by the Servicer with respect to
such Liquidated Loans and the portion of such net Liquidation Proceeds allocable
to interest and (B) the aggregate net Partial Liquidation Proceeds on all
Mortgage Loans received by the Servicer on or after the Determination Date
occurring in the month preceding the month in which such Distribution Date
occurs and prior to the Determination Date occurring in the month in which such
Distribution Date occurs, less the amounts allocable to principal of any
unreimbursed Periodic Advances previously made by the Servicer with respect
thereto and the portion of the net Partial Liquidation Proceeds allocable to
interest, (iv) the Class A Prepayment Percentage of an amount equal to the
principal portion of Realized Losses (other than Bankruptcy Losses due to Debt
Service Reductions) incurred in such preceding month other than Excess Special
Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses, (v) the Class A
Prepayment Percentage of the Scheduled Principal Balance of each Mortgage Loan
which was the subject of a principal prepayment in full during the month
preceding the month of such Distribution Date, (vi) the Class A Prepayment
Percentage of all partial principal prepayments received by the Servicer on or
after the Determination Date occurring in the month preceding the month in which
such Distribution Date occurs and prior to the Determination Date occurring in
the month in which such Distribution Date occurs and (vii) the Class A
Percentage of the difference between the unpaid principal balance of any
Mortgage Loan substituted for a defective Mortgage Loan during the month
preceding the month in which such Distribution Date occurs and the unpaid
principal balance of such defective Mortgage Loan, less the amounts allocable to
principal of any unreimbursed Periodic Advances with respect to such defective
Mortgage Loan. See "The Trust Estates-- Mortgage Loans--Assignment of Mortgage
Loans to the Trustee" in the Prospectus.
In addition, in the event that there is any recovery of an amount in respect
of principal which had previously been allocated as a Realized Loss to the Class
A Certificates, each Subclass of the Class A Certificates then outstanding will
be entitled to its pro rata share of such recovery in an amount up to the amount
by which the Class A Subclass Principal Balance of such Subclass was reduced as
a result of such Realized Loss.
The "Scheduled Principal Balance" of a Mortgage Loan as of any Distribution
Date is the unpaid principal balance of such Mortgage Loan as specified in the
amortization schedule at the time relating thereto (before any adjustment to
such schedule by reason of bankruptcy (other than Deficient Valuations),
moratorium or similar waiver or grace period) as of the Due Date occurring in
the month preceding the month in which such Distribution Date occurs, after
giving effect to any principal prepayments or other unscheduled recoveries of
principal previously received, to any partial principal prepayments and Partial
Liquidation Proceeds applied as of such Due Date, Deficient Valuations occurring
prior to such Due Date and to the payment of principal due on such Due Date, and
irrespective of any delinquency in payment by the mortgagor.
"Partial Liquidation Proceeds" are Liquidation Proceeds received by the
Servicer on a Mortgage Loan prior to such Mortgage Loan becoming a Liquidated
Loan. A "Liquidated Loan" is a defaulted Mortgage Loan as to which the Servicer
has determined that all recoverable liquidation and insurance proceeds have been
received. A "Liquidated Loan Loss" on a Liquidated Loan is generally equal to
the excess, if any, of (i) the unpaid principal balance of such Liquidated Loan,
plus interest thereon in accordance with the amortization schedule at the Net
Mortgage Interest Rate through the last day of the month in which such Mortgage
Loan was liquidated, over (ii) net Liquidation Proceeds. For purposes of
calculating the amount of any Liquidated Loan Loss, all net Liquidation Proceeds
(after reimbursement to the Servicer for any previously unreimbursed advances)
will be applied first to accrued interest and then to the unpaid principal
balance of the Liquidated Loan. A "Special Hazard Loss" is a
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Liquidated Loan Loss occurring as a result of a hazard not insured against under
a standard hazard insurance policy of the type described in the Prospectus under
"The Trust Estates--Mortgage Loans--Insurance Policies." A "Fraud Loss" is a
Liquidated Loan Loss incurred on a Liquidated Loan as to which there was fraud
in the origination of such Mortgage Loan. A "Bankruptcy Loss" is a loss
attributable to certain actions which may be taken by a bankruptcy court in
connection with a Mortgage Loan, including a reduction by a bankruptcy court of
the principal balance of or the interest rate on a Mortgage Loan or an extension
of its maturity. A "Debt Service Reduction" means a reduction in the amount of
monthly payments due to certain bankruptcy proceedings, but does not include any
permanent forgiveness of principal. A "Deficient Valuation" with respect to a
Mortgage Loan means a valuation by a court of the Mortgaged Property in an
amount less than the outstanding indebtedness under the Mortgage Loan or any
reduction in the amount of monthly payments that results in a permanent
forgiveness of principal, which valuation or reduction results from a bankruptcy
proceeding. Liquidated Loan Losses (including Special Hazard Losses and Fraud
Losses) and Bankruptcy Losses are referred to herein as "Realized Losses."
The "Class A Percentage" for any Distribution Date occurring prior to the
Cross-Over Date is the percentage (subject to rounding), which in no event will
exceed 100%, obtained by dividing the Class A Principal Balance as of such date
(before taking into account distributions in reduction of principal balance on
such date) by the aggregate Scheduled Principal Balances of all Mortgage Loans
for such Distribution Date (the "Pool Scheduled Principal Balance"). The Class A
Percentage for the first Distribution Date will be approximately 94.75%. The
Class A Percentage will decrease as a result of the allocation of certain
unscheduled payments in respect of principal according to the Class A Prepayment
Percentage for a specified period to the Class A Certificates and will increase
as a result of the allocation of Realized Losses to the Class B Certificates.
The Class A Percentage for each Distribution Date occurring on or after the
Cross-Over Date will be 100%.
The "Class A Prepayment Percentage" for any Distribution Date occurring
during the five years beginning on the first Distribution Date will, except as
provided below, equal 100%. Thereafter, the Class A Prepayment Percentage will
be subject to gradual reduction as described in the following paragraph. This
disproportionate allocation of certain unscheduled payments in respect of
principal will have the effect of accelerating the amortization of the Class A
Certificates while, in the absence of Realized Losses, increasing the respective
interest in the principal balance of the Mortgage Loans evidenced by the Class B
Certificates. Increasing the respective interest of the Class B Certificates
relative to that of the Class A Certificates is intended to preserve the
availability of the subordination provided by the Class B Certificates. See
"--Subordination of Class B Certificates" below.
The Class A Prepayment Percentage for any Distribution Date occurring on or
after the fifth anniversary of the first Distribution Date will be as follows:
for any Distribution Date subsequent to February 1999 to and including the
Distribution Date in February 2000, the Class A Percentage for such Distribution
Date plus 70% of the Class B Percentage for such Distribution Date; for any
Distribution Date subsequent to February 2000 to and including the Distribution
Date in February 2001, the Class A Percentage for such Distribution Date plus
60% of the Class B Percentage for such Distribution Date; for any Distribution
Date subsequent to February 2001 to and including the Distribution Date in
February 2002, the Class A Percentage for such Distribution Date plus 40% of the
Class B Percentage for such Distribution Date; for any Distribution Date
subsequent to February 2002 to and including the Distribution Date in February
2003, the Class A Percentage for such Distribution Date plus 20% of the Class B
Percentage for such Distribution Date; and for any Distribution Date thereafter,
the Class A Percentage for such Distribution Date (unless on any of the
foregoing Distribution Dates the Class A Percentage exceeds the initial Class A
Percentage, in which case the Class A Prepayment Percentage for such
Distribution Date will once again equal 100%). See "Prepayment and Yield
Considerations" herein and in the Prospectus. Notwithstanding the foregoing, no
reduction of the Class A Prepayment Percentage will occur on any Distribution
Date if (i) as of such Distribution Date as to which any such reduction applies,
more than an average of 2% of the dollar amount of all monthly payments on the
Mortgage Loans due in each of the preceding twelve months were delinquent 60
days or more (including for this purpose any Mortgage Loans in foreclosure and
Mortgage Loans with respect to which the related Mortgaged Property has been
acquired by the Trust Estate), or (ii) cumulative Realized Losses with respect
to the Mortgage Loans exceed (a) 30% of the initial principal balance of the
Class B Certificates (the "Original Class B Principal Balance") if such
Distribution Date occurs between and including March 1999 and February 2000, (b)
35% of the Original Class B Principal Balance if such Distribution Date occurs
between and including March 2000 and February 2001, (c) 40% of the Original
Class B Principal Balance if such Distribution Date occurs between and including
March 2001 and February 2002, (d) 45% of the Original Class B Principal Balance
if such Distribution
S-21
<PAGE>
Date occurs between and including March 2002 and February 2003, and (e) 50% of
the Original Class B Principal Balance if such Distribution Date occurs during
or after March 2003. The "Class B Percentage" for any Distribution Date will be
calculated as the difference between 100% and the Class A Percentage for such
date. The "Class B Prepayment Percentage" for any Distribution Date will be
calculated as the difference between 100% and the Class A Prepayment Percentage
for such date. If on any Distribution Date the allocation to the Class A
Certificates of full and partial principal prepayments and other amounts in the
percentage required above would reduce the outstanding Class A Principal Balance
below zero, the Class A Prepayment Percentage for such Distribution Date will be
limited to the percentage necessary to reduce the Class A Principal Balance to
zero. See "Description of the Certificates--Distributions to Percentage
Certificateholders--Shifting Interest Certificates" in the Prospectus.
ALLOCATION OF AMOUNT TO BE DISTRIBUTED TO THE CLASS A CERTIFICATES
The Class A-2 Certificates have no Class A Subclass Principal Balance and
are not entitled to principal distributions.
On each Distribution Date the Class A Principal Distribution Amount will be
distributed between the Class A-1 and Class A-R Certificates pro rata in
accordance with their respective outstanding Class A Subclass Principal
Balances.
Amounts distributed on each Distribution Date to the holders of each
Subclass of Class A Certificates (other than the Class A-2 Certificates) in
reduction of principal balance will be allocated among the holders of the Class
A Certificates of such Subclass pro rata in accordance with their respective
Percentage Interests.
ADDITIONAL RIGHTS OF THE CLASS A-R CERTIFICATEHOLDER
The Class A-R Certificate will remain outstanding for as long as the Trust
Estate shall exist, whether or not it is receiving current distributions of
principal or interest. The holder of the Class A-R Certificate will be entitled
to receive the proceeds of the remaining assets of the Trust Estate, if any, on
the final Distribution Date for the Series 1994-10 Certificates, after
distributions in respect of any accrued but unpaid interest on the Series
1994-10 Certificates and after distributions in reduction of principal balance
have reduced the principal balances of the Series 1994-10 Certificates to zero.
It is not anticipated that there will be any assets remaining in the REMIC on
the final Distribution Date following the distributions of interest and in
reduction of principal balance made on the Series 1994-10 Certificates on such
date.
In addition, the Class A-R Certificateholder will be entitled on each
Distribution Date to receive any Pool Distribution Amount remaining after all
distributions pursuant to the Pool Distribution Amount Allocation have been made
and any Net Foreclosure Profits after the Servicer has been reimbursed for
unpaid Servicing Fees. See "Servicing of the Mortgage Loans--Fixed Retained
Yield, Servicing Compensation and Payment of Expenses" in the Prospectus. "Net
Foreclosure Profits" means, with respect to any Distribution Date, the excess,
if any, of (i) the aggregate profits on Liquidated Loans in the related period
with respect to which net Liquidation Proceeds exceed the unpaid principal
balance thereof plus accrued interest thereon at the Mortgage Interest Rate over
(ii) the aggregate realized losses on Liquidated Loans in the related period
with respect to which net Liquidation Proceeds are less than the unpaid
principal balance thereof plus accrued interest thereon at the Mortgage Interest
Rate. It is not anticipated that there will be any such Net Foreclosure Profits
or any undistributed Pool Distribution Amounts.
PERIODIC ADVANCES
If, on any Determination Date, payments of principal and interest due on any
Mortgage Loan in the Trust Estate on the related Due Date have not been received
as of the close of business on the business day preceding such Determination
Date, the Servicer will be obligated to advance on or before the related
Distribution Date for the benefit of holders of the Series 1994-10 Certificates
an amount in cash equal to all delinquent payments of principal and interest due
on each Mortgage Loan in the Trust Estate (with interest adjusted to the
applicable Net Mortgage Interest Rate) not previously advanced, but only to the
extent that the Servicer believes that such amounts will be recoverable by it
from liquidation proceeds or other recoveries in respect of the related Mortgage
Loan (each a "Periodic Advance").
The Pooling and Servicing Agreement provides that any Periodic Advance may
be reimbursed to the Servicer at any time from funds available in the
Certificate Account to the extent that (i) such funds represent receipts on, or
S-22
<PAGE>
liquidation, insurance, purchase or repurchase proceeds in respect of, the
Mortgage Loans to which the advance relates or (ii) the Servicer has determined
in good faith that it will be unable to recover such advance from funds of the
type referred to in clause (i) above.
RESTRICTIONS ON TRANSFER OF THE CLASS A-R CERTIFICATE
The Class A-R Certificate will be subject to the following restrictions on
transfer and will contain a legend describing such restrictions.
The REMIC provisions of the Code impose certain taxes on (i) transferors of
residual interests to, or agents that acquire residual interests on behalf of,
Disqualified Organizations (as defined in the Prospectus) and (ii) certain
Pass-Through Entities (as defined in the Prospectus) that have Disqualified
Organizations as beneficial owners. No tax will be imposed on a Pass-Through
Entity with respect to a Class A-R Certificate to the extent it has received an
affidavit from each owner thereof that such owner is not a Disqualified
Organization or a nominee for a Disqualified Organization. The Pooling and
Servicing Agreement will provide that no legal or beneficial interest in the
Class A-R Certificate may be transferred to or registered in the name of any
person unless (i) the proposed purchaser provides to the Trustee an affidavit to
the effect that, among other things, such transferee is not a Disqualified
Organization and is not purchasing the Class A-R Certificate as an agent for a
Disqualified Organization (I.E., as a broker, nominee, or other middleman
thereof) and (ii) the transferor states in writing to the Trustee that it has no
actual knowledge that such affidavit is false. Further, such affidavit requires
the transferee to affirm that it (i) historically has paid its debts as they
have come due and intends to do so in the future, (ii) understands that it may
incur tax liabilities with respect to the Class A-R Certificate in excess of
cash flows generated thereby, (iii) intends to pay taxes associated with holding
the Class A-R Certificate as such taxes become due and (iv) will not transfer
the Class A-R Certificate to any person or entity that does not provide a
similar affidavit. The transferor must certify in writing to the Trustee that,
as of the date of the transfer, it had no knowledge or reason to know that the
affirmations made by the transferee pursuant to the preceding sentence were
false.
In addition, the Class A-R Certificate may not be purchased by or
transferred to any person that is not a "U.S. Person," unless (i) such person
holds the Class A-R Certificate in connection with the conduct of a trade or
business within the United States and furnishes the transferor and the Trustee
with an effective Internal Revenue Service Form 4224 or (ii) the transferee
delivers to both the transferor and the Trustee an opinion of a nationally
recognized tax counsel to the effect that such transfer is in accordance with
the requirements of the Code and the regulations promulgated thereunder and that
such transfer of the Class A-R Certificate will not be disregarded for federal
income tax purposes. The term "U.S. Person" means a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision thereof,
or an estate or trust that is subject to U.S. federal income tax regardless of
the source of its income.
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. Any transferor or
agent to whom the Trustee provides information as to any applicable tax imposed
on such transferor or agent may be required to bear the cost of computing or
providing such information. See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Residual Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates" in the Prospectus.
The Class A-R Certificate may not be purchased by or transferred to a Plan.
See "ERISA Considerations" herein and in the Prospectus.
REPORTS
In addition to the applicable information specified in the Prospectus, the
Servicer will include in the statement delivered to holders of Class A
Certificates with respect to each Distribution Date the following information:
(i) the amount of such distribution allocable to interest, the amount of
interest currently distributable on the Class A Certificates allocated to each
Subclass, any Class A Subclass Interest Shortfall Amount arising with respect to
each Subclass on such Distribution Date, any remaining unpaid Class A Subclass
Interest Shortfall Amount with respect to each Subclass, after giving effect to
such distribution and any Non-Supported Interest Shortfall or the interest
portion of Realized Losses allocable to such Subclass or Class with respect to
such Distribution Date, (ii) the amount of such distribution allocable to
principal, (iii) the Class A Principal Balance and the Class A Subclass
S-23
<PAGE>
Principal Balance of each Subclass of Class A Certificates after giving effect
to the distribution of principal and the allocation of the principal portion of
Realized Losses to such Subclass with respect to such Distribution Date, (iv)
the Adjusted Pool Amount and the Pool Scheduled Principal Balance of the
Mortgage Loans for such Distribution Date, (v) the Class A Percentage for the
following Distribution Date (without giving effect to partial prepayments and
Partial Liquidation Proceeds received after the Determination Date in the
current month that are applied as of the Due Date occurring in such month), and
(vi) the amount of the remaining Special Hazard Loss Amount, the Fraud Loss
Amount and the Bankruptcy Loss Amount as of the close of business on such
Distribution Date. The statement delivered to holders of the Class A-2
Certificates will also include the Class A-2 Notional Amount and the weighted
average Net Mortgage Interest Rate of the Mortgage Loans applicable to such
Distribution Date minus 7.55%. See "Servicing of the Mortgage Loans--Reports to
Certificateholders" in the Prospectus.
Copies of the foregoing reports are available upon written request to the
Trustee at the Corporate Trust Office. See "Pooling and Servicing
Agreement--Trustee" herein.
SUBORDINATION OF CLASS B CERTIFICATES
The rights of the holders of the Class B Certificates to receive
distributions with respect to the Mortgage Loans in the Trust Estate will be
subordinated to such rights of the holders of the Class A Certificates to the
extent described below. This subordination is intended to enhance the likelihood
of timely receipt by the holders of the Class A Certificates (to the extent of
the subordination of the Class B Certificates) of the full amount of their
scheduled monthly payments of interest and principal and to afford the holders
of the Class A Certificates (to the extent of the subordination of the Class B
Certificates) protection against Realized Losses, as more fully described below.
If Realized Losses exceed the credit support provided through subordination to
the Class A Certificates or if Excess Special Hazard Losses, Excess Fraud Losses
or Excess Bankruptcy Losses occur, all or a portion of such losses will be borne
by the Class A Certificates.
The protection afforded to the holders of Class A Certificates by means of
the subordination feature will be accomplished by the preferential right of such
holders to receive, prior to any distribution being made on a Distribution Date
in respect of the Class B Certificates, the amounts of principal and interest
due the Class A Certificateholders on each Distribution Date out of the Pool
Distribution Amount with respect to such date and, if necessary, by the right of
such holders to receive future distributions on the Mortgage Loans that would
otherwise have been payable to the holders of Class B Certificates. The
application of this subordination to cover Realized Losses experienced in
periods prior to the periods in which a Subclass of Class A Certificates is
entitled to distributions in reduction of principal balance will decrease the
protection provided by the subordination to any such Subclass.
The Class B Certificates will be entitled, on each Distribution Date, to the
remaining portion, if any, of the applicable Pool Distribution Amount, after
payment of the Class A Optimal Amount for such date. Amounts so distributed to
Class B Certificateholders will not be available to cover delinquencies or
Realized Losses in respect of subsequent Distribution Dates.
ALLOCATION OF LOSSES
Realized Losses (other than Excess Special Hazard Losses, Excess Fraud
Losses or Excess Bankruptcy Losses) will not be allocated to the holders of the
Class A Certificates until the date on which the amount of principal payments on
the Mortgage Loans to which the holders of the Class B Certificates are entitled
has been reduced to zero as a result of the allocation of losses to the Class B
Certificates, I.E., the date on which the Class B Percentage has been reduced to
zero (the "Cross-Over Date"). Prior to such time, such Realized Losses will be
allocated to the Class B Certificates until the Class B Principal Balance has
been reduced to zero.
The allocation of the principal portion of a Realized Loss (other than a
Debt Service Reduction, Excess Special Hazard Loss, Excess Fraud Loss or Excess
Bankruptcy Loss) will be effected through the adjustment of the principal
balance of the most subordinate Class then-outstanding in such amount as is
necessary to cause the sum of the Class A Subclass Principal Balances and the
Class B Principal Balance to equal the Adjusted Pool Amount.
Allocations to the Class B Certificates of (i) the principal portion of Debt
Service Reductions, (ii) the interest portion of Realized Losses (other than
Excess Special Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses),
(iii) any interest shortfalls resulting from delinquencies for which the
Servicer does not advance and
S-24
<PAGE>
(iv) any interest shortfalls resulting from the timing of the receipt of partial
principal prepayments and Partial Liquidation Proceeds, will result from the
priority of distributions to the Class A Certificateholders of the Pool
Distribution Amount as described above under "--Distributions."
The principal portion of any Realized Loss occurring on or after the
Cross-Over Date will be allocated among the outstanding Subclasses of Class A
Certificates pro rata in accordance with their then-outstanding Class A Subclass
Principal Balances and the interest portion of any Realized Loss occurring on or
after the Cross-Over Date will be allocated among the outstanding Subclasses of
Class A Certificates pro rata in accordance with their Class A Subclass Interest
Accrual Amounts. Any such losses will be allocated among the outstanding Class A
Certificates within each Subclass pro rata in accordance with their respective
Percentage Interests.
Any Excess Special Hazard Losses, Excess Fraud Losses or Excess Bankruptcy
Losses will be allocated on a pro rata basis between the Class A and Class B
Certificates (any such losses so allocated to the Class A Certificates will be
allocated among the outstanding Subclasses of Class A Certificates pro rata in
accordance with their then-outstanding Class A Subclass Principal Balances with
respect to the principal portion of such losses and their Class A Subclass
Interest Accrual Amounts with respect to the interest portion of such losses,
and among the outstanding Class A Certificates within each Subclass pro rata in
accordance with their respective Percentage Interests). An allocation of a loss
on a "pro rata basis" between the Class A and Class B Certificates means an
allocation on a pro rata basis to each such Class of Certificates on the basis
of their then-outstanding principal balances in the case of the principal
portion of a loss or based on the accrued interest thereon in the case of an
interest portion of a loss.
The interest portion of Excess Special Hazard Losses, Excess Fraud Losses
and Excess Bankruptcy Losses will be allocated by reducing the Class A Interest
Accrual Amount and the Class B Interest Accrual Amount.
As described above, the Pool Distribution Amount for any Distribution Date
will include current receipts (other than certain unscheduled payments in
respect of principal) from the Mortgage Loans otherwise payable to holders of
the Class B Certificates. If the Pool Distribution Amount is not sufficient to
cover the amount of principal payable to the holders of the Class A Certificates
on a particular Distribution Date (other than any portion thereof representing
the difference between the Class A Percentage of the Scheduled Principal
Balances of Liquidated Loans and the Class A Prepayment Percentage of such
amounts), then the percentage of principal payments on the Mortgage Loans to
which the holders of the Class A Certificates will be entitled (I.E., the Class
A Percentage) on and after the next Distribution Date will be proportionately
increased, thereby reducing, as a relative matter, the respective interest of
the Class B Certificates in future payments of principal on the Mortgage Loans
in the Trust Estate. Such a shortfall could occur, for example, if a
considerable number of Mortgage Loans were to become Liquidated Loans in a
particular month.
Special Hazard Losses, other than Excess Special Hazard Losses, will be
allocated solely to the Class B Certificates. Special Hazard Losses in excess of
the Special Hazard Loss Amount are "Excess Special Hazard Losses." Upon initial
issuance of the Series 1994-10 Certificates, the "Special Hazard Loss Amount"
with respect thereto will be equal to approximately 1.31% (approximately
$3,752,405) of the Cut-Off Date Aggregate Principal Balance of the Mortgage
Loans. As of any Distribution Date, the Special Hazard Loss Amount will equal
the initial Special Hazard Loss Amount less the sum of (A) any Special Hazard
Losses allocated solely to the Class B Certificates and (B) the Adjustment
Amount. The "Adjustment Amount" on each anniversary of the Cut-Off Date will be
equal to the amount, if any, by which the Special Hazard Amount, without giving
effect to the deduction of the Adjustment Amount for such anniversary, exceeds
the greater of (i) 1.00% (or, if greater than 1.00%, the highest percentage of
Mortgage Loans by principal balance in any California zip code) times the
aggregate principal balance of all the Mortgage Loans on such anniversary (ii)
twice the principal balance of the single Mortgage Loan having the largest
principal balance, and (iii) that which is necessary to maintain the original
ratings on the Class A Certificates, as evidenced by a letter to that effect
delivered by Fitch to the Servicer and the Trustee. On and after the Cross-Over
Date, the Special Hazard Loss Amount will be zero.
Fraud Losses, other than Excess Fraud Losses, will be allocated solely to
the Class B Certificates. Fraud Losses in excess of the Fraud Loss Amount are
"Excess Fraud Losses." Upon initial issuance of the Series 1994-10 Certificates,
the "Fraud Loss Amount" with respect thereto will be equal to approximately
2.00% (approximately $5,733,679) of the Cut-Off Date Aggregate Principal Balance
of the Mortgage Loans. As of any Distribution Date
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<PAGE>
prior to the first anniversary of the Cut-Off Date, the Fraud Loss Amount will
equal the initial Fraud Loss Amount minus the aggregate amount of Fraud Losses
allocated solely to the Class B Certificates through the related Determination
Date. As of any Distribution Date from the first through fifth anniversary of
the Cut-Off Date, the Fraud Loss Amount will be an amount equal to (1) the
lesser of (a) the Fraud Loss Amount as of the most recent anniversary of the
Cut-Off Date and (b) 1.00% of the aggregate principal balance of all of the
Mortgage Loans as of the most recent anniversary of the Cut-Off Date minus (2)
the aggregate amounts allocated solely to the Class B Certificates with respect
to Fraud Losses since the most recent anniversary of the Cut-Off Date through
the related Determination Date. On and after the Cross-Over Date or after the
fifth anniversary of the Cut-Off Date, the Fraud Loss Amount will be zero.
Bankruptcy Losses, other than Excess Bankruptcy Losses, will be allocated
solely to the Class B Certificates. Bankruptcy losses in excess of the
Bankruptcy Loss Amount are "Excess Bankruptcy Losses." Upon initial issuance of
the Series 1994-10 Certificates, the "Bankruptcy Loss Amount" with respect
thereto will be equal to approximately 0.07% (approximately $189,000) of the
Cut-Off Date Aggregate Principal Balance of the Mortgage Loans. As of any
Distribution Date prior to the first anniversary of the Cut-Off Date, the
Bankruptcy Loss Amount will equal the initial Bankruptcy Loss Amount minus the
aggregate amount of Bankruptcy Losses allocated solely to the Class B
Certificates through the related Determination Date. As of any Distribution Date
on or after the first anniversary of the Cut-Off Date, the Bankruptcy Loss
Amount will equal the excess, if any, of (1) the lesser of (a) the Bankruptcy
Loss Amount as of the business day next preceding the most recent anniversary of
the Cut-Off Date and (b) an amount, if any, calculated pursuant to the terms of
the Pooling and Servicing Agreement, which amount as calculated will provide for
a reduction in the Bankruptcy Loss Amount, over (2) the aggregate amount of
Bankruptcy Losses allocated solely to the Class B Certificates since such
anniversary. The Bankruptcy Loss Amount and the related coverage levels
described above may be reduced or modified upon written confirmation from
Moody's and Fitch that such reduction or modification will not adversely affect
the then-current ratings assigned to the Class A Certificates by Moody's and
Fitch. Such a reduction or modification may adversely affect the coverage
provided by subordination with respect to Bankruptcy Losses. On and after the
Cross-Over Date, the Bankruptcy Loss Amount will be zero.
Notwithstanding the foregoing, the provisions relating to subordination will
not be applicable in connection with a Bankruptcy Loss so long as the Servicer
has notified the Trustee in writing that the Servicer is diligently pursuing any
remedies that may exist in connection with the representations and warranties
made regarding the related Mortgage Loan and when (A) the related Mortgage Loan
is not in default with regard to the payments due thereunder or (B) delinquent
payments of principal and interest under the related Mortgage Loan and any
premiums on any applicable Standard Hazard Insurance Policy and any related
escrow payments in respect of such Mortgage Loan are being advanced on a current
basis by the Servicer, in either case without giving effect to any Debt Service
Reduction.
Since the initial principal balance of the Class B Certificates in the
aggregate will be approximately $15,050,950, the risk of Special Hazard Losses,
Fraud Losses and Bankruptcy Losses will be borne separately by the Class B
Certificates to a lesser extent (I.E., only up to the Special Hazard Loss
Amount, Fraud Loss Amount and Bankruptcy Loss Amount, respectively) than the
risk of other Realized Losses, which they will bear to the full extent of their
initial principal balance. See "The Trust Estates--Mortgage
Loans--Representations and Warranties" and "--Insurance Policies," "Certain
Legal Aspects of the Mortgage Loans--Environmental Considerations" and
"Servicing of the Mortgage Loans--Enforcement of Due-on-Sale Clauses;
Realization Upon Defaulted Mortgage Loans" in the Prospectus.
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<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS(1)
The Mortgage Loans to be included in the Trust Estate will be fixed interest
rate, conventional, monthly pay, fully amortizing, one- to four-family,
residential first mortgage loans originated or acquired by PHMC for its own
account or for the account of an affiliate having original terms to stated
maturity of approximately 30 years, which may include loans secured by shares
("Co-op Shares") issued by private non-profit housing corporations
("Cooperatives"), and the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specified units in such Cooperatives'
buildings. As of the Cut-Off Date, there are not expected to be any loans
secured by Co-op Shares in the Trust Estate. The Mortgage Loans are expected to
include 1,175 promissory notes, to have an aggregate unpaid principal balance as
of the Cut-Off Date (the "Cut-Off Date Aggregate Principal Balance") of
approximately $286,683,950, to be secured by first liens (the "Mortgages") on
one- to four-family residential properties or Co-op Shares (the "Mortgaged
Properties") and to have the additional characteristics described below and in
the Prospectus.
No Mortgage Loan is a Buy-Down Loan. See "The Trust Estates--Mortgage Loans"
in the Prospectus. No Mortgage Loan was originated pursuant to PHMC's relocation
mortgage program. See "PHMC--Mortgage Loan Production Sources" in the
Prospectus.
Each of the Mortgage Loans is subject to a due-on-sale clause. See "Certain
Legal Aspects of the Mortgage Loans--'Due-on-Sale' Clauses" and "Servicing of
the Mortgage Loans--Enforcement of Due-on-Sale Clauses; Realization Upon
Defaulted Mortgage Loans" in the Prospectus.
As of the Cut-Off Date, each Mortgage Loan is expected to have an unpaid
principal balance of not less than $36,974 or more than $999,312, and the
average unpaid principal balance of the Mortgage Loans is expected to be
approximately $243,986. The latest stated maturity date of any of the Mortgage
Loans is expected to be February 1, 2024; however, the actual date on which any
Mortgage Loan is paid in full may be earlier than the stated maturity date due
to unscheduled payments of principal. Based on information supplied by the
mortgagors in connection with their loan applications at origination, 1,120 of
the Mortgaged Properties, which secure approximately 95.68% of the Cut-Off Date
Aggregate Principal Balance of the Mortgage Loans, are expected to be owner
occupied primary residences and 55 of the Mortgaged Properties, which secure
approximately 4.32% of the Cut-Off Date Aggregate Principal Balance of the
Mortgage Loans, are expected to be non-owner occupied or second homes. See
"PHMC--Mortgage Loan Underwriting" in the Prospectus.
It is expected that none of the Mortgage Loans will be a Subsidy Loan. See
"The Trust Estates--Mortgage Loans" and "PHMC--Mortgage Loan Underwriting" in
the Prospectus.
On January 17, 1994, southern California experienced an earthquake (the
"Earthquake") and thereafter has experienced a number of aftershocks. As a
result of the Earthquake, Los Angeles and Ventura Counties were declared federal
disaster areas eligible for federal disaster assistance. In addition to Los
Angeles and Ventura Counties, other counties may have been affected by the
Earthquake. Approximately 8.34% of the Cut-Off Date
- ------------
(1) The descriptions in this Prospectus Supplement of the Trust Estate and the
properties securing the Mortgage Loans to be included in the Trust Estate
are based upon the expected characteristics of the Mortgage Loans at the
close of business on the Cut-Off Date, as adjusted for the scheduled
principal payments due on or before such date. Notwithstanding the
foregoing, any of such Mortgage Loans may be excluded from the Trust Estate
(i) as a result of principal prepayment thereof in full or (ii) if, as a
result of delinquencies or otherwise, the Seller otherwise deems such
exclusion necessary or desirable. In either event, other Mortgage Loans may
be included in the Trust Estate. The Seller believes that the information
set forth herein with respect to the expected characteristics of the
Mortgage Loans on the Cut-Off Date is representative of the characteristics
as of the Cut-Off Date of the Mortgage Loans to be included in the Trust
Estate as it will be constituted at the time the Series 1994-10 Certificates
are issued, although the Cut-Off Date Aggregate Principal Balance, the range
of Mortgage Interest Rates and maturities, and certain other characteristics
of the Mortgage Loans in the Trust Estate may vary. In the event that any of
the characteristics as of the Cut-Off Date of the Mortgage Loans that
constitute the Trust Estate on the date of initial issuance of the Series
1994-10 Certificates vary materially from those described herein, revised
information regarding the Mortgage Loans will be made available to
purchasers of the Class A Certificates, on or before such issuance date, and
a Current Report on Form 8-K containing such information will be filed with
the Securities and Exchange Commission within 15 days following such date.
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<PAGE>
Aggregate Principal Balance of the Mortgage Loans are secured by Mortgaged
Properties that are located in Los Angeles and Ventura Counties. The Seller has
not undertaken the physical inspection of any Mortgaged Properties. As a result,
there can be no assurance that material damage to any Mortgaged Property in the
affected region has not occurred. See "Prepayment and Yield Considerations"
herein for a discussion of the Seller's representation and warranty with respect
to damage arising from the Earthquake.
Set forth below is a description of certain additional expected
characteristics of the Mortgage Loans as of the Cut-Off Date (except as
otherwise indicated).
MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
MORTGAGE PRINCIPAL PRINCIPAL
MORTGAGE INTEREST RATE LOANS BALANCE BALANCE
- -------------------------------------------------------------------------------- --------- --------------- --------------
<S> <C> <C> <C>
7.750%.......................................................................... 466 $114,788,441.80 40.05 %
7.875%.......................................................................... 395 96,963,758.15 33.82
8.000%.......................................................................... 191 45,140,279.50 15.75
8.125%.......................................................................... 66 15,824,696.69 5.52
8.250%.......................................................................... 39 9,026,924.28 3.15
8.375%.......................................................................... 13 3,123,631.96 1.09
8.500%.......................................................................... 2 528,606.43 0.18
8.625%.......................................................................... 2 471,221.62 0.16
9.000%.......................................................................... 1 816,389.17 0.28
--------- --------------- -------
Total................................................................... 1,175 $286,683,949.60 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Interest Rate of the
Mortgage Loans is expected to be approximately 7.881% per annum. The Net
Mortgage Interest Rate of each Mortgage Loan will be equal to the Mortgage
Interest Rate of such Mortgage Loan minus the Servicing Fee rate of 0.20% per
annum. As of the Cut-Off Date, the weighted average Net Mortgage Interest Rate
of the Mortgage Loans is expected to be approximately 7.681% per annum.
REMAINING TERMS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
MORTGAGE PRINCIPAL PRINCIPAL
REMAINING STATED TERM (MONTHS) LOANS BALANCE BALANCE
- -------------------------------------------------------------------------------- --------- --------------- --------------
<S> <C> <C> <C>
347............................................................................. 1 $ 816,389.17 0.28 %
352............................................................................. 1 74,020.83 0.03
353............................................................................. 4 1,079,946.23 0.38
354............................................................................. 7 2,098,998.48 0.73
355............................................................................. 11 2,211,949.03 0.77
356............................................................................. 11 2,756,291.78 0.96
357............................................................................. 16 4,168,842.33 1.45
358............................................................................. 375 89,787,381.77 31.32
359............................................................................. 710 175,337,879.98 61.17
360............................................................................. 39 8,352,250.00 2.91
--------- --------------- -------
Total................................................................... 1,175 $286,683,949.60 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
As of the Cut-Off Date, the weighted average remaining term to stated maturity
of the Mortgage Loans is expected to be approximately 359 months.
S-28
<PAGE>
YEARS OF ORIGINATION
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
MORTGAGE PRINCIPAL PRINCIPAL
YEAR OF ORIGINATION LOANS BALANCE BALANCE
- -------------------------------------------------------------------------------- --------- --------------- --------------
<S> <C> <C> <C>
1992............................................................................ 1 $ 816,389.17 0.28 %
1993............................................................................ 1,153 281,751,260.43 98.28
1994............................................................................ 21 4,116,300.00 1.44
--------- --------------- -------
Total................................................................... 1,175 $286,683,949.60 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
The earliest month and year of origination of any Mortgage Loan is expected to
be December 1992 and the latest month and year of origination is expected to be
January 1994.
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
MORTGAGE PRINCIPAL PRINCIPAL
LOAN-TO-VALUE RATIO LOANS BALANCE BALANCE
- -------------------------------------------------------------------------------- --------- --------------- --------------
<S> <C> <C> <C>
50.00% or less.................................................................. 79 $ 15,359,258.43 5.36 %
50.01-55.00%.................................................................... 36 7,677,428.53 2.68
55.01-60.00%.................................................................... 50 13,098,808.07 4.57
60.01-65.00%.................................................................... 65 19,096,852.65 6.66
65.01-70.00%.................................................................... 155 35,577,028.44 12.41
70.01-75.00%.................................................................... 201 42,783,224.95 14.92
75.01-80.00%.................................................................... 368 92,971,926.49 32.43
80.01-85.00%.................................................................... 32 8,989,613.11 3.14
85.01-90.00%.................................................................... 189 51,129,808.93 17.83
--------- --------------- -------
Total................................................................... 1,175 $286,683,949.60 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
As of the Cut-Off Date, the minimum and maximum Loan-to-Value Ratios at
origination of the Mortgage Loans are expected to be 17.08% and 90.00%,
respectively, and the weighted average Loan-to-Value Ratio at origination of the
Mortgage Loans is expected to be approximately 74.19%. The Loan-to-Value Ratio
of a Mortgage Loan is calculated using the lesser of (i) the appraised value of
the related Mortgaged Property, as established by an appraisal obtained by the
originator from an appraiser in connection with the origination of such Mortgage
Loan and (ii) the sale price for such property. For the purpose of calculating
the Loan-to-Value Ratio of any Mortgage Loan that is the result of the
refinancing (including a refinancing for "equity take-out" purposes) of an
existing mortgage loan, the appraised value of the related Mortgaged Property is
generally determined by reference to an appraisal obtained in connection with
the origination of the replacement loan. See "The Trust Estates--Mortgage Loans"
in the Prospectus. It is expected that 123 of the Mortgage Loans having
Loan-to-Value Ratios at origination in excess of 80%, representing approximately
12.24% of the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans,
were originated without primary mortgage insurance. See "PHMC--Mortgage Loan
Underwriting" in the Prospectus.
S-29
<PAGE>
MORTGAGE LOAN DOCUMENTATION LEVELS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
MORTGAGE PRINCIPAL PRINCIPAL
DOCUMENTATION LEVEL LOANS BALANCE BALANCE
- -------------------------------------------------------------------------------- --------- --------------- --------------
<S> <C> <C> <C>
Full Documentation.............................................................. 590 $169,366,821.50 59.07 %
Asset and Mortgage Verification................................................. 485 97,957,704.96 34.17
Income and Mortgage Verification................................................ 28 8,046,754.88 2.81
Asset and Income Verification................................................... 0 0.00 0.00
Asset Verification.............................................................. 13 2,316,880.08 0.81
Mortgage Verification........................................................... 46 7,455,373.49 2.60
Income Verification............................................................. 0 0.00 0.00
Preferred Processing............................................................ 13 1,540,414.69 0.54
--------- --------------- -------
Total................................................................... 1,175 $286,683,949.60 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
Documentation levels vary depending upon several factors, including loan amount,
Loan-to-Value Ratio and the type and purpose of the Mortgage Loan. Asset, income
and mortgage verifications were obtained for Mortgage Loans processed with "full
documentation." In the case of "preferred processing," neither asset, income nor
mortgage verifications were obtained. However, for all of the Mortgage Loans,
verification of the borrower's employment, a credit report on the borrower and a
property appraisal were obtained. See "PHMC--Mortgage Loan Underwriting" in the
Prospectus.
S-30
<PAGE>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
ORIGINAL NUMBER OF UNPAID AGGREGATE
MORTGAGE LOAN MORTGAGE PRINCIPAL PRINCIPAL
PRINCIPAL BALANCE LOANS BALANCE BALANCE
-------------------- --------- --------------- --------------
<S> <C> <C> <C>
Less than or equal to $200,000.................................................. 347 $ 42,952,224.16 14.98 %
$200,001-$250,000............................................................... 321 73,255,530.90 25.56
$250,001-$300,000............................................................... 237 64,996,646.16 22.67
$300,001-$350,000............................................................... 127 41,267,502.00 14.39
$350,001-$400,000............................................................... 69 25,850,616.34 9.02
$400,001-$450,000............................................................... 32 13,599,175.69 4.74
$450,001-$500,000............................................................... 22 10,630,234.92 3.71
$500,001-$550,000............................................................... 4 2,069,832.85 0.72
$550,001-$600,000............................................................... 4 2,398,358.65 0.84
$600,001-$650,000............................................................... 3 1,908,163.13 0.67
$650,001-$700,000............................................................... 1 698,508.24 0.24
$700,001-$750,000............................................................... 1 738,478.42 0.26
$750,001-$800,000............................................................... 1 779,476.64 0.27
$800,001-$850,000............................................................... 2 1,621,276.16 0.57
$900,001-$950,000............................................................... 1 925,628.51 0.32
$950,001-$1,000,000............................................................. 3 2,992,296.83 1.04
--------- --------------- -------
Total................................................................... 1,175 $286,683,949.60 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
As of the Cut-Off Date, the average unpaid principal balance of the Mortgage
Loans is expected to be approximately $243,986. As of the Cut-Off Date, the
weighted average Loan-to-Value Ratio at origination and the maximum Loan-
to-Value Ratio at origination of the Mortgage Loans which had original principal
balances in excess of $600,000 are expected to be approximately 63.91% and
72.22%, respectively. See "The Trust Estates--Mortgage Loans" and
"PHMC--Mortgage Loan Underwriting" in the Prospectus.
MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
MORTGAGE PRINCIPAL PRINCIPAL
PROPERTY LOANS BALANCE BALANCE
- -------------------------------------------------------------------------------- --------- --------------- --------------
<S> <C> <C> <C>
Single-family detached.......................................................... 1,113 $275,977,171.45 96.27 %
Two- to four-family units....................................................... 4 1,200,902.38 0.42
Condominiums
High-rise (four stories or more).............................................. 8 1,267,119.60 0.44
Low-rise (less than four stories)............................................. 45 7,638,323.73 2.66
Planned unit development........................................................ 1 175,176.28 0.06
Townhouses...................................................................... 4 425,256.16 0.15
Cooperative units............................................................... 0 0.00 0.00
--------- --------------- -------
Total................................................................... 1,175 $286,683,949.60 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
S-31
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
MORTGAGE PRINCIPAL PRINCIPAL
STATE LOANS BALANCE BALANCE
- -------------------------------------------------------------------------------- --------- --------------- --------------
<S> <C> <C> <C>
Arizona......................................................................... 17 $ 2,961,858.94 1.03 %
California...................................................................... 764 208,072,430.83 72.59
Colorado........................................................................ 9 1,614,725.14 0.56
Connecticut..................................................................... 18 5,425,889.78 1.89
District of Columbia............................................................ 4 1,289,399.02 0.45
Florida......................................................................... 58 8,005,501.32 2.79
Georgia......................................................................... 7 910,137.63 0.32
Hawaii.......................................................................... 5 2,744,380.62 0.96
Illinois........................................................................ 14 2,407,103.30 0.84
Indiana......................................................................... 1 239,830.61 0.08
Kansas.......................................................................... 1 245,460.55 0.09
Maine........................................................................... 1 84,443.29 0.03
Maryland........................................................................ 9 1,741,556.54 0.61
Massachusetts................................................................... 24 4,985,212.83 1.74
Michigan........................................................................ 6 644,734.95 0.22
Missouri........................................................................ 1 241,683.55 0.08
Nevada.......................................................................... 18 3,799,114.66 1.33
New Hampshire................................................................... 2 194,953.03 0.07
New Jersey...................................................................... 59 10,788,364.04 3.76
New Mexico...................................................................... 3 615,138.78 0.21
New York........................................................................ 104 18,796,363.86 6.56
North Carolina.................................................................. 1 69,951.83 0.02
Ohio............................................................................ 1 404,136.92 0.14
Oklahoma........................................................................ 1 59,158.21 0.02
Oregon.......................................................................... 4 1,020,599.38 0.36
Pennsylvania.................................................................... 4 581,804.82 0.20
Rhode Island.................................................................... 2 424,486.93 0.15
Tennessee....................................................................... 1 183,876.54 0.06
Texas........................................................................... 11 2,380,698.13 0.83
Utah............................................................................ 1 269,718.91 0.09
Vermont......................................................................... 4 1,138,875.34 0.40
Virginia........................................................................ 9 1,375,463.43 0.48
Washington...................................................................... 9 2,687,990.35 0.94
Wyoming......................................................................... 2 278,905.54 0.10
--------- --------------- -------
Total................................................................... 1,175 $286,683,949.60 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
No more than approximately 1.31% of the Cut-Off Date Aggregate Principal Balance
of the Mortgage Loans is expected to be secured by Mortgaged Properties located
in any one zip code.
S-32
<PAGE>
ORIGINATORS OF MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
MORTGAGE PRINCIPAL PRINCIPAL
ORIGINATOR LOANS BALANCE BALANCE
- -------------------------------------------------------------------------------- --------- --------------- --------------
<S> <C> <C> <C>
PHMC or Affiliate............................................................... 221 $ 51,990,495.07 18.14 %
Other Originators............................................................... 954 234,693,454.53 81.86
--------- --------------- -------
Total................................................................... 1,175 $286,683,949.60 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
It is expected that, as of the Cut-Off Date, none of the "Other Originators"
will have accounted for more than 5.00% of the Cut-Off Date Aggregate Principal
Balance of the Mortgage Loans. See "PHMC--Mortgage Loan Production Sources" in
the Prospectus.
PURPOSES OF MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
MORTGAGE PRINCIPAL PRINCIPAL
LOAN PURPOSE LOANS BALANCE BALANCE
- -------------------------------------------------------------------------------- --------- --------------- --------------
<S> <C> <C> <C>
Purchase........................................................................ 264 $ 55,931,565.98 19.51 %
Rate/Term Refinance............................................................. 723 189,045,886.92 65.94
Equity Take Out Refinance....................................................... 188 41,706,496.70 14.55
--------- --------------- -------
Total................................................................... 1,175 $286,683,949.60 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
In general, in the case of a Mortgage Loan made for "rate/term" refinance
purposes, substantially all of the proceeds are used to pay in full the
principal balance of a previous mortgage loan of the mortgagor with respect to a
Mortgaged Property and to pay origination and closing costs associated with such
refinancing. However, in the case of a Mortgage Loan made for "equity take out"
refinance purposes, all or a portion of the proceeds are generally retained by
the mortgagor for uses unrelated to the Mortgaged Property. The amount of such
proceeds retained by the mortgagor may be substantial. See "The Trust
Estates--Mortgage Loans" and "PHMC--Mortgage Loan Underwriting" in the
Prospectus.
MANDATORY REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS
The Seller is required, with respect to Mortgage Loans that are found by the
Trustee to have defective documentation, or in respect of which the Seller has
breached a representation or warranty, either to repurchase such Mortgage Loans
or, if within two years of the date of initial issuance of the Series 1994-10
Certificates, to substitute new Mortgage Loans therefor. Any Mortgage Loan so
substituted must, among other things, have an unpaid principal balance equal to
or less than the Scheduled Principal Balance of the Mortgage Loan for which it
is being substituted (after giving effect to the scheduled principal payment due
in the month of substitution on the Mortgage Loan for which a new Mortgage Loan
is being substituted), a Loan-to-Value Ratio less than or equal to, and a
Mortgage Interest Rate no less than, and no more than one percent per annum
greater than, that of the Mortgage Loan for which it is being substituted. See
"Prepayment and Yield Considerations" herein and "The Trust Estates--Mortgage
Loans--Assignment of Mortgage Loans to the Trustee" in the Prospectus.
OPTIONAL REPURCHASE OF DEFAULTED MORTGAGE LOANS
The Seller may, in its sole discretion, repurchase any defaulted Mortgage
Loan from the Trust Estate at a price equal to the unpaid principal balance of
such Mortgage Loan, together with accrued interest at a rate equal to the
Mortgage Interest Rate through the last day of the month in which such
repurchase occurs. See "The Trust Estates--Mortgage Loans--Optional Repurchases"
in the Prospectus. The Servicer may, in its sole discretion, allow the
assumption of a defaulted Mortgage Loan by a borrower meeting PHMC's
underwriting guidelines or encourage the refinancing of a defaulted Mortgage
Loan. See "Prepayment and Yield Considerations" herein and "Servicing of the
Mortgage Loans--Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted
Mortgage Loans" in the Prospectus.
S-33
<PAGE>
ORIGINATION, DELINQUENCY AND FORECLOSURE EXPERIENCE
LOAN ORIGINATION
During the years ended December 31, 1991, December 31, 1992 and December 31,
1993, PHMC originated or purchased, for its own account or for the account of an
affiliate, conventional mortgage loans having aggregate principal balances of
approximately $9,742,858,764, $24,516,257,276 and $35,805,498,813, respectively.
DELINQUENCY AND FORECLOSURE EXPERIENCE
The following tables set forth certain information concerning recent
delinquency, foreclosure and loan loss experience on the conventional mortgage
loans included in PHMC's mortgage loan servicing portfolio which were originated
by PHMC for its own account or for the account of an affiliate or acquired by
PHMC for its own account or for the account of an affiliate and underwritten to
PHMC's underwriting standards (the "Program Loans"), on the Program Loans which
are fixed interest rate mortgage loans ("Fixed Program Loans"), including, in
both cases, mortgage loans originated in connection with the purchases of
residences by relocated employees ("Relocation Mortgage Loans"), and on the
Fixed Program Loans, other than Relocation Mortgage Loans ("Fixed Non-relocation
Program Loans"). See "Description of the Mortgage Loans" herein and "The Trust
Estates--Mortgage Loans" and "PHMC--General," "--Mortgage Loan Underwriting" and
"--Servicing" in the Prospectus. The delinquency, foreclosure and loan loss
experience represents the recent experience of PHMC and The Prudential Mortgage
Capital Company, Inc., an affiliate of PHMC which serviced the Program Loans
prior to June 30, 1989. There can be no assurance that the delinquency,
foreclosure and loan loss experience set forth with respect to PHMC's total
servicing portfolio of Program Loans, which includes both fixed and adjustable
interest rate mortgage loans and loans having a variety of original terms to
stated maturity including Relocation Mortgage Loans and non-relocation mortgage
loans, and PHMC's servicing portfolios of Fixed Program Loans or Fixed
Non-relocation Program Loans, each of which includes loans having a variety of
payment characteristics, such as Subsidy Loans, Buy-Down Loans and Balloon
Loans, will be representative of the results that may be experienced with
respect to the Mortgage Loans included in the Trust Estate.
Historically, Relocation Mortgage Loans, which constitute a significant
percentage of the Mortgage Loans currently serviced by PHMC, have experienced a
significantly lower rate of delinquency and foreclosure than other mortgage
loans included in the portfolios of total Program Loans and Fixed Program Loans.
There can be no assurance that the future experience on the Mortgage Loans
contained in the Trust Estate, all of which are fixed interest rate mortgage
loans having original terms to stated maturity of 30 years and none of which are
Relocation Mortgage Loans, will be comparable to that of the total Program
Loans, the Fixed Program Loans or the Fixed Non-relocation Program Loans.
The following tables reflect rapid growth during recent periods in PHMC's
mortgage loan servicing portfolio as a result of the substantially higher volume
of new loan originations and acquisitions of recently originated mortgage loans.
Delinquencies, foreclosures and loan losses generally are expected to occur more
frequently after the first full year of the life of mortgage loans. Accordingly,
because a large number of mortgage loans serviced by PHMC have been originated
recently, the current level of delinquencies, foreclosures and loan losses may
not be representative of the levels which may be experienced over the lives of
such mortgage loans. If the volume of PHMC's new loan originations and
acquisitions does not continue to grow at the current rate, the levels of
delinquencies, foreclosures and loan losses as percentages of PHMC's total
servicing portfolio could rise significantly above the rates indicated in the
following tables.
S-34
<PAGE>
TOTAL PROGRAM LOANS
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1991 DECEMBER 31, 1992 DECEMBER 31, 1993
---------------------- ---------------------- ----------------------
BY DOLLAR BY DOLLAR BY DOLLAR
BY NO. AMOUNT BY NO. AMOUNT BY NO. AMOUNT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Total Portfolio of Program Loans........................... 136,972 $21,489,014 225,024 $38,686,531 337,156 $57,687,887
-------- ----------- -------- ----------- -------- -----------
-------- ----------- -------- ----------- -------- -----------
Period of Delinquency(1)
30 to 59 days............................................ 2,973 $ 396,403 2,913 $ 423,662 3,190 $ 489,235
60 to 89 days............................................ 706 103,710 574 84,522 703 109,529
90 days or more.......................................... 1,268 220,943 1,205 221,392 1,398 271,637
-------- ----------- -------- ----------- -------- -----------
Total Delinquent Loans..................................... 4,947 $ 721,056 4,692 $ 729,576 5,291 $ 870,401
-------- ----------- -------- ----------- -------- -----------
-------- ----------- -------- ----------- -------- -----------
Percent of Portfolio....................................... 3.61% 3.36% 2.09% 1.89% 1.57% 1.51%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER DECEMBER DECEMBER
31, 1991 31, 1992 31, 1993
--------- --------- ---------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Foreclosures(2)........................................................................... $189,563 $248,806 $277,533
Foreclosure Ratio(3)...................................................................... 0.88 % 0.64 % 0.48 %
</TABLE>
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED YEAR ENDED
DECEMBER DECEMBER DECEMBER
31, 1991 31, 1992 31, 1993
--------- --------- ----------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Net Gain (Loss)(4)....................................................................... $(11,103 ) $(35,871 ) $(112,603 )
Net Gain (Loss) Ratio(5)................................................................. (0.05 )% (0.09 )% (0.20 )%
</TABLE>
- -------------
(1) The indicated periods of delinquency are based on the number of days past
due, based on a 30-day month. No mortgage loan is considered delinquent for
these purposes until one month has passed since its contractual due date. A
mortgage loan is no longer considered delinquent once foreclosure
proceedings have commenced.
(2) Includes loans in the applicable portfolio for which foreclosure proceedings
had been instituted or with respect to which the related property had been
acquired as of the dates indicated.
(3) Foreclosures as a percentage of total loans in the applicable portfolio at
the end of each period.
(4) Does not include gain or loss with respect to loans in the applicable
portfolio for which foreclosure proceedings had been instituted but not
completed as of the dates indicated, or for which the related properties
have been acquired in foreclosure proceedings but not yet sold.
(5) Net gain (loss) as a percentage of total loans in the applicable portfolio
at the end of each period.
S-35
<PAGE>
FIXED PROGRAM LOANS
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1991 DECEMBER 31, 1992 DECEMBER 31, 1993
---------------------- ---------------------- ----------------------
BY DOLLAR BY DOLLAR BY DOLLAR
BY NO. AMOUNT BY NO. AMOUNT BY NO. AMOUNT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Total Portfolio of Fixed Program Loans.................. 120,333 $18,604,937 193,364 $32,825,642 288,556 $48,156,806
-------- ----------- -------- ----------- -------- -----------
-------- ----------- -------- ----------- -------- -----------
Period of Delinquency(1)
30 to 59 days......................................... 2,379 $ 311,415 2,379 $ 337,097 2,609 $ 380,197
60 to 89 days......................................... 534 72,567 466 67,487 571 86,136
90 days or more....................................... 859 133,313 921 159,942 1,117 211,870
-------- ----------- -------- ----------- -------- -----------
Total Delinquent Loans.................................. 3,772 $ 517,295 3,766 $ 564,526 4,297 $ 678,203
-------- ----------- -------- ----------- -------- -----------
-------- ----------- -------- ----------- -------- -----------
Percent of Fixed Program Loan Portfolio................. 3.13% 2.78% 1.95% 1.72% 1.49% 1.41%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER DECEMBER DECEMBER
31, 1991 31, 1992 31, 1993
-------- -------- ---------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Foreclosures(2)................................................................................ $93,405 $152,089 $195,361
Foreclosure Ratio(3)........................................................................... 0.50 % 0.46 % 0.41 %
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER DECEMBER DECEMBER
31, 1991 31, 1992 31, 1993
-------- -------- ---------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net Gain (Loss)(4)............................................................................. $(4,048 ) $(15,817) $(63,575 )
Net Gain (Loss) Ratio(5)....................................................................... (0.02 )% (0.05 )% (0.13 )%
</TABLE>
- -------------
(1) The indicated periods of delinquency are based on the number of days past
due, based on a 30-day month. No mortgage loan is considered delinquent for
these purposes until one month has passed since its contractual due date. A
mortgage loan is no longer considered delinquent once foreclosure
proceedings have commenced.
(2) Includes loans in the applicable portfolio for which foreclosure proceedings
had been instituted or with respect to which the related property had been
acquired as of the dates indicated.
(3) Foreclosures as a percentage of total loans in the applicable portfolio at
the end of each period.
(4) Does not include gain or loss with respect to loans in the applicable
portfolio for which foreclosure proceedings had been instituted but not
completed as of the dates indicated, or for which the related properties
have been acquired in foreclosure proceedings but not yet sold.
(5) Net gain (loss) as a percentage of total loans in the applicable portfolio
at the end of each period.
S-36
<PAGE>
FIXED NON-RELOCATION PROGRAM LOANS
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1991 DECEMBER 31, 1992 DECEMBER 31, 1993
---------------------- ---------------------- ----------------------
BY DOLLAR BY DOLLAR BY DOLLAR
BY NO. AMOUNT OF BY NO. AMOUNT OF BY NO. AMOUNT OF
OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS
-------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Total Portfolio of
Fixed Non-relocation Program Loans....................... 84,246 $13,352,914 153,210 $26,877,075 247,792 $42,030,123
-------- ----------- -------- ----------- -------- -----------
-------- ----------- -------- ----------- -------- -----------
Period of Delinquency(1)
30 to 59 days........................................... 2,071 $ 272,540 2,118 $ 303,939 2,326 $ 344,861
60 to 89 days........................................... 495 67,553 431 64,113 530 81,444
90 days or more......................................... 801 126,752 856 150,830 1,054 203,444
-------- ----------- -------- ----------- -------- -----------
Total Delinquent Loans.................................... 3,367 $ 466,845 3,405 $ 518,882 3,910 $ 629,749
-------- ----------- -------- ----------- -------- -----------
-------- ----------- -------- ----------- -------- -----------
Percent of
Fixed Non-relocation Program Loan Portfolio.............. 4.00% 3.50% 2.22% 1.93% 1.58% 1.50%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER DECEMBER DECEMBER
31, 1991 31, 1992 31, 1993
-------- --------- ---------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Foreclosures(2)................................................................................ $90,861 $148,746 $190,293
Foreclosure Ratio(3)........................................................................... 0.68 % 0.55 % 0.45 %
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER DECEMBER DECEMBER
31, 1991 31, 1992 31, 1993
-------- --------- ---------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net Gain (Loss)(4)............................................................................. $(3,859 ) $(15,406 ) $(61,260 )
Net Gain (Loss) Ratio(5)....................................................................... (0.03 )% (0.06 )% (0.15 )%
</TABLE>
- -------------
(1) The indicated periods of delinquency are based on the number of days past
due, based on a 30-day month. No mortgage loan is considered delinquent for
these purposes until one month has passed since its contractual due date. A
mortgage loan is no longer considered delinquent once foreclosure
proceedings have commenced.
(2) Includes loans in the applicable portfolio for which foreclosure proceedings
had been instituted or with respect to which the related property had been
acquired as of the dates indicated.
(3) Foreclosures as a percentage of total loans in the applicable portfolio at
the end of each period.
(4) Does not include gain or loss with respect to loans in the applicable
portfolio for which foreclosure proceedings had been instituted but not
completed as of the dates indicated, or for which the related properties
have been acquired in foreclosure proceedings but not yet sold.
(5) Net gain (loss) as a percentage of total loans in the applicable portfolio
at the end of each period.
The likelihood that a mortgagor will become delinquent in the payment of his
or her mortgage loan, the rate of any subsequent foreclosures, and the severity
of any loan loss experience, may be affected by a number of factors related to a
borrower's personal circumstances, including, but not limited to, unemployment
or change in employment (or in the case of self-employed mortgagors or
mortgagors relying on commission income, fluctuations in income), marital
separation and the mortgagor's equity in the related mortgaged property. In
addition, delinquency, foreclosure and loan loss experience may be sensitive to
adverse economic conditions, either nationally or regionally, may exhibit
seasonal variations and may be influenced by the level of interest rates and
servicing decisions on the applicable mortgage loans. Regional economic
conditions (including declining real estate values) may particularly affect
delinquency, foreclosure and loan loss experience on mortgage loans to the
extent that mortgaged properties are concentrated in certain geographic areas.
Furthermore, the level of foreclosures reported is affected by the length of
time legally required to complete the foreclosure process and take title to the
related property, which varies from jurisdiction to jurisdiction. The Seller
believes that the changes in the delinquency, foreclosure and loan loss
experience of PHMC's respective servicing portfolios during the periods set
forth in the preceding tables may be attributable to factors such as those
described above, although the Seller is unable to
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assess to what extent these changes are the result of any particular factor or a
combination of factors. The delinquency, foreclosure and loan loss experience on
the Mortgage Loans contained in the Trust Estate may be particularly affected to
the extent that the Mortgaged Properties are concentrated in areas which
experience adverse economic conditions or declining real estate values. See
"Description of the Mortgage Loans."
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of distributions in reduction of the principal balance of any
Subclass of the Class A Certificates, the aggregate amount of distributions on
any Subclass of the Class A Certificates and the yield to maturity of any
Subclass of the Class A Certificates purchased at a discount or premium will be
directly related to the rate of payments of principal on the Mortgage Loans in
the Trust Estate and the amount and timing of mortgagor defaults resulting in
Realized Losses. The rate of principal payments on the Mortgage Loans will in
turn be affected by the amortization schedules of the Mortgage Loans, the rate
of principal prepayments (including partial prepayments and those resulting from
refinancing) thereon by mortgagors, liquidations of defaulted Mortgage Loans,
repurchases by the Seller of Mortgage Loans as a result of defective
documentation or breaches of representations and warranties, optional repurchase
by the Seller of defaulted Mortgage Loans and optional purchase by the Servicer
of all of the Mortgage Loans in connection with the termination of the Trust
Estate. See "Description of the Mortgage Loans--Optional Repurchase of Defaulted
Mortgage Loans" and "Pooling and Servicing Agreement--Optional Termination"
herein and "The Trust Estates--Mortgage Loans--Assignment of Mortgage Loans to
the Trustee," "-- Optional Repurchases" and "The Pooling and Servicing
Agreement--Termination; Purchase of Mortgage Loans" in the Prospectus.
Mortgagors are permitted to prepay the Mortgage Loans, in whole or in part, at
any time without penalty. As described under "Description of the
Certificates--Principal (Including Prepayments)" herein, all or a
disproportionate percentage of principal prepayments on the Mortgage Loans
(including liquidations and repurchases of Mortgage Loans) will be distributed
to the holders of the Class A Certificates then entitled to distributions in
respect of principal during the nine years beginning on the first Distribution
Date. Prepayments (which, as used herein, include all unscheduled payments of
principal, including payments as the result of liquidations, purchases and
repurchases) of the Mortgage Loans in the Trust Estate will result in
distributions to Certificateholders then entitled to distributions in respect of
principal of amounts which would otherwise be distributed over the remaining
terms of such Mortgage Loans. Since the rate of prepayment on the Mortgage Loans
will depend on future events and a variety of factors (as described more fully
below and in the Prospectus under "Prepayment and Yield Considerations"), no
assurance can be given as to such rate or the rate of principal payments on any
Subclass of the Class A Certificates or the aggregate amount of distributions on
any Subclass of Class A Certificates.
The rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing rates for similar mortgage loans fall below the Mortgage Interest
Rates on the Mortgage Loans, the rate of prepayment would generally be expected
to increase. Conversely, if interest rates on similar mortgage loans rise
significantly above the Mortgage Interest Rates on the Mortgage Loans, the rate
of prepayment would generally be expected to decrease. The rate of prepayment on
the Mortgage Loans may also be influenced by programs offered by mortgage loan
originators (including PHMC) and mortgage loan brokers to encourage refinancing
through such originators and brokers, including but not limited to general or
targeted solicitations, reduced origination fees or closing costs, or other
financial incentives. See "Prepayment and Yield Considerations--Weighted Average
Life of Certificates" in the Prospectus.
Other factors affecting prepayment of mortgage loans include changes in
mortgagors' housing needs, job transfers, unemployment or, in the case of
self-employed mortgagors or mortgagors relying on commission income, substantial
fluctuations in income, significant declines in real estate values and adverse
economic conditions either generally or in particular geographic areas,
mortgagors' equity in the Mortgaged Properties and servicing decisions. In
addition, all of the Mortgage Loans contain due-on-sale clauses which will
generally be exercised upon the sale of the related Mortgaged Properties.
Consequently, acceleration of mortgage payments as a result of any such sale
will affect the level of prepayments on the Mortgage Loans. The extent to which
defaulted Mortgage Loans are assumed by transferees of the related Mortgaged
Properties will also affect the rate of principal payments. The rate of
prepayment and, therefore, the yield to maturity of the Class A Certificates
will be affected by the extent to which (i) the Seller elects to repurchase,
rather than substitute for, Mortgage Loans which are found by the Trustee to
have defective documentation or with respect to which the Seller has breached a
representation or
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warranty or (ii) the Servicer elects to encourage the refinancing of any
defaulted Mortgage Loan rather than to permit an assumption thereof by a
mortgagor meeting the Servicer's underwriting guidelines. See "Servicing of the
Mortgage Loans--Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted
Mortgage Loans" in the Prospectus. There can be no certainty as to the rate of
prepayments on the Mortgage Loans during any period or over the life of the
Series 1994-10 Certificates. See "Prepayment and Yield Considerations" in the
Prospectus.
THE YIELD TO MATURITY OF THE OFFERED CERTIFICATES WILL BE SENSITIVE IN
VARYING DEGREES TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS, WHICH MAY BE MADE AT ANY TIME WITHOUT PENALTY) ON THE MORTGAGE
LOANS. INVESTORS IN THE OFFERED CERTIFICATES SHOULD CONSIDER THE ASSOCIATED
RISKS, INCLUDING, IN THE CASE OF OFFERED CERTIFICATES PURCHASED AT A DISCOUNT,
THE RISK THAT A SLOWER THAN ANTICIPATED RATE OF PAYMENTS IN RESPECT OF PRINCIPAL
(INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS COULD RESULT IN AN ACTUAL YIELD
THAT IS LOWER THAN ANTICIPATED. A FASTER THAN ANTICIPATED RATE OF PAYMENTS IN
RESPECT OF PRINCIPAL (INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS COULD RESULT
IN AN ACTUAL YIELD THAT IS LOWER THAN ANTICIPATED FOR INVESTORS PURCHASING
OFFERED CERTIFICATES AT A PREMIUM. INVESTORS PURCHASING OFFERED CERTIFICATES AT
A PREMIUM SHOULD ALSO CONSIDER THE RISK THAT A RAPID RATE OF PAYMENTS IN RESPECT
OF PRINCIPAL (INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS COULD RESULT IN THE
FAILURE OF SUCH INVESTORS TO FULLY RECOVER THEIR INITIAL INVESTMENTS.
The timing of changes in the rate of prepayment on the Mortgage Loans may
significantly affect the actual yield to maturity experienced by an investor who
purchases a Class A Certificate at a price other than par, even if the average
rate of principal payments experienced over time is consistent with such
investor's expectation. In general, the earlier a prepayment of principal on the
underlying Mortgage Loans, the greater the effect on such investor's yield to
maturity. As a result, the effect on such investor's yield of principal payments
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of the Class A Certificates
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal payments.
No representation is made as to the rate of principal payments on the
Mortgage Loans or as to the yield to maturity of any Subclass of Class A
Certificates. An investor is urged to make an investment decision with respect
to any Subclass of Class A Certificates based on the anticipated yield to
maturity of such Subclass of Class A Certificates resulting from its purchase
price and such investor's own determination as to anticipated Mortgage Loan
prepayment rates under a variety of scenarios. The extent to which any Subclass
of Class A Certificates is purchased at a discount or a premium and the degree
to which such Subclass is sensitive to the timing of prepayments will determine
the extent to which the yield to maturity of such Subclass may vary from the
anticipated yield. An investor should carefully consider the associated risks,
including, in the case of any Class A Certificates purchased at a discount, the
risk that a slower than anticipated rate of principal payments on the Mortgage
Loans could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of any Class A Certificates purchased at a
premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield to such investor that is lower than the
anticipated yield.
An investor should consider the risk that rapid rates of prepayments on the
Mortgage Loans, and therefore of amounts distributable in reduction of principal
balance of the Class A Certificates, may coincide with periods of low prevailing
interest rates. During such periods, the effective interest rates on securities
in which an investor may choose to reinvest amounts distributed in reduction of
the principal balance of such investor's Class A Certificate may be lower than
the applicable Pass-Through Rate. Conversely, slower rates of prepayments on the
Mortgage Loans, and therefore of amounts distributable in reduction of principal
balance of the Class A Certificates, may coincide with periods of high
prevailing interest rates. During such periods, the amount of principal
distributions available to an investor for reinvestment at such high prevailing
interest rates may be relatively small.
As indicated under "Federal Income Tax Considerations" herein, the Class A-R
Certificateholder's REMIC taxable income and the tax liability thereon will
exceed, and may significantly exceed, cash distributions to such holder during
certain periods. There can be no assurance as to the amount by which such
taxable income or such tax liability will exceed cash distributions in respect
of the Class A-R Certificate during any such period and no representation is
made with respect thereto under any principal prepayment scenario or otherwise.
DUE TO THE SPECIAL TAX TREATMENT OF RESIDUAL INTERESTS, THE AFTER-TAX RETURN OF
THE CLASS A-R CERTIFICATE MAY BE SIGNIFICANTLY LOWER THAN WOULD BE THE CASE IF
THE CLASS A-R CERTIFICATE WERE TAXED AS A DEBT INSTRUMENT.
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<PAGE>
As referred to herein, the weighted average life of a Subclass of Offered
Certificates refers to the average amount of time that will elapse from the date
of issuance of such Subclass until each dollar in reduction of the principal
balance of such Subclass is distributed to the investor. The weighted average
life of each Subclass of the Class A Certificates will be influenced by, among
other things, the rate and timing of principal payments on the Mortgage Loans,
which may be in the form of scheduled amortization or prepayments.
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement, the Standard
Prepayment Assumption ("SPA"), represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of new
mortgage loans. A prepayment assumption of 100% SPA assumes constant prepayment
rates of 0.2% per annum of the then outstanding principal balance of such
mortgage loans in the first month of the life of the mortgage loans and an
additional 0.2% per annum in each month thereafter until the thirtieth month.
Beginning in the thirtieth month and in each month thereafter during the life of
the mortgage loans, 100% SPA assumes a constant prepayment rate of 6% per annum
each month. As used in the table below, "0% SPA" assumes prepayment rates equal
to 0% of SPA, I.E., no prepayments. Correspondingly, "75% SPA" assumes
prepayment rates equal to 75% of SPA, and so forth. SPA DOES NOT PURPORT TO BE A
HISTORICAL DESCRIPTION OF PREPAYMENT EXPERIENCE OR A PREDICTION OF THE
ANTICIPATED RATE OF PREPAYMENT OF ANY POOL OF MORTGAGE LOANS, INCLUDING THE
MORTGAGE LOANS.
The table set forth below has been prepared on the basis of the
characteristics of the Mortgage Loans that are expected to be included in the
Trust Estate, as described above under "Description of the Mortgage Loans." The
table assumes, among other things, that (i) the scheduled payment in each month
for each Mortgage Loan has been based on its outstanding balance as of the first
day of the month preceding the month of such payment, its Mortgage Interest Rate
and its remaining term to stated maturity, so that such scheduled payments would
amortize the remaining balance by its stated maturity date, (ii) scheduled
monthly payments of principal and interest on the Mortgage Loans will be timely
received on the first day of each month (with no defaults), commencing in March
1994, (iii) the Seller does not repurchase any Mortgage Loan, as described under
"The Trust Estates-- Mortgage Loans" in the Prospectus, and the Servicer does
not exercise its option to purchase the Mortgage Loans and thereby cause a
termination of the Trust Estate, (iv) principal prepayments on the Mortgage
Loans will be received on the last day of each month commencing in February 1994
at the respective constant percentages of SPA set forth in the table and there
are no Prepayment Interest Shortfalls, (v) each Mortgage Loan has an original
term to maturity of 30 years and (vi) the Series 1994-10 Certificates will be
issued on February 25, 1994. IT IS HIGHLY UNLIKELY THAT THE MORTGAGE LOANS WILL
PREPAY AT ANY CONSTANT RATE OR THAT ALL OF THE MORTGAGE LOANS WILL PREPAY AT THE
SAME RATE. In addition, there may be differences between the characteristics of
the mortgage loans ultimately included in the Trust Estate and the Mortgage
Loans which are expected to be included, as described herein. Any difference may
have an effect upon the actual percentages of initial Class A Subclass Principal
Balance of the Subclasses of Class A Certificates outstanding, the actual
weighted average lives of the Subclasses of Class A Certificates and the date on
which the Class A Subclass Principal Balance of any Subclass of Class A
Certificates is reduced to zero.
Based upon the foregoing assumptions, the following table indicates the
weighted average life of each Subclass of Offered Certificates, and set forth
the percentages of the initial Class A Subclass Principal Balance of each such
Subclass that would be outstanding after each of the dates shown at various
constant percentages of SPA.
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<PAGE>
PERCENTAGE OF INITIAL CLASS A SUBCLASS PRINCIPAL BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-1 AND CLASS A-R CERTIFICATES AT THE
FOLLOWING PERCENTAGES OF SPA
<S> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------
DISTRIBUTION DATE 0% 75% 150% 300% 450% 550% 700%
- -------------------- -----------------------------------------------
Initial............. 100 100 100 100 100 100 100
February 1995....... 99 98 97 94 92 90 87
February 1996....... 98 94 90 81 73 68 61
February 1997....... 97 89 80 65 52 44 33
February 1998....... 96 83 72 52 36 27 17
February 1999....... 95 78 64 41 25 16 7
February 2000....... 94 74 57 33 17 10 3
February 2001....... 92 69 51 26 11 6 1
February 2002....... 91 65 46 21 8 3 0
February 2003....... 89 61 41 16 5 2 0
February 2004....... 87 57 36 13 4 1 0
February 2005....... 85 53 32 11 3 1 0
February 2006....... 83 50 29 9 2 1 0
February 2007....... 81 46 25 7 1 0 0
February 2008....... 79 43 22 5 1 0 0
February 2009....... 76 40 20 4 1 0 0
February 2010....... 73 36 17 3 0 0 0
February 2011....... 70 33 15 3 0 0 0
February 2012....... 67 30 13 2 0 0 0
February 2013....... 64 27 11 2 0 0 0
February 2014....... 60 25 10 1 0 0 0
February 2015....... 56 22 8 1 0 0 0
February 2016....... 51 19 7 1 0 0 0
February 2017....... 46 17 6 1 0 0 0
February 2018....... 41 14 5 0 0 0 0
February 2019....... 35 12 4 0 0 0 0
February 2020....... 29 9 3 0 0 0 0
February 2021....... 22 7 2 0 0 0 0
February 2022....... 15 4 1 0 0 0 0
February 2023....... 7 2 1 0 0 0 0
February 2024....... 0 0 0 0 0 0 0
Weighted Average
Life (years)
(1)............... 20.35 13.11 9.18 5.47 3.86 3.24 2.63
</TABLE>
- ------------------
(1) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of principal
balance by the number of years from the date of the issuance of such
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions in reduction of
principal balance referred to in clause (i).
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Interest on Mortgage Loans prepaid in full is accrued only to the date of
such prepayment in full. Any interest shortfall with respect to prepayments in
full will be offset only to the extent of the aggregate of the Servicing Fees
relating to mortgagor payments or other recoveries distributed on the related
Distribution Date. Any excess of such shortfall above the Servicing Fees in any
month will result in a pro rata reduction of interest distributable to the
holders of each Subclass of Class A Certificates and the holders of the Class B
Certificates. Interest shortfalls resulting from the timing of the receipt of
partial principal prepayments on the Mortgage Loans and Partial Liquidation
Proceeds or from net Liquidation Proceeds in respect of Liquidated Loans will
not be offset by Servicing Fees but will be allocated first to the Class B
Certificates until the Class B Principal Balance has been reduced to zero and
then to the Subclasses of Class A Certificates. See "Description of the
Certificates--Interest" herein and "Prepayment and Yield Considerations" in the
Prospectus.
Interest accrued on the Class A Certificates will be reduced by the amount
of any interest portions of Realized Losses allocated to such Certificates as
described under "Description of the Certificates--Interest" herein. The yield on
the Class A Certificates will be less than the yield otherwise produced by their
respective Pass-Through Rates and the prices at which the Class A Certificates
are purchased because the interest which accrues on the Mortgage Loans during
each month will not be passed through to Certificateholders until the 25th day
of the month following the end of such month (or if such 25th day is not a
business day, the following business day).
With respect to any Mortgage Loan as to which the related Mortgaged Property
is located in Los Angeles County, Ventura County or an adjoining county (each, a
"Covered Mortgaged Property"), the Seller will represent and warrant that the
Covered Mortgaged Property is free of material damage arising from the
Earthquake and any aftershocks relating to the Earthquake occurring prior to
February 25, 1994 which would adversely affect the value of such Mortgaged
Property as security for such Mortgage Loan or the use for which such premises
were intended as of the date of issuance of the Certificates. The Seller is
undertaking reasonable efforts consistent with prudent servicing practices
(which may or may not include physical or visual inspections of the Covered
Mortgaged Properties) to generally assess the effects of the Earthquake as they
relate to the Covered Mortgaged Properties. In the event that (i) it is
established to the satisfaction of either the Servicer or the Trustee that a
Covered Mortgaged Property suffered damage that was solely attributable to the
Earthquake and any aftershocks relating to the Earthquake occurring prior to
February 25, 1994, resulting in an uncured breach of the representation and
warranty described above and (ii) such uncured breach materially and adversely
affects the interests of Certificateholders, the Seller will be required to
substitute another mortgage loan for the affected Mortgage Loan or repurchase
the affected Mortgage Loan. The Seller will use reasonable efforts to deliver a
substitute mortgage loan in such event, subject to the substitution criteria
specified in the Pooling and Servicing Agreement. Repurchase of any such
Mortgage Loan will affect in varying degrees the yields and weighted average
lives of the Subclasses of Class A Certificates, particularly the yield of any
Offered Certificates purchased at a premium. See "Description of the Mortgage
Loans" herein.
POOLING AND SERVICING AGREEMENT
GENERAL
The Series 1994-10 Certificates will be issued pursuant to a Pooling and
Servicing Agreement to be dated as of the date of initial issuance of the Series
1994-10 Certificates (the "Pooling and Servicing Agreement") among the Seller,
the Servicer and the Trustee. Reference is made to the Prospectus for important
additional information regarding the terms and conditions of the Pooling and
Servicing Agreement and the Series 1994-10 Certificates. See "Description of the
Certificates," "Servicing of the Mortgage Loans" and "The Pooling and Servicing
Agreement" in the Prospectus. Distributions (other than the final distribution
in retirement of the Class A Certificates of each Subclass) will be made by
check mailed to the address of the person entitled thereto as it appears on the
Certificate Register. However, with respect to any holder of an Offered
Certificate evidencing at least a $5,000,000 initial principal balance,
distributions will be made on the Distribution Date by wire transfer in
immediately available funds, provided that the Servicer, or the paying agent
acting on behalf of the Servicer, shall have been furnished with
appropriate wiring instructions not less than seven business days prior to the
related Distribution Date. The final distribution in respect of each Class A
Certificate will be made only upon presentation and surrender of such Class A
Certificate at the office or agency appointed by the Trustee specified in the
notice of final distribution with respect to the related Subclass.
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Unless Definitive Certificates are issued as described above, the Servicer
and the Trustee will treat DTC as the Holder of the Book-Entry Certificates for
all purposes, including making distributions thereon and taking actions with
respect thereto. DTC will make book-entry transfers among its participants with
respect to the Book-Entry Certificates; it will also receive distributions on
the Book-Entry Certificates from the Trustee and transmit them to participants
for distribution to Beneficial Owners or their nominees.
VOTING
With respect to any provisions of the Pooling and Servicing Agreement
providing for the action, consent or approval of the holders of all Series
1994-10 Certificates evidencing specified Voting Interests in the Trust Estate,
the holders of the Class A Certificates will collectively be entitled to the
then applicable Class A Percentage of the aggregate Voting Interest represented
by all Series 1994-10 Certificates and the holders of the Class B Certificates
will collectively be entitled to the balance of the aggregate Voting Interest
represented by all Series 1994-10 Certificates. The aggregate Voting Interests
of the Class A Certificates other than the Class A-2 Certificates, on any date
will be 99% of the Class A Percentage on such date. The Voting Interest of the
Class A-2 Certificates on any date will be 1% of the Class A Percentage on such
date. The aggregate Voting Interests of each Subclass of Class A Certificates
other than the Class A-2 Certificates on any date will be equal to the product
of (a) 99% of the Class A Percentage on such date and (b) the fraction obtained
by dividing the Class A Subclass Principal Balance of such Subclass on such date
by the aggregate Class A Subclass Principal Balance of the Class A Certificates
other than the Class A-2 Certificates on such date. Each Certificateholder of a
Class or Subclass will have a Voting Interest equal to the product of the Voting
Interest to which such Class or Subclass is collectively entitled and the
Percentage Interest in such Class or Subclass represented by such holder's
Certificates. With respect to any provisions of the Pooling and Servicing
Agreement providing for action, consent or approval of each Class or Subclass of
Certificates or specified Classes or Subclasses of Certificates, each
Certificateholder of a Subclass will have a Voting Interest in such Subclass
equal to such holder's Percentage Interest in such Subclass. Unless Definitive
Certificates are issued as described above, Beneficial Owners of Book-Entry
Certificates may exercise their voting rights only through Participants.
TRUSTEE
The Trustee for the Series 1994-10 Certificates will be First Trust National
Association, a national banking association. The Corporate Trust Office of the
Trustee is located at 180 East Fifth Street, St. Paul, Minnesota 55101. See "The
Pooling and Servicing Agreement--The Trustee" in the Prospectus.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The servicing fee paid to the Servicer with respect to the servicing of each
Mortgage Loan included in the Trust Estate underlying the Series 1994-10
Certificates and administrative services provided by it will be 0.20% per annum
of the outstanding principal balance of each such Mortgage Loan (the "Servicing
Fee"). No Fixed Retained Yield (as defined in the Prospectus) will be retained
with respect to any of the Mortgage Loans. See "Servicing of the Mortgage
Loans--Fixed Retained Yield, Servicing Compensation and Payment of Expenses" in
the Prospectus for information regarding other possible compensation to the
Servicer. The Servicer will pay all routine expenses incurred in connection with
its responsibilities under the Pooling and Servicing Agreement, subject to
certain rights of reimbursement as described in the Prospectus. The servicing
fees and other expenses of the REMIC will be allocated to a holder of the Class
A-R Certificate who is an individual, estate, or trust (whether such Certificate
is held directly or through certain pass-through entities) as additional gross
income without a corresponding distribution of cash, and any such investor (or
its owners, in the case of a pass-through entity) may be limited in its ability
to deduct such expenses for regular tax purposes and may not be able to deduct
such expenses to any extent for alternative minimum tax purposes. See "Certain
Federal Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Limitations on Deduction of Certain Expenses" in the Prospectus.
OPTIONAL TERMINATION
At its option, the Servicer may purchase from the Trust Estate all remaining
Mortgage Loans, and thereby effect early retirement of the Series 1994-10
Certificates, on any Distribution Date when the Pool Scheduled Principal Balance
is less than 10% of the Cut-Off Date Aggregate Principal Balance. Any such
purchase will be made only in connection with a "qualified liquidation" of the
REMIC within the meaning of Section 860F(a)(4)(A) of the Code. The purchase
price will, generally, be equal to the greater of (i) the unpaid principal
balance of each Mortgage Loan plus
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the fair market value of other property in the Trust Estate and (ii) the fair
market value of the Trust Estate's assets plus, in each case, accrued interest.
See "The Pooling and Servicing Agreement--Termination; Purchase of Mortgage
Loans" in the Prospectus.
FEDERAL INCOME TAX CONSIDERATIONS
An election will be made to treat the Trust Estate, and the Trust Estate
will qualify, as a REMIC for federal income tax purposes. The Class A-1
Certificates (the "Regular Certificates"), together with the Class A-2 and Class
B Certificates, will be designated as the regular interests in the REMIC, and
the Class A-R Certificate will be designated as the residual interest in the
REMIC. The Class A-R Certificate is a "Residual Certificate" for purposes of the
Prospectus.
The Offered Certificates will be treated as "qualifying real property loans"
for mutual savings banks and domestic building and loan associations, "regular
or residual interests in a REMIC" for domestic building and loan associations,
and "real estate assets" for real estate investment trusts, to the extent
described in the Prospectus.
REGULAR CERTIFICATES
The Regular Certificates generally will be treated as newly originated debt
instruments for federal income tax purposes. Beneficial Owners of the Regular
Certificates will be required to report income on such Certificates in
accordance with the accrual method of accounting.
It is anticipated that the Class A-1 Certificates will be issued at a
premium for federal income tax purposes. The Class A-2 Certificates, which are
not offered hereby, will be treated as issued with original issue discount for
federal income tax purposes.
The Prepayment Assumption (as defined in the Prospectus) that is to be used
in determining the rate of accrual of original issue discount and whether the
original issue discount is considered DE MINIMIS, and that may be used to
amortize premium, will be calculated using 450% SPA. No representation is made
as to the actual rate at which the Mortgage Loans will prepay.
RESIDUAL CERTIFICATE
The holder of the Class A-R Certificate must include the taxable income or
loss of the REMIC in determining its federal taxable income. The Class A-R
Certificate will remain outstanding for federal income tax purposes until there
are no Certificates of any other Class outstanding. PROSPECTIVE INVESTORS ARE
CAUTIONED THAT THE CLASS A-R CERTIFICATEHOLDER'S REMIC TAXABLE INCOME AND THE
TAX LIABILITY THEREON WILL EXCEED, AND MAY SIGNIFICANTLY EXCEED, CASH
DISTRIBUTIONS TO SUCH HOLDER DURING CERTAIN PERIODS, IN WHICH EVENT SUCH HOLDER
MUST HAVE SUFFICIENT ALTERNATIVE SOURCES OF FUNDS TO PAY SUCH TAX LIABILITY.
Furthermore, it is anticipated that all or a substantial portion of the taxable
income of the REMIC includible by the holder of the Class A-R Certificate will
be treated as "excess inclusion" income, resulting in (i) the inability of such
holder to use net operating losses to offset such income from the REMIC, (ii)
the treatment of such income as "unrelated business taxable income" to certain
holders who are otherwise tax-exempt, and (iii) the treatment of such income as
subject to 30% withholding tax to certain non-U.S. investors, with no exemption
or treaty reduction.
Under the REMIC Regulations, because the fair market value of the Class A-R
Certificate will not exceed 2% of the fair market value of the REMIC, the Class
A-R Certificate will not have "significant value," and thrift institutions will
not be permitted to offset their net operating losses against such excess
inclusion income. In addition, under the REMIC Regulations, the Class A-R
Certificate will be considered a "noneconomic residual interest," with the
result that transfers thereof would be disregarded for federal income tax
purposes if any significant purpose of the transferor was to impede the
assessment or collection of tax. Accordingly, the transferee affidavit used for
transfers of the Class A-R Certificate will require the transferee to affirm
that it (i) historically has paid its debts as they have come due and intends to
do so in the future, (ii) understands that it may incur tax liabilities with
respect to the Class A-R Certificate in excess of cash flows generated thereby,
(iii) intends to pay taxes associated with holding the Class A-R Certificate as
such taxes become due and (iv) will not transfer the Class A-R Certificate to
any person or entity that does not provide a similar affidavit. The transferor
must certify in writing to the Trustee that, as of the date of the transfer, it
had no knowledge or reason to know that the affirmations made by the transferee
pursuant to the preceding sentence were false. Finally, the Class A-R
Certificate generally may not be transferred to a person who is
S-44
<PAGE>
not a U.S. Person (as defined herein). See "Description of the
Certificates--Restrictions on Transfer of the Class A-R and Class M
Certificates" herein and "Certain Federal Income Tax Consequences--Federal
Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Limitations on Offset or Exemption of REMIC Income" and
"--Tax-Related Restrictions on Transfer of Residual Certificates--Noneconomic
Residual Interests" in the Prospectus.
An individual, trust or estate that holds the Class A-R Certificate (whether
such Certificate is held directly or indirectly through certain pass-through
entities) also may have additional gross income with respect to, but may be
subject to limitations on the deductibility of, Servicing Fees on the Mortgage
Loans and other administrative expenses properly allocable to the REMIC in
computing such holder's regular tax liability, and may not be able to deduct
such fees or expenses to any extent in computing such holder's alternative
minimum tax liability. In addition, some portion of a purchaser's basis, if any,
in the Class A-R Certificate may not be recovered until termination of the
REMIC. Furthermore, the federal income tax consequences of any consideration
paid to a transferee on a transfer of a Class A-R Certificate are unclear. The
preamble to the REMIC Regulations indicates that the Internal Revenue Service
anticipates providing guidance with respect to the federal tax treatment of such
consideration. Any transferee receiving consideration with respect to the Class
A-R Certificate should consult its tax advisors.
DUE TO THE SPECIAL TAX TREATMENT OF RESIDUAL INTERESTS, THE EFFECTIVE
AFTER-TAX RETURN OF THE CLASS A-R CERTIFICATE MAY BE SIGNIFICANTLY LOWER THAN
WOULD BE THE CASE IF THE CLASS A-R CERTIFICATE WERE TAXED AS A DEBT INSTRUMENT.
ERISA CONSIDERATIONS
The Class A-R Certificate may not be purchased by or transferred to any
person that is an employee benefit plan within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
that is subject to the fiduciary responsibility rules of Sections 401-414 of
ERISA or Code Section 4975 (an "ERISA Plan") or that is a governmental plan, as
defined in Section 3(32) of ERISA, subject to any federal, state or local law
("Similar Law") that is, to a material extent, similar to the foregoing
provisions of ERISA or the Code (collectively with an ERISA Plan, a "Plan"), or
any person utilizing the assets of such Plan.
As described in the Prospectus under "ERISA Considerations," ERISA and the
Code impose certain duties and restrictions on ERISA Plans and certain persons
who perform services for ERISA Plans. Comparable duties and restrictions may
exist under Similar Law on governmental plans and certain persons who perform
services for governmental plans. For example, unless exempted, investment by a
Plan in the Class A-1 Certificates may constitute or give rise to a prohibited
transaction under ERISA, the Code or Similar Law. There are certain exemptions
issued by the United States Department of Labor (the "DOL") that may be
applicable to an investment by an ERISA Plan in the Offered Certificates,
including the individual administrative exemption described below and Prohibited
Transaction Class Exemption 83-1 ("PTE 83-1"). For a further discussion of PTE
83-1 and other important factors to be considered by an ERISA Plan contemplating
investing in the Class A-1 Certificates, see "ERISA Considerations" in the
Prospectus.
On May 24, 1990, the DOL issued to the Underwriter an individual
administrative exemption, Prohibited Transaction Exemption 90-28, 55 Fed. Reg.
21456 (the "Exemption"), from certain of the prohibited transaction rules of
ERISA with respect to the initial purchase, the holding, and the subsequent
resale by an ERISA Plan of certificates in pass-through trusts that meet the
conditions and requirements of the Exemption. The Exemption might apply to the
acquisition, holding and resale of the Class A-1 Certificates by an ERISA Plan,
provided that specified conditions are met.
Among the conditions which would have to be satisfied for the Exemption to
apply to the acquisition by an ERISA Plan of the Class A-1 Certificates is the
condition that the ERISA Plan investing in the Class A-1 Certificates 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 1993, as amended
(the "Securities Act").
Before purchasing a Class A-1 Certificate, a fiduciary of an ERISA 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
such exemption will be applicable to the
S-45
<PAGE>
Class A-1 Certificates and a fiduciary of a governmental plan should make its
own determination as to the need for and availability of any exemptive relief
under Similar Law. Any fiduciary of a Plan considering whether to purchase a
Class A-1 Certificate should also carefully review with its own legal advisors
the applicability of the fiduciary duty and prohibited transaction provisions of
ERISA, the Code and Similar Law to such investment. See "ERISA Considerations"
in the Prospectus.
LEGAL INVESTMENT
The Offered Certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 (the
"Enhancement Act") so long as they are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization. As such, the Offered Certificates are legal investments for
certain entities to the extent provided in the Enhancement Act. However,
institutions subject to the jurisdiction of the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Office of Thrift Supervision, the National
Credit Union Administration or state banking or insurance authorities should
review applicable rules, supervisory policies and guidelines of these agencies
before purchasing any of the Offered Certificates, as certain Subclasses of the
Class A Certificates may be deemed to be unsuitable investments under one or
more of these rules, policies and guidelines and whether certain restrictions
may apply to investments in other Subclasses of the Class A Certificates. It
should also be noted that certain states recently have enacted, or have proposed
enacting, legislation limiting to varying extents the ability of certain
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 such investors. See "Legal Investment" in the Prospectus.
SECONDARY MARKET
There will not be any market for the Offered Certificates prior to the
issuance thereof. The Underwriter intends to act as a market maker in the
Offered Certificates, subject to applicable provisions of federal and state
securities laws and other regulatory requirements, but is under no obligation to
do so. There can be no assurance that a secondary market in the Offered
Certificates will develop or, if such a market does develop, that it will
provide holders of Offered Certificates with liquidity of investment at any
particular time or for the life of the Offered Certificates.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated as
of January 27, 1994 (the "Underwriting Agreement") among the Seller, PHMC and
Kidder, Peabody & Co. Incorporated, as underwriter (the "Underwriter"), the
Offered Certificates offered hereby are being purchased from the Seller by the
Underwriter upon issuance. The Underwriter is committed to purchase all of the
Offered Certificates if any Offered Certificates are purchased. The Underwriter
has advised the Seller that it proposes to offer the Offered Certificates, from
time to time, for sale in negotiated transactions or otherwise at prices
determined at the time of sale. Proceeds to the Seller from the sale of the
Offered Certificates will be approximately 102.640625% of the aggregate initial
principal balance of the Class A Certificates, plus accrued interest thereon at
the rate of 7.55% per annum from February 1, 1994 to (but not including)
February 25, 1994, before deducting expenses payable by the Seller. The
Underwriter has advised the Seller that the Underwriter has not allocated the
purchase price paid to the Seller for the Offered Certificates between the
Subclasses of Offered Certificates. The Underwriter and any dealers that
participate with the Underwriter in the distribution of the Offered Certificates
may be deemed to be underwriters, and any discounts or commissions received by
them and any profit on the resale of Offered Certificates by them may be deemed
to be underwriting discounts or commissions, under the Securities Act.
The Underwriting Agreement provides that the Seller and PHMC will indemnify
the Underwriter against certain civil liabilities under the Securities Act or
contribute to payments which the Underwriter may be required to make in respect
thereof.
S-46
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the Offered Certificates offered
hereby will be passed upon for the Seller by Cadwalader, Wickersham & Taft, New
York, New York, and for the Underwriter by Brown & Wood, New York, New York.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Offered Certificates
will be applied by the Seller to the purchase from PHMC of the Mortgage Loans
represented by the Series 1994-10 Certificates. It is expected that PHMC will
use the proceeds from the sale of the Mortgage Loans to the Seller for its
general business purposes, including, without limitation, the origination or
acquisition of new mortgage loans and the repayment of borrowings incurred to
finance the origination or acquisition of the Mortgage Loans underlying the
Series 1994-10 Certificates.
RATINGS
It is a condition to the issuance of the Class A Certificates that each
Subclass will have been rated at least "Aa2" by Moody's and at least "AA" by
Fitch. A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
agency. Each security rating should be evaluated independently of any other
security rating.
The ratings of Moody's on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions to which
such certificateholders are entitled. Moody's rating opinions address the
structural, legal and issuer aspects associated with the certificates, including
the nature of the underlying mortgage loans and the credit quality of the credit
support provider, if any. Moody's ratings on pass-through certificates do not
represent any assessment of the likelihood that principal prepayments may differ
from those originally anticipated.
The ratings of Fitch on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions to which
such certificateholders are entitled. Fitch's rating opinions address the
structural and legal aspects associated with the certificates, including the
nature of the underlying mortgage loans. Fitch's ratings on pass-through
certificates do not represent any assessment of the likelihood or rate of
principal prepayments.
The ratings of Moody's and Fitch do not address the possibility that, as a
result of principal prepayments, Certificateholders may receive a lower than
anticipated yield.
The Seller has not requested a rating on the Offered Certificates of any
Subclass by any rating agency other than Moody's and Fitch, although data with
respect to the Mortgage Loans may have been provided to other agencies solely
for their informational purposes. There can be no assurance that if a rating is
assigned to any Subclass of Offered Certificates by any other rating agency such
rating will be as high as those assigned by Moody's and Fitch.
S-47
<PAGE>
INDEX OF SIGNIFICANT
PROSPECTUS SUPPLEMENT DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Adjusted Pool Amount................................................................................................. S-18
Adjustment Amount.................................................................................................... S-25
Bankruptcy Loss...................................................................................................... S-21
Bankruptcy Loss Amount............................................................................................... S-26
Beneficial Owner..................................................................................................... S-15
Book-Entry Certificates.............................................................................................. S-5
Cede................................................................................................................. S-15
Certificates......................................................................................................... S-4
Class A Certificates................................................................................................. Cover
Class A Distribution Amount.......................................................................................... S-17
Class A Optimal Amount............................................................................................... S-19
Class A Optimal Principal Amount..................................................................................... S-19
Class A Percentage................................................................................................... S-21
Class A Prepayment Percentage........................................................................................ S-21
Class A Principal Balance............................................................................................ S-18
Class A Principal Distribution Amount................................................................................ S-19
Class A Subclass Interest Accrual Amount............................................................................. S-17
Class A Subclass Interest Shortfall Amount........................................................................... S-19
Class A Subclass Principal Balance................................................................................... S-17
Class A-2 Notional Amount............................................................................................ S-18
Class B Certificates................................................................................................. Cover
Class B Interest Accrual Amount...................................................................................... S-17
Class B Percentage................................................................................................... S-22
Class B Prepayment Percentage........................................................................................ S-22
Class B Principal Balance............................................................................................ S-18
Code................................................................................................................. S-12
Cooperatives......................................................................................................... S-27
Co-op Shares......................................................................................................... S-27
Covered Mortgage Property............................................................................................ S-42
Cross-Over Date...................................................................................................... S-24
Cut-Off Date Aggregate Principal Balance............................................................................. S-27
Debt Service Reduction............................................................................................... S-21
Definitive Certificates.............................................................................................. S-15
Deficient Valuation.................................................................................................. S-21
Determination Date................................................................................................... S-15
Distribution Date.................................................................................................... S-7
DTC.................................................................................................................. S-5
Earthquake........................................................................................................... S-27
Enhancement Act...................................................................................................... S-46
ERISA................................................................................................................ S-12
Excess Bankruptcy Losses............................................................................................. S-26
Excess Fraud Losses.................................................................................................. S-25
Excess Special Hazard Losses......................................................................................... S-25
Fitch................................................................................................................ S-4
Fixed Non-Relocation Program Loans................................................................................... S-34
Fixed Program Loans.................................................................................................. S-34
Fraud Loss........................................................................................................... S-21
Fraud Loss Amount.................................................................................................... S-25
Indirect Participants................................................................................................ S-15
</TABLE>
S-48
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------------------------------------------------------------------------------------- ---------
Liquidated Loan...................................................................................................... S-20
<S> <C>
Liquidated Loan Loss................................................................................................. S-20
Moody's.............................................................................................................. S-4
Mortgage Loans....................................................................................................... Cover
Mortgaged Properties................................................................................................. S-27
Mortgages............................................................................................................ S-27
Net Foreclosure Profits.............................................................................................. S-22
Net Mortgage Interest Rate........................................................................................... S-18
Non-Supported Interest Shortfall..................................................................................... S-18
Original Class B Principal Balance................................................................................... S-21
Partial Liquidation Proceeds......................................................................................... S-20
Participants......................................................................................................... S-15
Percentage Interest.................................................................................................. S-17
Periodic Advance..................................................................................................... S-22
PHMC................................................................................................................. Cover
Plan................................................................................................................. S-12
Pool Distribution Amount............................................................................................. S-16
Pool Distribution Amount Allocation.................................................................................. S-16
Pool Scheduled Principal Balance..................................................................................... S-21
Pooling and Servicing Agreement...................................................................................... S-42
Prepayment Interest Shortfall........................................................................................ S-18
Program Loans........................................................................................................ S-34
Realized Losses...................................................................................................... S-21
Record Date.......................................................................................................... S-16
Regular Certificates................................................................................................. S-44
Relocation Mortgage Loans............................................................................................ S-34
REMIC................................................................................................................ S-2
Rules................................................................................................................ S-15
Scheduled Principal Balance.......................................................................................... S-20
Securities Act....................................................................................................... S-45
Seller............................................................................................................... Cover
Senior Certificates.................................................................................................. S-4
Series 1994-10 Certificates.......................................................................................... Cover
Servicer............................................................................................................. Cover
Servicing Fee........................................................................................................ S-43
Similar Law.......................................................................................................... S-12
SPA.................................................................................................................. S-40
Special Hazard Loss.................................................................................................. S-20
Special Hazard Loss Amount........................................................................................... S-25
Subclass............................................................................................................. Cover
Trust Estate......................................................................................................... Cover
Trustee.............................................................................................................. S-4
Underwriter.......................................................................................................... Cover
Underwriting Agreement............................................................................................... S-46
</TABLE>
S-49
<PAGE>
[LOGO]
THE PRUDENTIAL HOME MORTGAGE SECURITIES COMPANY, INC.
SELLER
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
---------------------
The Prudential Home Mortgage Securities Company, Inc. (the "Seller" or
"PHMSC") may sell from time to time under this Prospectus and related Prospectus
Supplements Mortgage Pass-Through Certificates (the "Certificates"), issuable in
series (each, a "Series") consisting of one or more classes (each, a "Class") of
Certificates.
The Certificates of a Series will represent beneficial ownership interests
in a separate trust formed by the Seller. Unless otherwise specified in the
applicable Prospectus Supplement, the property of each such trust (for each
Series, the "Trust Estate") will be comprised primarily of fixed or adjustable
interest rate, conventional, monthly pay, fully-amortizing first mortgage loans
(the "Mortgage Loans"), secured by one- to four-family residential properties.
Unless otherwise specified in the applicable prospectus supplement, the Mortgage
Loans will have been acquired by the Seller from its affiliate, The Prudential
Home Mortgage Company, Inc. ("PHMC"), and will have been underwritten to PHMC's
underwriting standards. Unless otherwise specified in the applicable prospectus
supplement, all of the Mortgage Loans will be serviced by PHMC (PHMC in its
capacity as servicer being referred to hereafter as the "Servicer").
The Certificates of a Series will consist of (i) one or more Classes of
Certificates representing fractional undivided interests in all the principal
payments and the interest payments, to the extent of the related Net Mortgage
Interest Rate (as defined herein), on the related Mortgage Loans ("Standard
Certificates"), (ii) one or more Classes of Certificates representing fractional
undivided interests in all or specified portions of the principal payments
and/or interest payments, to the extent of the related Net Mortgage Interest
Rate, on the related Mortgage Loans ("Stripped Certificates"), or (iii) two or
more Classes of Certificates ("Multi-Class Certificates"), each of which will be
assigned a principal balance (a "Stated Amount"), and each of which may bear
interest on the Stated Amount at a fixed rate (which may be zero) specified in,
or a variable rate determined as specified in, the applicable Prospectus
Supplement (the "Interest Rate"). Any Class of Certificates may be divided into
two or more subclasses (each, a "Subclass").
Each Series of Certificates may include one or more Classes of Certificates
(the "Subordinated Certificates") that are subordinate in right of distributions
to such rights of one or more of the other Classes of such Series (the "Senior
Certificates"). If specified in the applicable Prospectus Supplement, the
relative interests of the Senior Certificates and the Subordinated Certificates
of a Series in the Trust Estate may be subject to adjustment from time to time
on the basis of distributions received in respect thereof. Any Class of Senior
Certificates or Subordinated Certificates may, as described above, be divided
into two or more Subclasses. If specified in the Prospectus Supplement, credit
support may also be provided for any Series of Certificates in the form of a
guarantee, letter of credit, mortgage pool insurance policy or other form of
credit enhancement as described herein or therein.
Except for the Seller's limited obligation in connection with certain
breaches of its representations and warranties and certain other undertakings
and PHMC's obligations as Servicer, neither the Seller, the Servicer, nor any
affiliate of the Seller or the Servicer, will have any obligations with respect
to the Certificates. In the event of delinquencies in payments on the Mortgage
Loans, the Servicer will be obligated to make advances which it determines will
be recoverable from future payments and collections on the Mortgage Loans.
An election will be made to treat each Trust Estate (or a segregated pool of
assets therein) underlying a Series of Multi-Class Certificates or a Series of
Certificates in which the relative interests in the Trust Estate of the Classes
of Senior Certificates and Subordinated Certificates are subject to adjustment
as a "real estate mortgage investment conduit" (a "REMIC") for federal income
tax purposes. Such an election may also be made with respect to any other Trust
Estate. See "Certain Federal Income Tax Consequences."
There will have been no public market for the Certificates of any Series
prior to the offering thereof. No assurance can be given that such a market will
develop, or that if such a market does develop, it will provide
Certificateholders with liquidity of investment or will continue for the life of
the Certificates.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Certificates may be sold from time to time by the Seller through dealers
or agents, through underwriting syndicates led by one or more managing
underwriters or through one or more underwriters acting alone. See "Plan of
Distribution." Affiliates of the Seller may from time to time act as agents or
underwriters in connection with the sale of the Certificates. The terms of a
particular offering will be set forth in the Prospectus Supplement relating to
such offering.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF CERTIFICATES UNLESS
ACCOMPANIED BY THE PROSPECTUS SUPPLEMENT RELATING TO THE OFFERING OF SUCH
CERTIFICATES.
--------------------------
The date of this Prospectus is February 9, 1994
<PAGE>
REPORTS
The Servicer, or the Paying Agent appointed by the Servicer, will furnish
the Certificateholders of each Series, in connection with each distribution and
annually, statements containing information with respect to principal and
interest payments and the related Trust Estate, as described herein and in the
applicable Prospectus Supplement for such Series. No information contained in
such reports will have been examined or reported upon by an independent public
accountant. See "Servicing of the Mortgage Loans--Reports to
Certificateholders." The Servicer will also furnish periodic statements setting
forth certain specified information to the Trustee identified in the Prospectus
Supplement. See "Servicing of the Mortgage Loans--Reports to the Trustee." In
addition, annually the Servicer will furnish the Trustee for each Series a
statement from a firm of independent public accountants with respect to the
examination of certain documents and records relating to the mortgage loans
serviced by the Servicer under the related Pooling and Servicing Agreement and
other similar servicing agreements. See "Servicing of the Mortgage
Loans--Evidence as to Compliance." Copies of the monthly and annual statements
provided by the Servicer to the Trustee will be furnished to Certificateholders
of each Series upon request addressed to the Servicer c/o The Prudential Home
Mortgage Company, Inc., 7470 New Technology Way, Frederick, Maryland 21701,
Attention: Legal Department.
ADDITIONAL INFORMATION
This Prospectus contains, and the Prospectus Supplement for each Series of
Certificates will contain, a summary of the material terms of the documents
referred to herein and therein, but neither contains nor will contain all of the
information set forth in the Registration Statement of which this Prospectus is
a part. For further information, reference is made to such Registration
Statement and the exhibits thereto which the Seller has filed with the
Securities and Exchange Commission (the "Commission"), Washington, D.C., under
the Securities Act of 1933, as amended (the "Securities Act"). Statements
contained in this Prospectus and any Prospectus Supplement as to the contents of
any contract or other document referred to are summaries and, in each instance,
reference is made to the copy of the contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. Copies of the Registration Statement may be
obtained from the Public Reference Section of the Commission, Washington, D.C.
20549 upon payment of the prescribed charges, or may be examined free of charge
at the Commission's offices, 450 Fifth Street N.W., Washington, D.C. 20549 or at
the regional offices of the Commission located at Room 1400, 75 Park Place, New
York, New York 10007 and 14th Floor, 500 West Madison Street, Chicago, Illinois
60661. Copies of any documents incorporated herein by reference will be provided
to each person to whom a Prospectus is delivered upon written or oral request
directed to The Prudential Home Mortgage Securities Company, Inc., 7470 New
Technology Way, Frederick, Maryland 21701, telephone number 301-846-8199.
ADDITIONAL DETAILED INFORMATION
The Seller intends to offer by subscription detailed mortgage loan
information in machine readable format updated on a monthly basis (the "Detailed
Information") with respect to each outstanding Series of Certificates. The
Detailed Information will reflect payments made on the individual mortgage
loans, including prepayments in full and in part made on such mortgage loans, as
well as the liquidation of any such mortgage loans, and will identify various
characteristics of the mortgage loans. Among the initial subscribers of the
Detailed Information will be a number of major investment brokerage firms as
well as financial information service firms. Some of such firms, including
certain investment brokerage firms as well as Bloomberg L.P. through the "The
Bloomberg (R)" service and Merrill Lynch Mortgage Capital Inc. through the "CMO
Passport-Registered Trademark-" service, may, in accordance with their
individual business practices and fee schedules, if any, make portions of, or
summaries of portions of, the Detailed Information available to their customers
and subscribers. The Seller, the Servicer and any affiliates thereof take no
responsibility for the actions of such firms in processing, analyzing or
disseminating such information. For further information regarding the Detailed
Information and subscriptions thereto, please contact The Prudential Home
Mortgage Securities Company, Inc., 7470 New Technology Way, Frederick, Maryland
21701, telephone number (301) 846-8199.
2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports............................................................... 2
Additional Information................................................ 2
Additional Detailed Information....................................... 2
Summary of Prospectus................................................. 7
Title of Securities................................................... 7
Seller................................................................ 7
Servicer.............................................................. 7
The Trust Estates..................................................... 7
Description of the Certificates....................................... 7
A. Standard Certificates.......................................... 7
B. Stripped Certificates.......................................... 7
C. Shifting Interest Certificates................................. 8
D. Multi-Class Certificates....................................... 8
Cut-Off Date.......................................................... 8
Distribution Dates.................................................... 8
Record Dates.......................................................... 8
Interest.............................................................. 8
Principal (Including Prepayments)..................................... 8
Distributions in Reduction of Stated Amount........................... 9
Credit Enhancement.................................................... 9
Periodic Advances..................................................... 10
Optional Purchase of Mortgage Loans................................... 10
ERISA Limitations..................................................... 10
Tax Status............................................................ 10
Rating................................................................ 10
The Trust Estates..................................................... 11
General............................................................... 11
Mortgage Loans........................................................ 11
INSURANCE POLICIES................................................ 14
ACQUISITION OF THE MORTGAGE
LOANS FROM PHMC................................................. 15
ASSIGNMENT OF MORTGAGE LOANS
TO THE TRUSTEE.................................................. 15
REPRESENTATIONS AND WARRANTIES.................................... 16
OPTIONAL REPURCHASES.............................................. 19
Description of The Certificates....................................... 19
General............................................................... 19
Percentage Certificates............................................... 20
Multi-Class Certificates.............................................. 21
Distributions to Percentage
Certificateholders................................................... 21
CERTIFICATES OTHER THAN SHIFTING
INTEREST CERTIFICATES........................................... 21
CALCULATION OF DISTRIBUTABLE AMOUNTS.............................. 22
DETERMINATION OF AMOUNTS TO
BE DISTRIBUTED.................................................. 23
SHIFTING INTEREST CERTIFICATES.................................... 25
Example of Distribution to
Percentage Certificateholders........................................ 27
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Distributions to Multi-Class Certificateholders....................... 28
VALUATION OF MORTGAGE LOANS....................................... 29
SPECIAL DISTRIBUTIONS............................................. 30
LAST SCHEDULED DISTRIBUTION DATE.................................. 30
Credit Support........................................................ 30
Subordination......................................................... 30
CERTIFICATES OTHER THAN SHIFTING INTEREST CERTIFICATES............ 30
SHIFTING INTEREST CERTIFICATES.................................... 32
Other Credit Enhancement.............................................. 34
LIMITED GUARANTEE................................................. 34
LETTER OF CREDIT.................................................. 34
POOL INSURANCE POLICIES........................................... 34
SPECIAL HAZARD INSURANCE POLICIES................................. 34
MORTGAGOR BANKRUPTCY BOND......................................... 34
Prepayment and Yield Considerations................................... 35
Pass-Through Rates and Interest Rates................................. 35
Scheduled Delays in Distributions..................................... 35
Effect of Principal Prepayments....................................... 35
Weighted Average Life of Certificates................................. 36
The Seller............................................................ 37
PHMC.................................................................. 37
General............................................................... 37
Mortgage Loan Production Sources...................................... 39
Mortgage Loan Underwriting............................................ 40
Mortgage Origination Processing....................................... 42
Servicing............................................................. 43
Use of Proceeds....................................................... 43
Servicing of the Mortgage Loans....................................... 43
The Servicer.......................................................... 43
Payments on Mortgage Loans............................................ 43
Periodic Advances and Limitations Thereon............................. 45
Adjustment to Servicing Fee in Connection with Prepaid Mortgage
Loans................................................................ 46
Reports to Certificateholders......................................... 46
Reports to the Trustee................................................ 47
Collection and Other Servicing Procedures............................. 48
Enforcement of Due-on-Sale Clauses;
Realization Upon Defaulted Mortgage Loans............................ 48
Fixed Retained Yield, Servicing Compensation and Payment of
Expenses............................................................. 49
Evidence as to Compliance............................................. 50
Certain Matters Regarding the Servicer................................ 50
The Pooling and Servicing Agreement................................... 52
Events of Default..................................................... 52
Rights Upon Event of Default.......................................... 52
Amendment............................................................. 53
Termination; Purchase of Mortgage Loans............................... 53
The Trustee........................................................... 54
Certain Legal Aspects of the Mortgage Loans........................... 54
General............................................................... 54
Foreclosure........................................................... 54
Foreclosure on Shares of Cooperatives................................. 55
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Rights of Redemption.................................................. 56
Anti-Deficiency Legislation and Other Limitations on Lenders.......... 56
Soldiers' and Sailors' Civil Relief Act and Similar Laws.............. 57
Environmental Considerations.......................................... 57
"Due-on-Sale" Clauses................................................. 58
Applicability of Usury Laws........................................... 59
Enforceability of Certain Provisions.................................. 59
Certain Federal Income Tax Consequences............................... 60
Federal Income Tax Consequences for REMIC Certificates................ 60
General............................................................. 60
Status of REMIC Certificates........................................ 60
Qualification as a REMIC............................................ 61
Taxation of Regular Certificates.................................... 62
GENERAL........................................................... 62
ORIGINAL ISSUE DISCOUNT........................................... 62
ACQUISITION PREMIUM............................................... 64
VARIABLE RATE REGULAR CERTIFICATES................................ 64
MARKET DISCOUNT................................................... 65
PREMIUM........................................................... 66
TREATMENT OF LOSSES............................................... 66
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD METHOD.... 67
SALE OR EXCHANGE OF REGULAR CERTIFICATES.......................... 67
Taxation of Residual Certificates..................................... 68
TAXATION OF REMIC INCOME.......................................... 68
BASIS AND LOSSES.................................................. 69
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE............ 69
ORIGINAL ISSUE DISCOUNT......................................... 69
MARKET DISCOUNT................................................. 69
PREMIUM......................................................... 70
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME................ 70
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL CERTIFICATES..... 71
DISQUALIFIED ORGANIZATIONS...................................... 71
NONECONOMIC RESIDUAL INTERESTS.................................. 72
FOREIGN INVESTORS............................................... 72
SALE OR EXCHANGE OF A RESIDUAL CERTIFICATE........................ 73
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL....................... 73
PROHIBITED TRANSACTIONS......................................... 73
CONTRIBUTIONS TO THE REMIC POOL AFTER THE STARTUP DAY........... 73
NET INCOME FROM FORECLOSURE PROPERTY............................ 74
LIQUIDATION OF THE REMIC POOL..................................... 74
ADMINISTRATIVE MATTERS............................................ 74
Limitations on Deduction of Certain Expenses.......................... 74
Taxation of Certain Foreign Investors................................. 75
REGULAR CERTIFICATES.............................................. 75
RESIDUAL CERTIFICATES............................................. 75
Backup Withholding.................................................... 75
Reporting Requirements................................................ 76
Federal Income Tax Consequences for Certificates as to Which No REMIC
Election Is Made..................................................... 76
Standard Certificates................................................. 76
GENERAL........................................................... 76
TAX STATUS........................................................ 77
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PREMIUM AND DISCOUNT.............................................. 77
PREMIUM......................................................... 77
ORIGINAL ISSUE DISCOUNT......................................... 77
MARKET DISCOUNT................................................. 78
RECHARACTERIZATION OF SERVICING FEES.............................. 78
SALE OR EXCHANGE OF STANDARD CERTIFICATES......................... 79
Stripped Certificates................................................. 79
GENERAL........................................................... 79
STATUS OF STRIPPED CERTIFICATES................................... 80
TAXATION OF STRIPPED CERTIFICATES................................. 80
ORIGINAL ISSUE DISCOUNT........................................... 80
SALE OR EXCHANGE OF STRIPPED CERTIFICATES....................... 81
PURCHASE OF MORE THAN ONE CLASS OF STRIPPED CERTIFICATES........ 81
POSSIBLE ALTERNATIVE CHARACTERIZATIONS.......................... 81
Reporting Requirements and Backup Withholding......................... 82
Taxation of Certain Foreign Investors................................. 82
ERISA Considerations.................................................. 82
General............................................................... 82
Certain Requirements Under ERISA...................................... 82
GENERAL........................................................... 82
PARTIES IN INTEREST/DISQUALIFIED PERSONS.......................... 83
DELEGATION OF FIDUCIARY DUTY...................................... 83
Administrative Exemptions............................................. 83
INDIVIDUAL ADMINISTRATIVE EXEMPTIONS.............................. 83
PTE 83-1.......................................................... 84
Exempt Plans.......................................................... 85
Unrelated Business Taxable Income--Residual Certificates.............. 85
Legal Investment...................................................... 86
Plan of Distribution.................................................. 87
Legal Matters......................................................... 88
Rating................................................................ 88
Index of Significant Definitions...................................... 89
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SUMMARY OF PROSPECTUS
THE FOLLOWING IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS, AND BY REFERENCE TO THE
INFORMATION WITH RESPECT TO EACH SERIES OF CERTIFICATES CONTAINED IN THE
APPLICABLE PROSPECTUS SUPPLEMENT. CERTAIN CAPITALIZED TERMS USED AND NOT
OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS GIVEN ELSEWHERE IN THIS
PROSPECTUS.
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Title of Securities............... Mortgage Pass-Through Certificates (Issuable in Series).
Seller............................ The Prudential Home Mortgage Securities Company, Inc. (the
"Seller"), a direct, wholly-owned subsidiary of The Prudential
Home Mortgage Company, Inc. ("PHMC"), which is a direct,
wholly-owned subsidiary of Residential Services Corporation of
America. See "The Seller." The Seller and PHMC are each indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of
America ("Prudential Insurance").
Servicer.......................... PHMC (in such capacity, the "Servicer"). The Servicer will
service the Mortgage Loans comprising each Trust Estate and
administer each Trust Estate pursuant to a Pooling and Servicing
Agreement (each, a "Pooling and Servicing Agreement"). See
"Servicing of the Mortgage Loans."
The Trust Estates................. Each Trust Estate will consist of the related Mortgage Loans
(other than the Fixed Retained Yield (as defined herein), if any)
and certain other related property, as specified in the
applicable Prospectus Supplement. Unless otherwise specified in
the applicable Prospectus Supplement, the Mortgage Loans will be
conventional, fixed interest rate, monthly pay, fully-amortizing,
level payment, one- to four-family residential first mortgage
loans. If so specified in the applicable Prospectus Supplement, a
Trust Estate may include fully amortizing, adjustable rate
Mortgage Loans, Mortgage Loans secured by condominium units,
townhouses, units located within planned unit developments,
long-term leases with respect to any of the foregoing, shares
issued by cooperative housing corporations, and/or Mortgage Loans
which are subject to interest differential subsidy agreements or
buydown schedules or which provide for balloon payments of
principal.
The Mortgage Loans will have been acquired by the Seller from its
affiliate PHMC or another affiliate. The Mortgage Loans will have
been originated by PHMC or will have been acquired by PHMC from
other mortgage loan originators, in each case for its own account
or for the account of an affiliate. All of the Mortgage Loans
will have been underwritten to PHMC's standards. See "The Trust
Estates."
The particular characteristics or expected characteristics of
each Trust Estate will be set forth in the applicable Prospectus
Supplement.
Description of the Certificates... Each Series will consist of one or more Classes of Certificates
which may be (i) Standard Certificates, (ii) Stripped
Certificates, or (iii) Multi-Class Certificates. Unless otherwise
specified in the applicable Prospectus Supplement, the
Certificates will be offered only in fully-registered form.
A. Standard Certificates....... Standard Certificates of a Series will each evidence a fractional
undivided beneficial interest in the related Trust Estate and
will entitle the holder thereof to its proportionate share of a
percentage of the principal and interest payments (to the extent
of the applicable Net Mortgage Interest Rate) on the related
Mortgage Loans.
B. Stripped Certificates....... Stripped Certificates will each evidence a fractional undivided
beneficial interest in the related Trust Estate and will entitle
the holder thereof to its proportionate share of a specified
portion (which may be zero) of principal
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payments and/or a specified portion (which may be zero) of
interest payments (to the extent of the applicable Net Mortgage
Interest Rate) on the related Mortgage Loans.
C. Shifting Interest
Certificates.................... Shifting Interest Certificates of a Series are Standard or
Stripped Certificates, credit enhancement for which is supplied
by the adjustment from time to time of the relative interests in
the Trust Estate of the Senior Certificates and the Subordinated
Certificates of such Series. See "Description of the Certifi-
cates--Distributions to Percentage Certificateholders--Shifting
Interest Certificates" and "Credit
Support--Subordination--Shifting Interest Certificates."
D. Multi-Class Certificates.... Each Series of Multi-Class Certificates will consist of
Certificates, each of which evidences a beneficial interest in
the related Trust Estate and entitles the holder thereof to
interest payments on the outstanding Stated Amount thereof at a
fixed rate (which may be zero) specified in, or a variable rate
determined as specified in, the applicable Prospectus Supplement,
and distributions in reduction of such Stated Amount determined
in the manner and applied in the priority set forth in the
applicable Prospectus Supplement. The aggregate Stated Amount of
a Series of Multi-Class Certificates may be less than the
aggregate principal balance of the related Mortgage Loans.
Cut-Off Date...................... The date specified in the applicable Prospectus Supplement.
Distribution Dates................ Distributions on Standard Certificates and Stripped Certificates
will generally be made on the 25th day (or, if such day is not a
business day, the business day following the 25th day) of each
month, commencing with the month following the month in which the
applicable Cut-Off Date occurs (each, a "Distribution Date").
Distributions on Multi-Class Certificates will be made monthly,
quarterly, or semi-annually, on the dates specified in the
applicable Prospectus Supplement.
Record Dates...................... Distributions will be made on each Distribution Date to
Certificateholders of record at the close of business on (unless
a different date is specified in the applicable Prospectus
Supplement) the last business day of the month preceding the
month in which such Distribution Date occurs (each, a "Record
Date").
Interest.......................... With respect to a Series of Certificates consisting of Standard
Certificates or Stripped Certificates, interest on the related
Mortgage Loans at the applicable pass-through rate for each Class
and Subclass (the "Pass-Through Rate"), as set forth in the
applicable Prospectus Supplement, will be passed through monthly
to holders thereof, in accordance with the particular terms of
each such Certificate. Holders of Multi-Class Certificates will
receive distributions of interest on the Stated Amount of such
Certificate, without regard to the Net Mortgage Interest Rate on
the underlying Mortgage Loans. The Net Mortgage Interest Rate for
each Mortgage Loan in a given period will equal the mortgage
interest rate for such Mortgage Loan in such period, as specified
in the related mortgage note (the "Mortgage Interest Rate"), less
the retained yield, if any (the "Fixed Retained Yield"), and less
an amount reserved for servicing the Mortgage Loan and
administration of the related Trust Estate and related expenses
(the "Servicing Fee").
Principal (Including
Prepayments).................... With respect to a Series of Standard Certificates or Stripped
Certificates, unless otherwise specified in the applicable
Prospectus Supplement, principal payments (including prepayments
in full received on each related Mortgage Loan during the month
preceding the month in which a Distribution
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Date occurs and partial prepayments received by the Servicer
prior to the Determination Date preceding such Distribution Date)
will be passed through to holders on such Distribution Date.
Distributions in Reduction of
Stated Amount................... With respect to a Series of Multi-Class Certificates,
distributions in reduction of Stated Amount will be made on each
Distribution Date to the holders of each Class then entitled to
receive such distributions until the aggregate amount of such
distributions have reduced the Stated Amount of each such Class
of Certificates to zero. Distributions in reduction of Stated
Amount will be allocated among the Classes of such Certificates
in the manner specified in the applicable Prospectus Supplement.
See "Description of the Certificates--Distributions to
Multi-Class Certificateholders."
Credit Enhancement................ A Series of Certificates may include one or more Classes of
Senior Certificates and one or more Classes of Subordinated
Certificates. The rights of the holders of Subordinated
Certificates of a Series to receive distributions with respect to
the related Mortgage Loans will be subordinated to such rights of
the holders of the Senior Certificates of the same Series to the
extent (the "Subordinated Amount") specified in the applicable
Prospectus Supplement. This subordination is intended to enhance
the likelihood of the timely receipt by the Senior
Certificateholders of their proportionate share of scheduled
monthly principal and interest payments on the related Mortgage
Loans and to protect them against losses. This protection will be
effected by the preferential right of the Senior
Certificateholders to receive current distributions on the
related Mortgage Loans and (if so specified in the applicable
Prospectus Supplement) by the establishment of a reserve fund
(the "Subordination Reserve Fund") with respect to each Series of
Certificates that includes a Class of Subordinated Certificates.
Any Subordination Reserve Fund may be funded initially with the
Initial Deposit (as defined herein) in an amount specified in the
applicable Prospectus Supplement, and may be funded from time to
time from payments on the Mortgage Loans otherwise distributable
to the Subordinated Certificateholders in the manner and to the
extent specified in the applicable Prospectus Supplement. The
maintenance of any Subordination Reserve Fund is intended to
provide liquidity, but in certain circumstances the Subordination
Reserve Fund could be depleted and, if other amounts available
for distribution are insufficient, shortfalls in distributions to
the Senior Certificateholders could result. Until the Subordi-
nated Amount is reduced to zero, Senior Certificateholders will
be entitled to receive the amount of any such shortfall, together
with interest at the applicable Pass-Through Rate, on the next
Distribution Date (as defined herein). The Subordinated Amount is
intended to protect Senior Certificateholders against losses;
however, if losses realized on the Mortgage Loans in a Trust
Estate are exceptionally high Senior Certificateholders will bear
their proportionate share of any losses realized on the related
Mortgage Loans in excess of the applicable Subordinated Amount.
If so specified in the applicable Prospectus Supplement, the
protection afforded to holders of Senior Certificates of a Series
by the subordination of certain rights of holders of Subordinated
Certificates of such Series to distributions on the related
Mortgage Loans may be effected by a method other than that
described above, such as, in the event that the applicable Trust
Estate (or a segregated pool of assets therein) elects to be
treated as a REMIC, the reallocation from time to time, on the
basis of distributions previously received, of the respective
percentage interests of the Senior
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Certificates and the Subordinated Certificates in the related
Trust Estate. See "Description of the Certificates--Distributions
to Percentage Certificateholders--Shifting Interest
Certificates."
The Certificates of any Series, or any one or more Classes
thereof, may be entitled to the benefits of a guarantee, letter
of credit, mortgage pool insurance policy or other form of credit
enhancement as specified in the applicable Prospectus Supplement.
See "Description of the Certificates" and "Credit Support."
Periodic Advances................. In the event of delinquencies in payments on the Mortgage Loans,
the Servicer will make advances of cash ("Periodic Advances") to
the Certificate Account (as defined herein) to the extent that
the Servicer determines such Periodic Advances would be
recoverable from future payments and collections on the Mortgage
Loans. Any such Periodic Advances will be reimbursable to the
Servicer as described herein and in the applicable Prospectus
Supplement. See "Servicing of the Mortgage Loans--Periodic
Advances and Limitations Thereon."
Optional Purchase of Mortgage
Loans........................... The Seller may, at its option, repurchase any defaulted Mortgage
Loan. See "The Trust Estates--Mortgage Loans--Optional
Repurchases." If so specified in the Prospectus Supplement with
respect to a Series, all, but not less than all, of the Mortgage
Loans in the related Trust Estate and any property acquired in
respect thereof at the time, may be purchased by the person or
persons specified in such Prospectus Supplement in the manner and
at the price specified in such Prospectus Supplement. In the
event that an election is made to treat the related Trust Estate
(or a segregated pool of assets therein) as a REMIC, any such
purchase will be effected only pursuant to a "qualified
liquidation," as defined under Section 860F(a)(4)(A) of the
Internal Revenue Code of 1986, as amended (the "Code"). Exercise
of the right of purchase will effect the early retirement of the
Certificates of that Series. See "Prepayment and Yield
Considerations."
ERISA Limitations................. A fiduciary of any employee benefit plan subject to the fiduciary
responsibility provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), including the
"prohibited transaction" rules thereunder, and to the
corresponding provisions of the Code, should carefully review
with its own legal advisors whether the purchase or holding of
Certificates could give rise to a transaction prohibited or
otherwise impermissible under ERISA or the Code. See "ERISA
Considerations."
Tax Status........................ The treatment of the Certificates for federal income tax purposes
will be determined (i) by whether a REMIC election is made with
respect to a Series of Certificates and, if a REMIC election is
made, by whether the Certificates are Regular Interests or
Residual Interests and (ii) by whether, if a REMIC election is
not made, the Certificates of such Series are Standard
Certificates or Stripped Certificates. See "Certain Federal
Income Tax Consequences."
Rating............................ It is a condition to the issuance of the Stripped Certificates
and the Multi-Class Certificates of any Series that they be rated
in one of the four highest rating categories by at least one
nationally recognized statistical rating organization (a "Rating
Agency"). Standard Certificates may or may not be rated by a
Rating Agency.
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THE TRUST ESTATES
GENERAL
The Trust Estate for each Series of Certificates will consist of Mortgage
Loans evidenced by promissory notes (the "Mortgage Notes") secured by mortgages,
deeds of trust or other instruments creating first liens (the "Mortgages") on
some or all of the following types of property (as so secured, the "Mortgaged
Properties"), to the extent set forth in the applicable Prospectus Supplement:
(i) one- to four-family detached residences, (ii) townhouses, (iii) condominium
units, (iv) units within planned unit developments, (v) long-term leases with
respect to any of the foregoing, and (vi) shares issued by private non-profit
housing corporations ("cooperatives") and the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specified units in such
cooperatives' buildings. In addition, a Trust Estate will also include (i)
amounts held from time to time in the related Certificate Account, (ii) the
Seller's interest in any primary mortgage insurance, hazard insurance, title
insurance or other insurance policies relating to a Mortgage Loan, (iii) any
property which initially secured a Mortgage Loan and which has been acquired by
foreclosure or trustee's sale or deed in lieu of foreclosure or trustee's sale,
(iv) if applicable, and to the extent set forth in the applicable Prospectus
Supplement, any Subordination Reserve Fund and/or any other reserve fund, (v) if
applicable, and to the extent set forth in the applicable Prospectus Supplement,
contractual obligations of any person to make payments in respect of any form of
credit enhancement or any interest subsidy agreement, and (vi) such other assets
as may be specified in the applicable Prospectus Supplement. Unless otherwise
specified in the applicable Prospectus Supplement, the Trust Estate will not
include, however, the portion of interest on the Mortgage Loans which
constitutes the Fixed Retained Yield, if any. See "Servicing of the Mortgage
Loans--Fixed Retained Yield; Servicing Compensation and Payment of Expenses."
MORTGAGE LOANS
The Mortgage Loans will have been acquired by the Seller from its affiliate
PHMC or another affiliate. The Mortgage Loans will have been originated by PHMC
for its own account or for the account of an affiliate or will have been
acquired by PHMC for its own account or for the account of an affiliate from
other mortgage loan originators. Each Mortgage Loan will have been underwritten
to PHMC's standards. See "PHMC--Mortgage Loan Production Sources" and
"--Mortgage Loan Underwriting." The Prospectus Supplement for each Series will
set forth the respective number and principal amounts of Mortgage Loans (i)
originated by PHMC for its own account or for the account of its affiliates and
(ii) purchased by PHMC for its own account or for the account of its affiliates
from other mortgage loan originators through PHMC's mortgage loan purchase
programs.
Each of the Mortgage Loans will be secured by a Mortgage on a Mortgaged
Property located in any of the 50 states or the District of Columbia. Generally,
the land underlying a Mortgaged Property will consist of five acres or less but
may consist of greater acreage in PHMC's discretion. The Mortgage Loans may be
secured by leases on real property under circumstances that PHMC determines in
its discretion are commonly acceptable to institutional mortgage investors.
Generally, a Mortgage Loan will be secured by a lease only if the use of
leasehold estates as security for mortgage loans is customary in the area, the
lease is not subject to any prior lien that could result in termination of the
lease and the term of the lease ends at least five years beyond the maturity
date of the related Mortgage Loan. The Prospectus Supplement will set forth the
geographic distribution of Mortgaged Properties and the number and aggregate
unpaid principal balances of the Mortgage Loans by category of Mortgaged
Property.
The Prospectus Supplement for each Series will also set forth the range of
original terms to maturity of the Mortgage Loans in the Trust Estate, the
weighted average remaining term to stated maturity at the Cut-Off Date of such
Mortgage Loans, the earliest and latest months of origination of such Mortgage
Loans, the range of Mortgage Interest Rates and Net Mortgage Interest Rates
borne by such Mortgage Loans, if such Mortgage Loans have varying Net Mortgage
Interest Rates, the weighted average Net Mortgage Interest Rate at the Cut-Off
Date of such Mortgage Loans, the range of Loan-to-Value Ratios at the time of
origination of such Mortgage Loans and the highest outstanding principal balance
at origination of any such Mortgage Loan.
The information with respect to the Mortgage Loans and Mortgaged Properties
described in the preceding two paragraphs may be presented in the Prospectus
Supplement for a Series as ranges in which the actual characteristics of such
Mortgage Loans and Mortgaged Properties are expected to fall. In all such cases,
information as to the final characteristics of the Mortgage Loans and Mortgaged
Properties will be available in a Current Report on Form 8-K which will be filed
with the Commission within 15 days of the initial issuance of the related
Series.
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Unless otherwise specified in the applicable Prospectus Supplement, all of
the Mortgage Loans in a Trust Estate will have monthly payments due on the first
of each month (each, a "Due Date") and will be fully-amortizing Mortgage Loans,
each with a fixed rate of interest and level monthly payments over the term of
the Mortgage Loan. If so specified in the applicable Prospectus Supplement, a
Trust Estate may include fully amortizing, adjustable rate Mortgage Loans with
Mortgage Interest Rates adjusted periodically, in the manner specified in the
related Prospectus Supplement. Unless otherwise specified in the applicable
Prospectus Supplement, no adjustable interest rate Mortgage Loan will be subject
to a possibility of negative amortization. If specified in the applicable
Prospectus Supplement, fixed rates on certain Mortgage Loans may be converted to
adjustable rates and adjustable rates on certain Mortgage Loans may be converted
to fixed rates, in each case after origination of such Mortgage Loans and upon
the satisfaction of other conditions specified in the applicable Prospectus
Supplement. Unless otherwise specified in the applicable Prospectus Supplement,
in either such event, the Pooling and Servicing Agreement will require the
Servicer to repurchase each such converted Mortgage Loan at the price set forth
in the applicable Prospectus Supplement. If specified in the applicable
Prospectus Supplement, a Trust Estate may contain convertible Mortgage Loans
which have converted prior to the formation of the Trust Estate and which are
subject to no further conversions.
Unless otherwise specified in the applicable Prospectus Supplement, no
Mortgage Loan will have had at origination a Loan-to-Value Ratio in excess of
90%. The Loan-to-Value Ratio is the ratio, expressed as a percentage, of the
principal amount of the Mortgage Loan at origination to the lesser of (i) the
appraised value of the related Mortgaged Property, as established by an
appraisal obtained by the originator generally no more than four months prior to
origination, or (ii) the sale price for such property. For the purpose of
calculating the Loan-to-Value Ratio of any Mortgage Loan that is the result of
the refinancing (including a refinancing for "equity take out" purposes) of an
existing mortgage loan, the appraised value of the related Mortgaged Property is
generally determined by reference to an appraisal obtained in connection with
the origination of the replacement loan. Unless otherwise specified in the
related Prospectus Supplement, with respect to a Mortgage Loan secured by a
second home, an owner-occupied cooperative, a high rise condominium or a
non-owner occupied property, the Loan-to-Value Ratio will not exceed 80%, and
with respect to a Mortgage Loan which is made to refinance, for equity take out
purposes, an existing mortgage loan on a non-owner occupied property, the
Loan-to-Value Ratio will generally not exceed 75%. Mortgage Loans having a Loan-
to-Value Ratio in excess of 80% will not be covered by primary mortgage
insurance, except to the extent specified in the applicable Prospectus
Supplement. See "PHMC--Mortgage Loan Underwriting."
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at the levels which existed on the dates of appraisal
(or, where applicable, recertification of value) of the related Mortgage Loans.
If residential real estate values generally or in particular geographic areas
decline such that the outstanding balances of the Mortgage Loans and any
secondary financing on the Mortgaged Properties in a particular Trust Estate
become equal to or greater than the values of the related Mortgaged Properties,
the actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry and those now
experienced in PHMC's servicing portfolio. In addition, adverse economic
conditions generally, in particular geographic areas or industries, or affecting
particular segments of the borrowing community (such as mortgagors relying on
commission income and self-employed mortgagors) and other factors which may or
may not affect real property values, including the purposes for which the
Mortgage Loans were made and the uses of the Mortgaged Properties, may affect
the timely payment by mortgagors of scheduled payments of principal and interest
on the Mortgage Loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses with respect to any Trust Estate. See "PHMC--Mortgage
Loan Underwriting" and "Description of the Certificates--Weighted Average Life
of Certificates" herein. To the extent that such losses are not covered by the
methods of credit support or the insurance policies described herein, they will
be borne by holders of the Certificates of the Series evidencing interests in
such Trust Estate.
Unless otherwise provided in the applicable Prospectus Supplement, all
Mortgage Loans will be covered by an appropriate standard form American Land
Title Association ("ALTA") title insurance policy, or a substantially similar
policy or form of insurance acceptable to the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC").
If so specified in the applicable Prospectus Supplement, a Trust Estate may
contain Mortgage Loans subject to temporary interest subsidy agreements
("Subsidy Loans") pursuant to which the monthly payments made by the related
mortgagors will be less than the scheduled monthly payments on such Mortgage
Loans with the present value of the resulting difference in payment ("Subsidy
Payments") being provided by the employer of the mortgagor,
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generally on an annual basis. Unless otherwise specified in the applicable
Prospectus Supplement, Subsidy Payments will be placed in a custodial account
("Subsidy Account") by the Servicer. Despite the existence of a subsidy program,
a mortgagor remains primarily liable for making all scheduled payments on a
Subsidy Loan and for all other obligations provided for in the related Mortgage
Note and Mortgage Loan.
Subsidy Loans are offered by employers generally through either a graduated
or fixed subsidy loan program, or a combination thereof. The terms of the
subsidy agreements relating to Subsidy Loans generally range from one to ten
years. The subsidy agreements relating to Subsidy Loans made under a graduated
program generally will provide for subsidy payments that result in effective
subsidized interest rates between three percentage points and five percentage
points below the Mortgage Interest Rates specified in the related Mortgage
Notes. Generally, under a graduated program, the subsidized rate for a Mortgage
Loan will increase approximately one percentage point per year until it equals
the full Mortgage Interest Rate. For example, if the initial subsidized interest
rate is five percentage points below the Mortgage Interest Rate in year one, the
subsidized rate will increase to four percentage points below the Mortgage
Interest Rate in year two, and likewise until year six, when the subsidized rate
will equal the Mortgage Interest Rate. Where the subsidy agreements relating to
Subsidy Loans are in effect for longer than five years, the subsidized interest
rates generally increase at smaller percentage increments for each year. The
subsidy agreements relating to Subsidy Loans made under a fixed program
generally will provide for subsidized interest rates at fixed percentages
(generally one percentage point to two percentage points) below the Mortgage
Interest Rates for specified periods, generally not in excess of ten years.
Subsidy Loans are also offered pursuant to combination fixed/graduated programs.
The subsidy agreements relating to such Subsidy Loans generally will provide for
an initial fixed subsidy of up to five percentage points below the related
Mortgage Interest Rate for up to five years, and then a periodic reduction in
the subsidy for up to five years, at an equal fixed percentage per year until
the subsidized rate equals the Mortgage Interest Rate.
Generally, employers may terminate subsidy programs in the event of (i) the
mortgagor's death, retirement, resignation or termination of employment, (ii)
the full prepayment of the Subsidy Loan by the mortgagor, (iii) the sale or
transfer by the mortgagor of the related Mortgaged Property as a result of which
the mortgagee is entitled to accelerate the Subsidy Loan pursuant to the
"due-on-sale" clause contained in the Mortgage, or (iv) the commencement of
foreclosure proceedings or the acceptance of a deed in lieu of foreclosure. In
addition, some subsidy programs provide that if prevailing market rates of
interest on mortgage loans similar to a Subsidy Loan are less than the Mortgage
Interest Rate of such Subsidy Loan, the employer may request that the mortgagor
refinance such Subsidy Loan and may terminate the related subsidy agreement if
the mortgagor fails to refinance such Subsidy Loan. In the event the mortgagor
refinances such Subsidy Loan, the new loan will not be included in the Trust
Estate. See "Prepayment and Yield Considerations" herein. In the event a subsidy
agreement is terminated, the amount remaining in the Subsidy Account will be
returned to the employer, and the mortgagor will be obligated to make the full
amount of all remaining scheduled payments, if any. The mortgagor's reduced
monthly housing expense as a consequence of payments under a subsidy agreement
is used by PHMC in determining certain expense-to-income ratios utilized in
underwriting a Subsidy Loan. See "PHMC--Mortgage Loan Underwriting."
If so specified in the applicable Prospectus Supplement, a Trust Estate may
contain Mortgage Loans subject to temporary buy-down plans ("Buy-Down Loans")
pursuant to which the monthly payments made by the mortgagor during the early
years of the Mortgage Loan will be less than the scheduled monthly payments on
the Mortgage Loan. The resulting difference in payment will be compensated for
from an amount contributed by the seller of the related Mortgaged Property or
another source, including the originator of the Mortgage Loan (generally on a
present value basis) and, if so specified in the related Prospectus Supplement,
placed in a custodial account (the "Buy-Down Fund") by the Servicer. If the
mortgagor on a Buy-Down Loan prepays such Mortgage Loan in its entirety, or
defaults on such Mortgage Loan and the Mortgaged Property is sold in liquidation
thereof, during the period when the mortgagor is not obligated, on account of
the buy-down plan, to pay the full monthly payment otherwise due on such loan,
the unpaid principal balance of such Buy-Down Loan will be reduced by the
amounts remaining in the Buy-Down Fund with respect to such Buy-Down Loan, and
such amounts will be deposited in the Certificate Account (as defined herein),
net of any amounts paid with respect to such Buy-Down Loan by any insurer,
guarantor or other person pursuant to a credit enhancement arrangement described
in the applicable Prospectus Supplement.
If so specified in the applicable Prospectus Supplement, a Trust Estate may
include Mortgage Loans which are amortized over 30 years but which have shorter
terms to maturity (each such Mortgage Loan, a "Balloon Loan") that causes the
outstanding principal balance of the related Mortgage Loan to be due and payable
at the end of a certain
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specified period (the "Balloon Period"). Unless otherwise specified in the
applicable Prospectus Supplement, the borrower of such Balloon Loan will be
obligated to pay the entire outstanding principal balance of the Balloon Loan at
the end of the related Balloon Period. In the event PHMC refinances a
mortgagor's Balloon Loan at maturity, the new loan will not be included in the
Trust Estate. See "Prepayment and Yield Considerations" herein. A Trust Estate
may also include other types of Mortgage Loans to the extent set forth in the
applicable Prospectus Supplement.
INSURANCE POLICIES
The Pooling and Servicing Agreement will require the Servicer to cause to be
maintained for each Mortgage Loan a standard hazard insurance policy issued by a
generally acceptable insurer insuring the improvements on the Mortgaged Property
underlying such Mortgage Loan against loss by fire, with extended coverage (a
"Standard Hazard Insurance Policy"). The Pooling and Servicing Agreement will
require that such Standard Hazard Insurance Policy be in an amount at least
equal to the lesser of 100% of the insurable value of the improvements on the
Mortgaged Property or the principal balance of such Mortgage Loan; provided,
however, that such insurance may not be less than the minimum amount required to
fully compensate for any damage or loss on a replacement cost basis. The
Servicer will also maintain on property acquired upon foreclosure, or deed in
lieu of foreclosure, of any Mortgage Loan, a Standard Hazard Insurance Policy in
an amount that is at least equal to the lesser of 100% of the insurable value of
the improvements which are a part of such property or the principal balance of
such Mortgage Loan plus accrued interest and liquidation expenses; provided,
however, that such insurance may not be less than the minimum amount required to
fully compensate for any damage or loss on a replacement cost basis. Any amounts
collected under any such policies (other than amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the borrower in
accordance with normal servicing procedures) will be deposited in the
Certificate Account.
The Standard Hazard Insurance Policies covering the Mortgage Loans generally
will cover physical damage to, or destruction of, the improvements on the
Mortgaged Property caused by fire, lightning, explosion, smoke, windstorm, hail,
riot, strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Because the Standard Hazard Insurance Policies
relating to such Mortgage Loans will be underwritten by different insurers and
will cover Mortgaged Properties located in various states, such policies will
not contain identical terms and conditions. The most significant terms thereof,
however, generally will be determined by state law and generally will be
similar. Most such policies typically will not cover any physical damage
resulting from the following: war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, hazardous wastes or hazardous substances, theft and, in
certain cases, vandalism. The foregoing list is merely indicative of certain
kinds of uninsured risks and is not all-inclusive.
The Servicer may maintain a blanket policy insuring against hazard losses on
all of the Mortgaged Properties in lieu of maintaining the required Standard
Hazard Insurance Policies. The Servicer will be liable for the amount of any
deductible under a blanket policy if such amount would have been covered by a
required Standard Hazard Insurance Policy, had it been maintained.
In general, if the improvements on a Mortgaged Property are located in an
area identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards (and such flood insurance has been made
available) the Pooling and Servicing Agreement will require the Servicer to
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. Generally, the Pooling and Servicing Agreement
will require that such flood insurance be in an amount not less than the least
of (i) the outstanding principal balance of the Mortgage Loan, (ii) the full
insurable value of the improvements, or (iii) the maximum amount of insurance
which is available under the Flood Disaster Protection Act of 1973, as amended.
PHMC does not provide financing for flood zone properties located in communities
not participating in the National Flood Insurance Program or if available
insurance coverage is, in its judgment, unrealistically low.
Any losses incurred with respect to Mortgage Loans due to uninsured risks
(including earthquakes, mudflows, floods and hazardous wastes or hazardous
substances) or insufficient hazard insurance proceeds could affect distributions
to the Certificateholders.
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ACQUISITION OF THE MORTGAGE LOANS FROM PHMC
The Seller will have acquired the Mortgage Loans included in each Trust
Estate from PHMC. In connection with the conveyance of the Mortgage Loans to the
Seller, PHMC will (i) agree to deliver to the Seller all of the documents which
the Seller is required to deliver to the Trustee; (ii) make certain
representations and warranties to the Seller which will be the basis of certain
of the Seller's representations and warranties to the Trustee; and (iii) agree
to repurchase or substitute for any Mortgage Loan for which any document is not
delivered or is found to be defective in any material respect, or which is
discovered at any time not to be in conformance with the representations and
warranties PHMC has made to the Seller, if PHMC cannot deliver such document or
cure such defect or breach within 60 days after notice thereof. Such agreement
will inure to the benefit of the Trustee and is intended to help ensure the
Seller's performance of its limited obligation to repurchase or substitute for
Mortgage Loans. See "The Trust Estates--Mortgage Loans-- Assignment of Mortgage
Loans to the Trustee," and "--Representations and Warranties."
ASSIGNMENT OF MORTGAGE LOANS TO THE TRUSTEE
At the time of issuance of each Series of Certificates, the Mortgage Loans
in the related Trust Estate will, pursuant to the applicable Pooling and
Servicing Agreement, be assigned to the Trustee, together with all principal and
interest received on or with respect to such Mortgage Loans after the applicable
Cut-Off Date other than principal and interest due and payable on or before such
Cut-Off Date and interest attributable to the Fixed Retained Yield on such
Mortgage Loans, if any. See "Servicing of the Mortgage Loans--Fixed Retained
Yield, Servicing Compensation and Payment of Expenses." The Trustee or its agent
will, concurrently with such assignment, authenticate and deliver the
Certificates evidencing such Series to the Seller in exchange for the Mortgage
Loans. Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the applicable Pooling and Servicing Agreement. Each such schedule
will include, among other things, the unpaid principal balance as of the close
of business on the applicable Cut-Off Date, the maturity date and the Mortgage
Interest Rate for each Mortgage Loan in the related Trust Estate.
In addition, with respect to each Mortgage Loan in a Trust Estate, the
mortgage or other promissory note, any assumption, modification or conversion to
fixed interest rate agreement, a mortgage assignment in recordable form and the
recorded Mortgage (or other documents as are required under applicable law to
create a perfected security interest in the Mortgaged Property in favor of the
Trustee) will be delivered to the Trustee (or to a designated custodian);
provided that, in instances where recorded documents cannot be delivered due to
delays in connection with recording, copies thereof, certified by the Seller to
be true and complete copies of such documents sent for recording, may be
delivered and the original recorded documents will be delivered promptly upon
receipt. As to each Mortgage Loan for which there is primary mortgage insurance,
the certificate of primary mortgage insurance will be delivered to the Trustee.
The assignment of each Mortgage will be recorded promptly after the initial
issuance of Certificates for the related Trust Estate, except in states where,
in the opinion of counsel acceptable to the Trustee, such recording is not
required to protect the Trustee's interest in the Mortgage Loan against the
claim of any subsequent transferee or any successor to or creditor of the
Seller, PHMC or the originator of such Mortgage Loan.
The Trustee will hold such documents in trust for the benefit of
Certificateholders of the related Series and will review such documents within
45 days of the date of the applicable Pooling and Servicing Agreement. If any
document is not delivered or is found to be defective in any material respect,
or if the Seller is in breach of any of its representations and warranties
contained in such Pooling and Servicing Agreement, and such breach materially
and adversely affects the interests of the Certificateholders in a Mortgage
Loan, and the Seller cannot deliver such document or cure such defect or breach
within 60 days after written notice thereof, the Seller will, within 60 days of
such notice, either repurchase the related Mortgage Loan from the Trustee at a
price equal to the then unpaid principal balance thereof, plus accrued and
unpaid interest at the applicable Mortgage Interest Rate (minus any Fixed
Retained Yield) through the last day of the month in which such repurchase takes
place, or (in the case of a Series for which a REMIC election will be made,
unless the maximum period as may be provided by the Code or applicable
regulations of the Department of the Treasury ("Treasury Regulations") shall
have elapsed since the execution of the applicable Pooling and Servicing
Agreement) substitute for such Mortgage Loan a new mortgage loan having
characteristics such that the representations and warranties of the Seller made
pursuant to the applicable Pooling and Servicing Agreement (except for
representations and warranties as to the correctness of the applicable schedule
of mortgage loans) would not have been incorrect had such substitute Mortgage
Loan originally been a Mortgage Loan. In the case of a repurchased Mortgage
Loan, the purchase price will be deposited by the Seller in the related
Certificate Account. In the case of a substitute Mortgage Loan, the mortgage
file relating thereto will be delivered to the Trustee (or the custodian) and
the
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Seller will deposit in the Certificate Account an amount equal to the excess of
(i) the unpaid principal balance of the Mortgage Loan which is substituted for,
over (ii) the unpaid principal balance of the substitute Mortgage Loan, together
with interest on such excess at the Net Mortgage Interest Rate to the next
scheduled Due Date of the Mortgage Loan which is being substituted for
(adjusted, in the case of a Series for which a REMIC election will be made, as
set forth in the applicable Pooling and Servicing Agreement, to ensure that the
Trustee will not recognize gain). In no event will any substitute Mortgage Loan
have an unpaid principal balance greater than the Scheduled Principal Balance
(as defined herein) of the Mortgage Loan for which it is substituted (after
giving effect to the scheduled principal payment due in the month of
substitution on the Mortgage Loan substituted for), or a term greater than, a
Mortgage Interest Rate less than, a Mortgage Interest Rate more than one percent
per annum greater than or a Loan-to-Value Ratio greater than, the Mortgage Loan
for which it is substituted. If substitution is to be made for an adjustable
rate Mortgage Loan, the substitute Mortgage Loan will have an unpaid principal
balance no greater than the Scheduled Principal Balance of the Mortgage Loan for
which it is substituted (after giving effect to the scheduled principal payment
due in the month of substitution on the Mortgage Loan substituted for), a
Loan-to-Value Ratio less than or equal to, and a Mortgage Interest Rate at least
equal to, that of the Mortgage Loan for which it is substituted, and will bear
interest based on the same index, margin and frequency of adjustment as the
substituted Mortgage Loan. Unless otherwise specified in the applicable
Prospectus Supplement, the repurchase obligation and the mortgage substitution
referred to above will constitute the sole remedies available to the
Certificateholders or the Trustee with respect to missing or defective documents
or breach of the Seller's representations and warranties. Notwithstanding the
above, if an election is made to treat the Trust Estate (or a segregated pool of
assets therein) with respect to a Series of Certificates as a REMIC (see
"Certain Federal Income Tax Consequences"), substitutions will be made only upon
receipt by the Trustee of an opinion of counsel or other evidence satisfactory
to the Trustee to the effect that such substitution will not cause the Trust
Estate (or segregated pool of assets) to be subject to the tax on "prohibited
transactions" imposed by Code Section 860F(a), otherwise subject the Trust
Estate (or segregated pool of assets) to tax, cause any replacement mortgage not
to constitute a "qualified replacement mortgage" within the meaning of Code
Section 860G(a)(4), or cause the Trust Estate (or segregated pool of assets) to
fail to qualify as a REMIC while any Certificates of the Series are outstanding.
See "The Trust Estates--Mortgage Loans" with respect to certain obligations of
PHMC in connection with defective documentation and breaches of representations
and warranties as to the Mortgage Loans.
The Trustee will be authorized to appoint a custodian to maintain possession
of the documents relating to the Mortgage Loans and to conduct the review of
such documents described above. The custodian will keep and review such
documents as the Trustee's agent under a custodial agreement.
REPRESENTATIONS AND WARRANTIES
Unless otherwise provided in the applicable Pooling and Servicing Agreement
for a Series, the Seller will represent and warrant to the Trustee, among other
things, that as of the date of execution of the Pooling and Servicing Agreement,
with respect to the Mortgage Loans, or each Mortgage Loan, as the case may be:
(i) the information set forth in the schedule of Mortgage Loans
appearing as an exhibit to such Pooling and Servicing Agreement is correct
in all material respects at the date or dates respecting which such
information is furnished as specified therein;
(ii) immediately prior to the transfer and assignment contemplated by
the Pooling and Servicing Agreement, the Seller is the sole owner and holder
of the Mortgage Loan, free and clear of any and all liens, pledges, charges
or security interests of any nature and has full right and authority to sell
and assign the same;
(iii) the Mortgage is a valid, subsisting and enforceable first lien on
the related Mortgaged Property, and the Mortgaged Property is free and clear
of all encumbrances and liens having priority over the first lien of the
Mortgage except for liens for real estate taxes and special assessments not
yet due and payable and liens or interests arising under or as a result of
any federal, state or local law, regulation or ordinance relating to
hazardous wastes or hazardous substances; and, if the Mortgaged Property is
a condominium unit, any lien for common charges permitted by statute; and
any security agreement, chattel mortgage or equivalent document related to,
and delivered to the Trustee with, any Mortgage establishes in the Seller a
valid first lien on the property described therein and the Seller has full
right to sell and assign the same to the Trustee;
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(iv) neither the Seller nor any prior holder of the Mortgage or the
related Mortgage Note has modified the Mortgage in any material respect;
satisfied, cancelled or subordinated the Mortgage or the related Mortgage
Note in whole or in part; or released the Mortgaged Property in whole or in
part from the lien of the Mortgage; or executed any instrument of release,
cancellation, modification or satisfaction, except in each case as reflected
in a document delivered by the Seller to the Trustee together with the
related Mortgage;
(v) all taxes, governmental assessments, insurance premiums, and water,
sewer and municipal charges previously due and owing have been paid, or an
escrow of funds in an amount sufficient to pay for every such item which
remains unpaid has been established to the extent permitted by law; and the
Seller has not advanced funds or received any advance of funds by a party
other than the mortgagor, directly or indirectly (except pursuant to any
Buy-Down Loan or Subsidy Loan arrangement), for the payment of any amount
required by the Mortgage, except for interest accruing from the date of the
related Mortgage Note or date of disbursement of the Mortgage Loan proceeds,
whichever is later, to the date which precedes by 30 days the first Due Date
under the related Mortgage Note;
(vi) to the best of the Seller's knowledge, there is no proceeding
pending or threatened for the total or partial condemnation of the Mortgaged
Property and the Mortgaged Property is undamaged by water, fire, earthquake
or earth movement, windstorm, flood, tornado or similar casualty (excluding
casualty from the presence of hazardous wastes or hazardous substances, as
to which the Seller makes no representation), so as to affect adversely the
value of the Mortgaged Property as security for the Mortgage Loan or the use
for which the premises were intended;
(vii) the Mortgaged Property is free and clear of all mechanics' and
materialmen's liens or liens in the nature thereof; provided, however, that
this warranty shall be deemed not to have been made at the time of the
initial issuance of the Certificates if a title policy affording, in
substance, the same protection afforded by this warranty is furnished to the
Trustee by the Seller;
(viii) except for Mortgage Loans secured by shares in cooperatives, the
Mortgaged Property consists of a fee simple or leasehold estate in real
property, all of the improvements which are included for the purpose of
determining the appraised value of the Mortgaged Property lie wholly within
the boundaries and building restriction lines of such property and no
improvements on adjoining properties encroach upon the Mortgaged Property
(unless insured against under the applicable title insurance policy) and, to
the best of the Seller's knowledge, the Mortgaged Property and all
improvements thereon comply with all requirements of any applicable zoning
and subdivision laws and ordinances;
(ix) the Mortgage Loan meets, or is exempt from, applicable state or
federal laws, regulations and other requirements pertaining to usury, and
the Mortgage Loan is not usurious;
(x) to the best of the Seller's knowledge, all inspections, licenses and
certificates required to be made or issued with respect to all occupied
portions of the Mortgaged Property and, with respect to the use and
occupancy of the same, including, but not limited to, certificates of
occupancy and fire underwriting certificates, have been made or obtained
from the appropriate authorities;
(xi) all payments required to be made up to the Due Date immediately
preceding the Cut-Off Date for such Mortgage Loan under the terms of the
related Mortgage Note have been made;
(xii) the Mortgage Note, the related Mortgage and other agreements
executed in connection therewith are genuine, and each is the legal, valid
and binding obligation of the maker thereof, enforceable in accordance with
its terms except as such enforcement may be limited by bankruptcy,
insolvency, reorganization or other similar laws affecting the enforcement
of creditors' rights generally and by general equity principles (regardless
of whether such enforcement is considered in a proceeding in equity or at
law); and, to the best of the Seller's knowledge, all parties to the
Mortgage Note and the Mortgage had legal capacity to execute the Mortgage
Note and the Mortgage and each Mortgage Note and Mortgage has been duly and
properly executed by the mortgagor;
(xiii) any and all requirements of any federal, state or local law with
respect to the origination of the Mortgage Loans including, without
limitation, truth-in-lending, real estate settlement procedures, consumer
credit protection, equal credit opportunity or disclosure laws applicable to
the Mortgage Loans have been complied with;
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(xiv) the proceeds of the Mortgage Loans have been fully disbursed,
there is no requirement for future advances thereunder and any and all
requirements as to completion of any on-site or off-site improvements and as
to disbursements of any escrow funds therefor have been complied with,
except for escrow funds for exterior items which could not be completed due
to weather; and all costs, fees and expenses incurred in making, closing or
recording the Mortgage Loan have been paid, except recording fees with
respect to Mortgages not recorded as of the date of the Pooling and
Servicing Agreement;
(xv) the Mortgage Loan (except any Mortgage Loan secured by Mortgaged
Property located in Iowa, as to which an opinion of counsel of the type
customarily rendered in such State in lieu of title insurance is instead
received) is covered by an ALTA mortgagee title insurance policy or other
generally acceptable form of policy or insurance acceptable to FNMA or
FHLMC, issued by a title insurer acceptable to FNMA or FHLMC insuring the
originator, its successors and assigns, as to the first priority lien of the
Mortgage in the original principal amount of the Mortgage Loan and subject
only to (A) the lien of current real property taxes and assessments not yet
due and payable, (B) covenants, conditions and restrictions, rights-of-way,
easements and other matters of public record as of the date of recording of
such Mortgage acceptable to mortgage lending institutions in the area in
which the Mortgaged Property is located or specifically referred to in the
appraisal performed in connection with the origination of the related
Mortgage Loan, (C) liens created pursuant to any federal, state or local
law, regulation or ordinance affording liens for the costs of clean-up of
hazardous substances or hazardous wastes or for other environmental
protection purposes and (D) such other matters to which like properties are
commonly subject which do not individually, or in the aggregate, materially
interfere with the benefits of the security intended to be provided by the
Mortgage; the Seller is the sole insured of such mortgagee title insurance
policy, the assignment to the Trustee of the Seller's interest in such
mortgagee title insurance policy does not require any consent of or
notification to the insurer which has not been obtained or made, such
mortgagee title insurance policy is in full force and effect and will be in
full force and effect and inure to the benefit of the Trustee and no claims
have been made under such mortgagee title insurance policy, and no prior
holder of the related Mortgage, including the Seller, has done, by act or
omission, anything which would impair the coverage of such mortgagee title
insurance policy;
(xvi) the Mortgaged Property securing each Mortgage Loan is insured by
an insurer acceptable to FNMA or FHLMC against loss by fire and such hazards
as are covered under a standard extended coverage endorsement, in an amount
which is not less than the lesser of 100% of the insurable value of the
Mortgaged Property and the outstanding principal balance of the Mortgage
Loan, but in no event less than the minimum amount necessary to fully
compensate for any damage or loss on a replacement cost basis; if the
Mortgaged Property is a condominium unit, it is included under the coverage
afforded by a blanket policy for the project; if upon origination of the
Mortgage Loan, the improvements on the Mortgaged Property were in an area
identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards, a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance
Administration is in effect with a generally acceptable insurance carrier,
in an amount representing coverage not less than the least of (A) the
outstanding principal balance of the Mortgage Loan, (B) the full insurable
value and (C) the maximum amount of insurance which was available under the
Flood Disaster Protection Act of 1973; and each Mortgage obligates the
mortgagor thereunder to maintain all such insurance at the mortgagor's cost
and expense;
(xvii) to the best of the Seller's knowledge, there is no default,
breach, violation or event of acceleration existing under any Mortgage or
the related Mortgage Note and no event which, with the passage of time or
with notice and the expiration of any grace or cure period, would constitute
a default, breach, violation or event of acceleration; and the Seller has
not waived any default, breach, violation or event of acceleration; no
foreclosure action is threatened or has been commenced with respect to the
Mortgage Loan;
(xviii) no Mortgage Note or Mortgage is subject to any right of
rescission, set-off, counterclaim or defense, including the defense of
usury, nor will the operation of any of the terms of the Mortgage Note or
Mortgage, or the exercise of any right thereunder, render such Mortgage
unenforceable, in whole or in part, or subject it to any right of
rescission, set-off, counterclaim or defense, including the defense of
usury, and no such right of rescission, set-off, counterclaim or defense has
been asserted with respect thereto;
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(xix) each Mortgage Note is payable in monthly payments, resulting in
complete amortization of the Mortgage Loan over a term of not more than 360
months;
(xx) each Mortgage contains customary and enforceable provisions such as
to render the rights and remedies of the holder thereof adequate for the
realization against the Mortgaged Property of the benefits of the security,
including realization by judicial foreclosure (subject to any limitation
arising from any bankruptcy, insolvency or other law for the relief of
debtors), and there is no homestead or other exemption available to the
mortgagor which would interfere with such right of foreclosure;
(xxi) to the best of the Seller's knowledge, no mortgagor is a debtor in
any state or federal bankruptcy or insolvency proceeding;
(xxii) each Mortgaged Property is located in the United States and
consists of a one- to four-unit single family residential property which may
include a detached home, townhouse, condominium unit, unit in a planned unit
development or a leasehold interest with respect to any of the foregoing or,
in the case of Mortgage Loans secured by shares of cooperatives, leases or
occupancy agreements;
(xxiii) no payment required under any Mortgage Loan is more than 30 days
past due and no Mortgage Loan had more than one delinquency in the preceding
13 months; and
(xxiv) with respect to each Buy-Down Loan, the funds deposited in the
Buy-Down Fund, if any, will be sufficient, together with interest thereon at
the rate customarily received by the Seller on such funds, compounded
monthly, and adding the amounts required to be paid by the mortgagor, to
make the scheduled payments stated in the Mortgage Note for the term of the
buy-down agreement.
No representations or warranties are made by the Seller as to the absence or
effect of hazardous wastes or hazardous substances on any of the Mortgaged
Properties or on the lien of any Mortgage or with respect to the absence or
effect of fraud in the origination of any Mortgage Loan, and any loss or
liability resulting from the presence or effect of such hazardous wastes,
hazardous substances or fraud will be borne solely by Certificateholders. See
"Certain Legal Aspects of the Mortgage Loans--Environmental Considerations"
below.
See "The Trust Estates--Mortgage Loans" for a description of the limited
remedies available in connection with breaches of the foregoing representations
and warranties.
OPTIONAL REPURCHASES
The Seller may, at its option, repurchase any defaulted Mortgage Loan if, in
the Seller's judgment, the related default is not likely to be cured by the
borrower, at a price equal to the unpaid principal balance thereof plus accrued
interest thereon and under the conditions set forth in the applicable Prospectus
Supplement.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each Series of Certificates will be issued pursuant to a Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement") between the Seller,
the Servicer, and the Trustee named in the applicable Prospectus Supplement.
Each Pooling and Servicing Agreement will contain substantially the same terms
and conditions, except for revisions of defined terms and certain provisions
regarding distributions to Certificateholders, credit support and other similar
matters. Illustrative forms of Pooling and Servicing Agreement have been filed
as exhibits to the Registration Statement of which this Prospectus is a part.
The following summaries describe certain provisions common to the Certificates
and to each Pooling and Servicing Agreement. 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 Pooling and Servicing Agreement for each Series
of Certificates and the applicable Prospectus Supplement. Wherever particular
sections or defined terms of the Pooling and Servicing Agreement are referred
to, such sections or defined terms are thereby incorporated herein by reference
from the forms of Pooling and Servicing Agreement filed as exhibits to the
Registration Statement.
Each Series of Certificates will represent ownership interests in the
related Trust Estate. An election may be made to treat the Trust Estate (or a
segregated pool of assets therein) with respect to a Series of Certificates as a
REMIC. If such an election is made, such Series will consist of one or more
Classes of Certificates that will represent "regular
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interests" within the meaning of Code Section 860G(a)(1) (such Class or Classes
collectively referred to as the "Regular Certificates") and one Class or
Subclass of Certificates with respect to each REMIC that will be designated as
"residual interests" within the meaning of Code Section 860G(a)(2) (the
"Residual Certificates") representing the right to receive distributions as
specified in the Prospectus Supplement for such Series. See "Certain Federal
Income Tax Consequences" herein.
The Seller may sell certain Classes or Subclasses of the Certificates of a
Series, including one or more Classes of Subordinated Certificates, in privately
negotiated transactions exempt from registration under the Securities Act.
Alternatively, if so specified in a Prospectus Supplement relating to such
Subordinated Certificates, the Seller may offer one or more Classes of the
Subordinated Certificates of a Series by means of this Prospectus and such
Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement with
respect to a Series of Certificates, each Certificate offered hereby and by the
applicable Prospectus Supplement will be issued in fully registered form. The
Certificates of a Series offered hereby and by means of the applicable
Prospectus Supplements will be transferable and exchangeable at the office or
agency maintained by the Trustee or such other entity for such purpose set forth
in the related Prospectus Supplement. No service charge will be made for any
transfer or exchange of Certificates, but the Trustee or such other entity may
require payment of a sum sufficient to cover any tax or other governmental
charge in connection with such transfer or exchange. In the event that an
election is made to treat the Trust Estate (or a segregated pool of assets
therein) as a REMIC, no legal or beneficial interest in all or any portion of
the "residual interest" thereof may be transferred without the receipt by the
transferor and the Trustee of an affidavit signed by the transferee stating,
among other things, that the transferee (i) is not a disqualified organization
within the meaning of Code Section 860E(e) or an agent (including a broker,
nominee, or middleman) thereof and (ii) understands that it may incur tax
liabilities in excess of any cash flows generated by the residual interest.
Further, the transferee must state in the affidavit that it (x) historically has
paid its debts as they have come due, (y) intends to pay its debts as they come
due in the future and (z) intends to pay taxes associated with holding the
residual interest as they become due. The transferor must certify to the Trustee
that, as of the time of the transfer, it has no actual knowledge that any of the
statements made in the transferee affidavit are false and no reason to know that
the statements made by the transferee pursuant to clauses (x), (y) and (z) of
the preceding sentence are false. See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Residual Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates." In the event that an election is not made to treat the Trust
Estate (or a segregated pool of assets therein) as a REMIC, no Subordinated
Certificate may be transferred unless an appropriate ruling of the Internal
Revenue Service or opinion of counsel is obtained to the effect that the
transfer will not result in the arrangement contemplated under the Pooling and
Servicing Agreement being treated as an association taxable as a corporation
under the Code.
Unless otherwise specified in the applicable Prospectus Supplement,
distributions to Certificateholders of all Series (other than the final
distribution in retirement of the Certificates) will be made by check mailed to
the address of the person entitled thereto as it appears on the certificate
register, except that, with respect to any holder of a Certificate evidencing
not less than a certain minimum denomination set forth in the applicable
Prospectus Supplement, distributions will be made by wire transfer in
immediately available funds, provided that the Servicer, or the Paying Agent
acting on behalf of the Servicer, shall have been furnished with appropriate
wiring instructions not less than three business days prior to the related
Distribution Date. The final distribution in retirement of Certificates will be
made only upon presentation and surrender of the Certificates at the office or
agency maintained by the Trustee or other entity for such purpose, as specified
in the final distribution notice to Certificateholders.
A Series of Certificates will consist of one or more Classes of Standard
Certificates or Stripped Certificates (referred to hereinafter sometimes
collectively as "Percentage Certificates") or two or more Classes of Multi-Class
Certificates (each as described below).
PERCENTAGE CERTIFICATES
Each Series of Percentage Certificates may include one or more Classes of
Standard Certificates or Stripped Certificates, any Class of which may be
divided into two or more Subclasses. The Standard Certificates of each Class
will evidence fractional undivided interests in all of the principal and
interest (to the extent of the Net Mortgage Interest Rate) payments on the
Mortgage Loans comprising the Trust Estate related to such Series. Each holder
of a Standard
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Certificate of a Class will be entitled to receive its Certificate's percentage
interest of the portion of the Pool Distribution Amount (as defined below)
allocated to such Class. The percentage interest of each Standard Certificate
will be equal to the percentage obtained by dividing the aggregate unpaid
principal balance of the Mortgage Loans represented by such Standard Certificate
as of the Cut-Off Date by the aggregate unpaid principal balance of the Mortgage
Loans represented by all the Standard Certificates of the same Class as of the
Cut-Off Date.
The Stripped Certificates of each Class will evidence fractional undivided
interests in specified portions of the principal and/or interest payments on the
Mortgage Loans comprising the Trust Estate related to such Series. The holders
of the Stripped Certificates of each Class will be entitled to receive a portion
(which may be zero) as specified in the applicable Prospectus Supplement of the
principal distributions comprising the Pool Distribution Amount, and a portion
(which may be zero) as specified in the applicable Prospectus Supplement of the
interest distributions comprising the Pool Distribution Amount on each
Distribution Date.
In the case of Classes of Stripped Certificates representing interests in
interest distributions on the Mortgage Loans and not in principal distributions
on the Mortgage Loans, such Certificates will be denominated in notional
amounts. The aggregate original notional amount for a Class of such Certificates
will be equal to the aggregate unpaid principal balance (or a specified portion
thereof) of the Mortgage Loans as of the Cut-Off Date specified in the
applicable Prospectus Supplement. The notional amount of each such Stripped
Certificate will be used to calculate the holder's pro rata share of the
interest distributions on the Mortgage Loans allocated to that Class and for the
determination of certain other rights of holders of such Class of Stripped
Certificates and will not represent an interest in, or entitle any such holder
to any distribution with respect to, any principal distributions on the Mortgage
Loans. Each such Certificate's pro rata share of the interest distribution on
the Mortgage Loans on each Distribution Date will be calculated by multiplying
the interest distributions on the Mortgage Loans allocated to its Class by a
fraction, the numerator of which is the original notional amount of such
Stripped Certificate and the denominator of which is the aggregate original
notional amount of all the Stripped Certificates of its Class.
The interest of a Class of Percentage Certificates representing an interest
in a Trust Estate (or a segregated pool of assets therein) with respect to which
an election to be treated as a REMIC has been made may be fixed as described
above or may vary over time as a result of prepayments received and losses
realized on the underlying Mortgage Loans. A Series of Percentage Certificates
comprised of Classes whose percentage interests in the Trust Estate may vary is
referred to herein as a Series of "Shifting Interest Certificates."
Distributions on, and subordination arrangements with respect to, Shifting
Interest Certificates are discussed below under the headings "Description of the
Certificates-- Distributions to Percentage Certificateholders--Shifting Interest
Certificates" and "Credit Support--Subordination-- Shifting Interest
Certificates."
MULTI-CLASS CERTIFICATES
Each Series may include two or more Classes of Multi-Class Certificates.
Each Multi-Class Certificate will be assigned a Stated Amount. The Stated Amount
may be based on an amount of principal of the underlying Mortgage Loans or on
the value of an amount of future cash flows from the related Trust Estate,
without distinction as to principal and interest received on the Mortgage Loans.
The initial Stated Amount of each Class within a Series of Multi-Class
Certificates will be specified in the applicable Prospectus Supplement. Interest
on the Classes of Multi-Class Certificates will be paid at rates specified in or
determined as specified in the applicable Prospectus Supplement, and will accrue
in the manner specified therein. Each Series of Multi-Class Certificates may
include one or more Classes of Certificates on which interest accrues but is not
payable until such time as specified in the applicable Prospectus Supplement
("Compound Interest Certificates"), and interest accrued on any such Class will
be added to the Stated Amount thereof in the manner described therein.
DISTRIBUTIONS TO PERCENTAGE CERTIFICATEHOLDERS
CERTIFICATES OTHER THAN SHIFTING INTEREST CERTIFICATES
Except as otherwise specified in the applicable Prospectus Supplement, on or
about the 17th day of each month in which a Distribution Date occurs (the
"Determination Date"), the Servicer will determine the amount of the principal
and interest payments on the Mortgage Loans which will be distributed to holders
of each Class and Subclass of Percentage Certificates on the succeeding
Distribution Date. Such amounts will be distributed, pro rata, to holders of a
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Class or Subclass of Percentage Certificates (other than Shifting Interest
Certificates) except, in the case of Subordinated Certificateholders, for any
amounts required to be paid to the holders of the related Senior Certificates or
deposited in the related Subordination Reserve Fund, if any. If the Certificates
of a Class include two or more Subclasses, the allocation of distributions of
principal and interest among such Subclasses will be as specified in the related
Prospectus Supplement.
CALCULATION OF DISTRIBUTABLE AMOUNTS. On each Determination Date, the
Servicer will calculate the "Distributable Amount" for the following
Distribution Date for each Class of Certificates. Unless otherwise specified in
the applicable Prospectus Supplement, the Distributable Amount for a Class of
Senior Certificates (a "Senior Class") of a Series on a Distribution Date (the
"Senior Class Distributable Amount") will be an amount equal to the sum of:
(i) the aggregate undivided interest, expressed as a percentage and
specified in the applicable Prospectus Supplement, evidenced by all
Certificates of such Senior Class (the "Senior Class Principal Portion") of:
(a) all scheduled payments of principal on each outstanding Mortgage
Loan that became due on the Due Date immediately preceding such
Distribution Date in accordance with the amortization schedules of the
related Mortgage Loans (as adjusted to give effect to any previous
prepayments), whether or not such payments were actually received by the
Servicer (the aggregate of such scheduled payments due on any such Due
Date being referred to herein as "Scheduled Principal"), and all partial
principal prepayments received by the Servicer on or after the
Determination Date in the month preceding the month in which the
Distribution Date occurs (or after the Cut-Off Date, in the case of the
first Distribution Date) and prior to the Determination Date occurring in
the month in which the Distribution Date occurs ("Curtailments");
(b) all principal prepayments in full received by the Servicer during
the month preceding the month in which such Distribution Date occurs; and
(c) the unpaid principal balance, less any amounts with respect
thereto constituting Late Payments (as herein defined) attributable to
principal, and less any unreimbursed Periodic Advances with respect
thereto, of each Mortgage Loan which was repurchased by the Seller or
purchased by the Servicer, as the case may be (as described in "The Trust
Estates--Mortgage Loans--Assignment of Mortgage Loans to the Trustee",
"--Optional Repurchases," and "The Pooling and Servicing
Agreement--Termination; Purchase of Certificates"), and of each Mortgage
Loan in respect of which property was acquired, liquidated or foreclosed,
and with respect to which Liquidation Proceeds (as defined herein) were
received, during the month preceding the month in which such Distribution
Date occurs, determined as of the date each such Mortgage Loan was
repurchased or purchased, as the case may be, or as of the date each such
related property was acquired, liquidated or foreclosed, as the case may
be; and
(ii) interest at the applicable Pass-Through Rate from the second
preceding Due Date to the Due Date immediately preceding such Distribution
Date on the Senior Class Principal Portion of the aggregate principal
balance of the Mortgage Loans as of the Cut-Off Date, less scheduled
amortization of principal thereon and any principal prepayments with respect
thereto through the second preceding Due Date (the "Scheduled Principal
Balance"), whether or not such interest was actually received by the
Servicer; provided that interest attributable to the accrual of interest on
any prepaid Mortgage Loan at the Net Mortgage Interest Rate for such
Mortgage Loan from the date of its prepayment in full through the last day
of the month in which such prepayment in full occurred ("Prepayment Interest
Shortfall") is included only to the extent that funds for such purposes are
available out of the aggregate Servicing Fees; and
(iii) the sum of (a) the portion that was included in the Senior Class
Distributable Amount on a prior Distribution Date of the amount of each
scheduled payment of principal and interest on a Mortgage Loan not paid by
the mortgagor when due, net of any unreimbursed Periodic Advance with
respect thereto that was included in the Distributable Amount of each Class
on a prior Distribution Date but was not included in the Pool Distribution
Amount until the current Distribution Date (such net amount, a "Late
Payment"), less the aggregate amount, if any, received by the holders of
such Senior Certificates on any prior Distribution Date or Dates with
respect to such Late Payment from amounts otherwise distributable to the
holders of Subordinated Certificates and from any credit enhancement
available for the benefit of the Senior Certificateholders, and (b) interest
on the amount set forth in clause (a) above at the Pass-Through Rate from
the Distribution Date on which such Late Payment was first
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<PAGE>
included in the Distributable Amount for such Senior Certificates to the current
Distribution Date (the "Late Payment Period"); provided that the foregoing
amount will be included in the Senior Class Distributable Amount on a
Distribution Date only to the extent such amount is included in the Pool
Distribution Amount with respect to such Distribution Date.
Unless otherwise specified in the applicable Prospectus Supplement, the
Distributable Amount for a Class of Subordinated Certificates of a Series on a
Distribution Date (the "Subordinated Class Distributable Amount") will be an
amount equal to the sum of:
(i) the aggregate undivided interest, expressed as a percentage and
specified in the applicable Prospectus Supplement, evidenced by all
Subordinated Certificates (the "Subordinated Class Principal Portion") of:
(a) all Scheduled Principal and all Curtailments;
(b) all principal prepayments in full received by the Servicer during
the month preceding the month in which such Distribution Date occurs; and
(c) the unpaid principal balance, less any amounts with respect
thereto constituting Late Payments attributable to principal, and less
any unreimbursed Periodic Advances with respect thereto, of each Mortgage
Loan which was repurchased by the Seller or purchased by the Servicer,
and of each Mortgage Loan in respect of which property was acquired,
liquidated or foreclosed, and with respect to which Liquidation Proceeds
were received, during the month preceding the month in which such
Distribution Date occurs, determined as of the date each such Mortgage
Loan was repurchased or purchased, as the case may be, or as of the date
each such related property was acquired, liquidated or foreclosed, as the
case may be; and
(ii) interest at the applicable Pass-Through Rate from the second
preceding Due Date to the Due Date immediately preceding such Distribution
Date on the Subordinated Class Principal Portion of the Scheduled Principal
Balance of the Mortgage Loans as of the Determination Date preceding such
Distribution Date, whether or not such interest was actually received with
respect to the Mortgage Loans; provided that Prepayment Interest Shortfall
is included only to the extent that funds for such purposes are available
from the aggregate Servicing Fees; and
(iii) the sum of (a) each Late Payment that was included in the
Subordinated Class Distributable Amount on a prior Distribution Date plus
the aggregate amount, if any, received by the Senior Certificateholders on
any prior Distribution Date or Dates with respect to such Late Payment from
amounts otherwise available for distribution to the Subordinated
Certificateholders on such prior Distribution Date or Dates, or from the
Subordination Reserve Fund and not attributable to the Initial Deposit, and
(b) interest on the amount set forth in clause (a) above at the Pass-Through
Rate during the Late Payment Period; provided that the foregoing amount will
be included in the Subordinated Class Distributable Amount on such
Distribution Date only to the extent such amount is included in the Pool
Distribution Amount with respect to such Distribution Date.
DETERMINATION OF AMOUNTS TO BE DISTRIBUTED. Unless otherwise specified in
the applicable Prospectus Supplement, funds available for distribution to
Certificateholders of a Series of Percentage Certificates with respect to each
Distribution Date for such Series (the "Pool Distribution Amount") will be the
sum of all previously undistributed payments or other receipts on account of
principal (including principal prepayments and Liquidation Proceeds, if any) and
interest on or in respect of the related Mortgage Loans received by the Servicer
after the Cut-Off Date (except for amounts due on or prior to the Cut-Off Date),
or received by the Servicer on or prior to the Cut-Off Date but due after the
Cut-Off Date, in either case received on or prior to the business day preceding
the Determination Date in the month in which such Distribution Date occurs, plus
all Periodic Advances made by the Servicer with respect to payments due to be
received on the Mortgage Loans on the Due Date preceding such Distribution Date,
but excluding the following:
(a) amounts received as late payments of principal or interest
respecting which the Servicer previously has made one or more unreimbursed
Periodic Advances;
(b) unreimbursed Periodic Advances with respect to liquidated Mortgage
Loans;
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<PAGE>
(c) those portions of each payment of interest on a particular Mortgage
Loan which represent (i) the Fixed Retained Yield, if any, and (ii) the
applicable Servicing Fee, as adjusted in respect of principal prepayments in
full as described in "Servicing of the Mortgage Loans--Adjustment to
Servicing Fee in Connection with Prepaid Mortgage Loans" below;
(d) all amounts representing scheduled payments of principal and
interest due after the Due Date occurring in the month in which such
Distribution Date occurs;
(e) all principal prepayments in full and all proceeds (including
Liquidation Proceeds) of any Mortgage Loans, or property acquired in respect
thereof, liquidated, foreclosed, purchased or repurchased pursuant to the
applicable Pooling and Servicing Agreement, received on or after the Due
Date occurring in the month in which such Distribution Date occurs and all
Curtailments received by the Servicer on or after the Determination Date
occurring in the month in which such Distribution Date occurs, and all
related payments of interest on such amounts;
(f) that portion of Liquidation Proceeds which represents any unpaid
Servicing Fee to which the Servicer is entitled and any unpaid Fixed
Retained Yield;
(g) if an election has been made to treat the applicable Trust Estate as
a REMIC, any Net Foreclosure Profits with respect to such Distribution Date.
"Net Foreclosure Profits" with respect to a Distribution Date will be the
excess of (i) the portion of aggregate net Liquidation Proceeds which
represents the amount by which aggregate profits on Liquidated Loans with
respect to which net Liquidation Proceeds exceed the unpaid principal
balance thereof plus accrued interest thereon at the Mortgage Interest Rate
over (ii) aggregate realized losses on Liquidated Loans with respect to
which net Liquidation Proceeds are less than the unpaid principal balance
thereof plus accrued interest at the Mortgage Interest Rate.
(h) all amounts representing certain expenses reimbursable to the
Servicer and other amounts permitted to be withdrawn by the Servicer from
the Certificate Account, in each case pursuant to the applicable Pooling and
Servicing Agreement;
(i) all amounts in the nature of late fees, assumption fees, prepayment
fees and similar fees which the Servicer is entitled to retain pursuant to
the applicable Pooling and Servicing Agreement; and
(j) reinvestment earnings on payments received in respect of the
Mortgage Loans.
The Servicer will calculate the portion of the Distributable Amount for each
Class of the Series that is available to be paid out of the Pool Distribution
Amount on such date. The portion so available on a Distribution Date to the
Senior Certificateholders and to the Subordinated Certificateholders
(respectively, the "Senior Class Pro Rata Share" and the "Subordinated Class Pro
Rata Share") will be the amount equal to the product of (a) the Pool
Distribution Amount for such date and (b) a fraction the numerator of which is
the Distributable Amount for such Class on such date and the denominator of
which is the sum of the Distributable Amounts for such Series on such date.
On each Distribution Date for a Series of Percentage Certificates (other
than Shifting Interest Certificates), the holders of the Senior Certificates of
such Series will be entitled to receive the Senior Class Pro Rata Share of such
Class on such Distribution Date. In addition, to the extent credit enhancement
is available on such Distribution Date, the Senior Certificateholders will be
entitled to receive the amount by which the Senior Class Distributable Amount
plus any Senior Class Carryover Shortfall (as defined below) on such
Distribution Date exceeds the Senior Class Pro Rata Share on such Distribution
Date (such excess being referred to herein as the "Senior Class Shortfall").
Such credit support includes: (a) amounts otherwise distributable to the
Subordinated Certificateholders on such Distribution Date and amounts available
for such purpose in the Subordination Reserve Fund as described below; (b)
amounts held in the Certificate Account for future distributions to
Certificateholders; and (c) amounts available under any form of credit
enhancement (other than subordination) which is specified in the applicable
Prospectus Supplement. See "Credit Support" below. The manner in which any
available credit support will be allocated among Subclasses of a Senior Class
will be set forth in the applicable Prospectus Supplement. With respect to any
Distribution Date, the "Senior Class Carryover Shortfall" means the excess, if
any, of (a) the amount the Senior Certificateholders were entitled to receive on
the prior Distribution Date less the amount the Senior Certificateholders
received on such prior Distribution Date, together with interest thereon at the
Pass-Through Rate of such Senior Class from such prior Distribution Date through
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the current Distribution Date, over (b) the portion of the amount specified in
clause (a) constituting Late Payments, together with interest on such portion at
the applicable Pass-Through Rate from such prior Distribution Date through the
current Distribution Date, to the extent such Late Payments and interest thereon
are included in the Pool Distribution Amount with respect to the current
Distribution Date.
With respect to a Series of Percentage Certificates (other than Shifting
Interest Certificates) including a Class of Subordinated Certificates, once the
Subordinated Amount is reduced to zero, any remaining Senior Class Shortfall
with respect to a Class of Senior Certificates will cease to be payable from
amounts otherwise distributable to the Subordinated Certificateholders and the
amounts in the related Subordination Reserve Fund, if any, except that the
portion of such Senior Class Shortfall which is attributable to the accrual of
interest on the Senior Class Carryover Shortfall (the "Senior Class Shortfall
Accruals") shall continue to bear interest at the applicable Pass-Through Rate,
and the Senior Certificateholders shall continue to have a preferential right to
be paid such amounts from distributions otherwise available to the Subordinated
Certificateholders until such amount (including interest thereon at the
applicable Pass-Through Rate) is paid in full. See "Credit
Support--Subordination" below.
The Subordinated Certificateholders will be entitled to receive on any
Distribution Date an amount equal to the Subordinated Class Pro Rata Share less:
(a) any amounts required to be distributed to the Senior Certificateholders
pursuant to the subordination of the rights of the Subordinated
Certificateholders as described below; and (b) any amounts necessary to fund the
Subordination Reserve Fund as described below. See "Credit
Support--Subordination" below.
SHIFTING INTEREST CERTIFICATES
On each Distribution Date for a series of Shifting Interest Certificates,
the Servicer will distribute on behalf of the Trustee or cause the Paying Agent
to distribute, as the case may be, to the holders of record on the Record Date
of a Class of Senior Certificates, to the extent of the Pool Distribution Amount
with respect to such Distribution Date (as determined by the Servicer on the
related Determination Date in the same manner as described above with respect to
Percentage Certificates other than Shifting Interest Certificates) and prior to
any distribution being made on the related Subordinated Certificates, an amount
equal to the Senior Class Distribution Amount. The Senior Class Distribution
Amount will (except as otherwise set forth in the applicable Prospectus
Supplement) be calculated for any Distribution Date as the lesser of (x) the
Pool Distribution Amount for such Distribution Date and (y) the sum of:
(i) one month's interest at the applicable Pass-Through Rate on such
Class's outstanding principal balance (less, if specified in the applicable
Prospectus Supplement, (a) the amount by which the aggregate Prepayment
Interest Shortfall with respect to the preceding month exceeds the aggregate
Servicing Fees, in each case allocated to such Class on the basis set forth
in the related Prospectus Supplement and/or (b) one month's interest at the
applicable Net Mortgage Interest Rate on such Class's percentage, specified
in the applicable Prospectus Supplement, of the Scheduled Principal Balance
of each Special Hazard Mortgage Loan (as defined below) covered by clause
(iv) below);
(ii) if distribution of the amount of interest calculated pursuant to
clause (i) above on any prior Distribution Date was not made in full on such
prior Distribution Date, an amount equal to (a) the difference between (x)
the amount of interest which the holders of such Class would have received
on the prior Distribution Date if there had been sufficient funds available
in the Certificate Account and (y) the amount of interest actually
distributed to such holders on such prior Distribution Date (the "Unpaid
Interest Shortfall") less (b) the aggregate amount distributed on
Distribution Dates subsequent to such prior Distribution Date with respect
to the Unpaid Interest Shortfall;
(iii) such Class's percentage, calculated as provided in the applicable
Prospectus Supplement, of (a) all scheduled payments of principal due on
each outstanding Mortgage Loan, on the Due Date occurring in the month in
which the Distribution Date occurs, (b) all partial principal prepayments
received by the Servicer in reduction of the unpaid principal of any
Mortgage Loan on or after the Determination Date in the month preceding the
month in which the Distribution Date occurs (or after the Cut-Off Date, in
the case of the first Distribution Date) and prior to the Determination Date
occurring in the month in which the Distribution Date occurs, and (c) except
for Special Hazard Mortgage Loans covered by clause (iv) below, the
Scheduled Principal Balance of each Mortgage Loan
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which, during such preceding month, (i) was the subject of a principal
prepayment in full, (ii) became a liquidated Mortgage Loan, or (iii) was
repurchased by the Seller or purchased by the person or persons specified in
the applicable Prospectus Supplement pursuant to the Pooling and Servicing
Agreement; and
(iv) such Class's specified percentage of the net Liquidation Proceeds
from any Mortgage Loan that became a Special Hazard Mortgage Loan during
such preceding month (but only if the Special Hazard Termination Date (as
defined below) has occurred);
provided that, if such Distribution Date falls on or after the Cross-Over Date
(i.e., the date on which the amount of principal payments on the Mortgage Loans
to which the holders of the related Subordinated Certificates are entitled has
been reduced to zero as a result of the allocation of losses to the Subordinated
Certificates), then the Senior Class Distribution Amount will instead equal the
lesser of (x) the Pool Distribution Amount and (y) the sum of the items referred
to above plus the amount by which such Class's outstanding principal balance as
of such Distribution Date exceeds the Pool Scheduled Principal Balance as of
such Distribution Date. The Pool Scheduled Principal Balance as of any
Distribution Date is the aggregate of the Scheduled Principal Balances of all
Mortgage Loans in a Trust Estate that were outstanding on the first day of the
month prior to the month in which such Distribution Date falls. The Pool
Scheduled Principal Balance is determined after taking into account all
Curtailments applied by the Servicer on such first day of the month prior to the
month in which such Distribution Date falls. Under its current servicing
practices, Curtailments received in any month are applied by the Servicer in
reduction of the unpaid principal balance of the related Mortgage Loan as of the
first day of such month.
If so provided in the applicable Prospectus Supplement, one or more Classes
of Senior Certificates will also be entitled to receive, as its or their
specified percentage(s) referred to in clauses (y)(iii)(b) and (y)(iii)(c)(i)
above, all partial principal prepayments and all principal prepayments in full
on the Mortgage Loans in the related Trust Estate under the circumstances or for
the period of time specified therein, which will have the effect of accelerating
the amortization of the Senior Certificates while increasing the respective
interest evidenced by the Subordinated Certificates in the related Trust Estate.
Increasing the respective interest of the Subordinated Certificates relative to
that of the Senior Certificates is intended to preserve the availability of the
subordination provided by the Subordinated Certificates.
If the Special Hazard Termination Date would occur on any Distribution Date
under the circumstances referred to in "Credit Support--Subordination" below,
the Senior Class Distribution Amount for each Class of Senior Certificates of
such Series calculated as set forth in the two preceding paragraphs will be
modified to the extent described in such section.
Amounts distributed to a Class of Senior Certificates on a Distribution Date
will be deemed to be applied first to the payment of current interest, if any,
due on such Class (i.e., the amount calculated pursuant to clause (y)(i) of the
third preceding paragraph), second to the payment of any Unpaid Interest
Shortfall (i.e., the amount calculated pursuant to clause (y)(ii) of such
paragraph) and third to the payment of principal, if any, due on such Class
(i.e., the aggregate of the amounts calculated pursuant to clauses (y)(iii) and
(y)(iv) of such paragraph).
As indicated above, in the event that the Pool Distribution Amount on any
Distribution Date is not sufficient to make the full distribution of current
interest to the holders of a Class of Senior Certificates entitled to payments
of interest, the difference between the amount of current interest which the
holders of such Class would have received on such Distribution Date if there had
been sufficient funds available and the amount actually distributed will be
added to the amount of interest which the holders of such Class are entitled to
receive on the next Distribution Date. Unless otherwise specified in the
applicable Prospectus Supplement, the amount of any such interest shortfall so
carried forward will not bear interest.
If the Pool Distribution Amount is insufficient on any Distribution Date to
make the full distribution of principal due on a Class of Senior Certificates,
the percentage of principal payments to which the holders of the Senior
Certificates would be entitled on the immediately succeeding Distribution Date
will be increased. This increase will have the effect of reducing, as a relative
matter, the respective interest of the holders of the Subordinated Certificates
in future payments of principal on the related Mortgage Loans. If the Pool
Distribution Amount is not sufficient to make full distribution described above
to the holders of all Classes of Senior Certificates on any Distribution Date
(assuming that more than one Class or Subclass of Senior Certificates of a
Series has been issued), unless otherwise specified in the applicable
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Prospectus Supplement, the holders of each such Class or Subclass will share in
the funds actually available in proportion to the respective amounts that each
such Class or Subclass would have received had the Pool Distribution Amount been
sufficient to make the full distribution of interest and principal due to each
such Class or Subclass.
Unless otherwise provided in the related Prospectus Supplement, on each
Distribution Date the holders of the related Subordinated Certificates will be
entitled to receive (in the amounts specified therein if there is more than one
Class of Subordinated Certificates), out of funds available for distribution in
the related Certificate Account on such date, all amounts remaining after
deduction of the amounts required to be distributed to the holders of all
Classes of Senior Certificates of the same Series.
EXAMPLE OF DISTRIBUTION TO PERCENTAGE CERTIFICATEHOLDERS
The following chart sets forth an example of the application of the
foregoing provisions to the first two months of the related Trust Estate's
existence, assuming the Certificates are issued in the month of January, with a
Distribution Date on the 25th of each month and a Determination Date on the 17th
of each month:
<TABLE>
<S> <C>
January 1(A)................ Cut-Off Date.
January 2-January 31(B)..... The Servicer receives any principal prepayments in
full (including prepayments due to liquidation)
and interest thereon to date of prepayment.
January 31(C)............... Record Date.
February 1-February 16(D)... The Servicer receives scheduled payments of
principal and interest due on February 1.
February 17(E).............. Determination Date.
February 25(F).............. Distribution Date.
</TABLE>
- ------------------------
(A) The initial unpaid principal balance of the Mortgage Loans in a Trust Estate
would be the aggregate unpaid principal balance of the Mortgage Loans at the
close of business on January 1, after deducting principal payments due on or
before such date. Those principal payments due on or before January 1 and
the related interest payments, would not be part of the Trust Estate and
would be remitted by the Servicer to the Seller when received.
(B) Principal prepayments in full received during this period would be credited
to the Certificate Account for distribution to Certificateholders on the
February 25 Distribution Date. When a Mortgage Loan is prepaid in full or
liquidated or an insurance claim with respect to a Mortgage Loan is settled,
interest on the amount prepaid, liquidated or received in settlement is
collected only from the last scheduled Due Date to the date of prepayment,
liquidation or settlement. In addition, when a Mortgage Loan is prepaid in
part and such payment is applied as of a date other than a Due Date,
interest is charged on such payment only to the date applied. To the extent
funds are available from the aggregate Servicing Fees relating to mortgagor
payments or other recoveries distributed to Certificateholders on the
related Distribution Date, the Servicer would make an additional payment to
Certificateholders with respect to any Mortgage Loan that prepaid in full in
January equal to the amount of interest on such Mortgage Loan at the Net
Mortgage Interest Rate for such Mortgage Loan from the date of such
prepayment in full through January 31.
(C) Distributions in the month of February will be made to Certificateholders of
record at the close of business on this date.
(D) Scheduled monthly payments on the Mortgage Loans due on February 1, and
partial principal prepayments received by the Servicer in reduction of the
unpaid principal balance of any Mortgage Loan prior to February 17, will be
deposited in the Certificate Account as received by the Servicer and will be
distributed to Certificateholders on the February 25 Distribution Date.
Principal prepayments in full, liquidation proceeds and proceeds with
respect to the repurchase or purchase of any of the Mortgage Loans, in each
case received during this period, and partial principal prepayments received
on or after February 17, will be deposited in the Certificate Account but
will not be distributed to Certificateholders on the February 25
Distribution Date. Instead, such amounts will be credited to the Certificate
Account for distribution to Certificateholders on the March 25 Distribution
Date.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
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<PAGE>
Succeeding monthly periods follow the pattern of (B) through (F), except
that the period in (B) begins on the first of the month.
DISTRIBUTIONS TO MULTI-CLASS CERTIFICATEHOLDERS
The following description of distributions to Multi-Class Certificateholders
is one example of how such distributions may be determined. The Prospectus
Supplement for a Series may provide for a different manner in which
distributions to Multi-Class Certificateholders will be determined for such
Series so long as such Multi-Class Certificates are rated upon issuance in one
of the four highest rating categories by at least one Rating Agency.
Except as otherwise set forth in the applicable Prospectus Supplement,
distributions of interest and distributions in reduction of the Stated Amount of
Multi-Class Certificates will be made from the Pool Distribution Amount (as
determined by the Servicer on the related Determination Date in the same manner
as described above with respect to Series of Percentage Certificates) on each
Distribution Date for such Series to the holders of each Class then entitled to
receive such distributions until the aggregate amount of such distributions have
reduced the Stated Amount of each such Class of Certificates to zero.
Distributions in reduction of Stated Amount will be allocated among the Classes
of such Certificates in the manner specified in the applicable Prospectus
Supplement. If so specified in the related Prospectus Supplement, such Series
may include Classes designed to receive principal payments using a predetermined
schedule such as planned amortization class certificates and targeted
amortization class certificates and Classes that receive principal payments only
if other designated Classes receive their scheduled payments. Unless otherwise
specified in the applicable Prospectus Supplement, all distributions in
reduction of the Stated Amount of a Class of Multi-Class Certificates will be
made pro rata among the Certificates of such Class.
Unless otherwise specified in the Prospectus Supplement relating to a Series
of Certificates, the aggregate amount that will be distributed in reduction of
Stated Amount to holders of Multi-Class Certificates of a Series then entitled
thereto on any Distribution Date for such Series will equal, to the extent funds
are available, the sum of (i) the Multi-Class Certificate Distribution Amount
(as defined herein) and (ii) if and to the extent specified in the related
Prospectus Supplement, the applicable percentage of the Spread specified in such
Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, the
"Multi-Class Certificate Distribution Amount" with respect to a Distribution
Date for a Series of Multi-Class Certificates will equal the amount, if any, by
which the Stated Amount of the Multi-Class Certificates of such Series (after
taking into account the amount of interest to be added to the Stated Amount of
any Class of Compound Interest Certificates on such Distribution Date and before
giving effect to any distributions in reduction of Stated Amount on such
Distribution Date) exceeds the Pool Value (as defined
- --------------------------------------------------------------------------------
(FOOTNOTES CONTINUED FROM PRECEDING PAGE)
(E) As of the close of business on February 17, the Servicer will determine the
amounts of Periodic Advances and the amounts of principal and interest which
will be distributed to the Certificateholders, including scheduled payments
due on or before February 1 which have been received on or before the close
of business on February 16, partial principal prepayments received by the
Servicer in reduction of the unpaid principal balance of any Mortgage Loan
prior to February 17 and principal prepayments in full, liquidation
proceeds, and proceeds with respect to the repurchase or purchase of any of
the Mortgage Loans, received during the period commencing January 2 and
ending on January 31. With respect to each Series of Percentage
Certificates, other than Shifting Interest Certificates, the Servicer will
calculate the Distributable Amount and the Pro Rata Share for each Class,
and the amount otherwise distributable to the Subordinated Class, together
with amounts, if any, in the Subordination Reserve Fund, will be available,
to the extent of the Subordinated Amount, to increase the amount
distributable to the Senior Class or Classes up to the Senior Class
Shortfall in respect of such Classes. With respect to each Series of
Shifting Interest Certificates, the Servicer will calculate the Senior Class
Distribution Amount for each Senior Class and will determine the percentage
interests of each Senior Class to be used in connection with calculating
Senior Class Distribution Amounts with respect to the March 25 Distribution
Date. If applicable, the Servicer will calculate the amounts payable in
respect of any other form of credit enhancement.
(F) Unless otherwise so specified in the related Prospectus Supplement, the
Servicer or the Paying Agent will make distributions to Certificateholders
on the 25th day of each month, or if such 25th day is not a business day, on
the next business day.
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<PAGE>
herein) of the Mortgage Loans included in the Trust Estate for such Series as of
the end of the period (a "Due Period") specified in the related Prospectus
Supplement. For purposes of determining the Multi-Class Certificate Distribution
Amount with respect to a Distribution Date for a Series of Certificates having
one or more Classes of Multi-Class Certificates, the Pool Value of the Mortgage
Loans included in the Trust Estate for such Certificates will be reduced to take
into account all distributions thereon received by the Trustee during the
applicable Due Period.
Unless otherwise specified in the applicable Prospectus Supplement, "Spread"
with respect to a Distribution Date for a Series of Multi-Class Certificates
will be the excess of (a) the sum of (i) all payments of principal and interest
received on the related Mortgage Loans (net of the Fixed Retained Yield, if any,
and the applicable Servicing Fee with respect to such Mortgage Loans) in the Due
Period applicable to such Distribution Date and, in the case of the first Due
Period, any amount deposited by the Seller in the Certificate Account on the
Closing Date, (ii) income from reinvestment thereof, if any, and (iii) to the
extent specified in the applicable Prospectus Supplement, the amount of cash
withdrawn from any reserve fund or available under any other form of credit
enhancement for such Series, over (b) the sum of (i) all interest distributed on
the Multi-Class Certificates of such Series on such Distribution Date, (ii) the
Multi-Class Certificate Distribution Amount for such Series with respect to such
Distribution Date, (iii) if applicable to such Series, any Special Distributions
(as described below) in reduction of the Stated Amount of the Multi-Class
Certificates of such Series made since the preceding Distribution Date for such
Series (or since the Closing Date in the case of the first Distribution Date for
such Series), including any accrued interest distributed with such Special
Distributions, (iv) all administrative and other expenses relating to the Trust
Estate payable during the Due Period preceding such Distribution Date, other
than such expenses which are payable by the Servicer, and any amount required to
be deposited into any reserve fund from funds allocable to the Multi-Class
Certificates in the Certificate Account. Reinvestment income on any reserve fund
will not be included in Spread except to the extent that reinvestment income is
taken into account in calculating the initial amount required to be deposited in
such reserve fund, if any.
VALUATION OF MORTGAGE LOANS
If specified in the Prospectus Supplement relating to a series of
Multi-Class Certificates, for purposes of establishing the principal amount of
Mortgage Loans that will be included in a Trust Estate for such Series, each
Mortgage Loan to be included in such Trust Estate will be assigned an initial
"Pool Value." Unless otherwise specified in the applicable Prospectus
Supplement, the Pool Value of each Mortgage Loan in the Trust Estate for a
Series is the Stated Amount of Multi-Class Certificates of such Series which,
based upon certain assumptions and regardless of any prepayments on such
Mortgage Loans, can be supported by the scheduled payments of principal and
interest on such Mortgage Loans (net of the Fixed Retained Yield on such
Mortgage Loans, if any, and the applicable Servicing Fee), together with
reinvestment earnings thereon, if any, at the Assumed Reinvestment Rate for the
period specified in the related Prospectus Supplement and amounts available to
be withdrawn (if applicable) from any reserve fund for such Series, all as
specified in the applicable Prospectus Supplement. In calculating the Pool Value
of a Mortgage Loan included in the Trust Estate, future distributions on such
Mortgage Loan will be determined based on scheduled payments on such Mortgage
Loan. Any similar Mortgage Loans may be aggregated into one or more groups
(each, a "Pool Value Group"), each of which will be assigned an aggregate Pool
Value calculated as if all such Mortgage Loans in the Pool Value Group
constituted a single mortgage loan having the highest mortgage rate and the
longest maturity of any such mortgage loan for such Pool Value Group. There are
a number of alternative means of determining the Pool Value of a Mortgage Loan
or Pool Value Group, including determinations based on the discounted present
value of the remaining scheduled payments of principal and interest thereon and
determinations based on the relationship between the Mortgage Interest Rates
borne thereby and the Interest Rates of the Multi-Class Certificates of the
related Series. The Prospectus Supplement for each Series will describe the
method or methods (and related assumptions) used to determine the Pool Values of
the Mortgage Loans or the Pool Value Groups for such Series. In any event, on
each Distribution Date, after making the distributions in reduction of Stated
Amount on such Distribution Date, the aggregate of the Pool Values of all
Mortgage Loans and all the Pool Value Groups included in the Trust Estate for a
Series of Certificates will be at least equal to the aggregate Stated Amount of
the Multi-Class Certificates of such Series.
The "Assumed Reinvestment Rate" for a Series of Multi-Class Certificates
will be the highest rate permitted by the Rating Agency or Rating Agencies
rating such Series of Multi-Class Certificates or a rate insured by means of a
surety bond, guaranteed investment contract or similar arrangement satisfactory
to such Rating Agency or Rating Agencies. If the Assumed Reinvestment Rate is so
insured, the related Prospectus Supplement will set forth the terms of such
arrangement.
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<PAGE>
SPECIAL DISTRIBUTIONS
To the extent specified in the Prospectus Supplement relating to a Series of
Multi-Class Certificates which have other than monthly Distribution Dates, any
such Classes having Stated Amounts may receive special distributions in
reduction of Stated Amount, together with accrued interest on the amount of such
reduction ("Special Distributions") in any month, other than a month in which a
Distribution Date occurs, if, as a result of principal prepayments on the
Mortgage Loans in the related Trust Estate and/or reinvestment yields then
available, the Trustee determines, based on assumptions specified in the
applicable Pooling and Servicing Agreement, that the amount of cash anticipated
to be available on the next Distribution Date for such Series to be distributed
to the holders of such Multi-Class Certificates may be less than the sum of (i)
the interest scheduled to be distributed to such holders and (ii) the amount to
be distributed in reduction of Stated Amount of such Multi-Class Certificates on
such Distribution Date. Any such Special Distributions will be made in the same
priority and manner as distributions in reduction of Stated Amount would be made
on the next Distribution Date.
To the extent specified in the related Prospectus Supplement, one or more
Classes of Certificates of a Series of Multi-Class Certificates may be subject
to special distributions in reduction of the Stated Amount thereof at the option
of the holders of such Certificates, or to mandatory distributions by the
Servicer. Any such distributions with respect to a Series will be described in
the applicable Prospectus Supplement and will be on such terms and conditions as
described therein and specified in the Pooling and Servicing Agreement for such
Series.
LAST SCHEDULED DISTRIBUTION DATE
The "Last Scheduled Distribution Date" for each Class of Multi-Class
Certificates of a Series having a Stated Amount, to the extent Last Scheduled
Distribution Dates are specified in the applicable Prospectus Supplement, is the
latest date on which (based upon the assumptions set forth in the applicable
Prospectus Supplement) the Stated Amount of such Class is expected to be reduced
to zero. Since the rate of distributions in reduction of Stated Amount of each
such Class of Multi-Class Certificates will depend upon, among other things, the
rate of payment (including prepayments) of the principal of the Mortgage Loans
in the Trust Estate for such Series, the actual last Distribution Date for any
such Class could occur significantly earlier than its Last Scheduled
Distribution Date. To the extent of any delays in receipt of any payments,
insurance proceeds or liquidation proceeds with respect to the Mortgage Loans
included in any Trust Estate, the last Distribution Date for any such Class
could occur later than its Last Scheduled Distribution Date. The rate of
payments on the Mortgage Loans in the Trust Estate for any Series of
Certificates will depend upon their particular characteristics, as well as on
the prevailing level of interest rates from time to time and other economic
factors, and no assurance can be given as to the actual prepayment experience of
the Mortgage Loans. See "Prepayment and Yield Considerations" below.
CREDIT SUPPORT
SUBORDINATION
CERTIFICATES OTHER THAN SHIFTING INTEREST CERTIFICATES
If so specified in the Prospectus Supplement relating to a Series of
Certificates, other than a Series of Shifting Interest Certificates, the rights
of the holders of a Class of Subordinated Certificates to receive distributions
will be subordinated to the rights of the holders of a Class of Senior
Certificates, to the extent of the Subordinated Amount specified in such
Prospectus Supplement. The Subordinated Amount will be reduced by an amount
equal to Aggregate Losses and will be further reduced in accordance with a
schedule described in the applicable Prospectus Supplement. Aggregate Losses as
defined in the applicable Pooling and Servicing Agreement for any given period
will equal the aggregate amount of delinquencies, losses and other deficiencies
("Payment Deficiencies") in the amounts due to the Senior Certificateholders
paid or borne by the Subordinated Certificateholders (but excluding any payments
of Senior Class Shortfall Accruals or interest thereon) during such period,
whether such aggregate amount results by way of withdrawals from the
Subordination Reserve Fund (including, prior to the time that the Subordinated
Amount is reduced to zero, any such withdrawal of amounts attributable to the
Initial Deposit, if any), reductions in amounts that would otherwise have been
distributable to the Subordinated Certificateholders on any Distribution Date,
or otherwise; less the aggregate amount of previous Payment Deficiencies
recovered by the related Trust Estate during such period in respect of the
Mortgage Loans giving rise to such previous Payment Deficiencies, including,
without limitation, such recoveries
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<PAGE>
resulting from the receipt of delinquent principal or interest payments,
Liquidation Proceeds and insurance proceeds (net, in each case, of any
applicable Fixed Retained Yield and any unpaid Servicing Fee to which the
Servicer is entitled, foreclosure costs and other servicing costs, expenses and
advances relating to such Mortgage Loans).
The protection afforded to the Senior Certificateholders by the
subordination feature described above will be effected both by the preferential
right, to the extent specified in the applicable Prospectus Supplement, of such
Senior Certificateholders to receive current distributions on the related
Mortgage Loans that would otherwise have been distributable to the Subordinated
Certificateholders and (unless otherwise specified in the applicable Prospectus
Supplement) by the establishment and maintenance of a Subordination Reserve Fund
for such Series. Unless otherwise specified in the applicable Prospectus
Supplement, the Subordination Reserve Fund will not be a part of the Trust
Estate. The Subordination Reserve Fund may be funded initially with an initial
deposit by the Seller (the "Initial Deposit") in an amount set forth in the
applicable Prospectus Supplement. Following the initial issuance of the
Certificates of a Series and until the balance of the Subordination Reserve Fund
(without taking into account the amount of the Initial Deposit) first equals or
exceeds the Specified Subordination Reserve Fund Balance set forth in the
applicable Prospectus Supplement, and unless otherwise specified in the
applicable Prospectus Supplement, the Servicer will withhold all amounts that
would otherwise have been distributable to the Subordinated Certificateholders
and deposit such amounts (less any portions thereof required to be distributed
to Senior Certificateholders as described below) in the Subordination Reserve
Fund. The time necessary for the Subordination Reserve Fund of a Series to reach
the applicable Specified Subordination Reserve Fund Balance for such Series
after the initial issuance of the Certificates, and the period for which such
balance is maintained, will be affected by the delinquency, foreclosure and
prepayment experience of the Mortgage Loans in the related Trust Estate and
cannot be accurately predicted. Unless otherwise specified in the applicable
Prospectus Supplement, after the amount in the Subordination Reserve Fund
(without taking into account the amount of the Initial Deposit) for a Series
first equals or exceeds the applicable Specified Subordination Reserve Fund
Balance, the Servicer will withhold from the Subordinated Certificateholders and
will deposit in the Subordination Reserve Fund such portion of the principal
payments on the Mortgage Loans otherwise distributable to the Subordinated
Certificateholders as may be necessary to maintain the Subordination Reserve
Fund (without taking into account the amount of the Initial Deposit) at the
Specified Subordination Reserve Fund Balance. The Prospectus Supplement for each
Series will set forth the amount of the Specified Subordination Reserve Fund
Balance applicable from time to time and the extent, if any, to which the
Specified Subordination Reserve Fund Balance may be reduced.
In no event will the Specified Subordination Reserve Fund Balance for a
Series ever be required to exceed the Subordinated Amount. In the event the
Subordination Reserve Fund is depleted before the Subordinated Amount is reduced
to zero, the Senior Certificateholders will continue to have a preferential
right, to the extent specified in the applicable Prospectus Supplement, to
receive current distributions of amounts that would otherwise have been
distributable to the Subordinated Certificateholders to the extent of the then
Subordinated Amount.
After the Subordinated Amount is reduced to zero, the Senior
Certificateholders of a Series will, unless otherwise specified in the
applicable Prospectus Supplement, nonetheless have a preferential right to
receive payment of Senior Class Shortfall Accruals and interest which has
accrued thereon from amounts that would otherwise have been distributable to the
Subordinated Certificateholders. The Senior Certificateholders will otherwise
bear their proportionate share of any losses realized on the Trust Estate in
excess of the Subordinated Amount.
Amounts held from time to time in the Subordination Reserve Fund for a
Series will be held for the benefit of the Senior Certificateholders of such
Series until withdrawn from the Subordination Reserve Fund as described below.
If on any Distribution Date while the Subordinated Amount exceeds zero,
there is a Senior Class Shortfall, the Senior Class Certificateholders will be
entitled to receive from current payments on the Mortgage Loans that would
otherwise have been distributable to Subordinated Certificateholders the amount
of such Senior Class Shortfall. If such current payments are insufficient, an
amount equal to the lesser of: (i) the entire amount on deposit in the
Subordination Reserve Fund available for such purpose; or (ii) the amount
necessary to cover the Senior Class Shortfall will be withdrawn from the
Subordination Reserve Fund. Amounts representing investment earnings on amounts
held in the Subordination Reserve Fund will not be available to make payments to
the Senior Certificateholders. If current payments on the Mortgage Loans and
amounts available in the Subordination Reserve Fund are insufficient to pay the
entire Senior Class Shortfall, then amounts held in the Certificate Account for
future distributions will be distributed as necessary to the Senior
Certificateholders.
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Amounts withdrawn from the Subordination Reserve Fund for a Series and
deposited in the Certificate Account for such Series will be charged first
against amounts in the Subordination Reserve Fund other than the Initial Deposit
for such Series, and thereafter against such Initial Deposit.
Any amounts in the Subordination Reserve Fund for a Series on a Distribution
Date in excess of the Specified Subordination Reserve Fund Balance on such date
prior to the time the Subordinated Amount for such Series is reduced to zero,
and any amounts remaining in the Subordination Reserve Fund for such Series upon
termination of the trust created by the applicable Pooling and Servicing
Agreement, will be paid, unless otherwise specified in the applicable Prospectus
Supplement, to the Subordinated Certificateholders of such Series in accordance
with their pro rata ownership thereof, or, in the case of a Series with respect
to which an election has been made to treat the Trust Estate (or a segregated
pool of assets therein) as a REMIC, first to the Residual Certificateholders (to
the extent of any portion of the Initial Deposit, if any, and undistributed
reinvestment earnings attributable thereto), and second to the Subordinated
Certificateholders of such Series, in each case in accordance with their pro
rata ownership thereof. Amounts permitted to be distributed from the
Subordination Reserve Fund for a Series will no longer be subject to any claims
or rights of the Senior Certificateholders of such Series.
Funds in the Subordination Reserve Fund for a Series will be invested as
provided in the applicable Pooling and Servicing Agreement in certain types of
eligible investments ("Eligible Investments"). If an election has been made to
treat the Trust Estate (or a segregated pool of assets therein) as a REMIC, no
more than 30% of the income or gain of the Subordination Reserve Fund in any
taxable year may be derived from the sale or other disposition of investments
held for less than three months in the Subordination Reserve Fund. The earnings
on such investments will be withdrawn and paid to the Subordinated
Certificateholders of such Series or to the holders of the Residual
Certificates, in the event that an election has been made to treat the Trust
Estate (or a segregated pool of assets therein) with respect to such Series as a
REMIC, in accordance with their respective interests. Investment income earned
on amounts held in the Subordination Reserve Fund will not be available for
distribution to the Senior Certificateholders or otherwise subject to any claims
or rights of the Senior Certificateholders.
Eligible Investments for monies deposited in the Subordination Reserve Fund
will be specified in the applicable Pooling and Servicing Agreement and, unless
otherwise provided in the applicable Prospectus Supplement, will mature no later
than the next Distribution Date.
Holders of Subordinated Certificates of a Series will not be required to
refund any amounts which have been properly distributed to them, regardless of
whether there are sufficient funds to distribute to Senior Certificateholders
the amounts to which they are later entitled.
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Subordination Reserve Fund may be funded in any other manner
acceptable to the Rating Agency and consistent with an election, if any, to
treat the Trust Estate (or a segregated pool of assets therein) for such Series
as a REMIC, as will be more fully described in such Prospectus Supplement.
SHIFTING INTEREST CERTIFICATES
If specified in the applicable Prospectus Supplement, the rights of the
holders of the Subordinated Certificates of a Series of Shifting Interest
Certificates to receive distributions with respect to the Mortgage Loans in the
related Trust Estate will be subordinated to such rights of the holders of the
Senior Certificates of the same Series to the extent described below, except as
otherwise set forth in such Prospectus Supplement. This subordination is
intended to enhance the likelihood of regular receipt by holders of Senior
Certificates of the full amount of scheduled monthly payments of principal and
interest due them and to provide limited protection to the holders of the Senior
Certificates against losses due to mortgagor defaults.
The protection afforded to the holders of Senior Certificates of a Series of
Shifting Interest Certificates by the subordination feature described above will
be effected by the preferential right of such holders to receive, prior to any
distribution being made in respect of the related Subordinated Certificates on
each Distribution Date, current distributions on the related Mortgage Loans of
principal and interest due them on each Distribution Date out of the funds
available for distribution on such date in the related Certificate Account and,
to the extent described below, by the right of such holders to receive future
distributions on the Mortgage Loans that would otherwise have been payable to
the holders of Subordinated Certificates.
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Losses realized on liquidated Mortgage Loans (other than certain liquidated
Mortgage Loans that are Special Hazard Mortgage Loans as described below) will
be allocated to the holders of Subordinated Certificates through a reduction of
the amount of principal payments on the Mortgage Loans to which such holders are
entitled. Prior to the Cross-Over Date, holders of Senior Certificates of each
Class entitled to a percentage of principal payments on the related Mortgage
Loans will be entitled to receive, as part of their respective Senior Class
Distribution Amounts payable on each Distribution Date in respect of each
Mortgage Loan that became a liquidated Mortgage Loan in the preceding month
(subject to the additional limitation described below applicable to liquidated
Mortgage Loans that are Special Hazard Mortgage Loans), their respective shares
of the Scheduled Principal Balance of each such liquidated Mortgage Loan,
together with interest accrued at the applicable Net Mortgage Interest Rate,
irrespective of whether net Liquidation Proceeds realized thereon are sufficient
to cover such amount. For a description of the full Senior Class Distribution
Amount payable to holders of Senior Certificates of each Series, see
"Description of the Certificates--Distributions to Percentage
Certificateholders--Shifting Interest Certificates."
On each Distribution Date occurring on or after the Cross-Over Date, holders
of Senior Certificates of each Class entitled to a percentage of principal
payments will generally receive, as part of their respective Senior Class
Distribution Amounts, only their respective shares of the net Liquidation
Proceeds actually realized in respect of the applicable liquidated Mortgage
Loans after reimbursement to the Servicer of any previously unreimbursed
Periodic Advances made in respect of such liquidated Mortgage Loans. See
"Description of the Certificates--Distributions to Percentage
Certificateholders--Shifting Interest Certificates."
In the event that a Mortgage Loan becomes a liquidated Mortgage Loan as a
result of a hazard not insured against under a standard hazard insurance policy
of the type described herein (a "Special Hazard Mortgage Loan"), the holders of
Senior Certificates of each Class entitled to a percentage of principal payments
on the related Mortgage Loans will be entitled to receive in respect of each
Mortgage Loan which became a Special Hazard Mortgage Loan in the preceding
month, as part of their respective Senior Class Distribution Amounts payable on
each Distribution Date prior to the Special Hazard Termination Date, their
respective shares of the Scheduled Principal Balance of such Mortgage Loan,
together with interest accrued at the applicable Net Mortgage Interest Rate,
rather than their respective shares of net Liquidation Proceeds actually
realized. The Special Hazard Termination Date for a Series of Certificates will
be the earlier to occur of (i) the date on which cumulative net losses in
respect of Special Hazard Mortgage Loans exceed the Special Hazard Loss Amount
specified in the applicable Prospectus Supplement or (ii) the Cross-Over Date.
Since the amount of the Special Hazard Loss Amount for a Series of Certificates
is expected to be less than the amount of principal payments on the Mortgage
Loans to which the holders of the Subordinated Certificates of such Series are
initially entitled (such amount being subject to reduction, as described above,
as a result of allocation of losses on other liquidated Mortgage Loans as well
as Special Hazard Mortgage Loans), the holders of Subordinated Certificates of
such Series will bear the risk of losses in the case of Special Hazard Mortgage
Loans to a lesser extent than they will bear losses on other liquidated Mortgage
Loans. Once the Special Hazard Termination Date has occurred, holders of Senior
Certificates of each Class entitled to payments of principal will be entitled to
receive, as part of their respective Senior Class Distribution Amounts, only
their respective shares of net Liquidation Proceeds realized on Special Hazard
Mortgage Loans (less the total amount of delinquent installments in respect of
each such Special Hazard Mortgage Loan that were previously the subject of
distributions to the holders of Senior Certificates paid out of amounts
otherwise distributable to the holders of the Subordinated Certificates of such
Series). The outstanding principal balance of each such Class will, however, be
reduced by such Class's specified percentage of the Scheduled Principal Balance
of each such Special Hazard Mortgage Loan. See "Description of the
Certificates--Distributions to Percentage Certificateholders--Shifting Interest
Certificates."
If the cumulative net losses on all Mortgage Loans in a Trust Estate that
have become Special Hazard Mortgage Loans in the months prior to the month in
which a Distribution Date occurs would exceed the Special Hazard Loss Amount for
a Series of Certificates, that portion of the Senior Class Distribution Amount
as of such Distribution Date for each Class of Senior Certificates of such
Series entitled to a percentage of principal payments on the Mortgage Loans in
the related Trust Estate attributable to Mortgage Loans which became Special
Hazard Mortgage Loans in the month preceding the month of such Distribution Date
will be calculated not on the basis of the Scheduled Principal Balances of such
Special Hazard Mortgage Loans but rather will be computed as an amount equal to
the sum of (i) the excess of the Special Hazard Loss Amount over the cumulative
net losses on all Mortgage Loans that became Special Hazard Mortgage Loans in
the months prior to the month of such Distribution Date and (ii) the excess of
(a) the product of the
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percentage of principal payments to which such Class is entitled multiplied by
the aggregate net Liquidation Proceeds of the Mortgage Loans which became
Special Hazard Mortgage Loans in the month preceding the month of such
Distribution Date over (b) the total amount of delinquent installments in
respect of such Special Hazard Mortgage Loans that were previously the subject
of distributions to such Class paid out of amounts otherwise distributable to
the holders of the related Subordinated Certificates.
Although the subordination feature described above is intended to enhance
the likelihood of timely payment of principal and interest to the holders of
Senior Certificates, shortfalls could result in certain circumstances. For
example, a shortfall in the payment of principal otherwise due the holders of
Senior Certificates could occur if losses realized on the Mortgage Loans in a
Trust Estate were exceptionally high and were concentrated in a particular
month. See "Description of the Certificates--Distributions to Percentage
Certificateholders--Shifting Interest Certificates" for a description of the
consequences of any shortfall of principal or interest.
The holders of Subordinated Certificates will not be required to refund any
amounts previously properly distributed to them, regardless of whether there are
sufficient funds on a subsequent Distribution Date to make a full distribution
to holders of each Class of Senior Certificates of the same Series.
OTHER CREDIT ENHANCEMENT
In addition to subordination as discussed above, credit enhancement may be
provided with respect to any Series of Certificates in any other manner which
may be described in the applicable Prospectus Supplement, including, but not
limited to, credit enhancement through an alternative form of subordination
and/or one or more of the methods described below.
LIMITED GUARANTEE
If so specified in the Prospectus Supplement with respect to a Series of
Certificates, credit enhancement may be provided in the form of a limited
guarantee issued by a guarantor named therein.
LETTER OF CREDIT
Alternative credit support with respect to a Series of Certificates may be
provided by the issuance of a letter of credit by the bank or financial
institution specified in the applicable Prospectus Supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of credit
issued with respect to a Series of Certificates will be set forth in the
Prospectus Supplement relating to such Series.
POOL INSURANCE POLICIES
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Seller will obtain a pool insurance policy for the Mortgage
Loans in the related Trust Estate. The pool insurance policy will cover any loss
(subject to the limitations described in a related Prospectus Supplement) by
reason of default to the extent a related Mortgage Loan is not covered by any
primary mortgage insurance policy. The amount and principal terms of any such
coverage will be set forth in the Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the applicable Prospectus Supplement, for each Series of
Certificates as to which a pool insurance policy is provided, the Seller will
also obtain a special hazard insurance policy for the related Trust Estate in
the amount set forth in such Prospectus Supplement. The special hazard insurance
policy will, subject to the limitations described in the applicable Prospectus
Supplement, protect against loss by reason of damage to Mortgaged Properties
caused by certain hazards not insured against under the standard form of hazard
insurance policy for the respective states in which the Mortgaged Properties are
located. The amount and principal terms of any such coverage will be set forth
in the Prospectus Supplement.
MORTGAGOR BANKRUPTCY BOND
If so specified in the applicable Prospectus Supplement, losses resulting
from a bankruptcy proceeding relating to a mortgagor affecting the Mortgage
Loans in a Trust Estate with respect to a Series of Certificates will be covered
under a mortgagor bankruptcy bond (or any other instrument that will not result
in a downgrading of the rating of the Certificates of a Series by the Rating
Agency or Rating Agencies that rated such Series). Any mortgagor bankruptcy bond
or such other instrument will provide for coverage in an amount meeting the
criteria of the Rating Agency or Rating Agencies rating the Certificates of the
related Series, which amount will be set forth in the related Prospectus
Supplement. The amount and principal terms of any such coverage will be set
forth in the Prospectus Supplement.
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PREPAYMENT AND YIELD CONSIDERATIONS
PASS-THROUGH RATES AND INTEREST RATES
Any Class of Certificates of a Series may have a fixed Pass-Through Rate or
Interest Rate, or a Pass-Through Rate or Interest Rate which varies based on
changes in an index or based on changes with respect to the underlying Mortgage
Loans (such as, for example, varying on the basis of changes in the weighted
average Net Mortgage Interest Rate of the underlying Mortgage Loans).
The Prospectus Supplement for each Series will specify the range and the
weighted average of the Mortgage Interest Rates and, if applicable, Net Mortgage
Interest Rates for the Mortgage Loans underlying such Series as of the Cut-Off
Date. If the Trust Estate includes adjustable-rate Mortgage Loans or includes
Mortgage Loans with different Net Mortgage Interest Rates, the weighted average
Net Mortgage Interest Rate may vary from time to time as set forth below. See
"The Trust Estates." The Prospectus Supplement for a Series will also specify
the initial weighted average Pass-Through Rate or Interest Rate for each Class
of Certificates of such Series and will specify whether each such Pass-Through
Rate or Interest Rate is fixed or is variable.
The Net Mortgage Interest Rate for any adjustable rate Mortgage Loan will
change with any changes in the index specified in the related Prospectus
Supplement on which such Mortgage Interest Rate adjustments are based, subject
to any applicable periodic or aggregate caps or floors on the related Mortgage
Interest Rate. The weighted average Net Mortgage Interest Rate with respect to
any Series may vary due to changes in the Net Mortgage Interest Rates of
adjustable rate Mortgage Loans, to the timing of the Mortgage Interest Rate
readjustments of such Mortgage Loans and to different rates of payment of
principal of fixed or adjustable rate Mortgage Loans bearing different Mortgage
Interest Rates. See "Prepayment and Yield Considerations."
SCHEDULED DELAYS IN DISTRIBUTIONS
At the date of initial issuance of the Certificates of each Series offered
hereby, the initial purchasers of a Class of Certificates (other than certain
Classes of Residual Certificates) will be required to pay accrued interest at
the applicable Pass-Through Rate or Interest Rate for such Class from the
Cut-Off Date for such Series to, but not including, the date of issuance. With
respect to Standard Certificates or Stripped Certificates, the effective yield
to Certificateholders will be below the yield otherwise produced by the
applicable Pass-Through Rate because the distribution of principal and interest
which is due on each Due Date will not be made until the 25th day (or if such
25th day is not a business day, the business day immediately following such 25th
day) of the month in which such Due Date occurs (or until such other
Distribution Date specified in the applicable Prospectus Supplement). To the
extent set forth in the related Prospectus Supplement, Multi-Class Certificates
may provide for distributions of interest accrued during periods ending prior to
the related Distribution Date. In any such event, the nature of such scheduled
delays in distribution and the impact on the yield of such Multi-Class
Certificates will be set forth in the related Prospectus Supplement.
EFFECT OF PRINCIPAL PREPAYMENTS
When a Mortgage Loan is prepaid in full, the mortgagor pays interest on the
amount prepaid only to the date of prepayment and not thereafter. Liquidation
Proceeds (as defined herein) and amounts received in settlement of insurance
claims are also likely to include interest only to the time of payment or
settlement. When a Mortgage Loan is prepaid in part, an interest shortfall may
result depending on the timing of the receipt of the partial prepayment and the
timing of when those prepayments are passed through to Certificateholders. To
partially mitigate this reduction in yield, the Pooling and Servicing Agreement
relating to a Series will provide, unless otherwise specified in the applicable
Prospectus Supplement, that with respect to any principal prepayment in full of
any Mortgage Loan underlying the Certificates of such Series, the Servicer will
pay into the Certificate Account for such Series to the extent funds are
available for such purpose from the aggregate Servicing Fees (or portion thereof
as specified in the related Prospectus Supplement) which the Servicer is
entitled to receive relating to mortgagor payments or other recoveries
distributed to Certificateholders on the related Distribution Date, the amount,
if any, of interest at the Net Mortgage Interest Rate for such Mortgage Loan for
the period from the date of such prepayment in full to and including the end of
the month in which such prepayment in full occurs. Unless otherwise specified in
the applicable Prospectus Supplement, no comparable offset against the Servicing
Fee will be provided with respect to partial prepayments or liquidations of any
Mortgage Loans and any interest shortfall arising from partial prepayments or
from liquidations either will be covered by means of the subordination of the
rights of Subordinated Certificateholders or any other credit support
arrangements. See "Servicing of the Mortgage Loans--Adjustment to Servicing Fee
in Connection with Prepaid Mortgage Loans."
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A lower rate of principal prepayments than anticipated would negatively
affect the total return to investors in any Certificates of a Series that are
offered at a discount to their principal amount and a higher rate of principal
prepayments than anticipated would negatively affect the total return to
investors in the Certificates of a Series that are offered at a premium to their
principal amount. The yield on Stripped Certificates may be particularly
sensitive to prepayment rates, and further information with respect to yield on
such Stripped Certificates will be included in the applicable Prospectus
Supplement.
WEIGHTED AVERAGE LIFE OF CERTIFICATES
The Mortgage Loans may be prepaid in full or in part at any time. Unless
otherwise specified in the applicable Prospectus Supplement, no Mortgage Loan
will provide for a prepayment penalty. Unless otherwise specified in the
applicable Prospectus Supplement, all fixed rate Mortgage Loans will contain
due-on-sale clauses permitting the mortgagee to accelerate the maturities of the
Mortgage Loans upon conveyance of the related Mortgaged Properties, and all
adjustable-rate Mortgage Loans will permit creditworthy borrowers to assume the
then-outstanding indebtedness on the Mortgage Loans.
Prepayments on Mortgage Loans are commonly measured relative to a prepayment
standard or model. The Prospectus Supplement for each Series of Stripped
Certificates may, and the Prospectus Supplement for each Series of Multi-Class
Certificates will, describe one or more such prepayment standards or models and
contain tables setting forth the projected yields to maturity on each Class or
Subclass of Certificates of a Series of Stripped Certificates or, with respect
to a Series of Multi-Class Certificates, the weighted average life of each Class
and the percentage of the original aggregate Stated Amount of each Class that
would be outstanding on specified Distribution Dates for such Series based on
the assumptions stated in such Prospectus Supplement, including assumptions that
prepayments on the Mortgage Loans are made at rates corresponding to various
percentages of the prepayment standard or model specified in the related
Prospectus Supplement.
There is no assurance that prepayment of the Mortgage Loans underlying a
Series of Certificates will conform to any level of the prepayment standard or
model specified in the related Prospectus Supplement. A number of factors,
including homeowner mobility, economic conditions, changes in mortgagors'
housing needs, job transfers, unemployment or, in the case of borrowers relying
on commission income and self-employed borrowers, significant fluctuations in
income or adverse economic conditions, mortgagors' net equity in the properties
securing the mortgages, servicing decisions, enforceability of due-on-sale
clauses, mortgage market interest rates, mortgage recording taxes, and the
availability of mortgage funds, may affect prepayment experience. In general,
however, if prevailing interest rates fall significantly below the Mortgage
Interest Rates on the Mortgage Loans underlying a Series of Certificates, the
prepayment rates of such Mortgage Loans are likely to be higher than if
prevailing rates remain at or above the rates borne by such Mortgage Loans. It
should be noted that Certificates of a Series may evidence an interest in a
Trust Estate with different Mortgage Interest Rates. Accordingly, the prepayment
experience of such Certificates will to some extent be a function of the mix of
interest rates of the Mortgage Loans. In addition, the terms of the Pooling and
Servicing Agreement will require the Servicer to enforce any due-on-sale clause
to the extent it has knowledge of the conveyance or the proposed conveyance of
the underlying Mortgaged Property; provided, however, that any enforcement
action that the Servicer in good faith determines may be restricted by law or
that would impair or threaten to impair any recovery under any related insurance
policy will not be required and provided, further, that the Servicer may permit
the assumption of defaulted Mortgage Loans. See "Servicing of the Mortgage
Loans--Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage
Loans" and "Certain Legal Aspects of the Mortgage Loans--'Due-On-Sale' Clauses"
for a description of certain provisions of each Pooling and Servicing Agreement
and certain legal developments that may affect the prepayment experience on the
Mortgage Loans.
At the request of the mortgagor, the Servicer may allow the refinancing of a
Mortgage Loan in any Trust Estate by accepting prepayments thereon and
permitting a new loan secured by a Mortgage on the same property. Upon such
refinancing, the new loan will not be included in the Trust Estate. A mortgagor
may be legally entitled to require the Servicer to allow such a refinancing. Any
such refinancing will have the same effect as a prepayment in full of the
related Mortgage Loan. In this regard PHMC may, from time to time, implement
programs designed to encourage refinancing through PHMC, including but not
limited to general or targeted solicitations, or the offering of pre-approved
applications, reduced origination fees or closing costs, or other financial
incentives. The Servicer may also encourage refinancing of defaulted Mortgage
Loans, including Mortgage Loans that would permit creditworthy borrowers to
assume the outstanding indebtedness.
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The Seller will be obligated, under certain circumstances, to repurchase
certain of the Mortgage Loans. In addition, if specified in the applicable
Prospectus Supplement, the Pooling and Servicing Agreement will permit, but not
require, the Seller, and the terms of certain insurance policies relating to the
Mortgage Loans may permit the applicable insurer, to purchase any delinquent
Mortgage Loan. The proceeds of any such purchase or repurchase will be deposited
in the related Certificate Account and such purchase or repurchase will have the
same effect as a prepayment in full of the related Mortgage Loan. See "The Trust
Estates--Mortgage Loans--Assignment of the Mortgage Loans to the Trustee"
and"--Optional Repurchases." In addition, if so specified in the applicable
Prospectus Supplement, the Servicer will have the option to purchase all, but
not less than all, of the Mortgage Loans in any Trust Estate under the limited
conditions specified in such Prospectus Supplement. For any Series of
Certificates for which an election has been made to treat the Trust Estate (or a
segregated pool of assets therein) as a REMIC, any such purchase or repurchase
may be effected only pursuant to a "qualified liquidation," as defined in Code
Section 860F(a)(4)(A). See "The Pooling and Servicing Agreement--Termination;
Purchase of Mortgage Loans."
THE SELLER
The Prudential Home Mortgage Securities Company, Inc. (the "Seller"), a
direct, wholly-owned subsidiary of The Prudential Home Mortgage Company, Inc.
("PHMC") and an indirect, wholly-owned subsidiary of Residential Services
Corporation of America and The Prudential Insurance Company of America, a mutual
insurance company organized under the laws of the State of New Jersey
("Prudential Insurance"), is the successor in interest to The Prudential Home
Mortgage Securities Company, a limited purpose general partnership formed
pursuant to the Partnership Law of the State of New York on December 30, 1987
("PHMSCo."). The Seller was incorporated in the State of Delaware on August 21,
1985 under the name Dryden Guaranty Corporation, but did not actively engage in
business prior to December 28, 1988. On July 18, 1988, the Certificate of
Incorporation of the Seller was amended to, among other things, change the name
of Dryden Guaranty Corporation to The Prudential Home Mortgage Securities
Company, Inc. and to limit the purposes for which the Seller exists and, on
December 28, 1988, the Seller acquired all of the assets and assumed all of the
liabilities of PHMSCo., including but not limited to all of PHMSCo.'s rights and
obligations under the Pooling and Servicing Agreements relating to series of
mortgage pass-through certificates previously sold by it.
The limited purposes of the Seller are, in general, to acquire, own and sell
mortgage loans; to issue, acquire, own, hold and sell mortgage pass-through
securities which represent ownership interests in mortgage loans, collections
thereon and related properties; and to engage in any acts which are incidental
to, or necessary, suitable or convenient to accomplish, the foregoing.
The Seller maintains its principal office at 7470 New Technology Way,
Frederick, Maryland 21701. Its telephone number is (301) 846-8199.
At the time of the formation of any Trust Estate, the Seller will be the
sole owner of all the related Mortgage Loans. The Seller will have acquired the
Mortgage Loans included in any Trust Estate from PHMC or another affiliate. The
Seller's only obligation with respect to the Certificates of any Series will be
to repurchase or substitute for Mortgage Loans in a Trust Estate in the event of
defective documentation or upon the failure of certain representations and
warranties made by the Seller. See "The Trust Estates--Assignment of Mortgage
Loans to the Trustee."
PHMC
GENERAL
PHMC is the successor in interest to The Prudential Home Mortgage Company, a
joint venture which was formed under the laws of the State of New York on
November 7, 1984 ("PHMCo."). Immediately prior to November 1987, the partners of
PHMCo., each of which owned a 50% interest in the joint venture, were The
Prudential Mortgage Capital Company, Inc., a New Jersey corporation and an
indirect, wholly owned subsidiary of Prudential Insurance ("PMCC") and TR
Venture Corporation ("TRVC"), a Delaware corporation indirectly, wholly owned by
Salomon Inc and affiliated with Salomon Brothers Inc. During November 1987, PMCC
transferred a 0.1% interest in PHMCo. to its affiliate, PIC Realty Corporation,
and, immediately thereafter, the interest of TRVC in PHMCo. was retired. As a
consequence thereof, PHMCo. became indirectly, wholly owned by Prudential
Insurance, which, in turn, also indirectly, wholly owns the Seller.
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PHMC was incorporated in the State of New Jersey on September 18, 1978 under
the name Newark Rehabilitation, Inc., but did not actively engage in business
prior to October 31, 1988. On March 3, 1988, Newark Rehabilitation, Inc. changed
its name to The Prudential Home Mortgage Company, Inc., and, on October 31,
1988, PHMC acquired all of the assets and assumed all of the liabilities of
PHMCo. As used herein and in each Prospectus Supplement, references to PHMC that
relate to activities occurring prior to October 31, 1988 are to PHMCo. From
October 31, 1988 to December 19, 1989, PHMC was a direct, wholly owned
subsidiary of PMCC. On December 19, 1989, all of the common stock of PHMC was
transferred to, and PHMC became a direct, wholly owned subsidiary of,
Residential Services Corporation of America, a direct, wholly owned subsidiary
of Prudential Insurance.
PHMC is engaged principally in the business of originating and purchasing,
for its own account and for the account of its affiliates, residential mortgage
loans secured by one- to four-family homes located throughout the United States
and made in order to purchase those homes or to refinance prior loans secured by
such homes. PHMC also processes loans for other originators. See "--Mortgage
Origination Processing" below. The executive offices of PHMC are located at 8000
Maryland Avenue, Suite 1400, Clayton, Missouri 63105, and its telephone number
is (314) 726-3900.
PHMC is an affiliate of Lender's Service, Inc., a Delaware corporation
("LSI"), formerly known as Lender's Service Acquisition Corporation, which is a
wholly owned subsidiary of Residential Services Corporation of America and an
indirect wholly owned subsidiary of Prudential Insurance, and which is the
successor in interest to Lender's Service, Inc., a Pennsylvania corporation. LSI
maintains a relationship with a nationwide network of appraisers; these
appraisers perform work for LSI on an independent-contractor basis. Appraisals,
review appraisals and recertifications obtained in connection with mortgage
loans originated or acquired by PHMC may be obtained through LSI. See
"--Mortgage Loan Underwriting" below. LSI may also act as a title insurance
agent for various title insurance companies, and as a vendor of credit reports
for UCB Services, a national mortgage reporting company, with respect to
mortgage loans, including the Mortgage Loans. PHMC is also an affiliate of
Prudential Property and Casualty Insurance Company, a wholly owned, indirect
subsidiary of Prudential Insurance, which offers casualty insurance for
residential properties, which may include the Mortgaged Properties. PHMC is an
affiliate of The Prudential Bank and Trust Company, a Georgia bank, for which
PHMC processes applications for home equity loans secured by residential
properties, which may include the Mortgaged Properties. PHMC is also an
affiliate of The Prudential Real Estate Affiliates, Inc., which may, directly or
through real estate brokers, refer loan originations to PHMC. PHMC is also an
affiliate of The Prudential Savings Bank, a savings and loan association, which
may offer services to the mortgagors of the Mortgage Loans. PHMC is also an
affiliate of Prudential Residential Services Limited Partnership and The
Prudential Real Estate Affiliates, Inc. (collectively, "PRR"). PRR primarily
offers relocation services to corporate employees and residential brokerage
services to the public. PRR may, directly or through real estate brokers, refer
loan originations to PHMC. PHMC is also an affiliate of a number of other
insurance providers (including providers of life, health, disability, automobile
and personal catastrophe insurance) and financial services providers (including
providers of annuities, mutual funds, retirement accounts, financial planning
services, credit cards, securities and commodities brokerage and asset
management), all of which may offer services to the mortgagors of the Mortgage
Loans.
PHMC conducts its mortgage loan processing through centralized production
offices located in Costa Mesa, California, Frederick, Maryland and Minneapolis,
Minnesota. At these locations, PHMC receives applications for home mortgage
loans on toll-free telephone numbers that can be called from anywhere in the
United States. In addition, PHMC maintains marketing offices in major
metropolitan centers in the United States. While the manner in which it conducts
its business does not generally entail face-to-face interactions with borrowers,
PHMC has varying degrees of direct contact with borrowers under the mortgage
origination and acquisition programs described below. Since PHMC takes a more
active role in loan processing in connection with those programs that involve
the referral of applicants, rather than the purchase of completed loan packages,
borrower contact tends to be more frequent where PHMC functions as the
originator of the mortgage loans.
On May 31, 1991, PHMC acquired certain assets and operations of A Mortgage
Company, formerly America's Mortgage Company ("AMC"), located in Springfield,
Illinois. AMC's business consisted primarily of the origination and acquisition
of mortgage loans insured or guaranteed by the Federal Housing Administration
and the United States Department of Veterans Affairs ("FHA/VA loans"), the
issuance and sale of securities guaranteed by the Government National Mortgage
Association ("GNMA"), which securities were backed by pools of FHA/VA loans, and
the servicing of such mortgage loans. These activities are now being conducted
by PHMC from the Springfield, Illinois location. The
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description of PHMC's activities elsewhere in this Prospectus relate to
conventional rather than to FHA/VA loans, since the Mortgage Loans to be
included in the Trust Estate for any Series of Certificates will be comprised
exclusively of conventional loans.
MORTGAGE LOAN PRODUCTION SOURCES
Unless otherwise specified in the applicable Prospectus Supplement, PHMC's
primary sources of mortgage loans are (i) selected corporate clients, (ii)
mortgage brokers and similar entities, and (iii) other originators. The first
two categories involve the origination of mortgage loans by PHMC through the
referral of applicants to PHMC by the respective sources; the third category
involves the acquisition by PHMC of qualifying mortgage loans presented to PHMC
by such third parties. The relative contribution of each of these sources to
PHMC's business, measured by the volume of loans generated, tends to fluctuate
over time.
Mortgage loans generated through contacts with corporate clients or with
mortgage brokers and similar entities typically involve the referral of a loan
applicant to PHMC; the gathering of credit-related and property-specific
information by PHMC; and the decision by PHMC, based on its analysis of such
information, as to the suitability of its making the loan. It is characteristic
of PHMC's practice with respect to loans generated as a result of referrals from
these two sources that PHMC, itself, orders appraisals (most frequently, the
original appraisals, but in some cases, review appraisals) and credit reports.
The level of involvement by PHMC in other aspects of the processing of these
loans varies considerably; whereas, PHMC typically assists the borrower referred
by corporate clients through the application stage, PHMC tends to have limited
contact with those borrowers whose applications are processed on PHMC's behalf
by certain mortgage brokers or similar entities, as discussed below. Taken as a
whole, however, PHMC's processing role in connection with loans generated either
as a result of referrals from corporate clients or from mortgage brokers and
similar entities generally exceeds the more limited processing role associated
with loans acquired from PHMC's third production source, other originators. It
is PHMC's practice to review the loan file submitted to it by the other
originator; order a new credit report; under certain limited circumstances,
order a review appraisal; and, on the basis of its analysis of both the data
that it has received and the data that it has gathered, determine whether to
accept or reject the loan. For each loan purchased by PHMC, the seller, or the
other originator that previously sold the loan to PHMC's seller, will have taken
the borrower's loan application, obtained the initial credit reports, ordered
the original appraisal and provided all necessary documentation and disclosure
relating to compliance with federal, state or local law applicable to mortgage
loan origination and servicing.
A majority of PHMC's corporate clients are companies that sponsor relocation
programs for their employees and in connection with which PHMC provides mortgage
financing. Eligibility for a relocation loan is based, in general, on an
employer's providing financial assistance to the relocating employee in
connection with a job-required move. Although all Subsidy Loans are generated
through such corporate-sponsored programs, the assistance extended by the
employer need not necessarily take the form of a loan subsidy. (Not all
relocation loans are generated by PHMC through referrals from its corporate
clients: some relocation loans are generated as a result of referrals from
mortgage brokers and similar entities; others are generated through PHMC's
acquisition of mortgage loans from other originators.) Also among PHMC's
corporate clients are various professional associations. These associations, as
well as the other corporate clients, promote the availability of a broad range
of PHMC mortgage products to their members or employees, including refinance
loans, second-home loans and investment-property loans.
Mortgage brokers, realtors (including affiliates of Prudential Insurance),
mortgage bankers, commercial bankers, developers, and builders also refer loan
applicants to PHMC. Although the extent to which mortgage brokers or similar
entities will assist borrowers in the application process varies considerably,
PHMC's role in the processing of loans originated under this program typically
involves the ordering of credit reports, as well as the ordering of the property
appraisal. PHMC may, however, permit certain mortgage brokers and similar
entities to make an initial determination as to compliance of mortgage loans
with PHMC's underwriting guidelines. Under such circumstances, the applicable
third parties take the loan applications, obtain the borrowers' credit reports
and order the property appraisals from qualified appraisers. In advance of
reaching a financing decision with respect to such loans, PHMC will typically
order both review appraisals and additional credit reports.
In order to qualify for participation in PHMC's mortgage loan purchase
programs, lending institutions must (i) meet and maintain certain net worth and
other financial standards, (ii) demonstrate experience in originating
residential
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mortgage loans, (iii) meet and maintain certain operational standards, (iv)
evaluate each loan offered to PHMC for consistency with PHMC's underwriting
guidelines and (v) utilize the services of qualified appraisers. The contractual
arrangements with eligible originators may involve the commitment by PHMC to
accept delivery of a certain dollar amount of mortgage loans over a period of
time; this commitment may be satisfied either by delivery of mortgage loans one
at a time or in multiples as aggregated by the other originator. In all
instances, however, acceptance by PHMC is contingent upon the loans being found
to satisfy PHMC's program standards. PHMC may also acquire portfolios of
seasoned loans in negotiated transactions.
MORTGAGE LOAN UNDERWRITING
In determining whether to lend to a particular mortgage borrower or to
purchase a mortgage loan, PHMC makes an assessment of the applicant's ability to
repay the loan, as well as an assessment of the value of the property to which
the financing relates. The underwriting standards that guide the determination
represent a balancing of several factors that may affect the ultimate recovery
of the loan amount, including, among others, the amount of the loan, the ratio
of the loan amount to the property value (i.e., the lower of the appraised value
of the mortgaged property and the purchase price), the borrower's means of
support and the borrower's credit history. PHMC's guidelines for underwriting
may vary according to the nature of the borrower or the type of loan, since
differing characteristics may be perceived as presenting different levels of
risk.
PHMC's underwriting of a mortgage loan may be based on data obtained by
parties other than PHMC that are involved at various stages in the mortgage
origination or acquisition process. This typically occurs under circumstances in
which loans are subject to more than one approval process, as when third-party
lenders, certain mortgage brokers or similar entities that have been approved by
PHMC to process loans on its behalf, or independent contractors hired by PHMC to
perform underwriting services on its behalf ("contract underwriters") make
initial determinations as to the consistency of loans with PHMC underwriting
guidelines. In such instances, certain information may, but need not
necessarily, be resolicited by PHMC in connection with its approval process. For
example, in connection with a mortgage loan that is presented to PHMC by another
originator for purchase, PHMC will typically order a second credit report, but
it will only order a review appraisal under certain limited circumstances, in
advance of reaching a purchase decision. However, in connection with mortgage
loans that are processed on PHMC's behalf by certain mortgage brokers or similar
entities, PHMC will customarily order both a second credit report and a review
appraisal. When contract underwriters are used, PHMC will generally not order
any supplemental documentation but will review the information collected by
these providers, who are trained by PHMC personnel in PHMC's underwriting
practices and are required to review all loans in accordance with PHMC's
underwriting guidelines. In all cases, PHMC makes the final determination to
approve or deny the funding or purchase of a particular mortgage loan.
The loan application elicits pertinent information about the applicant, with
particular emphasis on the applicant's financial health (assets, liabilities,
income and expenses), the property being financed and the type of loan desired.
A self-employed applicant may be required to submit his or her most recent
signed federal income tax returns. With respect to every applicant, credit
reports are obtained from commercial reporting services, summarizing the
applicant's credit history with merchants and lenders. Significant unfavorable
credit information reported by the applicant or a credit reporting agency must
be explained by the applicant. The type of credit report that PHMC obtains, and
that it authorizes parties referring loans to it to obtain, is a
computer-generated report that electronically merges the information gathered
from the data bases of two major consumer credit repositories (these
repositories produce what are commonly referred to as "in-file" credit reports).
In connection with its underwriting procedure, PHMC will, with the single
exception of the use of contract underwriters, itself order a credit report of
the type described, whether or not a report has previously been ordered with
respect to an applicant for whom another party has processed or approved of the
loan. Certain of the credit reports that PHMC obtains may be purchased through a
credit reporting service with which LSI has a contractual relationship.
Verifications of employment, income, assets or mortgages may be used to
supplement the loan application and the credit report in reaching a
determination as to the applicant's ability to meet his or her monthly
obligations on the proposed mortgage loan, as well as his or her other mortgage
payments (if any), living expenses and financial obligations. A mortgage
verification involves obtaining information regarding the borrower's payment
history with respect to any existing mortgage the applicant may have. This
verification is accomplished by either having the present lender complete a
verification of mortgage form, evaluating the information on the credit report
concerning the
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applicant's payment history for the existing mortgage, communicating, either
verbally or in writing, with the applicant's present lender or analyzing
cancelled checks provided by the applicant. Verifications of income, assets or
mortgages may be waived under certain programs offered by PHMC, but PHMC's
practice is to obtain verification of employment for every loan applicant.
Waivers limit the amount of documentation required for an underwriting decision
and have the effect of increasing the relative importance of the credit report
and the appraisal. Such waivers or reduced-documentation options are, in
general, available for owner-occupied properties where the ratio of the loan
amount to the property value does not exceed 80%. The interest rate may be
higher with respect to a loan which has been processed according to a reduced
documentation program than a loan which has been processed under a full
documentation program. Documentation requirements vary based upon a number of
factors, including the purpose of the loan, the amount of the loan and the ratio
of the loan amount to the property value. The least restrictive
reduced-documentation programs apply to the applicant for a relocation loan and
to the borrower whose loan amount does not exceed $600,000 and whose
Loan-to-Value Ratio is not in excess of 75%. PHMC accepts alternative methods of
verification, in those instances where verifications are part of the
underwriting decision; for example, salaried income may be substantiated either
by means of a form independently prepared and signed by the applicant's employer
or by means of the applicant's most recent paystub and W-2. In cases where two
or more persons have jointly applied for a mortgage loan, the gross incomes and
expenses of all of the applicants, including nonoccupant co-mortgagors, are
combined and considered as a unit.
All borrowers applying for relocation loans with Loan-to-Value Ratios less
than or equal to 90%, as well as borrowers affiliated with professional
associations applying for loans with Loan-to-Value Ratios less than or equal to
80%, and all other borrowers applying for non-relocation mortgage loans with
respect to which the Loan-to-Value Ratios are less than or equal to 75%,
generally must demonstrate that the ratio of their total monthly housing debt to
their monthly gross income does not exceed 33%, and that the ratio of their
total monthly debt to their monthly gross income does not exceed 38%; borrowers
affiliated with professional associations applying for non-relocation mortgage
loans with Loan-to-Value Ratios in excess of 80%, and all other borrowers
applying for non-relocation mortgage loans with Loan-to-Value Ratios in excess
of 75%, generally must satisfy 28% and 36% ratios, respectively. These
calculations are based on the amortization schedule and the interest rate of the
related loan, with each ratio being computed on the basis of the proposed
monthly mortgage payment. In the case of adjustable-rate mortgage loans, the
interest rate used to determine a mortgagor's monthly payment for purposes of
the foregoing ratios is either the initial mortgage interest rate, which is
generally lower than the sum of the index that would have been applicable at
origination plus the applicable margin, or a minimum qualifying rate, as
determined by PHMC. In evaluating applications for Subsidy Loans and Buy-Down
Loans, the foregoing ratios are determined by including in the applicant's total
monthly housing expense and total monthly debt the proposed monthly mortgage
payment reduced by the amount expected to be applied on a monthly basis under
the related subsidy agreement or buy-down agreement or, in certain cases, the
mortgage payment that would result from an interest rate approximately 2.50%
lower than the Mortgage Interest Rate. See "The Trust Estates--Mortgage Loans."
These ratios may be exceeded if, in PHMC's judgment, certain compensating
factors are identified and proved to its satisfaction, including a large
downpayment, a large equity position on a refinance, an excellent credit
history, substantial liquid net worth, the potential of the borrower for
continued employment advancement or income growth, or the ability of the
borrower to accumulate assets or to devote a greater portion of income to basic
needs such as housing expense. Secondary financing is permitted on mortgage
loans under certain circumstances. In those cases, the payment obligations under
both primary and secondary financing are included in the computation of the
debt-to-income ratios described above, and the combined amount of primary and
secondary loans will be used to calculate the Loan-to-Value Ratio. Any secondary
financing permitted will generally mature prior to the maturity date of the
related mortgage loan. In evaluating an application with respect to a
"non-owner-occupied" property, which PHMC defines as a property leased to a
third party by its owner (as distinct from a "second home," which PHMC defines
as an owner-occupied, non-rental property that is not the owner's principal
residence), PHMC will include projected rental income net of certain mortgagor
obligations and other assumed expenses or loss from such property to be included
in the applicant's monthly gross income or total monthly debt in calculating the
foregoing ratios. A mortgage loan secured by a two- to four-family Mortgaged
Property is considered to be an owner-occupied property if the borrower occupies
one of the units; rental income on the other units is generally taken into
account in evaluating the borrower's ability to repay the mortgage loan.
Property value is established in connection with the origination of any
mortgage loan (whether the loan is originated for purchase or refinancing
purposes) by means of an appraisal, which is typically ordered by the party
originating the
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related mortgage loan. Consistent with this practice, the appraisals with
respect to the loans generated through corporate contacts or through referrals
from mortgage brokers or other similar entities (other than those certain
mortgage brokers or similar entities that process mortgage loans on PHMC's
behalf) are generally ordered by PHMC, while the appraisals with respect to the
loans sold to PHMC by third-party lenders are ordered by those other
originators. PHMC may, however, at its discretion, order a review appraisal with
respect to any loan generated by a third-party lender; in addition, PHMC
typically orders review appraisals with respect to loans that certain mortgage
brokers or similar entities process on its behalf. A review appraisal, like the
original appraisal, involves the making of a site visit, the taking of
photographs, and the gathering of data on comparable properties. Unlike original
appraisals, however, review appraisals do not include an inspection of the
interior of the house. A review appraisal is generally used to validate the
decision made based upon the original appraisal. If the variance between the
original and the review appraisal is significant, an explanation will be sought
and the underwriting decision may be reevaluated. In certain instances, which
most frequently involve the postponement of the closing with respect to a
mortgage loan on a newly built home due to construction delays, the
recertification of an appraisal may be required. A recertification includes a
physical inspection of the exterior of the property and a statement by an
appraiser that the present value of the property is no lower than that reflected
on the original appraisal.
There can be no assurance that the values determined by the appraisers as of
the dates of appraisal represent the prices at which the related Mortgaged
Properties can be sold, either as of the dates of appraisal or at foreclosure.
The appraisal of any Mortgaged Property reflects the individual appraiser's
judgment as to value, based on the market values of comparable homes sold within
the recent past in comparable nearby locations and on the estimated replacement
cost. The appraisal relates both to the land and to the structure; in fact, a
significant portion of the appraised value of a Mortgaged Property may be
attributable to the value of the land rather than to the residence. Because of
the unique locations and special features of certain Mortgaged Properties,
identifying comparable properties in nearby locations may be difficult. The
appraised values of such Mortgaged Properties will be based to a greater extent
on adjustments made by the appraisers to the appraised values of reasonably
similar properties rather than on objectively verifiable sales data. See "The
Trust Estates--Mortgage Loans" herein.
In connection with all mortgage loans that it originates, PHMC currently
obtains appraisals through LSI. Review appraisals with respect to mortgage loans
that PHMC acquires, or with respect to mortgage loans that PHMC originates but
that certain mortgage brokers or similar entities process on its behalf, are
also likely to be obtained through LSI. LSI also provides its services to
third-party lenders which sell mortgage loans to PHMC.
Most residential mortgage lenders have not originated mortgage loans with
Loan-to-Value Ratios in excess of 80% unless primary mortgage insurance was
obtained. PHMC, however, does not require primary mortgage insurance on loans up
to $400,000 that have Loan-to-Value Ratios exceeding 80% but less than or equal
to 90%. Only owner-occupied, primary residences (excluding cooperatives and
certain high-rise condominium dwellings) are eligible for this program. Each
qualifying loan will be made at an interest rate that is higher than the rate
would be if the Loan-to-Value Ratio was 80% or less or if primary mortgage
insurance was obtained. Loans that do not qualify for such program may be
approved if primary mortgage insurance is obtained from an approved primary
mortgage insurance company. In such cases, the excess over 75% will be covered
by primary mortgage insurance until the unpaid principal balance of the Mortgage
Loan is reduced to an amount that will result in a Loan-to-Value Ratio less than
or equal to 80%.
Where permitted by law, PHMC generally requires that a borrower include in
each monthly payment a portion of the real estate taxes, assessments, primary
mortgage insurance (if applicable), and hazard insurance premiums and other
similar items with respect to the related mortgage loan. PHMC may, however, on a
case-by-case basis, in its discretion not require such advance payments for
certain Mortgage Loans, based on an evaluation of the borrowers' ability to pay
such taxes and charges as they become due.
MORTGAGE ORIGINATION PROCESSING
PHMC, or an affiliate of PHMC, may provide loan processing services,
including document preparation, underwriting analysis and closing functions, to
other loan originators. It is possible that PHMC may purchase loans from such
loan originators, or from mortgage sellers that purchased loans from such
originators, that PHMC itself processed. Any such loans purchased by PHMC will
meet PHMC's underwriting guidelines.
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SERVICING
Prior to June 30, 1989, all residential mortgage loans originated or
purchased by PHMC for its own account or for the account of Prudential Insurance
were serviced by its affiliate, PMCC. On June 30, 1989, PHMC assumed all of the
residential mortgage servicing activities then being performed by PMCC. PHMC is
an approved servicer of FNMA, FHLMC and GNMA. As of December 31, 1992, PHMC had
a net worth of approximately $275 million. See "Servicing of the Mortgage
Loans--The Servicer" below.
USE OF PROCEEDS
The net proceeds from the sale of each Series of Certificates will be used
by the Seller for the purchase of the Mortgage Loans represented by the
Certificates of such Series from PHMC. It is expected that PHMC will use the
proceeds from the sale of the Mortgage Loans to the Seller for its general
business purposes, including, without limitation, the origination or acquisition
of new mortgage loans and the repayment of borrowings incurred to finance the
origination or acquisition of mortgage loans, including the Mortgage Loans
underlying the Certificates of such Series.
SERVICING OF THE MORTGAGE LOANS
THE SERVICER
The Servicer with respect to a Series of Certificates will be PHMC. See
"PHMC--Servicing" above. The Servicer may subcontract its servicing obligations
under any Pooling and Servicing Agreement. The Servicer will remain primarily
liable for any such subservicer's performance in accordance with the applicable
Pooling and Servicing Agreement. The Servicer presently intends to subcontract
certain of its administrative functions under the Pooling and Servicing
Agreements to Securitized Asset Services Corporation ("SASCOR"). SASCOR is a
direct, wholly-owned subsidiary of Residential Services Corporation of America
and an affiliate of the Seller and the Servicer. SASCOR was formed on September
23, 1992 to master service residential mortgage loans and to provide securities
administration services in connection with mortgage-backed securities
transactions. The Servicer may be released from its obligations in certain
circumstances. See "Servicing of the Mortgage Loans--Certain Matters Regarding
the Servicer."
Each Prospectus Supplement relating to a Series of Certificates will contain
information concerning recent delinquency, foreclosure and loan loss experience
on the mortgage loans included in PHMC's servicing portfolio which were
originated or acquired by PHMC for its own account or for the account of its
affiliates ("Program Loans"), and, if available, on those Program Loans having
payment terms generally similar to those of the Mortgage Loans in the related
Trust Estate. PHMC's total servicing portfolio of Program Loans as of any date
may include loans having a variety of payment characteristics, including
adjustable rate mortgage loans and loans subject to subsidy agreements, and the
overall delinquency, foreclosure and loan loss experience of the Program Loans
taken as a whole may differ from that of the Mortgage Loans contained in any
given Trust Estate and from that of mortgage servicers generally.
PAYMENTS ON MORTGAGE LOANS
The Servicer will, as to each Series of Certificates, establish and maintain
a separate trust account or accounts in the name of the Trustee (the
"Certificate Account"), which must be maintained with a depository institution
(the "Depository") either (i) whose long-term debt obligations (or, in the case
of a depository institution which is part of a holding company structure, the
long term debt obligations of which) are, at the time of any deposit therein
rated at least "AA" (or the equivalent) by each nationally recognized
statistical rating organization that rated the related Series of Certificates,
or (ii) that is otherwise acceptable to the Rating Agency or Rating Agencies
rating the Certificates of such Series and, if a REMIC election has been made,
that would not cause the related Trust Estate (or a segregated pool of assets
therein) to fail to qualify as a REMIC. To the extent that the portion of funds
deposited in the Certificate Account at any time exceeds the limit of insurance
coverage established by the Federal Deposit Insurance Corporation (the "FDIC"),
such excess will be subject to loss in the event of the failure of the
Depository. Such insurance coverage will be based on the number of holders of
Certificates, rather than the number of underlying mortgagors. Holders of the
Subordinated Certificates of a Series of Shifting Interest Certificates will
bear any such loss up to the amount of principal payments on the related
Mortgage Loans to which such holders are entitled.
The Servicer will deposit in the Certificate Account for each Series of
Certificates any amounts representing scheduled payments of principal and
interest on the Mortgage Loans due after the applicable Cut-Off Date but
received
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on or prior thereto, and, on a daily basis, except as specified in the
applicable Pooling and Servicing Agreement, the following payments and
collections received or made by it with respect to the Mortgage Loans subsequent
to the applicable Cut-Off Date (other than payments due on or before the Cut-Off
Date):
(i) all payments on account of principal, including prepayments, and
interest;
(ii) all amounts received by the Servicer in connection with the
liquidation of defaulted Mortgage Loans or property acquired in respect
thereof, whether through foreclosure sale or otherwise, including payments
in connection with defaulted Mortgage Loans received from the mortgagor
other than amounts required to be paid to the mortgagor pursuant to the
terms of the applicable Mortgage Loan or otherwise pursuant to law
("Liquidation Proceeds") less, to the extent permitted under the applicable
Pooling and Servicing Agreement, the amount of any expenses incurred in
connection with the liquidation of such Mortgage Loans;
(iii) all proceeds received by the Servicer under any title, hazard or
other insurance policy covering any such Mortgage Loan, other than proceeds
to be applied to the restoration or repair of the property subject to the
related Mortgage or released to the mortgagor in accordance with the
applicable Pooling and Servicing Agreement;
(iv) all amounts required to be deposited therein from any related
Reserve Fund, and amounts available under any other form of credit
enhancement applicable to such Series;
(v) all Periodic Advances made by the Servicer;
(vi) all amounts withdrawn from Buy-Down Funds or Subsidy Funds, if any,
with respect to such Mortgage Loans, in accordance with the terms of the
respective agreements applicable thereto;
(vii) all proceeds of any such Mortgage Loans or property acquired in
respect thereof purchased or repurchased pursuant to the Pooling and
Servicing Agreement; and
(viii) all other amounts required to be deposited therein pursuant to the
applicable Pooling and Servicing Agreement.
Notwithstanding the foregoing, the Servicer will be entitled, at its
election, either (a) to withhold and pay itself the applicable Servicing Fee
and/or to withhold and pay to the owner thereof the Fixed Retained Yield, if
any, from any payment or other recovery on account of interest as received and
prior to deposit in the Certificate Account or (b) to withdraw the applicable
Servicing Fee and/or the Fixed Retained Yield, if any, from the Certificate
Account after the entire payment or recovery has been deposited therein;
provided, however, that with respect to each Trust Estate (or a segregated pool
of assets therein) as to which a REMIC election has been made, the Servicer
will, in each instance, withhold and pay to the owner thereof the Fixed Retained
Yield prior to deposit of the related payment or recovery in the Certificate
Account.
Periodic Advances, amounts withdrawn from any Buy-Down Fund or Subsidy
Account, amounts withdrawn from any reserve fund, and amounts available under
any other form of credit enhancement, will be deposited in the Certificate
Account not later than the business day preceding the Distribution Date on which
such amounts are required to be distributed. All other amounts will be deposited
in the Certificate Account not later than the business day next following the
day of receipt and posting by the Servicer.
If the Servicer deposits in the Certificate Account for a Series any amount
not required to be deposited therein, it may at any time withdraw such amount
from such Certificate Account. Funds on deposit in the Certificate Account may
be invested in certain Eligible Investments maturing in general not later than
the business day preceding the next Distribution Date. In the event that an
election has been made to treat the Trust Estate (or a segregated pool of assets
therein) with respect to a Series as a REMIC, no such Eligible Investments will
be sold or disposed of at a gain prior to maturity unless the Servicer has
received an opinion of counsel or other evidence satisfactory to it that such
sale or disposition will not cause the Trust Estate (or segregated pool of
assets) to be subject to the tax on "prohibited transactions" imposed by Code
Section 860F(a)(1), otherwise subject the Trust Estate (or segregated pool of
assets) to tax, or cause the Trust Estate (or segregated pool of assets) to fail
to qualify as a REMIC while any Certificates of the Series are outstanding.
Except as otherwise specified in the applicable Prospectus Supplement, all
income and gain realized from any such investment will be for the account of the
Servicer as additional servicing compensation and all losses from any such
investment will be deposited by the Servicer into the Certificate Account
immediately as realized.
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The Servicer is permitted, from time to time, to make withdrawals from the
Certificate Account for the following purposes, to the extent permitted in the
applicable Pooling and Servicing Agreement:
(i) to reimburse itself for Periodic Advances;
(ii) to reimburse itself for liquidation expenses and for amounts
expended by it in connection with the restoration of damaged property;
(iii) to pay to itself the applicable Servicing Fee and/or pay the owner
thereof any Fixed Retained Yield, in the event the Servicer is not required,
and has elected not, to withhold such amounts out of any payment or other
recovery with respect to a particular Mortgage Loan prior to the deposit of
such payment or recovery in the Certificate Account;
(iv) to reimburse itself for certain expenses (including taxes paid on
behalf of the Trust Estate) incurred by and recoverable by or reimbursable
to it;
(v) to pay to the Seller with respect to each Mortgage Loan or property
acquired in respect thereof that has been repurchased by the Seller, all
amounts received thereon and not distributed as of the date as of which the
purchase price of such Mortgage Loan was determined;
(vi) to pay itself any interest earned on or investment income earned
with respect to funds in the Certificate Account (all such interest or
income to be withdrawn not later than the next Distribution Date);
(vii) to pay itself from net Liquidation Proceeds allocable to interest,
the amount of any unpaid Servicing Fees and any unpaid assumption fees, late
payment charges or other mortgagor charges on the related Mortgage Loan;
(viii) to withdraw from the Certificate Account any amount deposited in
the Certificate Account that was not required to be deposited therein;
(ix) to make withdrawals from the Certificate Account in order to make
distributions to Certificateholders; and
(x) to clear and terminate the Certificate Account.
The Servicer will be authorized to appoint a paying agent (the "Paying
Agent") to make distributions, as agent for the Servicer, to Certificateholders
of a Series. If the Paying Agent for a Series is the Trustee of such Series,
such Paying Agent will be authorized to make withdrawals from the Certificate
Account in order to make distributions to Certificateholders. If the Paying
Agent for a Series is not the Trustee for such Series, the Servicer will, prior
to each Distribution Date, deposit in immediately available funds in an account
designated by the Paying Agent the amount required to be distributed to the
Certificateholders on such Distribution Date.
The Servicer will cause any Paying Agent which is not the Trustee to execute
and deliver to the Trustee an instrument in which such Paying Agent agrees with
the Trustee that such Paying Agent will:
(1) hold all amounts deposited with it by the Servicer for distribution
to Certificateholders in trust for the benefit of Certificateholders until
such amounts are distributed to Certificateholders or otherwise disposed of
as provided in the applicable Pooling and Servicing Agreement;
(2) give the Trustee notice of any default by the Servicer in the making
of such deposit; and
(3) at any time during the continuance of any such default, upon written
request of the Trustee, forthwith pay to the Trustee all amounts held in
trust by such Paying Agent.
PERIODIC ADVANCES AND LIMITATIONS THEREON
With respect to each Series, the Servicer will agree to make Periodic
Advances in the amounts specified in the applicable Prospectus Supplement. Funds
of the Servicer so advanced are recoverable by the Servicer out of amounts
received on Mortgage Loans with respect to which such funds were advanced and
which represent late recoveries of principal and/or interest respecting which
any such Periodic Advance was made, or, if the Servicer determines that any
Periodic Advance may not be so recoverable, out of any funds in the Certificate
Account. The Servicer will make Periodic Advances only if it determines that
funds will ultimately be available to reimburse it. If specified in the
applicable
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Prospectus Supplement, a reserve fund may be established with respect to any
Series of Certificates in order to provide a source of liquidity for Periodic
Advances by the Servicer. Any such reserve fund will be funded by a deposit made
by the Servicer in such an amount specified, and will otherwise be as described,
in the applicable Prospectus Supplement.
ADJUSTMENT TO SERVICING FEE IN CONNECTION WITH PREPAID MORTGAGE LOANS
When a mortgagor prepays all of a Mortgage Loan, the mortgagor pays interest
on the amount prepaid only to the date on which the principal prepayment in full
is made. Unless otherwise specified in the applicable Prospectus Supplement, in
order to mitigate the adverse effect to Certificateholders of a Series resulting
from the prepayment in full of a Mortgage Loan the amount of the aggregate
Servicing Fees will be offset by an amount equal to the accrual of interest on
any fully prepaid Mortgage Loan at the Net Mortgage Interest Rate for such
Mortgage Loan from the date of its prepayment to but not including the next Due
Date (the "Prepayment Interest Shortfall"). Such reductions in the aggregate
Servicing Fees will be made by the Servicer with respect to the Mortgage Loans
under the applicable Pooling and Servicing Agreement, but only to the extent
that the aggregate Prepayment Interest Shortfall does not exceed the aggregate
amount of the Servicing Fee relating to mortgagor payments or other recoveries
distributed on the related Distribution Date. The amount of the offset against
the aggregate Servicing Fees will be included in the distributions to
Certificateholders on the Distribution Date on which the related principal
prepayments in full are passed through to Certificateholders. Unless otherwise
specified in the applicable Prospectus Supplement, any interest shortfall
arising from partial prepayments or liquidations will not be so offset. See
"Prepayment and Yield Considerations." Payments of the Prepayment Interest
Shortfall will not be obtained by means of any subordination of the rights of
Subordinated Certificateholders or any other credit enhancement arrangement.
REPORTS TO CERTIFICATEHOLDERS
Unless otherwise specified or modified in the related Pooling and Servicing
Agreement for each Series, the Servicer will include, or, in the event a Paying
Agent has been appointed with respect to such Series, will cause the Paying
Agent to include, with each distribution to Certificateholders of record of such
Series a statement setting forth the following information, if applicable:
(i) to each holder of a Certificate other than a Multi-Class
Certificate, the amount of such distribution allocable to principal of the
related Mortgage Loans, separately identifying the aggregate amount of any
principal prepayments included therein, the amount of such distribution
allocable to interest on the related Mortgage Loans and the aggregate unpaid
principal balance of the Mortgage Loans evidenced by each Class after giving
effect to the principal distributions on such Distribution Date;
(ii) to each holder of a Multi-Class Certificate on which an interest
distribution and a distribution in reduction of Stated Amount are then being
made, the amount of such interest distribution and distribution in reduction
of Stated Amount, and the Stated Amount of each Class after giving effect to
the distribution in reduction of Stated Amount made on such Distribution
Date;
(iii) to each holder of a Multi-Class Certificate on which a
distribution of interest only is then being made, the aggregate Stated
Amount of Certificates outstanding of each Class after giving effect to the
distribution in reduction of Stated Amount made on such Distribution Date
and on any Special Distribution Date occurring subsequent to the last such
report and after including in the aggregate Stated Amount the Stated Amount
of the Compound Interest Certificates, if any, outstanding and the amount of
any accrued interest added to the Stated Amount of such Compound Interest
Certificates on such Distribution Date;
(iv) to each holder of a Multi-Class Certificate which is a Compound
Interest Certificate (but only if such holder shall not have received a
distribution of interest equal to the entire amount of interest accrued on
such Certificate with respect to such Distribution Date):
(a) the information contained in the report delivered pursuant to
clause (ii) above;
(b) the interest accrued on such Class of Compound Interest
Certificates with respect to such Distribution Date and added to the
Stated Amount of such Compound Interest Certificate; and
(c) the Stated Amount of such Class of Compound Interest Certificates
after giving effect to the addition thereto of all interest accrued
thereon;
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(v) to each holder of a Certificate, the amount of servicing
compensation with respect to the related Trust Estate and such other
customary information as the Servicer deems necessary or desirable to enable
Certificateholders to prepare their tax returns;
(vi) to each holder of a Certificate, the amount by which the Servicing
Fee has been reduced by the aggregate Prepayment Interest Shortfall for the
related Distribution Date;
(vii) the aggregate amount of any Periodic Advances by the Servicer
included in the amounts actually distributed to the Certificateholders;
(viii) to each holder of each Senior Certificate (other than a Shifting
Interest Certificate):
(a) the amount of funds, if any, otherwise distributable to
Subordinated Certificateholders and the amount of any withdrawal from the
Subordination Reserve Fund included in amounts actually distributed to
Senior Certificateholders;
(b) the Subordinated Amount remaining and the balance in the
Subordination Reserve Fund following such distribution; and
(c) the amount of any Senior Class Shortfall with respect to, and the
amount of any Senior Class Carryover Shortfall outstanding prior to, such
Distribution Date;
(ix) to each holder of a Certificate entitled to the benefits of
payments under any form of credit enhancement or from any reserve fund other
than the Subordination Reserve Fund:
(a) the amounts so distributed under any such form of credit
enhancement or from any such reserve fund on the applicable Distribution
Date; and
(b) the amount of coverage remaining under any such form of credit
enhancement and the balance in any such fund, after giving effect to any
payments thereunder and other amounts charged thereto on the Distribution
Date;
(x) in the case of a Series of Certificates with a variable Pass-Through
Rate, such Pass-Through Rate;
(xi) the book value of any collateral acquired by the Trust Estate
through foreclosure or
otherwise;
(xii) the unpaid principal balance of any Mortgage Loan as to which the
Servicer has determined not to foreclose because it believes the related
Mortgaged Property may be contaminated with or affected by hazardous wastes
or hazardous substances; and
(xiii) the number and aggregate principal amount of Mortgage Loans one
month, two months and three or more months delinquent.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish either directly, or through the Paying
Agent, if any, a report to each Certificateholder of record at any time during
such calendar year (a) as to the aggregate of amounts reported pursuant to (i)
and (ii) above, as applicable, for such calendar year or, in the event such
person was a Certificateholder of record during a portion of such calendar year,
for the applicable portion of such year and (b) such other information as
required by the Code and applicable regulations thereunder and as the Servicer
deems necessary or desirable to enable Certificateholders to prepare their tax
returns. (Section 4.02.) In the event that an election has been made to treat
the Trust Estate (or a segregated pool of assets therein) as a REMIC, the
Trustee will be required to sign the Federal income tax returns of the REMIC
(which will be prepared by the Servicer). See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates-- Taxation
of Residual Certificates--Administrative Matters."
REPORTS TO THE TRUSTEE
No later than 15 days after each Distribution Date for a Series, the
Servicer will provide the Trustee of such Series with a report setting forth the
status of the related Certificate Account and the related Subordination Reserve
Fund and any other reserve fund as of the close of business on such Distribution
Date, stating that all distributions required to be made by the Servicer under
the applicable Pooling and Servicing Agreement have been made (or if any
required
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distribution has not been made by the Servicer, specifying the nature and status
thereof) and showing, for the period covered by such statement, the aggregate of
deposits to and withdrawals from the Certificate Account for each category of
deposits and withdrawals specified in the Pooling and Servicing Agreement. Such
statement shall also include information as to (i) the aggregate unpaid
principal balances of all the Mortgage Loans as of the close of business on the
last day of the month preceding the month in which such Distribution Date
occurs; and (ii) the amount of any Subordination Reserve Fund and any other
reserve fund, as of such Distribution Date (after giving effect to the
distributions on such Distribution Date). Copies of such reports may be obtained
by Certificateholders upon request in writing addressed to the Servicer, c/o The
Prudential Home Mortgage Company, Inc., 7470 New Technology Way, Frederick,
Maryland 21701. If the Servicer should fail to provide such copies, they may be
obtained from the Trustee. (Section 3.12).
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will make reasonable efforts to collect all payments called for
under the Mortgage Loans and will, consistent with the applicable Pooling and
Servicing Agreement and any applicable agreement governing any form of credit
enhancement, follow such collection procedures as it follows with respect to
mortgage loans serviced by it that are comparable to the Mortgage Loans.
Consistent with the above, the Servicer may, in its discretion, (i) waive any
prepayment charge, assumption fee, late payment charge or any other charge in
connection with the prepayment of a Mortgage Loan and (ii) arrange with a
mortgagor a schedule for the liquidation of deficiencies running for not more
than 180 days after the applicable Due Date.
Under the Pooling and Servicing Agreement, the Servicer, to the extent
permitted by law, will establish and maintain one or more escrow accounts (the
"Servicing Account") in which the Servicer will be required to deposit any
payments made by mortgagors in advance for taxes, assessments, primary mortgage
(if applicable) and hazard insurance premiums and other similar items.
Withdrawals from the Servicing Account may be made to effect timely payment of
taxes, assessments, mortgage and hazard insurance, to refund to mortgagors
amounts determined to be overages, to pay interest to mortgagors on balances in
the Servicing Account, if required, and to clear and terminate such account. The
Servicer will be responsible for the administration of each Servicing Account.
The Servicer will be obligated to advance certain amounts which are not timely
paid by the mortgagors, to the extent that it determines, in good faith, that
they will be recoverable out of insurance proceeds, liquidation proceeds, or
otherwise. Alternatively, in lieu of establishing a Servicing Account, the
Servicer may procure a performance bond or other form of insurance coverage, in
an amount acceptable to the Rating Agency rating the related Series of
Certificates, covering loss occasioned by the failure to escrow such amounts.
(Section 3.06.)
ENFORCEMENT OF DUE-ON-SALE CLAUSES; REALIZATION UPON DEFAULTED MORTGAGE LOANS
With respect to each Mortgage Loan having a fixed interest rate, unless
otherwise specified in the applicable Prospectus Supplement, each Pooling and
Servicing Agreement will provide that, when any Mortgaged Property is about to
be conveyed by the mortgagor, the Servicer will, to the extent it has knowledge
of such prospective conveyance, exercise its rights to accelerate the maturity
of such Mortgage Loan under the "due-on-sale" clause applicable thereto, if any,
unless it is not exercisable under applicable law or if such exercise would
result in loss of insurance coverage with respect to such Mortgage Loan or
would, in the Servicer's judgment, be reasonably likely to result in litigation
by the mortgagor. In either case, the Servicer is authorized to take or enter
into an assumption and modification agreement from or with the person to whom
such Mortgaged Property has been or is about to be conveyed, pursuant to which
such person becomes liable under the Mortgage Note and, unless prohibited by
applicable state law, the mortgagor remains liable thereon, provided that the
Mortgage Loan will continue to be covered by any pool insurance policy and any
related primary mortgage insurance policy and the Mortgage Interest Rate with
respect to such Mortgage Loan and the payment terms shall remain unchanged. The
Servicer will also be authorized, with the prior approval of the pool insurer
and the primary mortgage insurer, if any, to enter into a substitution of
liability agreement with such person, pursuant to which the original mortgagor
is released from liability and such person is substituted as mortgagor and
becomes liable under the Mortgage Note. (Section 3.08)
The Servicer is obligated under the Pooling and Servicing Agreement for each
Series to realize upon defaulted Mortgage Loans in accordance with its normal
servicing practices, which will conform generally to those of prudent mortgage
lending institutions which service mortgage loans of the same type in the same
jurisdictions. Notwithstanding the foregoing, the Servicer is authorized under
the Pooling and Servicing Agreement to permit the assumption of a
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defaulted Mortgage Loan rather than to foreclose or accept a deed-in-lieu of
foreclosure if, in the Servicer's judgment, the default is unlikely to be cured
and the assuming borrower meets PHMC's underwriting guidelines. In connection
with any such assumption, the Mortgage Interest Rate and the payment terms of
the related Mortgage Note will not be changed. See also "The Trust
Estates--Mortgage Loans--Optional Repurchases," above, with respect to the
Seller's right to repurchase defaulted Mortgage Loans. Further, the Servicer may
encourage the refinancing of such defaulted Mortgage Loans, including Mortgage
Loans that would permit creditworthy borrowers to assume the outstanding
indebtedness. In the case of foreclosure or of damage to a Mortgaged Property
from an uninsured cause, the Servicer is not required to expend its own funds to
foreclose or restore any damaged property, unless it reasonably determines (i)
that such foreclosure or restoration will increase the proceeds to
Certificateholders of such Series of liquidation of the Mortgage Loan after
reimbursement of the Servicer for its expenses and (ii) that such expenses will
be recoverable to it through Liquidation Proceeds. In the event that the
Servicer has expended its own funds for foreclosure or to restore damaged
property, it will be entitled to charge the Certificate Account for such Series
an amount equal to all costs and expenses incurred by it. (Sections 3.03 and
3.09).
The Servicer is not obligated to foreclose on any Mortgaged Property which
it believes may be contaminated with or affected by hazardous wastes or
hazardous substances. See "Certain Legal Aspects of the Mortgage Loans--
Environmental Considerations." If the Servicer does not foreclose on a Mortgaged
Property, the Certificateholders of the related Series may experience a loss on
the related Mortgage Loan. The Servicer will not be liable to the
Certificateholders if it fails to foreclose on a Mortgaged Property which it
believes may be so contaminated or affected, even if such Mortgaged Property is,
in fact, not so contaminated or affected. Conversely, the Servicer will not be
liable to the Certificateholders if, based on its belief that no such
contamination or effect exists, the Servicer forecloses on a Mortgaged Property
and takes title to such Mortgaged Property, and thereafter such Mortgaged
Property is determined to be so contaminated or affected.
The Servicer may foreclose against property securing a defaulted Mortgage
Loan either by foreclosure, by sale or by strict foreclosure and in the event a
deficiency judgment is available against the mortgagor or other person (see
"Certain Legal Aspects of the Mortgage Loans--Anti-Deficiency Legislation and
Other Limitations on Lenders" for a discussion of the availability of deficiency
judgments), may proceed for the deficiency. It is anticipated that in most cases
the Servicer will not seek deficiency judgments, and the Servicer is not
required under the Pooling and Servicing Agreement to seek deficiency judgments.
With respect to a Trust Estate (or a segregated pool of assets therein) as
to which a REMIC election has been made, if the trustee acquires ownership of
any Mortgaged Property as a result of a default or imminent default of any
Mortgage Loan secured by such Mortgaged Property, the Trustee will be required
to dispose of such property within two years following its acquisition by the
Trust Estate unless the Trustee (a) receives an opinion of counsel to the effect
that the holding of the Mortgaged Property by the Trust Estate will not cause
the Trust Estate to be subject to the tax on "prohibited transactions" imposed
by Code Section 860F(a)(1) or cause the Trust Estate (or any segregated pool of
assets therein as to which a REMIC election has been made or would be made) to
fail to qualify as a REMIC or (b) applies for and is granted an extension of the
two-year period in the manner contemplated by Code Section 856(e)(3). The
Servicer also will be required to administer the Mortgaged Property in a manner
which does not cause the Mortgaged Property to fail to qualify as "foreclosure
property" within the meaning of Code Section 860G(a)(8) or result in the receipt
by the Trust Estate of any "net income from foreclosure property" within the
meaning of Code Section 860G(c)(2), respectively. In general, this would
preclude the holding of the Mortgaged Property by a party acting as a dealer in
such property or the receipt of rental income based on the profits of the lessee
of such property. See "Certain Federal Income Tax Consequences."
FIXED RETAINED YIELD, SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Fixed Retained Yield with respect to any Mortgage Loan is that portion, if
any, of interest at the Mortgage Interest Rate that is not included in the
related Trust Estate. The Prospectus Supplement for a Series will specify
whether there is any Fixed Retained Yield with respect to the Mortgage Loans of
such Series. If so, the Fixed Retained Yield will be established on a
loan-by-loan basis and will be specified in the schedule of Mortgage Loans
attached as an exhibit to the applicable Pooling and Servicing Agreement. The
Servicer may deduct the Fixed Retained Yield from mortgagor payments as received
and prior to deposit of such payments in the Certificate Account for such Series
or may (unless an election has been made to treat the Trust Estate (or a
segregated pool of assets therein) as a REMIC) withdraw the
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Fixed Retained Yield from the Certificate Account after the entire payment has
been deposited in the Certificate Account. Notwithstanding the foregoing, with
respect to any payment of interest received by the Servicer relating to a
Mortgage Loan (whether paid by the mortgagor or received as Liquidation
Proceeds, insurance proceeds or otherwise) which is less than the full amount of
interest then due with respect to such Mortgage Loan, the owner of the Fixed
Retained Yield with respect to such Mortgage Loan will receive as its Fixed
Retained Yield only its pro rata share of such interest payment.
For each Series of Certificates, the Servicer will be entitled to be paid
the Servicing Fee on the related Mortgage Loans until termination of the
applicable Pooling and Servicing Agreement, subject, unless otherwise specified
in the applicable Prospectus Supplement, to adjustment as described under
"Adjustment to Servicing Fee in Connection with Prepaid and Liquidated Mortgage
Loans." The Servicer, at its election, will pay itself the Servicing Fee for a
Series with respect to each Mortgage Loan by (a) withholding the Servicing Fee
from any scheduled payment of interest prior to deposit of such payment in the
Certificate Account for such Series or (b) withdrawing the Servicing Fee from
the Certificate Account after the entire interest payment has been deposited in
the Certificate Account. The Servicer may also pay itself out of the Liquidation
Proceeds of a Mortgage Loan or other recoveries with respect thereto, or
withdraw from the Certificate Account, or if such Liquidation Proceeds or other
recoveries are insufficient, from Net Foreclosure Profits with respect to the
related Distribution Date the Servicing Fee in respect of such Mortgage Loan to
the extent provided in the applicable Pooling and Servicing Agreement. The
Servicing Fee with respect to the Mortgage Loans underlying the Certificates of
a Series will be specified in the applicable Prospectus Supplement. Additional
servicing compensation in the form of prepayment charges, assumption fees, late
payment charges or otherwise will be retained by the Servicer.
The Servicer will pay all expenses incurred in connection with the servicing
of the Mortgage Loans underlying a Series, including, without limitation,
payment of the hazard insurance policy premiums and fees or other amounts
payable pursuant to any applicable agreement for the provision of credit
enhancement for such Series, payment of the fees and disbursements of the
Trustee and any custodian, fees due to the independent accountants and expenses
incurred in connection with distributions and reports to Certificateholders.
Certain of these expenses may be reimbursable to the Servicer pursuant to the
terms of the applicable Pooling and Servicing Agreement.
As set forth in the preceding paragraph, the Servicer will be entitled to
reimbursement for certain expenses incurred by it in connection with the
liquidation of defaulted Mortgage Loans. In the event that claims are either not
made or are not fully paid from any applicable form of credit enhancement, the
related Trust Estate will suffer a loss to the extent that Liquidation Proceeds,
after reimbursement of the Servicing Fee and the expenses of the Servicer, are
less than the principal balance of the related Mortgage Loan. The Servicer is
also entitled to reimbursement from the Certificate Account of Periodic
Advances, of advances made by it to pay taxes, insurance premiums and similar
items with respect to any Mortgaged Property, of expenditures incurred by it in
connection with the restoration of any Mortgaged Property and of certain losses
against which it is indemnified by the Trust Estate. (Section 3.03).
EVIDENCE AS TO COMPLIANCE
The Servicer will deliver to the Trustee annually, on or before the date
specified in the Pooling and Servicing Agreement, an Officer's Certificate
stating that (i) a review of the activities of the Servicer during the preceding
calendar year and of performance under the Pooling and Servicing Agreement has
been made under the supervision of such officer, and (ii) to the best of such
officer's knowledge, based on such review, the Servicer has fulfilled all its
obligations under the Pooling and Servicing Agreement throughout such year, or,
if there has been a default in the fulfillment of any such obligation,
specifying each such default known to such officer and the nature and status
thereof. Such Officer's Certificate shall be accompanied by a statement of a
firm of independent public accountants to the effect that, on the basis of an
examination of certain documents and records relating to the mortgage loans
being serviced by the Servicer, conducted substantially in compliance with the
Uniform Single Audit Program for Mortgage Bankers, the servicing of such
mortgage loans was conducted in compliance with the provisions of the Pooling
and Servicing Agreement and other similar agreements, except for (i) such
exceptions as such firm believes to be immaterial and (ii) such other exceptions
as are set forth in such statement. (Sections 3.13, 3.14).
CERTAIN MATTERS REGARDING THE SERVICER
The Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement for each Series (other than its duties as
Certificate Registrar for such Series, if it is acting as such), except upon its
determination
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that its duties thereunder are no longer permissible under applicable law or are
in material conflict by reason of applicable law with any other activities of a
type and nature carried on by it. No such resignation will become effective
until the Trustee for such Series or a successor servicer has assumed the
Servicer's obligations and duties under the Pooling and Servicing Agreement.
(Section 6.04). If the Servicer resigns for any of the foregoing reasons and the
Trustee is unable or unwilling to assume responsibility for servicing the
Mortgage Loans, it may appoint another institution as mortgage loan servicer, as
described under "Rights Upon Event of Default" below.
The Pooling and Servicing Agreement will also provide that neither the
Servicer, any subservicer, nor any partner, director, officer, employee or agent
of either of them (or of any partner of the Servicer), will be under any
liability to the Trust Estate or the Certificateholders, for the taking of any
action or for refraining from the taking of any action in good faith pursuant to
the Pooling and Servicing Agreement, or for errors in judgment; provided,
however, that neither the Servicer, any subservicer, nor any such person will be
protected against any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of his or
its duties or by reason of reckless disregard of his or its obligations and
duties thereunder. The Pooling and Servicing Agreement will further provide that
the Servicer, any subservicer, and any partner, director, officer, employee or
agent of either of them (or of any partner of the Servicer) shall be entitled to
indemnification by the Trust Estate and will be held harmless against any loss,
liability or expense incurred in connection with any legal action relating to
the Pooling and Servicing Agreement or the Certificates, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of his or its duties thereunder or by reason
of reckless disregard of his or its obligations and duties thereunder. In
addition, the Pooling and Servicing Agreement will provide that the Servicer
will not be under any obligation to appear in, prosecute or defend any legal
action that is not incidental to its duties under the Pooling and Servicing
Agreement and that in its opinion may involve it in any expense or liability.
The Servicer may, however, in its discretion, undertake any such action deemed
by it necessary or desirable with respect to the Pooling and Servicing Agreement
and the rights and duties of the parties thereto and the interests of the
Certificateholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Trust Estate and the Servicer will be entitled to be
reimbursed therefor out of the Certificate Account, and any loss to the Trust
Estate arising from such right of reimbursement will be allocated pro rata among
the various Classes of Certificates unless otherwise specified in the applicable
Pooling and Servicing Agreement. (Section 6.03).
Any person into which the Servicer may be merged or consolidated, or any
person resulting from any merger, conversion or consolidation to which the
Servicer is a party, or any person succeeding to the business through the
transfer of substantially all of its assets, or otherwise, of the Servicer will
be the successor of the Servicer under the Pooling and Servicing Agreement for
each Series provided that such successor or resulting entity is qualified to
service mortgage loans for FNMA or FHLMC and has a net worth of not less than
$15,000,000.
The Servicer also has the right to assign its rights and delegate its duties
and obligations under the Pooling and Servicing Agreement for each Series;
provided that (i) the purchaser or transferee accepting such assignment or
delegation is qualified to service mortgage loans for FNMA or FHLMC, is
satisfactory to the Trustee for such Series, in the reasonable exercise of its
judgment, and executes and delivers to the Trustee an agreement, in form and
substance reasonably satisfactory to the Trustee, which contains an assumption
by such purchaser or transferee of the due and punctual performance and
observance of each covenant and condition to be performed or observed by the
Servicer under the Pooling and Servicing Agreement from and after the date of
such agreement; and (ii) each applicable Rating Agency's rating of any
Certificates for such Series in effect immediately prior to such assignment,
sale or transfer would not be qualified, downgraded or withdrawn as a result of
such assignment, sale or transfer and the Certificates would not be placed on
credit review status by any such Rating Agency. The Servicer will be released
from its obligations under the Pooling and Servicing Agreement upon any such
assignment and delegation, except that the Servicer will remain liable for all
liabilities and obligations incurred by it prior to the time that the conditions
contained in clauses (i) and (ii) above are met. (Section 6.02).
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THE POOLING AND SERVICING AGREEMENT
EVENTS OF DEFAULT
Events of Default under the Pooling and Servicing Agreement for each Series
include (i) any failure by the Servicer to distribute to Certificateholders any
required payment which continues unremedied for 10 days after the giving of
written notice of such failure to the Servicer by the Trustee for such Series,
or to the Servicer and the Trustee by the holders of Certificates of such Series
having voting rights allocated to such Certificates ("Voting Interests")
aggregating not less than 25% of the Voting Interests allocated to all
Certificates for such Series; (ii) any failure by the Servicer duly to observe
or perform in any material respect any other of its covenants or agreements in
the Pooling and Servicing Agreement which continues unremedied for 60 days (or
30 days in the case of a failure to maintain any pool insurance policy required
to be maintained pursuant to the Pooling and Servicing Agreement) after the
giving of written notice of such failure to the Servicer by the Trustee, or to
the Servicer and Trustee by the holders of Certificates aggregating not less
than 25% of the Voting Interests; (iii) certain events in insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings and certain action by the Servicer indicating its insolvency,
reorganization or inability to pay its obligations and (iv) both the Servicer
and any subservicer appointed by it to become ineligible to service for both
FNMA and FHLMC (unless remedied within 90 days). (Section 7.01).
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied under the Pooling and
Servicing Agreement for a Series, the Trustee for such Series or holders of
Certificates of such Series evidencing not less than 25% of the Voting Interests
in the Trust Estate for such Series may terminate all of the rights and
obligations of the Servicer under the Pooling and Servicing Agreement and in and
to the Mortgage Loans (other than the Servicer's right to recovery of any
Initial Deposit for such Series, the aggregate Servicing Fees due prior to the
date of termination, and other expenses and amounts advanced pursuant to the
terms of the Pooling and Servicing Agreement, which rights the Servicer will
retain under all circumstances), whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Pooling and
Servicing Agreement and will be entitled to monthly servicing compensation not
to exceed the aggregate Servicing Fees together with the other servicing
compensation in the form of assumption fees, late payment charges or otherwise
as provided in the Pooling and Servicing Agreement. In the event that the
Trustee is unwilling or unable so to act, it may select, pursuant to the public
bid procedure described in the applicable Pooling and Servicing Agreement, or
petition a court of competent jurisdiction to appoint, a housing and home
finance institution, bank or mortgage servicing institution with a net worth of
at least $10,000,000 to act as successor to the Servicer under the provisions of
the Pooling and Servicing Agreement relating to the servicing of the Mortgage
Loans; provided however, that until such a successor Servicer is appointed and
has assumed the responsibilities, duties and liabilities of the Servicer under
the Pooling and Servicing Agreement, the Trustee shall continue as the successor
to the Servicer as described above. In the event such public bid procedure is
utilized, the successor servicer would be entitled to servicing compensation in
an amount equal to the aggregate Servicing Fees, together with the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in the Pooling and Servicing Agreement, and the Servicer
would be entitled to receive the net profits, if any, realized from the sale of
its servicing rights and obligations under the Pooling and Servicing Agreement.
(Sections 7.01 and 7.05).
During the continuance of any Event of Default under the Pooling and
Servicing Agreement for a Series, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Certificateholders of such Series, and
holders of Certificates evidencing not less than 25% of the Voting Interests for
such Series may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred upon the Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or powers
unless such Certificateholders have offered the Trustee reasonable security or
indemnity against the cost, expenses and liabilities which may be incurred by
the Trustee thereby. Also, the Trustee may decline to follow any such direction
if the Trustee determines that the action or proceeding so directed may not
lawfully be taken or would involve it in personal liability or be unjustly
prejudicial to the non-assenting Certificateholders. (Sections 7.02 and 7.03).
No Certificateholder of a Series, solely by virtue of such holder's status
as a Certificateholder, will have any right under the Pooling and Servicing
Agreement for such Series to institute any proceeding with respect to the
Pooling and Servicing Agreement, unless such holder previously has given to the
Trustee for such Series written notice of default
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and unless the holders of Certificates evidencing not less than 25% of the
Voting Interests for such Series have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have offered
to the Trustee reasonable indemnity and the Trustee for 60 days has neglected or
refused to institute any such proceeding. (Section 10.03).
AMENDMENT
Each Pooling and Servicing Agreement may be amended by the Seller, the
Servicer and the Trustee without the consent of the Certificateholders, (i) to
cure any ambiguity or mistake, (ii) to correct or supplement any provision
therein that may be inconsistent with any other provision therein, (iii) to
modify, eliminate or add to any of its provisions to such extent as shall be
necessary to maintain the qualification of the Trust Estate (or a segregated
pool of assets therein) as a REMIC at all times that any Certificates are
outstanding or to avoid or minimize the risk of the imposition of any tax on the
Trust Estate pursuant to the Code that would be a claim against the Trust
Estate, provided that the Trustee has received an opinion of counsel to the
effect that such action is necessary or desirable to maintain such qualification
or to avoid or minimize the risk of the imposition of any such tax and such
action will not, as evidenced by such opinion of counsel, adversely affect in
any material respect the interests of any Certificateholder, (iv) to change the
timing and/or nature of deposits into the Certificate Account, provided that
such change will not, as evidenced by an opinion of counsel, adversely affect in
any material respect the interests of any Certificateholder and that such change
will not adversely affect the then current rating assigned to any Certificates,
as evidenced by a letter from each Rating Agency to such effect, (v) to add to,
modify or eliminate any provisions therein restricting transfers of residual
Certificates to certain disqualified organizations described below under
"Certain Federal Income Tax Consequences--Federal Income Tax Consequences for
REMIC Certificates--Taxation of Residual Certificates--Tax-Related Restrictions
on Transfer of Residual Certificates," (vi) to make certain provisions with
respect to the denominations of, and the manner of payments on, certain Classes
or Subclasses of Certificates initially retained by the Seller or an affiliate,
or (vii) to make any other provisions with respect to matters or questions
arising under such Pooling and Servicing Agreement that are not inconsistent
with the provisions thereof, provided that such action will not, as evidenced by
an opinion of counsel, adversely affect in any material respect the interests of
the Certificateholders of the related Series. The Pooling and Servicing
Agreement may also be amended by the Seller, the Servicer and the Trustee with
the consent of the holders of Certificates evidencing interests aggregating not
less than 66 2/3% of the Voting Interests evidenced by the Certificates of each
Class or Subclass affected thereby, for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of such Pooling
and Servicing Agreement or of modifying in any manner the rights of the
Certificateholders; provided, however, that no such amendment may (i) reduce in
any manner the amount of, or delay the timing of, any payments received on or
with respect to Mortgage Loans that are required to be distributed on any
Certificates, without the consent of the holder of such Certificate, (ii)
adversely affect in any material respect the interests of the holders of a Class
or Subclass of Certificates of a Series in a manner other than that set forth in
(i) above without the consent of the holders of Certificates aggregating not
less than 66 2/3% of the Voting Interests evidenced by such Class or Subclass,
or (iii) reduce the aforesaid percentage of Certificates of any Class or
Subclass, the holders of which are required to consent to such amendment,
without the consent of the holders of all Certificates of such Class or Subclass
affected then outstanding. Notwithstanding the foregoing, the Trustee will not
consent to any such amendment if such amendment would subject the Trust Estate
(or a segregated pool of assets therein) to tax or cause the Trust Estate (or a
segregated pool of assets therein) to fail to qualify as a REMIC.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The obligations created by the Pooling and Servicing Agreement for a Series
of Certificates will terminate on the Distribution Date following the final
payment or other liquidation of the last Mortgage Loan subject thereto and the
disposition of all property acquired upon foreclosure of any such Mortgage Loan.
In no event, however, will the trust created by the Pooling and Servicing
Agreement continue beyond the expiration of 21 years from the death of the last
survivor of certain persons named in such Pooling and Servicing Agreement. For
each Series of Certificates, the Trustee will give written notice of termination
of the Pooling and Servicing Agreement to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency appointed by the Seller and specified in the
notice of termination.
If so provided in the related Prospectus Supplement, the Pooling and
Servicing Agreement for each Series of Certificates will permit, but not
require, the person or persons specified in such Prospectus Supplement to
purchase from the Trust Estate for such Series all remaining Mortgage Loans at
the time subject to the Pooling and Servicing
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Agreement at a price specified in such Prospectus Supplement. In the event that
the Servicer has caused the related Trust Estate (or a segregated pool of assets
therein) to be treated as a REMIC, any such purchase will be effected only
pursuant to a "qualified liquidation" as defined in Code Section 860F(a)(4)(A)
and the receipt by the Trustee of an opinion of counsel that such purchase will
not (i) result in the imposition of a tax on "prohibited transactions" under
Code Section 860F(a)(1), (ii) otherwise subject the Trust Estate to tax, or
(iii) cause the Trust Estate (or a segregated pool of assets) to fail to qualify
as a REMIC. The exercise of such right will effect early retirement of the
Certificates of that Series, but the right so to purchase may be exercised only
after the aggregate principal balance of the Mortgage Loans for such Series at
the time of purchase is less than a specified percentage of the aggregate
principal balance at the Cut-Off Date for the Series, or after the date set
forth in the related Prospectus Supplement.
THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement (the "Trustee") will
be named in the applicable Prospectus Supplement. The commercial bank or trust
company serving as Trustee may have normal banking relationships with the Seller
or any of its affiliates.
The Trustee may resign at any time, in which event the Servicer will be
obligated to appoint a successor trustee. The Servicer may also remove the
Trustee if the Trustee ceases to be eligible to act as Trustee under the Pooling
and Servicing Agreement, if the Trustee becomes insolvent or in order to change
the situs of the Trust Estate for state tax reasons. Upon becoming aware of such
circumstances, the Servicer will become obligated to appoint a successor
trustee. The Trustee may also be removed at any time by the holders of
Certificates evidencing not less than 51% of the Voting Interests in the Trust
Estate, except that, any Certificate registered in the name of the Seller, the
Servicer or any affiliate thereof will not be taken into account in determining
whether the requisite Voting Interest in the Trust Estate necessary to effect
any such removal has been obtained. Any resignation and removal of the Trustee,
and the appointment of a successor trustee, will not become effective until
acceptance of such appointment by the successor trustee. The Trustee, and any
successor trustee, will have a combined capital and surplus of at least
$50,000,000, or will be a member of a bank holding system, the aggregate
combined capital and surplus of which is at least $50,000,000, provided that the
Trustee's and any such successor trustee's separate capital and surplus shall at
all times be at least the amount specified in Section 310(a)(2) of the Trust
Indenture Act of 1939, and will be subject to supervision or examination by
federal or state authorities.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because such legal aspects are
governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete or to reflect the laws of any particular
state, nor to encompass the laws of all states in which the security for the
Mortgage Loans is situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
GENERAL
The Mortgage Loans will, in general, be secured by either first mortgages or
first deeds of trust, depending upon the prevailing practice in the state in
which the underlying property is located. A mortgage creates a lien upon the
real property described in the mortgage. There are two parties to a mortgage:
the mortgagor, who is the borrower; and the mortgagee, who is the lender. In a
mortgage state instrument, the mortgagor delivers to the mortgagee a note or
bond evidencing the loan and the mortgage. Although a deed of trust is similar
to a mortgage, a deed of trust has three parties: a borrower called the trustor
(similar to a mortgagor), a lender called the beneficiary (similar to a
mortgagee), and a third-party grantee called the trustee. Under a deed of trust,
the borrower grants the property, irrevocably until the debt is paid, in trust,
generally with a power of sale, to the trustee to secure payment of the loan.
The trustee's authority under a deed of trust and the mortgagee's authority
under a mortgage are governed by the express provisions of the deed of trust or
mortgage, applicable law, and, in some cases, with respect to the deed of trust,
the directions of the beneficiary.
FORECLOSURE
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's
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right of foreclosure is contested, the legal proceedings necessary to resolve
the issue can be time-consuming. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by non-judicial 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 that authorizes
the trustee to sell the property to a third party upon any default by the
borrower under the terms of the note or deed of trust. In certain states, such
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, 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, the trustee must provide notice in some states to any other individual
having an interest of record in the real property, including any junior
lienholders. If the deed of trust is not reinstated within any applicable cure
period, a notice of sale must be posted in a public place and, in most states,
published for a specified period of time in one or more newspapers. In addition,
some state laws require that a copy of the notice of sale be posted on the
property and sent to all parties having an interest of record in the property.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other 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. Certain state laws control the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the receiver or other designated officer, or by the trustee, is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
receiver for an amount equal to the unpaid principal amount of the note, accrued
and unpaid interest and the expenses of foreclosure. Thereafter, subject to the
right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender commonly will
obtain the services of a real estate broker and pay the broker a commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of mortgage
insurance proceeds, if any, or by judicial action against the borrower for the
deficiency, if such action is permitted by law. See "--Anti-Deficiency
Legislation and Other Limitations on Lenders" below.
FORECLOSURE ON SHARES OF COOPERATIVES
The cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the cooperative's Certificate of Incorporation and By-laws, as well as
in the proprietary lease or occupancy agreement, and may be cancelled by the
cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided 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
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proceeds from a sale of the cooperative apartment, subject, however, to the
cooperative's right to sums due under such proprietary lease or occupancy
agreement. The total amount owed to the cooperative by the tenant-stockholder,
which the lender generally cannot restrict and does not monitor, could reduce
the value of the collateral below the outstanding principal balance of the
cooperative loan and accrued and unpaid interest thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited by the agreement 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 Uniform Commercial Code (the
"UCC") and the security agreement relating to those shares. Article 9 of the UCC
requires that a sale be conducted in a "commercially reasonable" manner. Whether
a foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to the
usual practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust and/or foreclosure of
a mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
most states where the right of redemption is available, statutory redemption may
occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect of
a right of redemption is to delay the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser at a foreclosure sale, or of any purchaser from the
lender subsequent to judicial foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the foreclosure sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of such sale. The
purpose of these statutes is 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 foreclosure sale.
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In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement and foreclosure on the
beneficial interest in a land trust. 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 Mortgage Loan secured by
shares of a cooperative, would be such shares and the related proprietary lease
or occupancy agreement) was conducted in a commercially reasonable manner.
The Servicer is not required under the Pooling and Servicing Agreement to
pursue deficiency judgments on the Mortgage Loans even if permitted by law.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of a secured mortgage lender to realize upon its security. For example,
in a Chapter 13 proceeding under the federal Bankruptcy Code, when a court
determines that the value of a home is less than the principal balance of the
loan, the court may prevent a lender from foreclosing on the home, and, as part
of the rehabilitation plan, reduce the amount of the secured indebtedness to the
value of the home as it exists at the time of the proceeding, leaving the lender
as a general unsecured creditor for the difference between that value and the
amount of outstanding indebtedness. A bankruptcy court may grant the debtor a
reasonable time to cure a payment default, and in the case of a mortgage loan
not secured by the debtor's principal residence, also may reduce the monthly
payments due under such mortgage loan, change the rate of interest, reduce the
principal balance of the loan to the then-current appraised value of the related
Mortgaged Property and alter the mortgage loan repayment schedule. Certain court
decisions have applied such relief to claims secured by the debtor's principal
residence. If a court relieves a borrower's obligation to repay amounts
otherwise due on a Mortgage Loan, the Servicer will not be required to advance
such amounts, and any loss in respect thereof will be borne by the
Certificateholders.
The Internal Revenue Code of 1986, as amended, provides priority to certain
tax liens over the lien of the mortgage or deed of trust. The laws of some
states provide priority to certain tax liens over the lien of the mortgage or
deed of trust. Numerous federal and some state consumer protection laws impose
substantive requirements upon mortgage lenders in connection with the
origination, servicing and enforcement of mortgage loans. These laws include the
federal Truth in Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and
related statutes and regulations. These federal laws and state laws impose
specific statutory liabilities upon lenders who originate or service mortgage
loans and who fail to comply with the provisions of the law. In some cases, this
liability may affect assignees of the mortgage loans.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT AND SIMILAR LAWS
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such action could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of interest on certain of the Mortgage Loans in a Trust Estate. Any
shortfall in interest collections resulting from the application of the Relief
Act could result in losses to the holders of the Certificates of the related
Series. Further, the Relief Act imposes limitations which would impair the
ability of the Servicer to foreclose on an affected Mortgage Loan during the
borrower's period of active duty status. Thus, in the event that such a Mortgage
Loan goes into default, there may be delays and losses occasioned by the
inability to realize upon the Mortgaged Property in a timely fashion. Certain
states have enacted comparable legislation which may interfere with or affect
the ability of the Servicer to timely collect payments of principal and interest
on, or to foreclose on, Mortgage Loans of borrowers in such states who are
active or reserve members of the armed services.
ENVIRONMENTAL CONSIDERATIONS
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
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property at a foreclosure sale or operates a mortgaged property may become
liable in certain circumstances for the costs of remedial action ("Cleanup
Costs") if hazardous wastes or hazardous substances have been released or
disposed of on the property. Such Cleanup Costs may be substantial. It is
possible that such Cleanup Costs could become a liability of the Trust Estate
and reduce the amounts otherwise distributable to the Certificateholders if a
Mortgaged Property securing a Mortgage Loan became the property of the Trust
Estate in certain circumstances and if such Cleanup Costs were incurred.
Moreover, certain states by statute impose a lien for any Cleanup Costs incurred
by such state on the property that is the subject of such Cleanup Costs (a
"Superlien"). All subsequent liens on such property are subordinated to such
Superlien and, in some states, even prior recorded liens are subordinated to
such Superliens. In the latter states, the security interest of the Trustee in a
property that is subject to such a Superlien could be adversely affected.
Traditionally, residential mortgage lenders have not taken steps to evaluate
whether hazardous wastes or hazardous substances are present with respect to any
mortgaged property prior to the origination of the mortgage loan or prior to
foreclosure or accepting a deed-in-lieu of foreclosure. Accordingly, neither the
Seller nor PHMC has made such evaluations prior to the origination of the
Mortgage Loans, nor does either require that such evaluations be made by
originators who have sold the Mortgage Loans to PHMC. Neither the Seller nor
PHMC is required to undertake any such evaluations prior to foreclosure or
accepting a deed-in-lieu of foreclosure. Neither the Seller, the Servicer nor
PHMC makes any representations or warranties or assumes any liability with
respect to the absence or effect of hazardous wastes or hazardous substances on
any Mortgaged Property or any casualty resulting from the presence or effect of
hazardous wastes or hazardous substances. See "The Trust Estates--Mortgage
Loans--Representations and Warranties" and "Servicing of the Mortgage
Loans--Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage
Loans" above.
"DUE-ON-SALE" CLAUSES
The forms of note, mortgage and deed of trust relating to conventional
Mortgage Loans may contain a "due-on-sale" clause permitting acceleration of the
maturity of a loan if the borrower transfers its interest in the property. In
recent years, court decisions and legislative actions placed substantial
restrictions on the right of lenders to enforce such clauses in many states.
However, effective October 15, 1982, Congress enacted the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn Act") which purports to preempt
state laws which prohibit the enforcement of "due-on-sale" clauses by providing
among other matters, that "due-on-sale" clauses in certain loans (which loans
may include the Mortgage Loans) made after the effective date of the Garn Act
are enforceable, within certain limitations as set forth in the Garn Act and the
regulations promulgated thereunder. "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 Office of Thrift
Supervision ("OTS"), as successor to the Federal Home Loan Bank Board ("FHLBB"),
which preempt state law restrictions on the enforcement of such clauses.
Similarly, "due-on-sale" clauses in mortgage loans made by national banks and
federal credit unions are now fully enforceable pursuant to preemptive
regulations of the Comptroller of the Currency and the National Credit Union
Administration, respectively.
The Garn Act created a limited exemption from its general rule of
enforceability for "due-on-sale" clauses in certain mortgage loans ("Window
Period Loans") which were originated by non-federal lenders and made or assumed
in certain states ("Window Period States") during the period, prior to October
15, 1982, in which that state prohibited the enforcement of "due-on-sale"
clauses by constitutional provision, statute or statewide court decision (the
"Window Period"). Though neither the Garn Act nor the OTS regulations actually
names the Window Period States, the Federal Home Loan Mortgage Corporation has
taken the position, in prescribing mortgage loan servicing standards with
respect to mortgage loans which it has purchased, that the Window Period States
were: Arizona, Arkansas, California, Colorado, Georgia, Iowa, Michigan,
Minnesota, New Mexico, Utah and Washington. Under the Garn Act, unless a Window
Period State took action by October 15, 1985, the end of the Window Period, to
further regulate enforcement of "due-on-sale" clauses in Window Period Loans,
"due-on-sale" clauses would become enforceable even in Window Period Loans. Five
of the Window Period States (Arizona, Minnesota, Michigan, New Mexico and Utah)
have taken actions which restrict the enforceability of "due-on-sale" clauses in
Window Period Loans beyond October 15, 1985. The actions taken vary among such
states.
By virtue of the Garn Act, the Servicer may generally be permitted to
accelerate any conventional Mortgage Loan which contains a "due-on-sale" clause
upon transfer of an interest in the property subject to the mortgage or deed of
trust. With respect to any Mortgage Loan secured by a residence occupied or to
be occupied by the borrower, this
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ability to accelerate will not apply to certain types of transfers, including
(i) the granting of a leasehold interest which has a term of three years or less
and which does not contain an option to purchase, (ii) a transfer to a relative
resulting from the death of a borrower, or a transfer where the spouse or
children become an owner of the property in each case where the transferee(s)
will occupy the property, (iii) a transfer resulting from a decree of
dissolution of marriage, legal separation agreement or from an incidental
property settlement agreement by which the spouse becomes an owner of the
property, (iv) the creation of a lien or other encumbrance subordinate to the
lender's security instrument which does not relate to a transfer of rights of
occupancy in the property (provided that such lien or encumbrance is not created
pursuant to a contract for deed), (v) a transfer by devise, descent or operation
of law on the death of a joint tenant or tenant by the entirety, and (vi) other
transfers as set forth in the Garn Act and the regulations thereunder. The
extent of the effect of the Garn Act on the average lives and delinquency rates
of the Mortgage Loans cannot be predicted. See "Prepayment and Yield
Considerations."
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The OTS as successor to the
FHLBB is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. 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. Fifteen states have adopted laws reimposing or reserving the right to
reimpose interest rate limits. In addition, even where Title V is not so
rejected, any state is authorized to adopt a provision limiting certain other
loan charges.
The Seller will represent and warrant in the Pooling and Servicing Agreement
to the Trustee for the benefit of Certificateholders that all Mortgage Loans are
originated in full compliance with applicable state laws, including usury laws.
See "The Pooling and Servicing Agreement--Assignment of Mortgage Loans to the
Trustee."
ENFORCEABILITY OF CERTAIN PROVISIONS
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under the Pooling and Servicing Agreement, late charges and prepayment
fees (to the extent permitted by law and not waived by the Servicer) will be
retained by the Servicer as additional servicing compensation.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial remedies
that may be fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's judgment
and have required lenders to reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from temporary financial disability. In
some cases, courts have limited the right of lenders to foreclose if the default
under the mortgage instrument is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second mortgage or
deed of trust affecting the property. In other cases, some courts have been
faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
the deeds of trust receive notices in addition to the statutorily-prescribed
minimum requirements. 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.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership, and disposition of
Certificates, which may consist of REMIC Certificates, Standard Certificates or
Stripped Certificates, as described below. The discussion below does not purport
to address all federal income tax consequences that may be applicable to
particular categories of investors, some of which may be subject to special
rules. The authorities on which this discussion is based are subject to change
or differing interpretations, and any such change or interpretation could apply
retroactively. This discussion reflects the applicable provisions of the Code,
as well as regulations (the "REMIC Regulations") promulgated by the U.S.
Department of the Treasury on December 23, 1992, and generally effective for
REMICs with startup days on or after November 12, 1991. Investors should consult
their own tax advisors in determining the federal, state, local, and any other
tax consequences to them of the purchase, ownership, and disposition of
Certificates.
For purposes of this discussion, where the applicable Prospectus Supplement
provides for a Fixed Retained Yield with respect to the Mortgage Loans of a
Series of Certificates, references to the Mortgage Loans will be deemed to refer
to that portion of the Mortgage Loans held by the Trust Estate that does not
include the Fixed Retained Yield. References to a "Holder" or
"Certificateholder" in this discussion generally mean the beneficial owner of a
Certificate.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
GENERAL
With respect to a particular Series of Certificates, an election may be made
to treat the Trust Estate or one or more segregated pools of assets therein as
one or more REMICs within the meaning of Code Section 860D. A Trust Estate or a
portion or portions thereof as to which one or more REMIC elections will be made
will be referred to as a "REMIC Pool." For purposes of this discussion,
Certificates of a Series as to which one or more REMIC elections are made, which
will include all Multi-Class Certificates and may include Standard Certificates
or Stripped Certificates or both, are referred to as "REMIC Certificates" and
will consist of one or more Classes of "Regular Certificates" and one Class of
"Residual Certificates" in the case of each REMIC Pool. Qualification as a REMIC
requires ongoing compliance with certain conditions. With respect to each Series
of REMIC Certificates, Cadwalader, Wickersham & Taft, counsel to the Seller, has
advised the Seller that in the firm's opinion, assuming (i) the making of an
appropriate election, (ii) compliance with the Pooling and Servicing Agreement,
and (iii) compliance with any changes in the law, including any amendments to
the Code or applicable Treasury regulations thereunder, each REMIC Pool will
qualify as a REMIC. In such case, the Regular Certificates will be considered to
be "regular interests" in the REMIC Pool and generally will be treated for
federal income tax purposes as if they were newly originated debt instruments,
and the Residual Certificates will be considered to be "residual interests" in
the REMIC Pool. The Prospectus Supplement for each Series of Certificates will
indicate whether one or more REMIC elections with respect to the related Trust
Estate will be made, in which event references to "REMIC" or "REMIC Pool" herein
shall be deemed to refer to each such REMIC Pool.
STATUS OF REMIC CERTIFICATES
REMIC Certificates held by a mutual savings bank or a domestic building and
loan association will constitute "qualifying real property loans" within the
meaning of Code Section 593(d)(1) in the same proportion that the assets of the
REMIC Pool would be so treated. REMIC Certificates held by a domestic building
and loan association will constitute "a regular or residual interest in a REMIC"
within the meaning of Code Section 7701(a)(19)(C)(xi) in the same proportion
that the assets of the REMIC Pool would be treated as "loans...secured by an
interest in real property" within the meaning of Code Section 7701(a)(19)(C)(v)
or as other assets described in Code Section 7701(a)(19)(C). REMIC Certificates
held by a real estate investment trust will constitute "real estate assets"
within the meaning of Code Section 856(c)(5)(A), and interest on the Regular
Certificates and income with respect to Residual Certificates will be considered
"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) in the same
proportion that, for both purposes, the assets of the REMIC Pool would be so
treated. If at all times 95% or more of the assets of the REMIC Pool qualify for
each of the foregoing treatments, the REMIC Certificates will qualify for the
corresponding status in their entirety. For purposes of Code Sections 593(d)(1)
and 856(c)(5)(A), payments of principal and interest on the Mortgage Loans that
are reinvested pending distribution to holders of REMIC Certificates qualify for
such treatment. Where two REMIC Pools are a part of a tiered structure they will
be treated as one REMIC for purposes of the tests described above respecting
asset
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ownership of more or less than 95%. In addition, if the assets of the REMIC
include Buy-Down Loans, it is possible that the percentage of such assets
constituting "qualifying real property loans" or "loans...secured by an interest
in real property" for purposes of Code Sections 593(d)(1) and 7701(a)(19)(C)(v),
respectively, may be required to be reduced by the amount of the related
Buy-Down Funds. REMIC Certificates held by a regulated investment company will
not constitute "Government securities" within the meaning of Code Section
851(b)(4)(A)(i). REMIC Certificates held by certain financial institutions will
constitute an "evidence of indebtedness" within the meaning of Code Section
582(c)(1).
QUALIFICATION AS A REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a DE MINIMIS portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Certificates) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant to
which the DE MINIMIS requirement will be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than 1% of the aggregate
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a DE MINIMIS
amount of nonqualified assets. A REMIC Pool also must provide "reasonable
arrangements" to prevent its residual interests from being held by "disqualified
organizations" or agents thereof and must furnish applicable tax information to
transferors or agents that violate this requirement. See "Taxation of Residual
Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates--Disqualified Organizations."
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
and, generally, certificates of beneficial interest in a grantor trust that
holds mortgage loans and regular interests in another REMIC, such as lower-tier
regular interests in a tiered REMIC. The REMIC Regulations specify that loans
secured by timeshare interests and shares held by a tenant stockholder in a
cooperative housing corporation can be qualified mortgages. A qualified mortgage
includes a qualified replacement mortgage, which is any property that would have
been treated as a qualified mortgage if it were transferred to the REMIC Pool on
the Startup Day and that is received either (i) in exchange for any qualified
mortgage within a three-month period thereafter or (ii) in exchange for a
"defective obligation" within a two-year period thereafter. A "defective
obligation" includes (i) a mortgage in default or as to which default is
reasonably foreseeable, (ii) a mortgage as to which a customary representation
or warranty made at the time of transfer to the REMIC Pool has been breached,
(iii) a mortgage that was fraudulently procured by the mortgagor, and (iv) a
mortgage that was not in fact principally secured by real property (but only if
such mortgage is disposed of within 90 days of discovery). A Mortgage Loan that
is "defective" as described in clause (iv) that is not sold or, if within two
years of the Startup Day, exchanged, within 90 days of discovery, ceases to be a
qualified mortgage after such 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and certain other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in such fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced "promptly and appropriately" as payments on the Mortgage Loans
are received. Foreclosure property is real property acquired by the REMIC Pool
in connection with the default or imminent default of a qualified mortgage and
generally held for not more than two years, with extensions granted by the
Internal Revenue Service.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more classes of regular interests or
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(ii) a single class of residual interests on which distributions, if any, are
made pro rata. A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount (or
other similar amount), and provides that interest payments (or other similar
amounts), if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate, or consist of a specified, nonvarying portion of
the interest payments on qualified mortgages. Such a specified portion may
consist of a fixed number of basis points, a fixed percentage of the total
interest, or a qualified variable or inverse variable rate on some or all of the
qualified mortgages. The specified principal amount of a regular interest that
provides for interest payments consisting of a specified, nonvarying portion of
interest payments on qualified mortgages may be zero. A residual interest is an
interest in a REMIC Pool other than a regular interest that is issued on the
Startup Day and that is designated as a residual interest. An interest in a
REMIC Pool may be treated as a regular interest even if payments of principal
with respect to such interest are subordinated to payments on other regular
interests or the residual interest in the REMIC Pool, and are dependent on the
absence of defaults or delinquencies on qualified mortgages or permitted
investments, lower than reasonably expected returns on permitted investments,
expenses incurred by the REMIC Pool or prepayment interest shortfalls.
Accordingly, the Regular Certificates of a Series will constitute one or more
classes of regular interests, and the Residual Certificates with respect to that
Series will constitute a single class of residual interests on which
distributions are made pro rata.
If an entity, such as the REMIC Pool, 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 such year
and thereafter. In this event, an entity with multiple classes of ownership
interests may be treated as a separate association taxable as a corporation
under Treasury regulations, and the Regular Certificates may be treated as
equity interests therein. The Code, however, authorizes the Treasury Department
to issue regulations that address situations where failure to meet one or more
of the requirements for REMIC status occurs inadvertently and in good faith, and
disqualification of the REMIC Pool would occur absent regulatory relief.
Investors should be aware, however, that the Conference Committee Report to the
Tax Reform Act of 1986 (the "1986 Act") indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
GENERAL
In general, interest, original issue discount, and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the "Regular Certificateholder"), and principal payments on
a Regular Certificate will be treated as a return of capital to the extent of
the Regular Certificateholder's basis in the Regular Certificate allocable
thereto. Regular Certificateholders must use the accrual method of accounting
with regard to Regular Certificates, regardless of the method of accounting
otherwise used by such Regular Certificateholders.
ORIGINAL ISSUE DISCOUNT
Compound Interest Certificates will be, and other classes of Regular
Certificates may be, issued with "original issue discount" within the meaning of
Code Section 1273(a). Holders of any Class or Subclass of Regular Certificates
having original issue discount generally must include original issue discount in
ordinary income for federal income tax purposes as it accrues, in accordance
with a constant interest method that takes into account the compounding of
interest, in advance of receipt of the cash attributable to such income. The
following discussion is based in part on temporary and final Treasury
regulations issued on February 2, 1994 under Code Sections 1271 through 1273 and
1275 (the "OID Regulations") and in part on the provisions of the 1986 Act. The
OID Regulations generally are effective for debt instruments issued on or after
April 4, 1994, but generally may be relied upon as authority with respect to
Regular Certificates issued after December 21, 1992. Alternatively, proposed
Treasury regulations issued December 21, 1992 may be relied upon for debt
instruments issued prior to April 4, 1994. Regular Certificateholders should be
aware, however, that neither the OID Regulations nor the proposed regulations
adequately address certain issues relevant to prepayable securities, such as the
Regular Certificates. To the extent such issues are not addressed in the OID
Regulations, the Seller intends to apply the principles of such regulations and
the methodology described in the Conference Committee Report to the 1986 Act.
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
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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 herein and the appropriate method for
reporting interest and original issue discount with respect to the Regular
Certificates.
Each Regular Certificate (except to the extent described below with respect
to a Regular Certificate on which principal is distributed in a single
installment or by lots of specified principal amounts upon the request of a
Certificateholder or by random lot (a "Non-Pro Rata Certificate")) will be
treated as a single installment obligation for purposes of determining the
original issue discount includible in a Regular Certificateholder's income. The
total amount of original issue discount on a Regular Certificate is the excess
of the "stated redemption price at maturity" of the Regular Certificate over its
"issue price." The issue price of a Regular Certificate offered pursuant to this
Prospectus generally is the first price at which a substantial amount of such
Class is sold to the public (excluding bond houses, brokers and underwriters).
Although unclear under the OID Regulations, the Seller intends to 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 Seller as the fair market value of that Class as
of the issue date. The issue price of a Regular Certificate also includes any
amount paid by an initial Regular Certificateholder for accrued interest that
relates to a period prior to the issue date of the Regular Certificate, unless
the Regular Certificateholder elects on its federal income tax return to exclude
such amount from the issue price and to recover it on the first Distribution
Date. The stated redemption price at maturity of a Regular Certificate always
includes the original principal amount (in the case of Standard or Stripped
Certificates) or initial Stated Amount (in the case of Multi-Class Certificates)
of the Regular Certificate, but generally will not include distributions of
interest if such distributions constitute "qualified stated interest." Under the
OID Regulations, qualified stated interest generally means interest payable at a
single fixed rate or a qualified variable rate (as described below) provided
that such interest payments are unconditionally payable at intervals of one year
or less during the entire term of the Regular Certificate. Distributions of
interest on a Compound Interest Certificate, or on other Regular Certificates
with respect to which deferred interest will accrue, will not constitute
qualified stated interest payments, in which case the stated redemption price at
maturity of such Regular Certificates includes all distributions of interest as
well as principal thereon. Likewise, the Seller intends to 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 Certificate 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 Certificate
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Certificate multiplied
by the weighted average maturity of the Regular Certificate. For this purpose,
the weighted average maturity of the Regular Certificate is computed as the sum
of the amounts determined by multiplying the number of full years (I.E.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the Regular Certificate and the
denominator of which is the stated redemption price at maturity of the Regular
Certificate. The Conference Committee Report to the 1986 Act provides that the
schedule of such distributions should be determined in accordance with the
assumed rate of prepayment of the Mortgage Loans and the anticipated
reinvestment rate, if any, relating to the Regular Certificates (the "Prepayment
Assumption"). The Prepayment Assumption with respect to a Series of Regular
Certificates 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 such income will be capital gain if the Regular
Certificate is held as a capital asset. Under the OID Regulations, however,
Regular Certificateholders may elect to accrue all DE MINIMIS original issue
discount as well as market discount and market premium, under the constant yield
method. See "Election to Treat All Interest Under the Constant Yield Method."
A Regular Certificateholder 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 Certificate accrued during an accrual period for
each day on which it holds the Regular Certificate, including the date of
purchase but excluding the date of disposition. The Seller will treat the
monthly period ending on the day before each Distribution Date as the accrual
period. With respect to each Regular Certificate, 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
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the related Distribution Date on the Regular Certificate. The Conference
Committee Report to the 1986 Act states that the rate of accrual of original
issue discount is intended to be based on the Prepayment Assumption. Other than
as discussed below with respect to a Non-Pro Rata Certificate, the original
issue discount accruing in a full accrual period would be the excess, if any, of
(i) the sum of (a) the present value of all of the remaining distributions to be
made on the Regular Certificate as of the end of that accrual period, and (b)
the distributions made on the Regular Certificate during the accrual period that
are included in the Regular Certificate's stated redemption price at maturity,
over (ii) the adjusted issue price of the Regular Certificate at the beginning
of the accrual period. The present value of the remaining distributions referred
to in the preceding sentence is calculated based on (i) the yield to maturity of
the Regular Certificate at the issue date, (ii) events (including actual
prepayments) that have occurred prior to the end of the accrual period, and
(iii) the Prepayment Assumption. For these purposes, the adjusted issue price of
a Regular Certificate at the beginning of any accrual period equals the issue
price of the Regular Certificate, increased by the aggregate amount of original
issue discount with respect to the Regular Certificate that accrued in all prior
accrual periods and reduced by the amount of distributions included in the
Regular Certificate's stated redemption price at maturity that were made on the
Regular Certificate in such prior periods. The original issue discount accruing
during any accrual period (as determined in this paragraph) will then be divided
by the number of days in the period to determine the daily portion of original
issue discount for each day in the period. With respect to an initial accrual
period shorter than a full accrual period, the daily portions of original issue
discount must be determined according to an appropriate allocation under any
reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates 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 prepayments on the Mortgage Loans with respect to a Series of
Regular Certificates can result in both a change in the priority of principal
payments with respect to certain Classes of Regular Certificates and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Certificates.
In the case of a Non-Pro Rata Certificate, the Seller intends to determine
the yield to maturity of such Certificate based upon the anticipated payment
characteristics of the Class as a whole under the Prepayment Assumption. In
general, the original issue discount accruing on each Non-Pro Rata Certificate
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 Certificate (or portion of
such unpaid principal balance), (a) the remaining unaccrued original issue
discount allocable to such Certificate (or to such portion) will accrue at the
time of such distribution, and (b) the accrual of original issue discount
allocable to each remaining Certificate of such Class (or the remaining unpaid
principal balance of a partially redeemed Non-Pro Rata Certificate after a
distribution of principal has been received) will be adjusted by reducing the
present value of the remaining payments on such Class and the adjusted issue
price of such Class to the extent attributable to the portion of the unpaid
principal balance thereof that was distributed. The Seller believes that the
foregoing treatment is consistent with the "pro rata prepayment" rules of the
OID Regulations, but with the rate of accrual of original issue discount
determined based on the Prepayment Assumption for the Class as a whole.
Investors are advised to consult their tax advisors as to this treatment.
ACQUISITION PREMIUM
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted issue
price and the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price. Alternatively, such
a subsequent purchaser may elect to treat all such acquisition premium under the
constant yield method, as described below under the heading "Election to Treat
All Interest Under the Constant Yield Method."
VARIABLE RATE REGULAR CERTIFICATES
Regular Certificates may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate if,
generally, (i) the issue price does not exceed the original principal balance by
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more than a specified amount and (ii) the interest compounds or is payable at
least annually at (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 in
the rate can reasonably be expected to measure contemporaneous variations in the
cost of newly borrowed funds, where such rate is subject to a multiple of not
less than zero nor more than 1.35. Such rate may also be increased or decreased
by a fixed spread or subject to a fixed cap or floor, or a cap or floor that is
not reasonably expected as of the issue date to affect the yield of the
instrument significantly. An objective rate includes a rate determined using a
single fixed formula and that is based on one or more qualified floating rates
or the yield or changes in the price of actively traded personal property. A
qualified inverse floating rate is a rate equal to a fixed rate minus a
qualified floating rate that inversely reflects the contemporaneous variations
in the cost of newly borrowed funds. A Class of Regular Certificates may be
issued under this Prospectus that does not have a variable rate under the
foregoing rules, for example, a Class that bears an interest-only or
super-premium floating rate, or a fixed rate for one year or more followed by
the inverse of an index multiplied by more than 1.35. It is possible that such a
Class may be considered to bear "contingent interest," within the meaning of
proposed Treasury regulations issued on April 8, 1986. These proposed
regulations under certain circumstances could result in a deferral of the timing
of reporting of such interest income when compared to the original issue
discount rules. However, the proposed regulations regarding contingent interest
have not been adopted in final form and may not currently be relied upon.
Moreover, under the REMIC Regulations, a Regular Certificate (i) bearing a rate
that qualifies as a variable rate under the OID Regulations that is tied to
current values of a variable rate (or the highest, lowest or average of two or
more variable rates, including a rate based on the average cost of funds of one
or more financial institutions), or a positive or negative multiple of such a
rate (plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans that bear either
a fixed rate or a variable rate, including such a rate that is subject to one or
more caps or floors, or (ii) bearing one or more such variable rates for one or
more periods, or one or more fixed rates for one or more periods, and a
different variable rate or fixed rate for other periods, qualifies as a regular
interest in a REMIC. Accordingly, unless otherwise indicated in the applicable
Prospectus Supplement, the Seller intends to treat Regular Certificates that
qualify as regular interests under this rule as bearing a variable rate for
original issue discount reporting purposes.
The amount of original issue discount with respect to a Regular Certificate
bearing a variable rate of interest will accrue in the manner described above
under "Original Issue Discount," with the yield to maturity and future payments
on such Regular Certificate generally to be determined by assuming that interest
will be payable for the life of the Regular Certificate 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 otherwise specified in the
applicable Prospectus Supplement, the Seller intends to treat such variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium Class, which will be treated as non-qualified
stated interest includible in the stated redemption price at maturity. Ordinary
income reportable for any period will be adjusted based on subsequent changes in
the applicable interest rate index.
Although unclear under the OID Regulations, the Seller intends to treat
Regular Certificates bearing an interest rate that is a weighted average of the
net interest rates on Mortgage Loans having adjustable rates as having
non-qualified stated interest. 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 Certificates.
MARKET DISCOUNT
A purchaser of a Regular Certificate 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 Certificate (i) is exceeded by the then-current principal
amount of the Regular Certificate, or (ii) in the case of a Regular Certificate
having original issue discount, is exceeded by the adjusted issue price of such
Regular Certificate at the time of purchase. Such purchaser generally will be
required to recognize ordinary income to the extent of accrued market discount
on such Regular Certificate as distributions includible in the stated redemption
price at maturity thereof are
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received, in an amount not exceeding any such distribution. Such market discount
would accrue in a manner to be provided in Treasury regulations and should take
into account the Prepayment Assumption. The Conference Committee Report to the
1986 Act provides that until such regulations are issued, such market discount
would accrue either (i) on the basis of a constant interest rate, or (ii) in the
ratio of stated interest allocable to the relevant period to the sum of the
interest for such period plus the remaining interest as of the end of such
period, or in the case of a Regular Certificate issued with original issue
discount, in the ratio of original issue discount accrued for the relevant
period to the sum of the original issue discount accrued for such period plus
the remaining original issue discount as of the end of such period. Such
purchaser also generally will be required to treat a portion of any gain on a
sale or exchange of the Regular Certificate as ordinary income to the extent of
the market discount accrued to the date of disposition under one of the
foregoing methods, less any accrued market discount previously reported as
ordinary income as partial distributions in reduction of the stated redemption
price at maturity were received. Such purchaser will be required to defer
deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Certificate over the
interest distributable thereon. The deferred portion of such interest expense in
any taxable year generally will not exceed the accrued market discount on the
Regular Certificate for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Certificate is disposed of.
As an alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Certificateholder may elect to include market discount in
income currently as it accrues on all market discount instruments acquired by
such Regular Certificateholder in that taxable year or thereafter, in which case
the interest deferral rule will not apply. See "Election to Treat All Interest
Under the Constant Yield Method" below regarding an alternative manner in which
such election may be deemed to be made.
By analogy to the OID Regulations, market discount with respect to a Regular
Certificate will be considered to be zero if such market discount is less than
0.25% of the remaining stated redemption price at maturity of such Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above in the third paragraph under
"Original Issue Discount") remaining after the date of purchase. Treasury
regulations implementing the market discount rules have not yet been issued, and
therefore investors should consult their own tax advisors regarding the
application of these rules. Investors should also consult Revenue Procedure
92-67 concerning the elections to include market discount in income currently
and to accrue market discount on the basis of the constant yield method.
PREMIUM
A Regular Certificate 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 Certificateholder holds such Regular Certificate as a
"capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize such premium
under the constant interest method. The Conference Committee Report to the 1986
Act indicates a Congressional intent that the same rules that will 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 Certificates, although it is unclear whether the alternatives to
the constant interest method described above under "Market Discount" are
available. Amortizable bond premium will be treated as an offset to interest
income on a Regular Certificate, rather than as a separate deduction 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.
TREATMENT OF LOSSES
Regular Certificateholders will be required to report income with respect to
Regular Certificates on the accrual method of accounting, without giving effect
to delays or reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans, except to the extent it can be established
that such losses are uncollectible. Accordingly, the holder of a Regular
Certificate, particularly a Subordinated Certificate, may have income, or may
incur a diminution in cash flow as a result of a default or delinquency, but may
not be able to take a deduction (subject to the discussion below) for the
corresponding loss until a subsequent taxable year. To the extent the rules of
Code Section 166 regarding bad debts are applicable, it appears that Regular
Certificateholders that are corporations should in general be allowed to deduct
as an ordinary loss such loss with respect to principal sustained during the
taxable year on account of any such Regular Certificates becoming wholly or
partially worthless, and that, in general, Regular Certificateholders that are
not corporations will be allowed to deduct as a short term capital loss any loss
sustained during the taxable year on account of a portion of any such Regular
Certificates becoming wholly worthless. Although the matter is not free from
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doubt, non-corporate Regular Certificateholders should be allowed a bad debt
deduction at such time as the principal balance of such Regular Certificates is
reduced to reflect losses resulting from any liquidated Mortgage Loans. The
Internal Revenue Service, however, could take the position that non-corporate
holders will be allowed a bad debt deduction to reflect such losses only after
all the Mortgage Loans remaining in the Trust Estate have been liquidated or the
applicable Class of Regular Certificates has been otherwise retired. The
Internal Revenue Service could also assert that losses on the Regular
Certificates are deductible based on some other method that may defer such
deductions for all holders, such as reducing future cash flow for purposes of
computing original issue discount. This may have the effect of creating
"negative" original issue discount which would be deductible only against future
positive original issue discount or otherwise upon termination of the Class.
Regular Certificateholders are urged to consult their own tax advisors regarding
the appropriate timing, amount and character of any loss sustained with respect
to such Regular Certificates. Losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate and
non-corporate holders. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Such taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
Regular Certificates.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD METHOD
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to such an election, (i) "interest" includes stated interest, original issue
discount, DE MINIMIS original issue discount, market discount and DE MINIMIS
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make such an election on an instrument by instrument basis or for
a class or group of debt instruments. However, if the holder makes such an
election with respect to a debt instrument with amortizable bond premium or with
market discount, the holder is deemed to have made elections to amortize bond
premium or to report market discount income currently as it accrues under the
constant yield method, respectively, for all debt instruments acquired by the
holder in the same taxable year or thereafter. The election is made on the
holder's federal income tax return for the year in which the debt instrument is
acquired and is irrevocable except with the approval of the Internal Revenue
Service. Investors should consult their own tax advisors regarding the
advisability of making such an election.
SALE OR EXCHANGE OF REGULAR CERTIFICATES
If a Regular Certificateholder sells or exchanges a Regular Certificate, the
Regular Certificateholder will recognize gain or loss equal to the difference,
if any, between the amount received and its adjusted basis in the Regular
Certificate. The adjusted basis of a Regular Certificate generally will equal
the cost of the Regular Certificate to the seller, increased by any original
issue discount or market discount previously included in the seller's gross
income with respect to the Regular Certificate and reduced by amounts included
in the stated redemption price at maturity of the Regular Certificate that were
previously received by the seller and by any amortized premium.
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 Certificate realized by an investor who holds the Regular Certificate as
a capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Certificate has been held for the long-term
capital gain holding period (currently, more than one year). Such gain will be
treated as ordinary income (i) if a Regular Certificate 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 Certificateholder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any prior
disposition of property that was held as part of such transaction, (ii) in the
case of a non-corporate taxpayer, to the extent such taxpayer has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates, or (iii) to the extent that such
gain does not exceed the excess, if any, of (a) the amount that would have been
includible in the gross income of the holder if its yield on such Regular
Certificate were 110% of the applicable Federal rate under Code Section 1274(d)
as of the date of purchase, over (b) the amount of income actually includible in
the gross income of such holder with respect to such Regular Certificate. In
addition, gain or loss
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recognized from the sale of a Regular Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code Section
582(c). Pursuant to the Revenue Reconciliation Act of 1993, capital gains of
certain non-corporate taxpayers are subject to a lower maximum tax rate than
ordinary income of such taxpayers. The maximum tax rate for corporations is the
same with respect to both ordinary income and capital gains.
TAXATION OF RESIDUAL CERTIFICATES
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 Certificates ("Residual Holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarter ratably to each day in such quarter
and by allocating such daily portion among the Residual Holders in proportion to
their respective holdings of Residual Certificates in the REMIC Pool on such
day. REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting, except
that (i) the limitations on deductibility of investment interest expense and
expenses for the production of income do not apply, (ii) all bad loans will be
deductible as business bad debts, and (iii) the limitation on the deductibility
of interest and expenses related to tax-exempt income will apply. The REMIC
Pool's gross income includes interest, original issue discount income, and
market discount income, if any, on the Mortgage Loans, reduced by amortization
of any premium on the Mortgage Loans, plus income on reinvestment of cash flows
and reserve assets, plus any cancellation of indebtedness income upon allocation
of realized losses to the Regular Certificates. The REMIC Pool's deductions
include interest and original issue discount expense on the Regular
Certificates, servicing fees on the Mortgage Loans, other administrative
expenses of the REMIC Pool and realized losses on the Mortgage Loans. The
requirement that Residual Holders report their pro rata share of taxable income
or net loss of the REMIC Pool will continue until there are no Certificates of
any class of the related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest and 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) on the
Regular Certificates, on the other hand. In the event that an interest in the
Mortgage Loans is acquired by the REMIC Pool at a discount, and one or more of
such Mortgage Loans is prepaid, the Residual Holder may recognize taxable income
without being entitled to receive a corresponding amount of cash because (i) the
prepayment may be used in whole or in part to make distributions in reduction of
principal or Stated Amount on the Regular Certificates, and (ii) the discount on
the Mortgage Loans which is includible in income may exceed the deduction
allowed upon such distributions on those Regular Certificates on account of any
unaccrued original issue discount relating to those Regular Certificates. When
there is more than one Class of Regular Certificates that distribute principal
or payments in reduction of Stated Amount sequentially, this mismatching of
income and deductions is particularly likely to occur in the early years
following issuance of the Regular Certificates when distributions in reduction
of principal or Stated Amount are being made in respect of earlier Classes of
Regular Certificates to the extent that such Classes are not issued with
substantial discount. If taxable income attributable to such a mismatching is
realized, in general, losses would be allowed in later years as distributions on
the later Classes of Regular Certificates are made. Taxable income may also be
greater in earlier years than in later years as a result of the fact that
interest expense deductions, expressed as a percentage of the outstanding
principal amount of such a Series of Regular Certificates, may increase over
time as distributions in reduction of principal or Stated Amount are made on the
lower yielding Classes of Regular Certificates, whereas, to the extent the REMIC
Pool consists of fixed rate Mortgage Loans, interest income with respect to any
given Mortgage Loan will remain constant over time as a percentage of the
outstanding principal amount of that loan. Consequently, Residual Holders must
have sufficient other sources of cash to pay any federal, state, or local income
taxes due as a result of such mismatching or unrelated deductions against which
to offset such income, subject to the discussion of "excess inclusions" below
under "Limitations on Offset or Exemption of REMIC Income." The timing of such
mismatching of income and deductions described in this paragraph, if present
with respect to a Series of Certificates, may have a significant adverse effect
upon a Residual Holder's after-tax rate of return. In addition, a Residual
Holder's taxable income during certain periods may exceed the income reflected
by such Residual Holder for such periods in accordance with generally accepted
accounting principles. Investors should consult their own accountants concerning
the accounting treatment of their investment in Residual Certificates.
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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
Certificate as of the close of the quarter (or time of disposition of the
Residual Certificate if earlier), determined without taking into account the net
loss for the quarter. The initial adjusted basis of a purchaser of a Residual
Certificate is the amount paid for such Residual Certificate. Such adjusted
basis will be increased by the amount of taxable income of the REMIC Pool
reportable by the Residual Holder and will be decreased (but not below zero),
first, by a cash distribution from the REMIC Pool and, second, by the amount of
loss of the REMIC Pool reportable by the Residual Holder. Any loss that is
disallowed on account of this limitation may be carried over indefinitely with
respect to the Residual Holder as to whom such loss was disallowed and may be
used by such Residual Holder only to offset any income generated by the same
REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of its
Residual Certificate as an offset to its share of the taxable income of the
related REMIC Pool. However, that taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Such recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Certificates over their life.
However, in view of the possible acceleration of the income of Residual Holders
described above under "Taxation of REMIC Income," the period of time over which
such issue price is effectively amortized may be longer than the economic life
of the Residual Certificates.
A Residual Certificate may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash flows.
The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the Internal Revenue Service may provide future guidance on the
proper tax treatment of payments made by a transferor of such a residual
interest to induce the transferee to acquire the interest, and Residual Holders
should consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Certificate is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations currently in effect do not so provide. See "Treatment of Certain
Items of REMIC Income and Expense-- Market Discount" below regarding the basis
of Mortgage Loans to the REMIC Pool and "Sale or Exchange of a Residual
Certificate" below regarding possible treatment of a loss upon termination of
the REMIC Pool as a capital loss.
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE
Although the Seller intends to 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
uncertainty and differing interpretations. The Seller makes no representation as
to the specific method that it will use for reporting income with respect to the
Mortgage Loans and expenses with respect to the Regular Certificates and
different methods could result in different timing of reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
ORIGINAL ISSUE DISCOUNT. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Certificates as described above under "Taxation of
Regular Certificates--Original Issue Discount" and "--Variable Rate Regular
Certificates," without regard to the DE MINIMIS rule described therein.
MARKET DISCOUNT. The REMIC Pool will have market discount income in respect
of Mortgage Loans if, in general, the basis of the REMIC Pool in such Mortgage
Loans is exceeded by their unpaid principal balances. The REMIC Pool's basis in
such Mortgage Loans is generally the fair market value of the Mortgage Loans
immediately after the transfer thereof to the REMIC Pool. The REMIC Regulations
provide that such basis is equal in the aggregate to the issue prices of all
regular and residual interests in the REMIC Pool. The accrued portion of such
market discount would be recognized currently as an item of ordinary income.
Market discount income generally should accrue in the manner described above
under "Taxation of Regular Certificates--Market Discount."
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PREMIUM. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Loans at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the fair
market value of the Mortgage Loans, based on the aggregate of the issue prices
of the regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "Taxation of Regular Certificates--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 a constant interest method. Amortizable bond premium will be treated
as an offset to interest income on the Mortgage Loans, rather than as a separate
deduction item. Because substantially all of the mortgagors on the Mortgage
Loans are expected to be individuals, Code Section 171 will not be available for
premium on Mortgage Loans originated on or prior to September 27, 1985. Premium
with respect to such Mortgage Loans may be deductible in accordance with a
reasonable method regularly employed by the holder thereof. The allocation of
such premium pro rata among principal payments should be considered a reasonable
method; however, the Internal Revenue Service may argue that such premium should
be allocated in a different manner, such as allocating such premium entirely to
the final payment of principal.
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME
The Code provides that, to the extent provided in regulations, if the
aggregate value of the Residual Certificates relative to the aggregate value of
the Regular Certificates and Residual Certificates is considered to be
"significant," as described below, then a portion (but not 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 Certificate over the daily accruals
for such quarterly period of (i) 120% of the long-term applicable Federal rate
that would have applied to the Residual Certificate (if it were a debt
instrument) on the Startup Day under Code Section 1274(d), multiplied by (ii)
the adjusted issue price of such Residual Certificate at the beginning of such
quarterly period. For this purpose, the adjusted issue price of a Residual
Certificate at the beginning of a quarter is the issue price of the Residual
Certificate, plus the amount of such daily accruals of REMIC income described in
this paragraph for all prior quarters, decreased by any distributions made with
respect to such Residual Certificate prior to the beginning of such quarterly
period. Although the Conference Committee Report to the 1986 Act indicates that
the value of all Residual Certificates would be considered significant in cases
where such value is at least 2% of the aggregate value of the Regular
Certificates and Residual Certificates, the REMIC Regulations have not adopted
such a general rule. Accordingly, the portion of the REMIC Pool's taxable income
that will be treated as excess inclusions will be determined by the preceding
formula, with the effect that such excess inclusions will be a larger portion of
such income as the relative value of the Residual Certificates diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including net
operating loss carryforwards, on such Residual Holder's return. Further, if the
Residual Holder is an organization subject to the tax on unrelated business
income imposed by Code Section 511, the Residual Holder's excess inclusions will
be treated as unrelated business taxable income of such Residual Holder for
purposes of Code Section 511. In addition, REMIC taxable income is subject to
30% withholding tax with respect to certain persons who are not U.S. Persons (as
defined below under "Tax-Related Restrictions on Transfer of Residual
Certificates--Foreign Investors"), and the portion thereof attributable to
excess inclusions is not eligible for any reduction in the rate of withholding
tax (by treaty or otherwise). See "Taxation of Certain Foreign
Investors--Residual Certificates" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Certificate, a portion
(allocated under Treasury regulations yet to be issued) of dividends paid by the
real estate investment trust or regulated investment company could not be offset
by net operating losses of its shareholders, would constitute unrelated business
taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to certain persons who are not U.S. Persons.
An exception to the inability of a Residual Holder to offset excess
inclusions with unrelated deductions and net operating losses applies to Code
Section 593 institutions ("thrift institutions"). For purposes of applying this
rule, all members of an affiliated group filing a consolidated return are
treated as one taxpayer, except that thrift institutions to which Code Section
593 applies, together with their subsidiaries formed to issue REMICs, are
treated as separate corporations. Furthermore, the Code provides that
regulations may disallow the ability of a thrift institution to use
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deductions to offset excess inclusions if necessary or appropriate to prevent
the avoidance of tax. A thrift institution may not so offset its excess
inclusions unless the Residual Certificates have "significant value," which
requires that (i) the Residual Certificates have an issue price that is at least
equal to 2% of the aggregate of the issue prices of all Residual Certificates
and Regular Certificates with respect to the REMIC Pool, and (ii) the
anticipated weighted average life of the Residual Certificates is at least 20%
of the anticipated weighted average life of the REMIC Pool. The anticipated
weighted average life of the Residual Certificates is based on all distributions
anticipated to be received with respect thereto (using the Prepayment
Assumption). The anticipated weighted average life of the REMIC Pool is the
aggregate weighted average life of all classes of interests therein (computed
using all anticipated distributions on a regular interest with nominal or no
principal). Finally, an ordering rule under the REMIC Regulations provides that
a thrift institution may only offset its excess inclusion income with deductions
after it has first applied its deductions against income that is not excess
inclusion income. If applicable, the Prospectus Supplement with respect to a
Series will set forth whether the Residual Certificates are expected to have
"significant value" within the meaning of the REMIC Regulations.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL CERTIFICATES
DISQUALIFIED ORGANIZATIONS. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Certificate for periods after the transfer and (ii) the highest
marginal federal income tax rate applicable to corporations. The REMIC
Regulations provide that the anticipated excess inclusions are based on actual
prepayment experience to the date of the transfer and projected payments based
on the Prepayment Assumption. The present value rate equals the applicable
federal rate under Code Section 1274(d) as of the date of the transfer for a
term ending with the last calendar quarter in which excess inclusions are
expected to accrue. Such rate is applied to the anticipated excess inclusions
from the end of the remaining calendar quarters in which they arise to the date
of the transfer. Such a tax generally would be imposed on the transferor of the
Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit stating that the transferee is not a Disqualified Organization and, as
of the time of the transfer, the transferor does not have actual knowledge that
such affidavit is false. The tax also may be waived by the Internal Revenue
Service if the Disqualified Organization promptly disposes of the residual
interest and the transferor pays income tax at the highest corporate rate on the
excess inclusion for the period the Residual Certificate is actually held by the
Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that it is not
a Disqualified Organization or stating such holder's taxpayer identification
number and, during the period such person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For these purposes, (i) "Disqualified Organization" means the United States,
any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations, any person holding an interest in a Pass-Through Entity as a
nominee for another will, with respect to such interest, be treated as a
Pass-Through Entity.
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The Pooling and Servicing Agreement with respect to a Series will provide
that no legal or beneficial interest in a Residual Certificate may be
transferred or registered unless (i) the proposed transferee furnishes to the
Seller and the Trustee an affidavit providing its taxpayer identification number
and stating that such transferee is the beneficial owner of the Residual
Certificate and is not a Disqualified Organization and is not purchasing such
Residual Certificate on behalf of a Disqualified Organization (I.E., as a
broker, nominee, or middleman thereof) and (ii) the transferor provides a
statement in writing to the Seller and the Trustee that it has no actual
knowledge that such affidavit is false. Moreover, the Pooling and Servicing
Agreement will provide that any attempted or purported transfer in violation of
these transfer restrictions will be null and void and will vest no rights in any
purported transferee. Each Residual Certificate with respect to a Series will
bear a legend referring to such restrictions on transfer, and each Residual
Holder will be deemed to have agreed, as a condition of ownership thereof, to
any amendments to the related Pooling and Servicing Agreement required under the
Code or applicable Treasury regulations to effectuate the foregoing
restrictions. Information necessary to compute an applicable excise tax must be
furnished to the Internal Revenue Service and to the requesting party within 60
days of the request, and the Seller or the Trustee may charge a fee for
computing and providing such information.
NONECONOMIC RESIDUAL INTERESTS. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person, as defined below under "Foreign Investors") is
disregarded for all federal income tax purposes if a significant purpose of the
transferor is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "Disqualified Organizations." The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of the non-economic residual
interest, the transferee may incur tax liabilities in excess of any cash flows
generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The Pooling
and Servicing Agreement with respect to each Series of Certificates will require
the transferee of a Residual Certificate to certify to the matters in the
preceding sentence as part of the affidavit described above under the heading
"Disqualified Organizations."
FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Certificate is deemed to have tax
avoidance potential unless, at the time of the transfer, (i) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (ii) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and prior to the end of the next
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Certificate back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to the Certificates of a Series may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the
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United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision thereof,
or an estate or trust that is subject to U.S. federal income tax regardless of
the source of its income.
SALE OR EXCHANGE OF A RESIDUAL CERTIFICATE
Upon the sale or exchange of a Residual Certificate, 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 Residual
Certificates--Basis and Losses") of such Residual Holder in such Residual
Certificate at the time of the sale or exchange. In addition to reporting the
taxable income of the REMIC Pool, a Residual Holder will have taxable income to
the extent that any cash distribution to it from the REMIC Pool exceeds such
adjusted basis on that Distribution Date. Such income will be treated as gain
from the sale or exchange of the Residual Certificate. It is possible that the
termination of the REMIC Pool may be treated as a sale or exchange of a Residual
Holder's Residual Certificate, in which case, if the Residual Holder has an
adjusted basis in its Residual Certificate remaining when its interest in the
REMIC Pool terminates, and if it holds such Residual Certificate as a capital
asset under Code Section 1221, then it will recognize a capital loss at that
time in the amount of such remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate 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 Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. In addition, gain or loss recognized from the sale of a
Residual Certificate 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 Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six months
after such sale or disposition, acquires (or enters into any other transaction
that results in the application of Code Section 1091) any residual interest in
any REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC
owner trust) that is economically comparable to a Residual Certificate.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
PROHIBITED TRANSACTIONS. Income from certain transactions by the REMIC
Pool, called prohibited transactions, will not be part of the calculation of
income or loss includible in the federal income tax returns of Residual Holders,
but rather will be taxed directly to the REMIC Pool at a 100% rate. Prohibited
transactions generally include (i) the disposition of a qualified mortgage other
than for (a) substitution within two years of the Startup Day for a defective
(including a defaulted) obligation (or repurchase in lieu of substitution of a
defective (including a defaulted) obligation at any time) or for any qualified
mortgage within three months of the Startup Day, (b) foreclosure, default, or
imminent default of a qualified mortgage, (c) bankruptcy or insolvency of the
REMIC Pool, or (d) a qualified (complete) liquidation, (ii) the receipt of
income from assets that are not the type of mortgages or investments that the
REMIC Pool is permitted to hold, (iii) the receipt of compensation for services,
or (iv) the receipt of gain from disposition of cash flow investments other than
pursuant to a qualified liquidation. Notwithstanding (i) and (iv), it is not a
prohibited transaction to sell REMIC Pool property to prevent a default on
Regular Certificates 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 Certificates is
outstanding). The REMIC Regulations indicate that the modification of a Mortgage
Loan generally will not be treated as a disposition if it is occasioned by a
default or reasonably foreseeable default, an assumption of the Mortgage Loan,
the waiver of a due-on-sale or due-on-encumbrance clause, or the conversion of
an interest rate by a mortgagor pursuant to the terms of a convertible
adjustable rate Mortgage Loan.
CONTRIBUTIONS TO THE REMIC POOL AFTER THE STARTUP DAY. In general, the
REMIC Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided for
cash
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contributions to the REMIC Pool (i) during the three months following the
Startup Day, (ii) made to a qualified reserve fund by a Residual Holder, (iii)
in the nature of a guarantee, (iv) made to facilitate a qualified liquidation or
clean-up call, and (v) as otherwise permitted in Treasury regulations yet to be
issued.
NET INCOME FROM FORECLOSURE PROPERTY. The REMIC Pool will be subject to
federal income tax at the highest corporate rate on "net income from foreclosure
property," determined by reference to the rules applicable to real estate
investment trusts. Generally, property acquired by deed in lieu of foreclosure
would be treated as "foreclosure property" for a period of two years, with
possible extensions. 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.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC Pool's final tax return a date on which such adoption is deemed to occur,
and sells all of its assets (other than cash) within a 90-day period beginning
on such date, the REMIC Pool will recognize no gain or loss 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 Certificates and Residual Holders within the 90-day
period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Holder for an entire
taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The Servicer will be obligated to act as "tax matters
person," as defined in applicable Treasury regulations, with respect to the
REMIC Pool, in its capacity as either Residual Holder or agent of the Residual
Holders. If the Code or applicable Treasury regulations do not permit the
Servicer to act as tax matters person in its capacity as agent of the Residual
Holders, the Residual Holder chosen by the Residual Holders or such other person
specified pursuant to Treasury regulations will be required to act as tax
matters person.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000 ($50,000 in the case of a married
individual filing a separate return) (subject to adjustment for inflation), or
(ii) 80% of the amount of itemized deductions otherwise allowable for such year.
In the case of a REMIC Pool, such deductions may include deductions under Code
Section 212 for the Servicing Fee and all administrative and other expenses
relating to the REMIC Pool, or any similar expenses allocated to the REMIC Pool
with respect to a regular interest it holds in another REMIC. Such investors who
hold REMIC Certificates either directly or indirectly through certain
pass-through entities may have their pro rata share of such expenses allocated
to them as additional gross income, but may be subject to such limitation on
deductions. In addition, such expenses are not deductible at all for purposes of
computing the alternative minimum tax, and may cause such investors to be
subject to significant additional tax liability. Temporary Treasury regulations
provide that the additional gross income and corresponding amount of expenses
generally are to be allocated entirely to the holders of Residual Certificates
in the case of a REMIC Pool that would not qualify as a fixed investment trust
in the absence of a REMIC election. However, such additional gross income and
limitation on deductions will apply to the allocable portion of such expenses to
holders of Regular Certificates, as well as holders of Residual Certificates,
where such Regular Certificates are issued in a manner that is similar to
pass-through certificates in a fixed investment trust. In general, such
allocable portion will be determined based on the ratio that a REMIC
Certificateholder's income, determined on a daily basis, bears to the income of
all holders of Regular Certificates and Residual Certificates with respect to a
REMIC Pool. As a result,
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individuals, estates or trusts holding REMIC Certificates (either directly or
indirectly through a grantor trust, partnership, S corporation, REMIC, or
certain other pass-through entities described in the foregoing temporary
Treasury regulations) may have taxable income in excess of the interest income
at the pass-through rate on Regular Certificates 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 Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
REGULAR CERTIFICATES
Interest, including original issue discount, distributable to Regular
Certificateholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), will be considered "portfolio interest"
and, therefore, generally will not be subject to 30% United States withholding
tax, provided that such Non-U.S. Person (i) is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (ii) provides the
Trustee, or the person who would otherwise be required to withhold tax from such
distributions under Code Section 1441 or 1442, with an appropriate statement,
signed under penalties of perjury, identifying the beneficial owner and stating,
among other things, that the beneficial owner of the Regular Certificate is a
Non-U.S. Person. If such statement, or any other required statement, is not
provided, 30% withholding will apply unless reduced or eliminated pursuant to an
applicable tax treaty or unless the interest on the Regular Certificate is
effectively connected with the conduct of a trade or business within the United
States by such Non-U.S. Person. In the latter case, such Non-U.S. Person will be
subject to United States federal income tax at regular rates. Investors who are
Non-U.S. Persons should consult their own tax advisors regarding the specific
tax consequences to them of owning a Regular Certificate. The term "Non-U.S.
Person" means any person who is not a U.S. Person.
RESIDUAL CERTIFICATES
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are Non-U.S. Persons are treated as interest for
purposes of the 30% (or lower treaty rate) United States withholding tax.
Treasury regulations provide that amounts distributed to Residual Holders may
qualify as "portfolio interest," subject to the conditions described in "Regular
Certificates" above, but only to the extent that (i) the Mortgage Loans were
issued after July 18, 1984 and (ii) the Trust Estate or segregated pool of
assets therein (as to which a separate REMIC election will be made), to which
the Residual Certificate 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, a Residual Holder 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 Residual Certificates--Limitations on
Offset or Exemption of REMIC Income." If the amounts paid to Residual Holders
who are Non-U.S. Persons are effectively connected with the conduct of a trade
or business within the United States by such Non-U.S. Persons, 30% (or lower
treaty rate) withholding will not apply. Instead, the amounts paid to such
Non-U.S. Persons will be subject to United States federal income tax at regular
rates. If 30% (or lower treaty rate) withholding is applicable, such amounts
generally will be taken into account for purposes of withholding only when paid
or otherwise distributed (or when the Residual Certificate 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
Certificates--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 Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under certain
circumstances, principal distributions) unless the Regular Certificateholder
complies with certain reporting and/or certification procedures, including the
provision of its taxpayer identification number to the Trustee, its agent or the
broker who effected the sale of the Regular Certificate, or such
Certificateholder is otherwise an exempt recipient under applicable provisions
of the Code. Any amounts to be withheld from distribution on the Regular
Certificates would be refunded by the Internal Revenue Service or allowed as a
credit against the Regular Certificateholder's federal income tax liability.
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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
Certificates or beneficial owners who own Regular Certificates through a broker
or middleman as nominee. All brokers, nominees and all other non-exempt holders
of record of Regular Certificates (including corporations, non-calendar year
taxpayers, securities or commodities dealers, real estate investment trusts,
investment companies, common trust funds, thrift institutions and charitable
trusts) may request such information for any calendar quarter by telephone or in
writing by contacting the person designated in Internal Revenue Service
Publication 938 with respect to a particular Series of Regular Certificates.
Holders through nominees must request such information from the nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual Holders,
furnished annually, if applicable, to holders of Regular Certificates, and filed
annually with the Internal Revenue Service concerning Code Section 67 expenses
(see "Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Certificates, 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 "Status of REMIC Certificates."
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES
AS TO WHICH NO REMIC ELECTION IS MADE
STANDARD CERTIFICATES
GENERAL
In the event that no election is made to treat a Trust Estate (or a
segregated pool of assets therein) with respect to a Series of Standard
Certificates as a REMIC, the Trust Estate will be classified as a grantor trust
under subpart E, Part 1 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). Where there is no Fixed Retained Yield with respect to the
Mortgage Loans underlying the Certificates of a Series, and where such
Certificates are not designated as "Stripped Certificates" the holder of each
such Certificate in such Series will be treated as the owner of a pro rata
undivided interest in the ordinary income and corpus portions of the Trust
Estate represented by its Standard Certificate and will be considered the
beneficial owner of a pro rata undivided interest in each of the Mortgage Loans,
subject to the discussion below under "Recharacterization of Servicing Fees."
Accordingly, the holder of a Standard Certificate of a particular Series will be
required to report on its federal income tax return its pro rata share of the
entire income from the Mortgage Loans represented by its Standard Certificate,
including interest at the coupon rate on such Mortgage Loans, original issue
discount (if any), prepayment fees, assumption fees, and late payment charges
received by the Servicer, in accordance with such Standard Certificateholder's
method of accounting. A Standard Certificateholder generally will be able to
deduct its share of the Servicing Fee and all administrative and other expenses
of the Trust Estate in accordance with its method of accounting, provided that
such amounts are reasonable compensation for services rendered to that Trust
Estate. However, investors who are individuals, estates or trusts who own
Standard Certificates, either directly or indirectly through certain
pass-through entities, will be subject to limitation with respect to certain
itemized deductions described in Code Section 67, including deductions under
Code Section 212 for the Servicing Fee and all such administrative and other
expenses of the Trust Estate, to the extent that such deductions, in the
aggregate, do not exceed two percent of an investor's adjusted gross income. In
addition, Code Section 68 provides that itemized deductions otherwise allowable
for a taxable year of an individual taxpayer will be reduced by the lesser of
(i) 3% of the excess, if any, of adjusted gross income over $100,000 ($50,000 in
the case of a married individual filing a separate return) (in each case, as
adjusted for inflation), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. As a result, such investors holding Standard
Certificates, directly or indirectly through a pass-through entity,
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may have aggregate taxable income in excess of the aggregate amount of cash
received on such Standard Certificates with respect to interest at the
pass-through rate or as discount income on such Standard Certificates. In
addition, such expenses are not deductible at all for purposes of computing the
alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Moreover, where there is Fixed Retained
Yield with respect to the Mortgage Loans underlying a Series of Standard
Certificates 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 Certificates" and "Recharacterization of Servicing Fees,"
respectively.
TAX STATUS
Cadwalader, Wickersham & Taft has advised the Seller that:
1. A Standard Certificate 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"
within the meaning of Code Section 7701(a)(19)(C)(v), provided that the real
property securing the Mortgage Loans represented by that Standard
Certificate is of the type described in such section of the Code.
2. A Standard Certificate owned by a financial institution described in
Code Section 593(a) will be considered to represent "qualifying real
property loans" within the meaning of Code Section 593(d)(1), provided that
the real property securing the Mortgage Loans represented by that Standard
Certificate is of the type described in such section of the Code.
3. A Standard Certificate owned by a real estate investment trust will
be considered to represent "real estate assets" within the meaning of Code
Section 856(c)(5)(A) to the extent that the assets of the related Trust
Estate consist of qualified assets, and interest income on such assets will
be considered "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B).
4. A Standard Certificate owned by a REMIC will be considered to
represent an "obligation (including any participation or certificate of
beneficial ownership therein) which is principally secured by an interest in
real property" within the meaning of Code Section 860G(a)(3)(A) to the
extent that the assets of the related Trust Estate consist of "qualified
mortgages" within the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buy-Down Loans may be characterized in their
entirety under the Code provisions cited in the immediately preceding paragraph.
Code Section 593(d)(1)(C) provides that the term "qualifying real property loan"
does not include a loan "to the extent secured by a deposit in or share of the
taxpayer." The application of this provision to a Buy-Down Fund is uncertain,
but may require that a taxpayer's investment in a Buy-Down Loan be reduced by
the Buy-Down Fund. As to the treatment of Buy-Down Loans as "qualifying real
property loans" under Code Section 593(d)(1) if the exception of Code Section
593(d)(1)(C) is inapplicable, as "loans...secured by an interest in real
property" under Code Section 7701(a)(19)(C)(v), as "real estate assets" under
Code Section 856(c)(5)(A), and as "obligation[s] . . . principally secured by an
interest in real property" under Code Section 860G(a)(3)(A), there is indirect
authority supporting treatment of an investment in a Buy-Down Loan as entirely
secured by real property if the fair market value of the real property securing
the loan exceeds the principal amount of the loan at the time of issuance or
acquisition, as the case may be. There is no assurance that the treatment
described above is proper. Accordingly, Standard Certificateholders are urged to
consult their own tax advisors concerning the effects of such arrangements on
the characterization of such Standard Certificateholder's investment for federal
income tax purposes.
PREMIUM AND DISCOUNT
Standard Certificateholders are advised to consult with their tax advisors
as to the federal income tax treatment of premium and discount arising either
upon initial acquisition of Standard Certificates or thereafter.
PREMIUM. The treatment of premium incurred upon the purchase of a Standard
Certificate will be determined generally as described above under "Federal
Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Premium."
ORIGINAL ISSUE DISCOUNT. The original issue discount rules of Code Sections
1271 through 1275 will be applicable to a Standard Certificateholder'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
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corporations originated after May 27, 1969, mortgages of noncorporate mortgagors
(other than individuals) originated after July 1, 1982, and mortgages of
individuals originated after March 2, 1984. Under the OID Regulations, such
original issue discount could arise by the charging of points by the originator
of the mortgages in an amount greater than the statutory DE MINIMIS exception,
including a payment of points that is currently deductible by the borrower under
applicable Code provisions or, under certain circumstances, by the presence of
"teaser" rates on the Mortgage Loans.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provides for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage Loans
acquired by a Standard Certificateholder are purchased at a price equal to the
then unpaid principal amount of such Mortgage Loans, no original issue discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Loans (I.E., points) will be includible by
such holder.
MARKET DISCOUNT. Standard Certificateholders 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 "Federal Income Tax Consequences for REMIC Certificates--Taxation of
Residual Certificates--Market Discount."
RECHARACTERIZATION OF SERVICING FEES
If the servicing fees paid to the Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would be nondeductible under
Code Section 162 or 212. 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 the Standard Certificate, the
reasonableness of servicing compensation should be determined on a weighted
average or loan-by-loan basis. If a loan-by-loan basis is appropriate, the
likelihood that such amount would exceed reasonable servicing compensation as to
some of the Mortgage Loans would be increased. Recently issued Internal Revenue
Service guidance indicates that a servicing fee in excess of reasonable
compensation ("excess servicing") will cause the Mortgage Loans to be treated
under the "stripped bond" rules. Such guidance provides safe harbors for
servicing deemed to be reasonable and requires taxpayers to demonstrate that the
value of servicing fees in excess of such amounts is not greater than the value
of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
Servicer who receives a servicing fee in excess of such amounts would be viewed
as retaining an ownership interest in a portion of the interest payments on the
Mortgage Loans. Under the rules of Code Section 1286, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from the right to receive some or all of the principal payments on
the obligation would result in treatment of such Mortgage Loans as "stripped
coupons" and "stripped bonds." Subject to the DE MINIMIS rule discussed below
under "--Stripped Certificates," 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 Certificates, and the original issue discount
rules of the Code would apply to the holder thereof. While Standard
Certificateholders would still be treated as owners of beneficial interests in a
grantor trust for federal income tax purposes, the corpus of such trust could be
viewed as excluding the portion of the Mortgage Loans the ownership of which is
attributed to the Servicer, or as including such portion as a second class of
equitable interest. Applicable Treasury regulations treat such an arrangement as
a fixed investment trust, since the multiple classes of trust interests should
be treated as merely facilitating direct investments in the trust assets and the
existence of multiple classes of ownership interests is incidental to that
purpose. In general, such a recharacterization should not have any significant
effect upon the timing or amount of income reported by a Standard
Certificateholder, except that the income reported by a cash method holder may
be slightly accelerated. See "Stripped Certificates" below for a further
description of the federal income tax treatment of stripped bonds and stripped
coupons.
In the alternative, the amount, if any, by which the servicing fees paid to
the Servicer are deemed to exceed reasonable compensation for servicing could be
treated as deferred payments of purchase price by the Standard
Certificateholders to the Seller to purchase its undivided interest in the
Mortgage Loans. In such event, the present value of such additional payments
might be included in the Standard Certificateholder's basis in such undivided
interests for purposes of determining whether the Standard Certificate was
acquired at a discount, at par, or at a
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premium. Under this alternative, Standard Certificateholders may also be
entitled to a deduction for unstated interest with respect to each deferred
payment. The Internal Revenue Service may take the position that the specific
statutory provisions of Code Section 1286 described above override the
alternative described in this paragraph. Standard Certificateholders are advised
to consult their tax advisors as to the proper treatment of the amounts paid to
the Servicer as set forth herein as servicing compensation or under either of
the alternatives set forth above.
SALE OR EXCHANGE OF STANDARD CERTIFICATES
Upon sale or exchange of a Standard Certificate, a Standard
Certificateholder 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 Standard Certificate. In general, the
aggregate adjusted basis will equal the Standard Certificateholder's cost for
the Standard Certificate, increased by the amount of any income previously
reported with respect to the Standard Certificate and decreased by the amount of
any losses previously reported with respect to the Standard Certificate and the
amount of any distributions received thereon. Except as provided above with
respect to market discount on any Mortgage Loans, and except for certain
financial institutions subject to the provisions of Code Section 582(c), any
such gain or loss generally would be capital gain or loss if the Standard
Certificate was held as a capital asset. However, gain on the sale of a Standard
Certificate will be treated as ordinary income (i) if a Standard Certificate 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 Standard
Certificateholder's net investment in the conversion transaction at 120% of the
appropriate applicable Federal rate in effect at the time the taxpayer entered
into the transaction minus any amount previously treated as ordinary income with
respect to any prior disposition of property that was held as a part of such
transaction or (ii) in the case of a non-corporate taxpayer, to the extent such
taxpayer has made an election under Code Section 163(d)(4) to have net capital
gains taxed as investment income at ordinary income rates. Pursuant to the
Revenue Reconciliation Act of 1993 capital gains of certain noncorporate
taxpayers are subject to a lower maximum tax rate than ordinary income of such
taxpayers. The maximum tax rate for corporations is the same with respect to
both ordinary income and capital gains.
STRIPPED CERTIFICATES
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,
Certificates that are subject to those rules will be referred to as "Stripped
Certificates." The Certificates will be subject to those rules if (i) the Seller
or any of its affiliates retains (for its own account or for purposes of
resale), in the form of Fixed Retained Yield or otherwise, an ownership interest
in a portion of the payments on the Mortgage Loans, (ii) the Seller 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 Certificates--Recharacterization of Servicing Fees" above), and (iii)
a Class of Certificates 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 Certificate 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 Certificate's allocable share of the
servicing fees paid to the Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"Standard Certificates--Recharacterization of Servicing Fees." For this purpose
the servicing fees will be allocated to the Stripped Certificates in proportion
to the respective offering price of each Class (or Subclass) of Stripped
Certificates. The holder of a Stripped Certificate generally will be entitled to
a deduction each year in respect of the servicing fees, as described above under
"Standard Certificates-- General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped Certificates
for federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Certificates are issued with respect to a
Mortgage Pool containing variable-rate Mortgage Loans, the Seller has been
advised by
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counsel that (i) the Trust Estate will be treated as a grantor trust under
subpart E, Part I of subchapter J of the Code and not as an association taxable
as a corporation or a "taxable mortgage pool" within the meaning of Code Section
7701(i), and (ii) each Stripped Certificate 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 Certificates
could be made in one of the ways described below under "Taxation of Stripped
Certificates--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 OID purposes, all payments on any Stripped
Certificates should be aggregated and treated as though they were made on a
single debt instrument. The Pooling and Servicing Agreement will require that
the Trustee make and report all computations described below using this
aggregate approach, unless substantial legal authority requires otherwise.
Furthermore, Treasury regulations issued December 28, 1992 provide for
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is originated for purposes of calculating any original issue discount.
In addition, under these regulations, a Stripped Certificate that represents a
right to payments of both interest and principal may be viewed either as issued
with original issue discount or market discount (as described below), at a DE
MINIMIS original issue discount, or, presumably, at a premium. This treatment
indicates that the interest component of such a Stripped Certificate would be
treated as qualified stated interest under the OID Regulations. Further, these
final regulations provide that the purchaser of such a Stripped Certificate will
be required to account for any discount as market discount rather than original
issue discount if either (i) the initial discount with respect to the Stripped
Certificate was treated as zero under the DE MINIMIS rule, or (ii) no more than
100 basis points in excess of reasonable servicing is stripped off the related
Mortgage Loans. Any such market discount would be reportable as described above
under "Federal Income Tax Consequences for REMIC Certificates--Taxation of
Regular Certificates--Market Discount," without regard to the DE MINIMIS rule
therein. Pursuant to Revenue Procedure 91-49, issued August 8, 1991, investors
using a method of accounting inconsistent with the above treatment must change
their method of accounting and request the consent to the Internal Revenue
Service to such change on a statement attached to their first timely federal
income tax returned for the first tax year ending after August 8, 1991.
STATUS OF STRIPPED CERTIFICATES
No specific legal authority exists as to whether the character of the
Stripped Certificates, 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 Seller that Stripped Certificates owned by applicable holders should
be considered to represent "qualifying real property loans" within the meaning
of Code Section 593(d)(1), "real estate assets" within the meaning of Code
Section 856(c)(5)(A), "obligation[s] . . . principally secured by an interest in
real property" within the meaning of Code Section 860G(a)(3)(A), and
"loans...secured by an interest in real property" within the meaning of Code
Section 7701(a)(19)(C)(v), and interest (including original issue discount)
income attributable to Stripped Certificates should be considered to represent
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), provided that in each case the Mortgage
Loans and interest on such Mortgage Loans qualify for such treatment. The
application of such Code provisions to Buy-Down Loans is uncertain. See
"Standard Certificates--Tax Status" above.
TAXATION OF STRIPPED CERTIFICATES
ORIGINAL ISSUE DISCOUNT. Except as described above under "General," each
Stripped Certificate 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 Certificate must be included in ordinary income as it accrues, in
accordance with a constant interest method that takes into account the
compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the OID Regulations and the
amendments to the original issue discount sections of the Code made by the 1986
Act, counsel has advised the Seller that the amount of original issue discount
required to be included in the income of a holder of a Stripped Certificate
(referred to in this discussion as a "Stripped Certificateholder") in any
taxable year likely will be computed generally as described above under "Federal
Income Tax Consequences for REMIC Certificates--Taxation of Regular
Certificates--Original Issue Discount" and
"--Variable Rate Regular Certificates." However, with the apparent exception of
a Stripped Certificate issued with DE
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MINIMIS original issue discount as described above under "General," the issue
price of a Stripped Certificate will be the purchase price paid by each holder
thereof, and the stated redemption price at maturity will include the aggregate
amount of the payments to be made on the Stripped Certificate to such Stripped
Certificateholder, presumably under the Prepayment Assumption.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the amount
of such original issue discount will be either increased or decreased depending
on the relative interests in principal and interest on each Mortgage Loan
represented by such Stripped Certificateholder's Stripped Certificate. While the
matter is not free from doubt, the holder of a Stripped Certificate should be
entitled in the year that it becomes certain (assuming no further prepayments)
that the holder will not recover a portion of its adjusted basis in such
Stripped Certificate to recognize a loss (which may be a capital loss) equal to
such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Certificates will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of proposed Treasury
regulations issued April 8, 1986 (the "Prior Proposed OID Regulations").These
proposed regulations generally would result in differences in the timing or
reporting of interest income until it became "fixed" in each period, and under
certain circumstances could result in a deferral of the timing of reporting of
such interest income when compared to the original issue discount rules. While
not free from doubt, counsel for the Seller believes that uncertainty as to the
payment of interest arising as a result of the possibility of prepayment of the
Mortgage Loans should not cause the contingent payment rules under the Prior
Proposed OID Regulations to apply to interest with respect to the Stripped
Certificates. Moreover, the contingent payment rules have not been adopted as
final regulations and may not currently be relied upon.
SALE OR EXCHANGE OF STRIPPED CERTIFICATES. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Certificates--Taxation of
Regular Certificates--Sale or Exchange of Regular Certificates." To the extent
that a subsequent purchaser's purchase price is exceeded by the remaining
payments on the Stripped Certificates, such subsequent purchaser will be
required for federal income tax purposes to accrue and report such excess as if
it were original issue discount in the manner described above. It is not clear
for this purpose whether the assumed prepayment rate that is to be used in the
case of a Stripped Certificateholder other than an original Stripped
Certificateholder 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 CERTIFICATES. When an investor
purchases more than one Class of Stripped Certificates, it is currently unclear
whether for federal income tax purposes such Classes of Stripped Certificates
should be treated separately or aggregated for purposes of the rules described
above.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS. The characterizations of the
Stripped Certificates discussed above are not the only possible interpretations
of the applicable Code provisions. For example, the Stripped Certificateholder
may be treated as the owner of (i) one installment obligation consisting of such
Stripped Certificate's pro rata share of the payments attributable to principal
on each Mortgage Loan and a second installment obligation consisting of such
Stripped Certificate's pro rata share of the payments attributable to interest
on each Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there
are scheduled payments of principal and/or interest on each Mortgage Loan, or
(iii) a separate installment obligation for each Mortgage Loan, representing the
Stripped Certificate's pro rata share of payments of principal and/or interest
to be made with respect thereto. Alternatively, the holder of one or more
Classes of Stripped Certificates may be treated as the owner of a pro rata
fractional undivided interest in each Mortgage Loan to the extent that such
Stripped Certificate, or Classes of Stripped Certificates in the aggregate,
represent the same pro rata portion of principal and interest on each such
Mortgage Loan, and a stripped bond or stripped coupon (as the case may be),
treated as an installment obligation or contingent payment obligation, as to the
remainder. Final regulations issued on December 28, 1992 regarding original
issue discount on stripped obligations make the foregoing interpretations less
likely to be applicable. The preamble to those 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.
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Because of these possible varying characterizations of Stripped Certificates
and the resultant differing treatment of income recognition, Stripped
Certificateholders are urged to consult their own tax advisors regarding the
proper treatment of Stripped Certificates 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 Standard Certificateholder or Stripped Certificateholder
at any time during such year, such information (prepared on the basis described
above) as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their federal income tax returns. Such information
will include the amount of original issue discount accrued on Certificates held
by persons other than Certificateholders exempted from the reporting
requirements. 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 Certificateholder, other than an original Certificateholder.
The Trustee will also file such original issue discount information with the
Internal Revenue Service. If a Certificateholder fails to supply an accurate
taxpayer identification number or if the Secretary of the Treasury determines
that a Certificateholder 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
"Federal Income Tax Consequences for REMIC Certificates--Backup Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Standard Certificate or Stripped Certificate 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 ("foreign persons") generally will be subject to 30% United
States withholding tax, or such lower rate as may be provided for interest by an
applicable tax treaty. Accrued original issue discount recognized by the
Standard Certificateholder or Stripped Certificateholder on the sale or exchange
of such a Certificate 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 foreign person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements, described above under "Federal
Income Tax Consequences for REMIC Certificates--Taxation of Certain Foreign
Investors-- Regular Certificates."
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements on those employee benefit plans to which it applies
("Plans") and on those persons who are fiduciaries with respect to such Plans.
The following is a general discussion of such requirements, and certain
applicable exceptions to and administrative exemptions from such requirements.
For purposes of this discussion, a person investing on behalf of an individual
retirement account established under Code Section 408 (an "IRA") is regarded as
a fiduciary and the IRA as a Plan.
Before purchasing any Certificates, a Plan fiduciary should consult with its
counsel and determine whether there exists any prohibition to such purchase
under the requirements of ERISA, whether prohibited transaction exemptions such
as PTE 83-1 or any individual administrative exemption (as described below)
applies, including whether the appropriate conditions set forth therein would be
met, or whether any statutory prohibited transaction exemption is applicable,
and further should consult the applicable Prospectus Supplement relating to such
Series of Certificates.
CERTAIN REQUIREMENTS UNDER ERISA
GENERAL. In accordance with ERISA's general fiduciary standards, before
investing in a Certificate a Plan fiduciary should determine whether to do so is
permitted under the governing Plan instruments and is appropriate for the Plan
in view of its overall investment policy and the composition and diversification
of its portfolio. A Plan fiduciary should
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especially consider the ERISA requirement of investment prudence and the
sensitivity of the return on the Certificates to the rate of principal
repayments (including prepayments) on the Mortgage Loans, as discussed in
"Prepayment and Yield Considerations" herein.
PARTIES IN INTEREST/DISQUALIFIED PERSONS. Other provisions of ERISA (and
corresponding provisions of the Code) prohibit certain transactions involving
the assets of a Plan and persons who have certain specified relationships to the
Plan (so-called "parties in interest" within the meaning of ERISA or
"disqualified persons" within the meaning of the Code). The Seller, the Servicer
or the Trustee or certain affiliates thereof might be considered or might become
"parties in interest" or "disqualified persons" with respect to a Plan. If so,
the acquisition or holding of Certificates by or on behalf of such Plan could be
considered to give rise to a "prohibited transaction" within the meaning of
ERISA and the Code unless an administrative exemption described below or some
other exemption is available.
Special caution should be exercised before the assets of a Plan (including
assets that may be held in an insurance company's separate or general accounts
where assets in such accounts may be deemed Plan assets for purposes of ERISA)
are used to purchase a Certificate if, with respect to such assets, the Seller,
the Servicer or the Trustee or an affiliate thereof either: (a) has investment
discretion with respect to the investment of such assets of such Plan; or (b)
has authority or responsibility to give, or regularly gives, investment advice
with respect to such assets for a fee and pursuant to an agreement or
understanding that such advice will serve as a primary basis for investment
decisions with respect to such assets and that such advice will be based on the
particular investment needs of the Plan.
DELEGATION OF FIDUCIARY DUTY. Further, if the assets included in a Trust
Estate were deemed to constitute Plan assets, it is possible that a Plan's
investment in the Certificates might be deemed to constitute a delegation, under
ERISA, of the duty to manage Plan assets by the fiduciary deciding to invest in
the Certificates, and certain transactions involved in the operation of the
Trust Estate might be deemed to constitute prohibited transactions under ERISA
and the Code. Neither ERISA nor the Code define the term "plan assets."
The U.S. Department of Labor (the "Department") has issued regulations (the
"Regulations") concerning whether or not a Plan's assets would be deemed to
include an interest in the underlying assets of an entity (such as a Trust
Estate) for purposes of the reporting and disclosure and general fiduciary
responsibility provisions of ERISA, as well as for the prohibited transaction
provisions of ERISA and the Code, if the Plan acquires an "equity interest"
(such as a Certificate) in such an entity.
Certain exceptions are provided in the Regulations whereby an investing
Plan's assets would be deemed merely to include its interest in the Certificates
instead of being deemed to include an interest in the assets of a Trust Estate.
However, it cannot be predicted in advance nor can there be any continuing
assurance whether such exceptions may be met, because of the factual nature of
certain of the rules set forth in the Regulations. For example, one of the
exceptions in the Regulations states that the underlying assets of an entity
will not be considered "plan assets" if less than 25% of the value of all
classes of equity interests are held by "benefit plan investors," which are
defined as Plans, IRAs, and employee benefit plans not subject to ERISA (for
example, governmental plans), but this exception is tested immediately after
each acquisition of an equity interest in the entity whether upon initial
issuance or in the secondary market.
ADMINISTRATIVE EXEMPTIONS
INDIVIDUAL ADMINISTRATIVE EXEMPTIONS. Several underwriters of
mortgage-backed securities have applied for and obtained ERISA prohibited
transaction exemptions (each, an "Underwriter's Exemption") which are in some
respects broader than Prohibited Transaction Class Exemption 83-1 (described
below). Such exemptions can only apply to mortgage-backed securities which,
among other conditions, are sold in an offering with respect to which such
underwriter serves as the sole or a managing underwriter, or as a selling or
placement agent. If such an Underwriter's Exemption might be applicable to a
Series of Certificates, the related Prospectus Supplement will refer to such
possibility.
Among the conditions that must be satisfied for an Underwriter's Exemption
to apply are the following:
(1) The acquisition of Certificates by a Plan is on terms (including the
price for the Certificates) that are at least as favorable to the Plan as
they would be in an arm's length transaction with an unrelated party;
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(2) The rights and interests evidenced by Certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by other
Certificates of the Trust Estate;
(3) The Certificates acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic rating
categories from either Standard & Poors Corporation ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), Duff & Phelps Rating Co. ("D&P") or
Fitch Investors Service, Inc. ("Fitch");
(4) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below);
(5) The sum of all payments made to and retained by the underwriter in
connection with the distribution of Certificates represents not more than
reasonable compensation for underwriting the Certificates. The sum of all
payments made to and retained by the Seller pursuant to the assignment of
the Mortgage Loans to the Trust Estate represents not more than the fair
market value of such Mortgage Loans. The sum of all payments made to and
retained by the Servicer (and any other servicer) represents not more than
reasonable compensation for such person's services under the Pooling and
Servicing Agreement and reimbursement of such person's reasonable expenses
in connection therewith; and
(6) The Plan investing in the Certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
The Trust Estate must also meet the following requirements:
(i) the assets of the Trust Estate must consist solely of assets of
the type that have been included in other investment pools in the
marketplace;
(ii) certificates in such other investment pools must have been rated
in one of the three highest rating categories of S&P, Moody's, Fitch or
D&P for at least one year prior to the Plan's acquisition of the
Certificates; and
(iii) certificates evidencing interests in such other investment
pools must have been purchased by investors other than Plans for at least
one year prior to any Plan's acquisition of the Certificates.
If the conditions to an Underwriter's Exemption are met, whether or not a
Plan's assets would be deemed to include an ownership interest in the Mortgage
Loans in a mortgage pool, the acquisition, holding and resale of the
Certificates by Plans would be exempt from the prohibited transaction provisions
of ERISA and the Code.
Moreover, an Underwriter's Exemption can provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur if a
Plan fiduciary causes a Plan to acquire Certificates in a Trust Estate in which
the fiduciary (or its affiliate) is an obligor on the Mortgage Loans held in the
Trust Estate provided that, among other requirements: (i) in the case of an
acquisition in connection with the initial issuance of Certificates, at least
fifty percent of each class of 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 Estate is acquired by persons
independent of the Restricted Group (as defined below); (ii) such fiduciary (or
its affiliate) is an obligor with respect to five percent or less of the fair
market value of the Mortgage Loans contained in the Trust Estate; (iii) the
Plan's investment in Certificates of any Class does not exceed twenty-five
percent of all of the Certificates of that Class outstanding at the time of the
acquisition and (iv) immediately after the acquisition no more than twenty-five
percent of the assets of the Plan with respect to which such person is a
fiduciary are invested in Certificates representing an interest in one or more
trusts containing assets sold or served by the same entity.
An Underwriter's Exemption does not apply to Plans sponsored by the Seller,
the underwriter specified in the applicable Prospectus Supplement, the Trustee,
the Servicer, any obligor with respect to Mortgage Loans included in the Trust
Estate constituting more than five percent of the aggregate unamortized
principal balance of the assets in the Trust Estate, or any affiliate of such
parties (the "Restricted Group").
PTE 83-1. Prohibited Transaction Class Exemption 83-1 for Certain
Transactions Involving Mortgage Pool Investment Trusts ("PTE 83-1") permits
certain transactions involving the creation, maintenance and termination of
certain residential mortgage pools and the acquisition and holding of certain
residential mortgage pool pass-through certificates by Plans, whether or not the
Plan's assets would be deemed to include an ownership interest in the mortgages
in such mortgage pools, and whether or not such transactions would otherwise be
prohibited under ERISA.
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The term "mortgage pool pass-through certificate" is defined in PTE 83-1 as
"a certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such a certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any fees
retained by the pool sponsor." It appears that, for purposes of PTE 83-1, the
term "mortgage pool pass-through certificate" would include Certificates issued
in a single Class or in multiple Classes that evidence the beneficial ownership
of both a specified percentage of future interest payments (after permitted
deductions) and a specified percentage of future principal payments on a Trust
Estate.
However, it appears that PTE 83-1 does or might not apply to the purchase
and holding of (a) Certificates that evidence the beneficial ownership only of a
specified percentage of future interest payments (after permitted deductions) on
a Trust Estate or only of a specified percentage of future principal payments on
a Trust Estate, (b) Residual Certificates, (c) Certificates evidencing ownership
interests in a Trust Estate which includes Mortgage Loans secured by multifamily
residential properties or shares issued by cooperative housing corporations, or
(d) Certificates which are subordinated to other Classes of Certificates of such
Series. Accordingly, unless exemptive relief other than PTE 83-1 applies, Plans
should not purchase any such Certificates.
PTE 83-1 sets forth "general conditions" and "specific conditions" to its
applicability. Section II of PTE 83-1 sets forth the following general
conditions to the application of the exemption: (i) the maintenance of a system
of insurance or other protection for the pooled mortgage loans or the property
securing such loans, and for indemnifying certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments;
(ii) the existence of a pool trustee who is not an affiliate of the pool
sponsor; and (iii) a requirement that the sum of all payments made to and
retained by the pool sponsor, and all funds inuring to the benefit of the pool
sponsor as a result of the administration of the mortgage pool, must represent
not more than adequate consideration for selling the mortgage loans plus
reasonable compensation for services provided by the pool sponsor to the pool.
The system of insurance or protection referred to in clause (i) above must
provide such protection and indemnification up to an amount not less than the
greater of one percent of the aggregate unpaid principal balance of the pooled
mortgages or the unpaid principal balance of the largest mortgage in the pool.
It should be noted that in promulgating PTE 83-1 (and a predecessor exemption),
the Department did not have under its consideration interests in pools of the
exact nature as some of the Certificates described herein.
EXEMPT PLANS
Employee benefit plans which are governmental plans (as defined in Section
3(32) of ERISA), and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements and assets of such plans may be invested
in Certificates without regard to the ERISA considerations described above but
such plans may be subject to the provisions of other applicable federal and
state law.
UNRELATED BUSINESS TAXABLE INCOME--RESIDUAL CERTIFICATES
The purchase of a Residual Certificate by any employee benefit plan
qualified under Code Section 401(a) and exempt from taxation under Code Section
501(a), including most varieties of ERISA Plans, may give rise to "unrelated
business taxable income" as described in Code Sections 511-515 and 860E.
Further, prior to the purchase of Residual Certificates, a prospective
transferee may be required to provide an affidavit to a transferor that it is
not, nor is it purchasing a Residual Certificate on behalf of, a "Disqualified
Organization," which term as defined above includes certain tax-exempt entities
not subject to Code Section 511 such as certain governmental plans, as discussed
above under the caption "Certain Federal Income Tax Consequences--Federal Income
Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates--Disqualified Organizations."
DUE TO THE COMPLEXITY OF THESE RULES AND THE PENALTIES IMPOSED UPON PERSONS
INVOLVED IN PROHIBITED TRANSACTIONS, IT IS PARTICULARLY IMPORTANT THAT POTENTIAL
INVESTORS WHO ARE PLAN FIDUCIARIES CONSULT WITH THEIR COUNSEL REGARDING THE
CONSEQUENCES UNDER ERISA OF THEIR ACQUISITION AND OWNERSHIP OF CERTIFICATES.
THE SALE OF CERTIFICATES TO A PLAN IS IN NO RESPECT A REPRESENTATION BY THE
SELLER OR THE APPLICABLE 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.
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LEGAL INVESTMENT
Standard Certificates which are not rated, as discussed below under "Rating"
will not constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 (the "Enhancement Act"). Unless
otherwise specified in the related Prospectus Supplement, the Certificates other
than Residual Certificates (and if so specified in the related Prospectus
Supplement, the Residual Certificates) will constitute "mortgage related
securities" for purposes of the Enhancement Act and as such will be legal
investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including but not limited to
state-chartered savings banks, commercial banks, savings and loan associations
and insurance companies, as well as trustees and state government employee
retirement systems) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulation to the same extent
that, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Pursuant to the Enhancement Act,
a number of states enacted legislation, on or before the October 3, 1991 cut-off
for such enactments, limiting to varying extents the ability of certain entities
(in particular insurance companies) to invest in mortgage related securities, in
most cases by requiring the affected investors to rely solely upon existing
state law, and not the Enhancement Act. Accordingly, the investors affected by
such legislation will be authorized to invest in the Certificates only to the
extent provided in such legislation.
The Enhancement Act also amended the legal investment authority of federally
chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with mortgage related securities without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in mortgage
related securities, and national banks may purchase mortgage related securities
for their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. Section 24 (Seventh), subject in
each case to such regulations as the applicable federal regulatory authority may
prescribe. In this connection, federal credit unions should review National
Credit Union Administration Letter to Credit Unions No. 96, as modified by
Letter to Credit Unions No. 108, which includes guidelines to assist federal
credit unions in making investment decisions for mortgage related securities.
The National Credit Union Administration has adopted rules, codified as 12
C.F.R. Section 703.5(f)-(k), which prohibit federal credit unions from investing
in certain mortgage related securities such as the Residual Certificates and the
Stripped Certificates, except under limited circumstances.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Securities Activities" dated
January 28, 1992 (the "Policy Statement") of the Federal Financial Institutions
Examination Council. The Policy Statement, 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 February 10, 1992, and by the National Credit Union
Administration (with certain modifications), effective June 26, 1992, prohibits
depository institutions from investing in certain "high-risk mortgage
securities" (including securities such as certain series and classes of the
Certificates), except under limited circumstances, and sets forth certain
investment practices deemed to be unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review policies and guidelines adopted from
time to time by such authorities before purchasing any of the Certificates, as
certain Series or Classes (in particular, Stripped Certificates) may be deemed
unsuitable investments, or may otherwise be restricted, under such policies or
guidelines (in certain instances irrespective of the Enhancement Act).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying," and, with regard to any Certificates
issued in book-entry form, provisions which may restrict or prohibit investments
in securities which are issued in book-entry form.
All investors should consult with their own legal advisors in determining
whether and to what extent the Certificates constitute legal investments for
such investors.
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PLAN OF DISTRIBUTION
The Certificates are being offered hereby in Series through one or more of
the methods described below. The applicable Prospectus Supplement for each
Series will describe the method of offering being utilized for that Series and
will state the public offering or purchase price of each Class of Certificates
of such Series, or the method by which such price is to be determined, and the
net proceeds to the Seller from such sale.
The Certificates will be offered through the following methods from time to
time and offerings may be made concurrently through more than one of these
methods or an offering of a particular Series of Certificates may be made
through a combination of two or more of these methods:
1. By negotiated firm commitment underwriting and public re-offering by
underwriters specified in the applicable Prospectus Supplement;
2. By placements by the Seller with investors through dealers; and
3. By direct placements by the Seller with investors.
If underwriters are used in a sale of any Certificates, such Certificates
will be acquired by the underwriters for their own account and may be resold
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. Firm
commitment underwriting and public reoffering by underwriters may be done
through underwriting syndicates or through one or more firms acting alone. The
specific managing underwriter or underwriters, if any, with respect to the offer
and sale of a particular Series of Certificates will be set forth on the cover
of the Prospectus Supplement applicable to such Series and the members of the
underwriting syndicate, if any, will be named in such Prospectus Supplement. The
Prospectus Supplement will describe any discounts and commissions to be allowed
or paid by the Seller to the underwriters, any other items constituting
underwriting compensation and any discounts and commissions to be allowed or
paid to the dealers. The obligations of the underwriters will be subject to
certain conditions precedent. The underwriters with respect to a sale of any
Class of Certificates will be obligated to purchase all such Certificates if any
are purchased. The Seller and PHMC will indemnify the applicable underwriters
against certain civil liabilities, including liabilities under the Securities
Act of 1933, as amended (the "Act").
The Prospectus Supplement with respect to any Series of Certificates offered
other than through underwriters will contain information regarding the nature of
such offering and any agreements to be entered into between the Seller and
dealers and/or the Seller and purchasers of Certificates of such Series.
Purchasers of Certificates, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the Act in connection with reoffers and sales by them of
Certificates. Certificateholders should consult with their legal advisors in
this regard prior to any such reoffer or sale.
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Seller or any affiliate thereof may purchase some or all of
one or more Classes of Certificates of such Series from the underwriter or
underwriters at a price specified or described in such Prospectus Supplement.
Such purchaser may thereafter from time to time offer and sell, pursuant to this
Prospectus, some or all of such Certificates so purchased directly, through one
or more underwriters to be designated at the time of the offering of such
Certificates or through dealers acting as agent and/or principal. Such offering
may be restricted in the matter specified in such Prospectus Supplement. Such
transactions may be effected at market prices prevailing at the time of sale, at
negotiated prices or at fixed prices. The underwriters and dealers participating
in such purchaser's offering of such Certificates may receive compensation in
the form of underwriting discounts or commissions from such purchaser and such
dealers may receive commissions from the investors purchasing such Certificates
for whom they may act as agent (which discounts or commissions will not exceed
those customary in those types of transactions involved). Any dealer that
participates in the distribution of such Certificates may be deemed to be an
"underwriter" within the meaning of the Act, and any commissions and discounts
received by such dealer and any profit on the resale of such Certificates by
such dealer might be deemed to be underwriting discounts and commissions under
the Act.
One or more affiliates of the Seller and the Servicer, including Prudential
Securities Incorporated, may act as underwriter or dealer with respect to
Certificates of any Series. Any such affiliate will be identified in the
applicable Prospectus Supplement.
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LEGAL MATTERS
Certain legal matters will be passed upon for the Seller by Cadwalader,
Wickersham & Taft, New York, New York and for any underwriters by Brown & Wood,
New York, New York.
RATING
It is a condition to the issuance of the Stripped Certificates and the
Multi-Class Certificates of any Series that they be rated in one of the four
highest categories by at least one Rating Agency. Standard Certificates may or
may not be rated by a Rating Agency.
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
Agency. Each securities rating should be evaluated independently of any other
rating.
88
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
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<S> <C>
Aggregate Losses...................................................... 30
Assumed Reinvestment Rate............................................. 29
Balloon Loan.......................................................... 13
Balloon Period........................................................ 14
Buy-Down Fund......................................................... 13
Buy-Down Loans........................................................ 13
Certificate Account................................................... 43
Certificates.......................................................... 1
Class................................................................. 1
Code.................................................................. 10
Compound Interest Certificates........................................ 21
Cross-Over Date....................................................... 26
Curtailments.......................................................... 22
Cut-Off Date.......................................................... 8
Depository............................................................ 43
Determination Date.................................................... 21
Distributable Amount.................................................. 22
Distribution Date..................................................... 8
Due Date.............................................................. 12
Due Period............................................................ 29
Eligible Investments.................................................. 32
ERISA................................................................. 10
FDIC.................................................................. 43
FHLMC................................................................. 12
Fixed Retained Yield.................................................. 8
FNMA.................................................................. 12
Initial Deposit....................................................... 31
Interest Rate......................................................... 1
Last Scheduled Distribution Date...................................... 30
Late Payment.......................................................... 22
Late Payment Period................................................... 23
Liquidation Proceeds.................................................. 44
Loan-to-Value Ratio................................................... 12
Mortgage Interest Rate................................................ 8
Mortgage Loans........................................................ 1
Mortgage Notes........................................................ 11
Mortgaged Properties.................................................. 11
Mortgages............................................................. 11
Multi-Class Certificate Distribution Amount........................... 28
Multi-Class Certificates.............................................. 1
Net Foreclosure Profits............................................... 24
Net Mortgage Interest Rate............................................ 8
Non-Pro Rata Certificate.............................................. 63
OTS................................................................... 58
Payment Deficiencies.................................................. 30
Pass-Through Rate..................................................... 8
Percentage Certificates............................................... 20
Periodic Advances..................................................... 10
PHMC.................................................................. 1
PMCC.................................................................. 37
Pool Distribution Amount.............................................. 23
Pool Scheduled Principal Balance...................................... 26
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
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<S> <C>
Pool Value............................................................ 29
Pool Value Group...................................................... 29
Pooling and Servicing Agreement....................................... 7
Prepayment Assumption................................................. 63
Prepayment Interest Shortfall......................................... 22
Prudential Insurance.................................................. 7
Rating Agency......................................................... 10
Record Date........................................................... 8
Registration Statement................................................ 2
Regular Certificateholder............................................. 62
Regular Certificates.................................................. 20
REMIC................................................................. 1
Residual Certificates................................................. 20
Scheduled Principal................................................... 22
Scheduled Principal Balance........................................... 22
Seller................................................................ 1
Senior Certificates................................................... 1
Senior Class.......................................................... 22
Senior Class Carryover Shortfall...................................... 24
Senior Class Distributable Amount..................................... 22
Senior Class Distribution Amount...................................... 25
Senior Class Principal Portion........................................ 22
Senior Class Pro Rata Share........................................... 24
Senior Class Shortfall................................................ 24
Senior Class Shortfall Accruals....................................... 25
Series................................................................ 1
Servicer.............................................................. 1
Servicing Fee......................................................... 8
Shifting Interest Certificates........................................ 21
Special Distributions................................................. 30
Special Hazard Loss Amount............................................ 33
Special Hazard Mortgage Loan.......................................... 33
Special Hazard Termination Date....................................... 33
Specified Subordination Reserve Fund Balance.......................... 31
Spread................................................................ 29
Standard Certificates................................................. 1
Standard Hazard Insurance Policy...................................... 14
Stated Amount......................................................... 1
Stripped Certificates................................................. 1
Subclass.............................................................. 1
Subordinated Amount................................................... 9
Subordinated Certificates............................................. 1
Subordinated Class Distributable Amount............................... 23
Subordinated Class Principal Portion.................................. 23
Subordinated Class Pro Rata Share..................................... 24
Subordination Reserve Fund............................................ 9
Subsidy Account....................................................... 13
Subsidy Loans......................................................... 12
Treasury Regulations.................................................. 15
Trust Estate.......................................................... 1
Trustee............................................................... 54
UCC................................................................... 56
Unpaid Interest Shortfall............................................. 25
Voting Interests...................................................... 52
</TABLE>
90
<PAGE>
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No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Supplement, the Prospectus Supplement or the Prospectus in connection with the
offer herein contained and, if given or made, such information or
representations must not be relied upon as having been authorized. This
Supplement, the Prospectus Supplement and the Prospectus do not constitute an
offer to sell or a solicitation of an offer to buy any securities other than the
Class A-2 Certificates offered by this Supplement, the Prospectus Supplement and
the Prospectus or any offer to sell or the solicitation of an offer to buy the
Class A-2 Certificates in any jurisdiction to any person to whom it is unlawful
to make such offer or solicitation in such jurisdiction. Neither the delivery of
this Supplement, the Prospectus Supplement and the Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that
information herein or therein is correct as of any time since the date of this
Supplement, the Prospectus Supplement or the Prospectus.
---------------------------
INDEX
SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
General.................................................. S1-3
Risk Factors and Special Considerations.................. S1-3
Description of the Certificates.......................... S1-4
Description of the Mortgage Loans........................ S1-5
Origination, Delinquency and Foreclosure Experience...... S1-11
Historical Prepayments................................... S1-15
Sensitivity of the Pre-Tax Yield and Weighted Average
Life of the Class A-2 Certificates..................... S1-16
Certain Federal Income Tax Consequences.................. S1-17
Underwriting............................................. S1-18
Secondary Market......................................... S1-18
ERISA Considerations..................................... S1-18
Legal Investment......................................... S1-19
Legal Matters............................................ S1-19
Use of Proceeds.......................................... S1-19
Ratings.................................................. S1-19
Incorporation of Certain Information by Reference........ S1-19
</TABLE>
PROSPECTUS SUPPLEMENT
<TABLE>
<S> <C>
Table of Contents................................. S-3
Summary Information............................... S-4
Description of the Certificates................... S-14
Description of the Mortgage Loans................. S-27
Origination, Delinquency and Foreclosure
Experience...................................... S-34
Prepayment and Yield Considerations............... S-38
Pooling and Servicing Agreement................... S-42
Federal Income Tax Considerations................. S-44
ERISA Considerations.............................. S-45
Legal Investment.................................. S-46
Secondary Market.................................. S-46
Underwriting...................................... S-46
Legal Matters..................................... S-47
Use of Proceeds................................... S-47
Ratings........................................... S-47
Index of Significant Prospectus Supplement
Definitions..................................... S-48
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Reports........................................... 2
Additional Information............................ 2
Additional Detailed Information................... 2
Table of Contents................................. 3
Summary of Prospectus............................. 7
The Trust Estates................................. 11
Description of the Certificates................... 19
Credit Support.................................... 30
Prepayment and Yield Considerations............... 35
The Seller........................................ 37
PHMC.............................................. 37
Use of Proceeds................................... 43
Servicing of the Mortgage Loans................... 43
The Pooling and Servicing Agreement............... 52
Certain Legal Aspects of the Mortgage Loans....... 54
Certain Federal Income Tax Consequences........... 60
ERISA Considerations.............................. 82
Legal Investment.................................. 86
Plan of Distribution.............................. 87
Legal Matters..................................... 88
Rating............................................ 88
Index of Significant Definitions.................. 89
</TABLE>
THE PRUDENTIAL HOME
MORTGAGE SECURITIES
COMPANY, INC.
MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 1994-10
---------------------------
SUPPLEMENT
-------------------
VARIABLE RATE(1)
CLASS A-2 CERTIFICATES
(1)ON THE CLASS A-2 NOTIONAL AMOUNT
LEHMAN BROTHERS
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