<PAGE>
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED OCTOBER 12, 1992
$402,876,000 (APPROXIMATE)
THE PRUDENTIAL HOME MORTGAGE SECURITIES COMPANY, INC. r
SELLER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1992-37
PRINCIPAL AND INTEREST PAYABLE MONTHLY, COMMENCING IN NOVEMBER 1992
---------------------
The Series 1992-37 Mortgage Pass-Through Certificates (the "Series 1992-37
Certificates") will consist of one class of senior certificates (the "Class A
Certificates") and two classes of subordinated certificates (the "Class M
Certificates" and "Class B Certificates," respectively, and together, the
"Subordinated Certificates"). The rights of the holders of the Class M
Certificates to receive distributions with respect to the Mortgage Loans will be
subordinated to the rights of the holders of the Class A Certificates and the
rights of the holders of the Class B Certificates to receive distributions with
respect to the Mortgage Loans will be subordinated to the rights of the holders
of both the Class A and Class M Certificates to the extent described herein and
in the Prospectus. The Class A Certificates will consist of twelve subclasses
(each, a "Subclass") of Certificates designated as the Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5, Class A-6, Class A-7, Class A-8, Class A-9,
Class A-10, Class A-11 and Class A-R Certificates. The Class A-11 Certificates
are not offered hereby. The Class M Certificates will not be divided into
subclasses. The Class B Certificates will consist of four subclasses of
Certificates designated as the Class B-1, Class B-2, Class B-3 and Class B-4
Certificates, none of which are offered hereby. The Class A Certificates (other
than the Class A-11 Certificates) and the Class M Certificates are referred to
herein collectively as the "Offered Certificates."
(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
REPRESENTA TION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
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INITIAL SUBCLASS OR CLASS
SUBCLASS OR CLASS DESIGNATION PRINCIPAL BALANCE (1) PASS-THROUGH RATE
Class A-1........................................................ $ 43,095,000 6.50%
Class A-2........................................................ $ 52,250,000 7.50%
Class A-3........................................................ $ 13,600,000 6.50%
Class A-4........................................................ $ 31,350,000 7.50%
Class A-5........................................................ $ 31,700,000 7.00%
Class A-6........................................................ $ 49,710,000 7.00%
Class A-7........................................................ $ 38,960,000 10.00%
Class A-8........................................................ $ 46,540,000 7.50%
Class A-9........................................................ $ 64,002,000 7.50%
Class A-10....................................................... $ 27,184,000 7.50%
Class A-R........................................................ $ 200,000 7.50%(2)
Class M.......................................................... $ 4,285,000 7.50%
</TABLE>
(1) Approximate. The initial Subclass or Class Principal Balances are subject to
adjustment as described herein.
(2) On the Class A-R Notional Amount.
The Offered Certificates will be purchased by Goldman, Sachs & Co. (the
"Underwriters") from the Seller and will be offered by the Underwriters from
time to time to the public in negotiated transactions or otherwise at varying
prices to be determined at the time of sale. Proceeds to the Seller from the
sale of the Offered Certificates will be 99.281250% of the aggregate principal
balance of the Offered Certificates, plus accrued interest thereon and on an
amount equal to the initial aggregate principal balance of the Class A-11
Certificates at the rate of 7.50% per annum from October 1, 1992 (the "Cut-Off
Date") to (but not including) October 30, 1992, before deducting expenses
payable by the Seller estimated to be $405,000. The price to be paid to the
Seller has not been allocated among the Offered Certificates. See "Underwriting"
herein.
The Offered Certificates are offered by the Underwriters, as specified
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that the Offered
Certificates will be available for delivery on or about October 30, 1992 through
the facilities of The Depository Trust Company or, in the case of the Class A-R
and Class M Certificates, at the offices of Goldman, Sachs & Co., New York, New
York.
GOLDMAN, SACHS & CO.
-------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS OCTOBER 23, 1992
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Series 1992-37 Certificates will evidence in the aggregate the entire
beneficial ownership interest in a trust fund (the "Trust Estate") 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, which may include loans secured by shares
issued by cooperative housing corporations (the "Mortgage Loans"), together with
certain related property, sold by The Prudential Home Mortgage Securities
Company, Inc. (the "Seller") and 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 93.00% undivided interest in
the principal balance of the Mortgage Loans. The Class M Certificates will
initially evidence in the aggregate an approximate 1.00% undivided interest in
the principal balance of the Mortgage Loans. The remaining approximate 6.00%
undivided interest in the principal balance of the Mortgage Loans will be
evidenced by the Class B Certificates.
Distributions in respect of interest will be made on the 25th day of each
month or, if such day is not a business day, on the succeeding business day,
commencing in November 1992, to the holders of Offered Certificates, as
described herein. The rights of the holders of the Class M Certificates to
receive distributions of interest will be subordinated to the rights of the
holders of the Class A Certificates to receive distributions of interest and
principal as described herein. The amount of interest accrued on any Subclass or
Class of Offered Certificates will be reduced by the amount of (i) any
Non-Supported Interest Shortfall and (ii) other losses allocable to such
Subclass or Class as described herein under "Description of the
Certificates--Interest." Distributions in reduction of the principal balance of
the Class A Certificates will be made monthly on each Distribution Date in an
aggregate amount equal to the Class A Principal Distribution Amount.
Distributions in reduction of the principal balance of the Class M Certificates
will be made monthly on each Distribution Date in an aggregate amount equal to
the Class M Principal Distribution Amount after the Class A Certificates have
received the Class A Distribution Amount and the Class M Certificates have
received their amount of interest due with respect to such Distribution Date.
Distributions in reduction of the principal balance of the Class A Certificates
on any Distribution Date will be allocated among the Subclasses of Class A
Certificates in the manner described herein under "Description of the
Certificates--Principal (Including Prepayments)." Distributions to each Subclass
or undivided Class of Offered Certificates will be made pro rata among
Certificateholders of such Subclass or Class.
THE YIELD TO MATURITY OF THE OFFERED CERTIFICATES WILL BE SENSITIVE IN
VARYING DEGREES TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS) ON THE MORTGAGE LOANS, WHICH MAY BE PREPAID AT ANY TIME WITHOUT
PENALTY. 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 AND, IN THE CASE OF OFFERED CERTIFICATES
PURCHASED AT A PREMIUM, THAT 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. THE YIELD TO MATURITY OF THE
CLASS M CERTIFICATES WILL, IN ADDITION, BE MORE SENSITIVE TO THE AMOUNT AND
TIMING OF LOSSES DUE TO LIQUIDATIONS OF THE MORTGAGE LOANS THAN THE CLASS A
CERTIFICATES, IN THE EVENT THAT THE CLASS B PRINCIPAL BALANCE HAS BEEN REDUCED
TO ZERO. SEE "DESCRIPTION OF THE CERTIFICATES--INTEREST", "--PRINCIPAL
(INCLUDING PREPAYMENTS)" AND "--SUBORDINATION OF CLASS M AND CLASS B
CERTIFICATES" HEREIN AND "PREPAYMENT AND YIELD CONSIDERATIONS" HEREIN AND IN THE
PROSPECTUS.
The Offered Certificates (other than the Class A-R and Class M 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.
There is currently no secondary market for the Offered 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 Offered Certificates. The
Underwriters intend to act as market makers in the Offered Certificates, subject
to applicable provisions of federal and state securities laws and other
regulatory requirements, but are under no obligation to do so. THE CLASS M
CERTIFICATES MAY NOT BE PURCHASED BY OR TRANSFERRED TO AN ERISA PLAN EXCEPT UPON
THE DELIVERY OF AN OPINION OF COUNSEL AS PROVIDED HEREIN. IN ADDITION, THE CLASS
A-R CERTIFICATES MAY NOT BE PURCHASED BY OR TRANSFERRED TO (I) A "DISQUALIFIED
ORGANIZATION" OR "BOOK-ENTRY NOMINEE," (II) EXCEPT UNDER CERTAIN LIMITED
CIRCUMSTANCES, PERSONS WHO ARE NOT "U.S. PERSONS," (III) AN ERISA PLAN OR (IV)
ANY PERSON OR ENTITY WHO THE TRANSFEROR HAS REASON TO BELIEVE INTENDS TO IMPEDE
THE ASSESSMENT OR COLLECTION OF ANY FEDERAL, STATE OR LOCAL TAXES LEGALLY
REQUIRED TO BE PAID WITH RESPECT THERETO. See "ERISA Considerations" and
"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--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, Class A-2, Class A-3,
Class A-4, Class A-5, Class A-6, Class A-7, Class A-8, Class A-9, Class A-10 and
Class A-11 Certificates, the Class M Certificates and each subclass of the Class
B Certificates will constitute "regular interests" in the REMIC and the Class
A-R Certificates will constitute the "residual interest" in the REMIC.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT THE CLASS A-R CERTIFICATEHOLDERS' REMIC
TAXABLE INCOME AND THE TAX LIABILITY THEREON WILL EXCEED CASH DISTRIBUTIONS TO
SUCH HOLDERS DURING CERTAIN PERIODS, IN WHICH EVENT SUCH HOLDERS 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-11 Certificates) represent
eleven Subclasses of a Class and the Class M Certificates represent a Class of a
separate Series of Certificates being offered by the Seller pursuant to the
Prospectus dated October 12, 1992 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 JANUARY 25, 1993, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
S-2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
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PAGE
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Summary Information........................................................................................ S-4
Description of the Certificates............................................................................ S-18
General.................................................................................................. S-18
Book-Entry Registration.................................................................................. S-18
Definitive Certificates.................................................................................. S-19
Distributions............................................................................................ S-19
Interest................................................................................................. S-21
Principal (Including Prepayments)........................................................................ S-25
CALCULATION OF AMOUNT TO BE DISTRIBUTED TO THE CLASS A CERTIFICATES.................................... S-25
CALCULATION OF AMOUNT TO BE DISTRIBUTED TO THE CLASS M CERTIFICATES.................................... S-27
ALLOCATION OF AMOUNT TO BE DISTRIBUTED TO THE CLASS A AND CLASS M CERTIFICATES......................... S-29
Additional Rights of the Class A-R Certificateholders.................................................... S-30
Periodic Advances........................................................................................ S-31
Restrictions on Transfer of the Class A-R and Class M Certificates....................................... S-32
Reports.................................................................................................. S-33
Subordination of Class M and Class B Certificates........................................................ S-33
ALLOCATION OF LOSSES................................................................................... S-34
Description of the Mortgage Loans.......................................................................... S-37
Mandatory Repurchase or Substitution of Mortgage Loans................................................... S-43
Optional Repurchase of Defaulted Mortgage Loans.......................................................... S-43
Origination, Delinquency and Foreclosure Experience........................................................ S-44
Loan Origination......................................................................................... S-44
Delinquency and Foreclosure Experience................................................................... S-44
Prepayment and Yield Considerations........................................................................ S-48
Pooling and Servicing Agreement............................................................................ S-55
General.................................................................................................. S-55
Voting................................................................................................... S-55
Trustee.................................................................................................. S-56
Servicing Compensation and Payment of Expenses........................................................... S-56
Optional Termination..................................................................................... S-56
Federal Income Tax Considerations.......................................................................... S-57
Regular Certificates..................................................................................... S-57
Residual Certificates.................................................................................... S-57
ERISA Considerations....................................................................................... S-58
Legal Investment........................................................................................... S-59
Secondary Market........................................................................................... S-60
Underwriting............................................................................................... S-60
Legal Matters.............................................................................................. S-60
Use of Proceeds............................................................................................ S-60
Ratings.................................................................................................... S-61
Index of Significant Prospectus Supplement Definitions..................................................... S-62
</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>
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Title of Securities............... Mortgage Pass-Through Certificates, Series 1992-37 (the
"Series 1992-37 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 offered by this Prospectus Supplement and
the Prospectus that they shall have been rated "Aaa" by
Moody's Investors Service, Inc. ("Moody's") and "AAA" by
Standard & Poor's Corporation ("S&P"). It is a condition
to the issuance of the Class M Certificates that they
shall have been rated "Aa2" by Moody's and "AA" by S&P.
The ratings by Moody's and S&P 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 1992-37 Certificates will consist of Class A
Certificates, Class M Certificates and Class B
Certificates. The Class A Certificates represent a type
of interest referred to in the Prospectus as "Senior
Certificates;" and the Class M and 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 M
and Class B Certificates, in right of distributions on
the mortgage loans underlying the Series 1992-37
Certificates (the "Mortgage Loans"). As between the
Class M Certificates and the Class B Certificates, the
Class M Certificates are entitled to a certain priority
in right of distributions on the Mortgage Loans. See
"--Distributions of Principal and Interest" below.
</TABLE>
S-4
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<TABLE>
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Initially, the Class A Certificates will evidence in the
aggregate an approximate 93.00% (approximately
$398,592,000) undivided interest in the initial
aggregate principal balance of the Mortgage Loans; the
Class M Certificates will evidence in the aggregate an
approximate 1.00% (approximately $4,285,000) undivided
interest in the initial aggregate principal balance of
the Mortgage Loans; and the Class B Certificates will
evidence in the aggregate an approximate 6.00%
(approximately $25,716,862) undivided interest in the
initial aggregate principal balance of the Mortgage
Loans. The relative interests in the aggregate
outstanding principal balance of the Mortgage Loans
represented by the Class A, Class M and Class B Certifi-
cates 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
until the aggregate principal balance thereof has been
reduced to zero and then to the Class M Certificates
until the aggregate principal balance thereof has been
reduced to zero, prior to the allocation of such losses
and shortfalls to the Class A Certificates, as discussed
in "--Distributions of Principal and of Interest" and
"--Credit Enhancement" below.
The Class A Certificates will consist of twelve
subclasses, designated as the Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5, Class A-6, Class A-7,
Class A-8, Class A-9, Class A-10, Class A-11 and Class
A-R Certificates. The Class A-11 Certificates are not
offered hereby. The Class M Certificates will not be
divided into subclasses. The Class B Certificates will
consist of four subclasses, designated as the Class B-1,
Class B-2, Class B-3 and Class B-4 Certificates, none of
which are offered hereby. The Class A Certificates
(other than the Class A-11 Certificates) and Class M
Certificates are referred to in this Prospectus
Supplement as the "Offered Certificates." References to
the "Subordinated Certificates" are to the Class M and
Class B Certificates. The Class A-11 Certificates and
one or more of the subclasses of Class B Certificates
may be retained or sold by the Seller.
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 and Class M
Certificates as of the date of issuance of the Series
1992-37 Certificates and the approximate initial
aggregate principal balance of the Class A and Class M
Certificates as of the date of this Prospectus Supple-
ment will not, with respect to the Class A Certificates
(other than the Class A-11 Certificates), exceed 5% of
the initial aggregate principal balance of such Class A
Certificates stated on the cover of this Prospectus
Supplement and, with respect to the Class M
Certificates, will depend on the final subordination
</TABLE>
S-5
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<TABLE>
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levels for the Series 1992-37 Certificates. Any
difference allocated to the Class A Certificates will be
allocated among the subclasses of Class A Certificates
other than the Class A-11 and Class A-R Certificates.
Forms of Certificates;
Denominations................... BOOK-ENTRY FORM. The Offered Certificates (other than
the Class A-R and Class M Certificates) will be issued
in book-entry form, through the facilities of The
Depository Trust Company ("DTC"). These Certificates are
referred to, collectively, in this Prospectus Supplement
as the "Book-Entry Certificates." An investor in a
subclass of Book-Entry Certificates will not receive a
physical certificate representing its ownership interest
in such Book-Entry Certificates, except under
extraordinary circumstances, which are discussed in
"Description of the Certificates--Definitive
Certificates" 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--Book-Entry
Registration" in this Prospectus Supplement.
The Book-Entry Certificates will be issued in minimum
denominations of $100,000 initial principal balance. Any
amounts in excess of $100,000 will be in integral
multiples of $1,000 initial principal balance.
CERTIFICATED FORM. The Class A-R and Class M
Certificates will be offered in fully registered,
certificated form. Accordingly, an investor in any such
subclass or class will be issued a physical certificate
representing its ownership interest.
The Class M Certificates will be issued in minimum
denominations of $100,000 initial principal balance. Any
amounts in excess of $100,000 will be in integral
multiples of $1,000 initial principal balance. The Class
A-R Certificates will be issued in minimum denominations
of $100,000 and integral multiples thereof. See
"Description of the Certificates--General" in this
Prospectus Supplement.
Mortgage Loans.................... MORTGAGE LOAN DATA. The Mortgage Loans, which are the
source of distributions to holders of the Series 1992-37
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 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.
</TABLE>
S-6
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<TABLE>
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SELECTED MORTGAGE LOAN DATA
(AS OF THE CUT-OFF DATE)
Cut-Off Date: October 1, 1992
Number of Mortgage Loans: 1,803
Aggregate Unpaid Principal
Balance 1: $428,593,862
Range of Unpaid Principal $30,000 to $999,363
Balances 1:
Average Unpaid Principal Balance 1: $237,712
Range of Interest Rates: 7.750% to 9.875%
Weighted Average Interest Rate 1: 8.294%
Range of Remaining Terms to Stated
Maturity: 350 months to 360 months
Weighted Average Remaining Term to
Stated Maturity 1: 359 months
Range of Original Loan-to-Value
Ratios: 12.50% to 90.00%
Weighted Average Original Loan-to-
Value Ratio 1: 72%
Geographical Concentration of
Mortgaged Properties Securing
Mortage Loans in Excess of 5% of
the Aggregate Unpaid Principal
Balance(1): California 57.19%
New Jersey 8.73%
New York 7.52%
1 approximate
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
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CHANGES TO POOL. A number of Mortgage Loans may be re-
moved from the pool, or a substitution may be made for
certain Mortgage Loans, in advance of the issuance of
the Series 1992-37 Certificates (which is expected to
occur on or about October 30, 1992). 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 1992-37
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.
</TABLE>
S-7
<PAGE>
<TABLE>
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The Servicer is entitled, subject to certain conditions
relating to the then-remaining size of the pool, to
purchase all outstanding Mortgage Loans in the pool and
thereby effect early retirement of the Series 1992-37
Certificates. See "Pooling and Servicing
Agreement--Optional Termination" in this Prospectus
Supplement.
Distributions of Principal and
Interest........................ DISTRIBUTIONS IN GENERAL. Distributions on the Series
1992-37 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 November 1992, to holders of record at the
close of business on the last business day of the
preceding month. In the case of the Book-Entry
Certificates, the holder of record will be DTC.
The amount available for distribution on any
Distribution Date is primarily a function of the amount
remitted by the respective mortgagors of the Mortgage
Loans in payment of their scheduled installments of
principal and interest, as well as the amount of
prepayments made by such mortgagors and 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 M and 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. The likelihood that
a holder of a particular subclass of the Class A
Certificates will receive principal distributions on any
Distribution Date will depend on the priority in which
such subclass is entitled to principal distributions, as
set forth under the heading "Description of the
Certificates--Principal (Including Prepay-
ments)--Allocation of Amount to be Distributed to the
Class A and Class M 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, in the following order,
to (i) pay interest due holders of the Class M
Certificates, (ii) reduce the outstanding principal
balance of the Class M Certificates, (iii) pay interest
due to the holders of the Class B Certificates and (iv)
reduce the outstanding principal balance of the 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."
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INTEREST DISTRIBUTIONS. The amount of interest to which
holders of each subclass or class of Offered
Certificates, other than the Class A-R Certificates,
will be entitled each month is calculated based on the
outstanding principal balance of that subclass or class,
as of the related Distribution Date. Interest will
accrue each month on each such subclass or class
according to the following formula: 1/12th of the
pass-through rate for such subclass or class multiplied
by the outstanding principal balance of such subclass or
class as of the related Distribution Date. The
pass-through rate for each such subclass or class is the
percentage set forth on the cover of this Prospectus
Supplement.
The amount of interest to which the holders of the Class
A-R Certificates are entitled each month is calculated
based on a "notional amount," which is an amount other
than the actual outstanding principal balance of such
subclass. The method of determining the notional amount
of the Class A-R Certificates is described under
"Description of the Certificates--Interest" in this
Prospectus Supplement. Interest will accrue on the Class
A-R Certificates each month in an amount equal to the
product of (i) 1/12th of 7.50% and (ii) the notional
amount of the Class A-R Certificates.
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. Any such
shortfalls that result 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.
Shortfalls in collections of interest resulting from
principal prepayments IN FULL, to the extent they exceed
the aggregate servicing fees, will be allocated pro
rata, based on interest accrued, among all classes and
subclasses of the Series 1992-37 Certificates. 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 but
instead will be borne first by the Class B Certificates,
second by the Class M Certificates and finally by the
Class A Certificates. See "Description of the
Certificates--Subordination of the Class M and Class B
Certificates" in this Prospectus Supplement.
In addition, the amount of interest required to be
distributed to holders of the Series 1992-37
Certificates will be reduced by a portion of certain
special hazard losses, fraud losses and bankruptcy
losses attributable to interest. See "Credit Enhance-
ment--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
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applicable amount of accrued interest on the Class A
Certificates (net of any shortfalls and losses allocable
to the Class A Certificates as described in the two
immediately preceding paragraphs), the amount of
interest 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.
To the extent that the amount available for distribution
on any Distribution Date, after the payment of all
amounts due the Class A Certificates has been made, is
insufficient to permit distribution in full of accrued
interest on the Class M Certificates (net of any
shortfalls and losses allocable to the Class M
Certificates as described above), the amount of any
deficiency will be added to the amount of interest that
the Class M Certificates are entitled to receive on
subsequent Distribution Dates. No interest will accrue
on such deficiencies.
Interest on the Class A and Class M 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
Subordinated Certificates. As a result, the percentage
of certain unscheduled principal payments otherwise dis-
tributable to the holders of the Subordinated
Certificates that is instead distributable to the
holders of the Class A Certificates will be equal to
100% during the first five years beginning on the first
Distribution Date and will decline during the subse-
quent four years, as described under the 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 it is equal
to zero. On each Distribution Date, the Subordinated
Certificates will collectively be entitled to receive
the percentages of the scheduled and certain unscheduled
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payments of principal on the Mortgage Loans equal, in
each case, to 100% less the applicable percentage for
the Class A Certificates described above.
Except as described below under "--Effect of
Subordination Levels on Principal Distributions," on
each Distribution Date, the Class M Certificates will be
entitled to a portion of scheduled payments and certain
unscheduled payments of principal on the Mortgage Loans
allocable to the Subordinated Certificates that
represents the ratio of the then-outstanding principal
balance of the Class M Certificates to the
then-outstanding principal balance of the Subordinated
Certificates.
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 1992-37 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" in
this Prospectus Supplement.
The amount that is available for distribution to the
holders of the Class M Certificates on any Distribution
Date as a distribution of principal is the amount
remaining after all interest and principal distributions
due on the Class A Certificates and interest due on the
Class M Certificates have been deducted from the total
amount collected that is available to be distributed to
holders of the Series 1992-37 Certificates.
EFFECT OF SUBORDINATION LEVELS ON PRINCIPAL
DISTRIBUTIONS. In order to preserve the availability of
the original subordination levels as protection against
losses on the Class M, Class B-1 and Class B-2
Certificates and, if rated by a nationally recognized
statistical rating agency at the request of the Seller,
the Class B-3 Certificates, some or all of the
subclasses of the Class B Certificates, as described
below, may not be entitled on certain Distribution Dates
to distributions of principal and the principal balance
of such subclasses will not be considered for purposes
of the allocation of principal among the Subordinated
Certificates.
In the case of the Class M Certificates, if on any
Distribution Date the percentage obtained by dividing
the outstanding principal balance of the Class B
Certificates by the sum of the outstanding principal
balances of the Class A, Class M and Class B
Certificates is less than such percentage was upon the
initial issuance of the Series 1992-37 Certificates,
then the Class B Certificates will not be entitled to
distributions of principal on such Distribution Date and
the Class M Certificates will be entitled to all
distributions of principal allocable to the Sub-
ordinated Certificates for such Distribution Date.
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In the case of the Class B-1 or Class B-2 Certificates
or, if rated by a nationally recognized statistical
rating agency at the request of the Seller, the Class
B-3 Certificates, if on any Distribution Date the
percentage obtained by dividing the outstanding
principal balances of the subclasses of Class B
Certificates with higher numerical designations by the
sum of the outstanding principal balances of the Class
A, Class M and Class B Certificates is less than such
percentage was upon the initial issuance of the Series
1992-37 Certificates, then such Class B subclasses with
higher numerical designations will not be entitled to
distributions of principal and the principal balances of
such subclasses will not be taken into account for
purposes of calculating the portions of scheduled and
unscheduled principal payments allocable to the Class M
Certificates and to the subclasses of Class B
Certificates with lower numerical designations. In any
such case, the Class M Certificates will receive a
greater portion of scheduled and unscheduled payments of
principal on the Mortgage Loans allocable to the
Subordinated Certificates than the Class M Certificates
would have received had all subclasses of the Class B
Certificates been entitled to their portion of such
principal payments. See "Description of the
Certificates--Principal (Including
Prepayments)--Calculation of Amount to be Distributed to
the Class M Certificates" in this Prospectus Supplement.
Credit Enhancement................ DESCRIPTION OF "SHIFTING-INTEREST" SUBORDINATION. The
rights of the holders of the Class M 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. 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 and Class M 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 M and
Class B Certificates) and the Class M Certificates (to
the extent of the subordination of the Class B Certifi-
cates) 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 M and Class B Certifi-
cates, 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 M and Class B Certificates and (ii) by the
allocation to the holders of the Class M and Class B
Certificates of certain losses resulting from the
liquidation of defaulted
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Mortgage Loans or the bankruptcy of mortgagors prior to
the allocation of such losses to the holders of the
Class A Certificates.
The protection afforded the holders of the Class M
Certificates by means of this subordination will also be
effected in two ways: (i) by the preferential right of
the holders of the Class M 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 M
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 holders of the Class B
Certificates of certain losses resulting from the
liquidation of defaulted Mortgage Loans or the bank-
ruptcy of mortgagors prior to the allocation of such
losses to the holders of the Class M Certificates.
In addition, in order to increase the period during
which the principal balances of the Class M and Class B
Certificates remain 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 Certifi-
cates 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
Subordinated Certificates.
EXTENT OF LOSS COVERAGE. Realized losses on Mortgage
Loans, other than losses that are (i) attributable to
"special hazards" not insured against 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 exten-
sion of its maturity, will not be allocated to the Class
A Certificates until the date on which the aggregate
principal balance of the Class M and Class B
Certificates (which aggregate balance is expected
initially to be approximately $30,001,862) has been
reduced to zero and will not be allocated to the Class M
Certificates until the date on which the aggregate
principal balance of the Class B Certificates (which
aggregate balance is expected initially to be
approximately $25,716,862) has been reduced to zero.
Such losses will be allocated first among the subclasses
of the Class B Certificates, in reverse numerical order
(that is, to the Class B-4, Class B-3, Class B-2 and
Class B-1 Certificates) and second to the Class M
Certificates.
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With respect to any Distribution Date, the availability
of the credit enhancement provided by the Class B and
Class M Certificates subsequent to the first
Distribution Date will be affected by the prior
reduction of the principal balances of the Class M and
Class B Certificates. Reduction of the principal balance
of the Class M Certificates and each subclass 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 class or subclasses. As of the date of issuance of
the Series 1992-37 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 and then solely by the holders of the
Class M Certificates will be approximately 1.00%, 2.00%
and 0.21%, respectively, of the aggregate principal
balance of the Mortgage Loans as of the Cut-Off Date
(approximately $4,285,939, $8,571,877 and $920,450,
respectively). If losses due to special hazards, fraud
or bankruptcy exceed any of such respective amounts
prior to the principal balances of the Class M and Class
B Certificates being reduced to zero, such losses will
be shared pro rata by the subclasses of Class A
Certificates, the Class M Certificates and the
subclasses of Class B Certificates. After the principal
balances of the Class M and Class B Certificates have
been reduced to zero, such losses will be shared pro
rata by the subclasses of Class A Certificates based on
their then-outstanding principal balances. Under certain
circumstances, the limits set forth above may be reduced
as described under "Description of the
Certificates--Subordination of the Class M and Class B
Certificates--Allocation of Losses" in this Prospectus
Supplement.
THE YIELD TO MATURITY ON THE CLASS M CERTIFICATES WILL
BE MORE SENSITIVE TO LOSSES DUE TO LIQUIDATIONS OF THE
MORTGAGE LOANS (AND THE TIMING THEREOF) THAN THE CLASS A
CERTIFICATES, IN THE EVENT THAT THE PRINCIPAL BALANCE OF
THE CLASS B CERTIFICATES HAS BEEN REDUCED TO ZERO.
See "Description of the Certificates--Subordination of
Class M and Class B Certificates" in this Prospectus
Supplement.
Effects of Prepayments on
Investment Expectations......... The actual rate of prepayment of principal on the
Mortgage Loans can not 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
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on investment expected by the investor or the expected
weighted average life of the Certificate may not be
realized. These effects are 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. AN
INVESTOR THAT PURCHASES ANY OFFERED CERTIFICATES AT A
DISCOUNT SHOULD CAREFULLY 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.
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 purchaser's investment, including an investor who
purchases at par, will be reduced to the extent that
principal distributions received on its Certificate can
not 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 significantly
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
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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 speeds on a security is the
change in its weighted average life. The "weighted
average life" of an Offered Certificate is the average
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, 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 tables 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, Class
A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class
A-7, Class A-8, Class A-9, Class A-10, Class A-11 and
Class M Certificates and each subclass of the Class B
Certificates will be designated as the regular interests
in the REMIC, and the Class A-R Certificates will be
designated as the residual interest in the REMIC.
The Regular Certificates (as defined herein) 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. The
Class A-3, Class A-6, Class A-10 and Class M
Certificates will be issued with original issue discount
in an amount equal to the excess of the initial
principal balances of such subclasses (plus five days of
interest at the pass-through rates thereon) over their
respective issue prices (including accrued interest). It
is also anticipated that the Class A-1, Class A-2, Class
A-4, Class A-5, Class A-7 and Class A-8 Certificates
will be issued at a premium and that the Class A-9
Certificates will be issued with DE MINIMIS original
issue discount for federal income tax purposes.
The holders of the Class A-R Certificates will be
required to include the taxable income or loss of the
REMIC in determining their federal taxable income. It is
anticipated that all or a substantial portion of the
taxable income of the REMIC includible by the Class A-R
Certificateholders will be treated as "excess inclusion"
income subject to special limitations for federal in-
come tax purposes. FURTHER, SIGNIFICANT RESTRICTIONS
APPLY TO THE TRANSFER OF THE CLASS A-R CERTIFICATES. THE
CLASS A-R
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CERTIFICATES ARE "NONECONOMIC RESIDUAL INTERESTS,"
CERTAIN TRANSFERS OF WHICH MAY BE DISREGARDED FOR
FEDERAL INCOME TAX PURPOSES.
See "Description of the Certificates--Restrictions on
Transfer of the Class A-R and Class M Certificates" 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 the Internal Revenue Code of 1986,
as amended (the "Code"), should carefully review with
its legal advisors whether the purchase or holding of
Class A or Class M Certificates could give rise to a
transaction prohibited or not otherwise permissible
under ERISA or the Code. BECAUSE THE CLASS M
CERTIFICATES ARE SUBORDINATED TO THE CLASS A CERTIFI-
CATES, THE CLASS M CERTIFICATES MAY NOT BE PURCHASED BY
OR TRANSFERRED TO AN ERISA PLAN EXCEPT UPON THE DELIVERY
OF AN OPINION OF COUNSEL AS DESCRIBED UNDER "ERISA
CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT. THE CLASS
A-R CERTIFICATES MAY NOT BE PURCHASED BY OR TRANSFERRED
TO AN ERISA PLAN. See "ERISA Considerations" in this
Prospectus Supplement and in the Prospectus.
Legal Investment.................. The Offered Certificates 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 suit-
ability 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
GENERAL
The Book-Entry Certificates will be issued only in book-entry form, except
as described below. The Book-Entry 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.
Offered Certificates issued in fully registered, certificated form are
referred to herein as "Definitive Certificates." The Class M Certificates will
be issued as Definitive Certificates 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 Certificates will be issued as
Definitive Certificates in minimum denominations of $100,000 and integral
multiples thereof.
Each Subclass of Book-Entry Certificates initially will be represented by a
single physical certificate 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
certificate representing such person's interest in the Book-Entry Certificates,
except as set forth below under "--Definitive Certificates." Unless and until
Definitive Certificates are issued 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 (as defined below), 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. See "--Book-Entry
Registration" below.
BOOK-ENTRY REGISTRATION
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 Underwriters), 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, 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.
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 DTC 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.
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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 physical
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 and, 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.
DEFINITIVE CERTIFICATES
The Class A-R and Class M Certificates will be issued as Definitive
Certificates. Further, 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 each outstanding class of 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 definitive 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.
Distributions of principal of, and interest on, the Book-Entry Certificates will
thereafter be made by the Servicer, or a paying agent on behalf of the Servicer,
directly to holders of Definitive Certificates in accordance with the procedures
set forth in the Pooling and Servicing Agreement.
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.
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
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of each month or, if such day is not a business day, on the succeeding business
day (each, a "Distribution Date"), beginning in November 1992, in an aggregate
amount equal to the Class A Distribution Amount. Distributions of interest and
in reduction of principal balance to holders of Class M Certificates will be
made monthly, to the extent of the Class M Certificates' entitlement thereto, on
each Distribution Date in an aggregate amount equal to the Class M Distribution
Amount after all amounts in respect of interest and principal due on the Class A
Certificates for such Distribution Date including all previously unpaid Class A
Subclass Interest Shortfall Amounts with respect to any Subclass of Class A
Certificates have been paid. 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 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 day of the preceding month (each, a "Record Date"), except that the final
distribution in respect of each Class A Certificate of any Subclass and each
Class M Certificate will only be made upon presentation and surrender of such
Class A or Class M 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 or Class M Certificate.
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 Determination Date in
the month in which such Distribution Date occurs, plus (i) all Periodic Advances
made by the Servicer, (ii) all withdrawals from any reserve fund established to
provide support for the Servicer's obligation to make advances, as described
under "--Periodic Advances" below and (iii) 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 or an unreimbursed advance has been made from the Reserve
Fund, if established;
(b)
any unreimbursed Periodic Advances or unreimbursed advances from the
Reserve Fund, if established, with respect to Liquidated Loans;
(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, received on or after the Due Date occurring in the month in which
such Distribution Date occurs, and all partial principal prepayments
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;
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(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; and
(j)
Net Foreclosure Profits.
On each Distribution Date, the Pool Distribution Amount will be allocated
among the Classes of Certificates and distributed to the holders thereof of
record as of the related Record Date as follows (the "Pool Distribution Amount
Allocation"):
FIRST, to each Subclass 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 each Subclass 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 each Subclass 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 and Class M Certificates;"
FOURTH, to the Class M Certificates in an amount up to the Class M
Interest Accrual Amount with respect to such Distribution Date;
FIFTH, to the Class M Certificates in an amount up to the previously
unpaid Class M Interest Shortfall Amount;
SIXTH, to the Class M Certificates in an amount up to the Class M
Optimal Principal Amount; and
SEVENTH, sequentially to the Class B-1, Class B-2, Class B-3 and Class
B-4 Certificates so that each subclass shall receive first an amount up to
its Class B Subclass Interest Accrual Amount with respect to such
Distribution Date, second an amount up to its previously unpaid subclass
interest shortfall amount and then an amount up to its subclass optimal
principal amount before any subclasses of Class B Certificates with a higher
numerical designation receive any payments in respect of interest or
principal.
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 "Class M Distribution Amount" for any Distribution Date will be equal to
the sum of the amounts distributed in accordance with priorities FOURTH through
SIXTH 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 or Class M Certificate in distributions to
such Subclass or Class 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 or Class, as the case may be.
INTEREST
The amount of interest which 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-11 and the Class A-R Certificates, will equal the product of (i) 1/12th of the
Pass-Through Rate for such Subclass and (ii) the outstanding Class A Subclass
Principal Balance of such Subclass. The Pass-Through Rate for each such Subclass
of Certificates is the percentage set forth or described on the cover
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of this Prospectus Supplement. The Class A Subclass Interest Accrual Amount for
the Class A-11 Certificates will equal the product of (i) 1/12th of (a) the
weighted average of the Net Mortgage Interest Rates (as defined below) of the
Mortgage Loans as of the first day of such month minus (b) 7.50% and (ii) the
Class A-11 Notional Amount. The Class A Subclass Interest Accrual Amount for the
Class A-R Certificates will equal the product of (i) 1/12th of 7.50% and (ii)
the Class A-R 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 which will accrue on the Class M Certificates during
each month is referred to herein as the "Class M Interest Accrual Amount." The
Class M Interest Accrual Amount will equal the product of (i) 1/12th of 7.50%
and (ii) the outstanding Class M Principal Balance. The Class M Interest Accrual
Amount will be reduced by (i) the portion of any Non-Supported Interest
Shortfall allocable to the Class M Certificates and (ii) the interest portion of
Excess Special Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses
allocable to the Class M Certificates.
Each subclass of Class B Certificates will accrue interest during each month
at a Pass-Through Rate of 7.50% per annum. The amount of interest accrued on
each subclass during each month (the "Class B Subclass Interest Accrual Amount")
will equal the product of (i) 1/12th of 7.50% and (ii) the outstanding Class B
Subclass Principal Balance of such subclass. Each Class B Subclass Interest
Accrual Amount will be reduced by (i) the portion of any Non-Supported Interest
Shortfalls 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 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 M and 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
applicable Distribution Date.
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 M Principal Balance" as of any Determination Date will be the
lesser of (a) the principal balance of the Class M Certificates on the date of
initial issuance of the Class M Certificates less (i) all amounts previously
distributed to holders of Class M 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 M Certificates in the manner described herein under
"--Subordination of Class M and 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.
The "Class B Subclass Principal Balance" of a subclass of Class B
Certificates as of any Determination Date will be the lesser of (a) the initial
principal balance of such subclass on the date of initial issuance of the Class
B Certificates less (i) all amounts previously distributed to holders of such
subclass 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 such subclass in the
manner described under "--Subordination of Class M and Class B Certificates--
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<PAGE>
Allocation of Losses" and (b) the Adjusted Pool Amount as of the preceding
Distribution Date less the sum of the Class A Principal Balance, the Class M
Principal Balance and the Class B Subclass Principal Balances of the subclasses
of Class B Certificates with lower numerical designations.
The "Class B Principal Balance" as of any date will be equal to the sum of
the Class B Subclass Principal Balance of the subclasses of Class B Certificates
as of such 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 1992-37 Certificates on such Distribution Date and all prior
Distribution Dates and (ii) the principal portion of all Realized Losses
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-R Notional Amount" with respect to each Distribution Date will
be equal to the sum of the Class A Subclass Principal Balance of the Class A-R
Certificates and the Class A Subclass Principal Balance of the Class A-11
Certificates. The Class A-R Notional Amount with respect to the first
Distribution Date will be $201,000.
The "Class A-11 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-11
Notional Amount with respect to the first Distribution Date will be
approximately $428,593,862 less any partial principal prepayments received in
October 1992.
Interest shortfalls resulting from principal prepayments in full of Mortgage
Loans ("Prepayment Interest Shortfalls") 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 Class A Percentage and (ii) the Class M
Certificates according to the percentage obtained by dividing the
then-outstanding Class M Principal Balance by the sum of the then-outstanding
Class A Principal Balance, Class M Principal Balance and Class B Principal
Balance. Such allocation of Non-Supported Interest Shortfalls will reduce the
amount of interest due to be distributed to holders of the Class A Certificates
and Class M Certificates, respectively, then entitled to distributions in
respect of interest. 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 on the Mortgage
Loans will not be offset by Servicing Fees and will, on each Distribution Date
occurring prior to the Cross-Over Date, be allocated first to the subclasses of
Class B Certificates in reverse numerical order and then to the Class M
Certificates before being borne by the Class A Certificates. 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 will be allocated to the Class A Certificates in the same manner as
Non-Supported Interest Shortfalls are allocated. See "--Subordination of the
Class M and Class B Certificates" below.
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The interest portion of any Excess Special Hazard Losses, Excess Fraud
Losses or Excess Bankruptcy Losses will be allocated among the Class A, Class M
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) first to
the Class B Certificates and then to the Class M Certificates will result from
the priority of distributions first to the Class A Certificateholders and then
to the Class M 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.
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 exceeds the
sum of the Class A Subclass Interest Accrual Amounts, 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 the respective unpaid Class A Subclass
Interest Shortfall Amounts immediately prior to such Distribution Date.
On each Distribution Date on which the Pool Distribution Amount equals or
exceeds the sum for such Distribution Date of (A) the sum 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, the "Class A Optimal Amount")
and (B) the Class M Interest Accrual Amount, distributions in respect of current
interest to the Class M Certificates will equal the Class M Interest Accrual
Amount.
If, on any Distribution Date, the Pool Distribution Amount is less than the
sum of (i) the Class A Optimal Amount and (ii) the Class M Interest Accrual
Amount, the amount of current interest distributed on the Class M Certificates
will equal the Pool Distribution Amount minus the amounts distributed to the
Class A Certificates with respect to such Distribution Date. Any difference
between the portion of the Pool Distribution Amount distributed in respect of
current interest to the Class M Certificates and the Class M Interest Accrual
Amount with respect to such Distribution Date (the "Class M 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 M Interest Shortfall
Amount.
On each Distribution Date on which the Pool Distribution Amount exceeds the
sum of the Class A Optimal Amount and the Class M Interest Accrual Amount, any
excess will be allocated first to pay previously unpaid Class M Interest
Shortfall Amounts and then to make distributions in respect of principal on the
Class M Certificates and in respect of interest and then principal on the
subclasses of
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Class B Certificates. With respect to each Distribution Date, the "Class M
Optimal Amount" will equal the sum of (i) the Class M Interest Accrual Amount,
(ii) the unpaid Class M Interest Shortfall Amount and (iii) the Class M Optimal
Principal Amount.
On any Distribution Date on which the Pool Distribution Amount is less than
the Class A Optimal Amount, the Class M Certificates and the subclasses of 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 or of any
Class M Certificate at any time is equal to the product of the Class A Subclass
Principal Balance of such Subclass or the Class M Principal Balance, as the case
may be, 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 or Class M Certificate and (ii) in the case of the Class A-R
Certificates, any additional amounts to which a holder of a Class A-R
Certificate may be entitled as described below under "--Additional Rights of the
Class A-R Certificateholders") 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 Class A-11
Certificates) and the approximate initial Class M Principal Balance are set
forth on the cover of this Prospectus Supplement. The initial Class A Subclass
Principal Balance of the Class A-11 Certificates is $1,000.
CALCULATION OF AMOUNT TO BE DISTRIBUTED TO THE CLASS A CERTIFICATES
Distributions in reduction of the principal balance of the Class A
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 Coverage Termination Date has occurred, the principal portion of
Debt Service Reductions, (ii) the 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 the aggregate net 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 Certificateholders" below),
less the amounts allocable to principal of any unreimbursed Periodic Advances
previously made by the Servicer and any unreimbursed advances from the Reserve
Fund (if established) with respect to such Liquidated Loans and the portion of
the net 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 and any unreimbursed
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advances from the Reserve Fund, if established, 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 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.
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 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 advance)
will be applied first to accrued interest and then to the unpaid principal
balance of the Liquidated Loan. A "Special Hazard Loss" is a 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 Balance of the Mortgage Loans
for such Distribution Date (the "Pool Scheduled Principal Balance"). The Class A
Percentage for the first Distribution Date will be approximately 93.00%. 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 and the Class M
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
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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 M and Class B Certificates. Increasing the respective interest of
the Class M and Class B Certificates relative to that of the Class A
Certificates is intended to preserve the availability of the subordination
provided by the Class M and Class B Certificates. See "--Subordination of Class
M and 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 October 1997 to and including the
Distribution Date in October 1998, the Class A Percentage for such Distribution
Date plus 70% of the Subordinated Percentage for such Distribution Date; for any
Distribution Date subsequent to October 1998 to and including the Distribution
Date in October 1999, the Class A Percentage for such Distribution Date plus 60%
of the Subordinated Percentage for such Distribution Date; for any Distribution
Date subsequent to October 1999 to and including the Distribution Date in
October 2000, the Class A Percentage for such Distribution Date plus 40% of the
Subordinated Percentage for such Distribution Date; for any Distribution Date
subsequent to October 2000 to and including the Distribution Date in October
2001, the Class A Percentage for such Distribution Date plus 20% of the
Subordinated 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 if (i) as of the first
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) with respect to the Distribution Date in November 1997, 30% of the
principal balance of the Subordinated Certificates as of the Cut-Off Date (the
"Original Subordinated Principal Balance"), (b) with respect to the Distribution
Date in November 1998, 35% of the Original Subordinated Principal Balance, (c)
with respect to the Distribution Date in November 1999, 40% of the Original
Subordinated Principal Balance, (d) with respect to the Distribution Date in
November 2000, 45% of the Original Subordinated Principal Balance, and (e) with
respect to the Distribution Date in November 2001, 50% of the Original
Subordinated Principal Balance. The "Subordinated Percentage" for any
Distribution Date will be calculated as the difference between 100% and the
Class A Percentage for such date. The "Subordinated 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.
CALCULATION OF AMOUNT TO BE DISTRIBUTED TO THE CLASS M CERTIFICATES
Distributions in reduction of the principal balance of the Class M
Certificates will be made on each Distribution Date, pursuant to priority SIXTH
of the Pool Distribution Amount Allocation, in an aggregate amount (the "Class M
Principal Distribution Amount"), up to the Class M Optimal Principal Amount.
The "Class M Optimal Principal Amount" with respect to each Distribution
Date will be an amount equal to the sum of (i) the Class M 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 Coverage Termination
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Date has occurred, the principal portion of Debt Service Reductions, (ii) the
Class M 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 M Prepayment
Percentage of the aggregate net Liquidation Proceeds on all Mortgage Loans that
became Liquidated Loans during such preceding month (excluding the portion
thereof, if any, constituting Net Foreclosure Profits), less the amounts
allocable to principal of any unreimbursed Periodic Advances previously made by
the Servicer and any unreimbursed advances from the Reserve Fund (if
established) with respect to such Liquidated Loans and the portion of the net
Liquidation Proceeds allocable to Interest, (iv) on each Distribution Date prior
to the reduction of the Class B Principal Balance to zero, the Class M
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 M 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 M 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 M 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 and any unreimbursed advances from the Reserve Fund, if
established, 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 M Certificates, the Class M Certificates will be entitled to their pro
rata share of such recovery up to the amount by which the Class M Principal
Balance was reduced as a result of such Realized Loss.
The "Class M Percentage" and "Class M Prepayment Percentage" for any
Distribution Date will equal that portion of the Subordinated Percentage and
Subordinated Prepayment Percentage, as the case may be, represented by the
fraction the numerator of which is the then-outstanding Class M Principal
Balance and the denominator of which is the sum of the Class M Principal Balance
and the Class B Subclass Principal Balances of the subclasses entitled to
principal distributions for such Distribution Date as described in the
succeeding paragraph.
In the event that on any Distribution Date, the Current Class M
Subordination Level is less than the Original Class M Subordination Level, then
the Class B-1, Class B-2, Class B-3 and Class B-4 Certificates will not be
entitled to distributions in respect of principal and the Class B Subclass
Principal Balances of such subclasses will not be used to determine the Class M
Percentage and Class M Prepayment Percentage for such Distribution Date. For
such Distribution Date, the Class M Percentage and Class M Prepayment Percentage
will equal the Subordinated Percentage and the Subordinated Prepayment
Percentage, respectively. In the event that the Current Class M Subordination
Level equals or exceeds the Original Class M Subordination Level but the Current
Class B-1 Subordination Level is less than the Original Class B-1 Subordination
Level, then the Class B-2, Class B-3 and Class B-4 Certificates will not be
entitled to distributions in respect of principal and the Class B Subclass
Principal Balances of such subclasses will not be used to determine the Class M
Percentage and the Class M Prepayment Percentage for such Distribution Date. In
the event that each of the Current Class M Subordination Level and the Current
Class B-1 Subordination Level equal or exceed the Original Class M Subordination
Level and the Original Class B-1 Subordination Level, respectively, but the
Current Class B-2 Subordination Level is less than the Original Class B-2
Subordination Level, then the Class B-3 and Class B-4 Certificates will not be
entitled to distributions in respect of principal and the Class B Subclass
Principal Balances of such subclasses will not be used to determine the Class M
Percentage and the Class M Prepayment Percentage for such Distribution Date. In
the event that (i) the Class B-3 Certificates are
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rated by a nationally recognized statistical rating agency at the request of the
Seller, and (ii) each of the Current Class M Subordination Level, the Current
Class B-1 Subordination Level and the Current Class B-2 Subordination Level
equals or exceeds the Original Class M Subordination Level, the Original Class
B-1 Subordination Level and the Original Class B-2 Subordination Level,
respectively, but the Current Class B-3 Subordination Level is less than the
Original Class B-3 Subordination Level, then the Class B-4 Certificates will not
be entitled to distributions in respect of principal and the Class B Subclass
Principal Balance of such subclass will not be used to determine the Class M
Percentage and the Class M Prepayment Percentage for such Distribution Date. In
the event that the Class B-3 Certificates are not rated by a nationally
recognized statistical rating agency at the request of the Seller, then the
Class B-3 Certificates will not have original or current subordination levels
which are required to be maintained as described in the prior sentence. The
Class B-4 Certificates will not have original or current subordination levels
which are required to be maintained as described above.
The "Original Class M Subordination Level" is the percentage obtained by
dividing the initial Class B Subclass Principal Balance by the Cut-Off Date
Aggregate Principal Balance of the Mortgage Loans. The Original Class M
Subordination Level is expected to be approximately 6.00%. The "Current Class M
Subordination Level" for any Distribution Date is the percentage obtained by
dividing the sum of the then-outstanding Class B Subclass Principal Balances of
the Class B-1, Class B-2, Class B-3 and Class B-4 Certificates by the sum of the
Class A Principal Balance, the Class M Principal Balance and the Class B
Principal Balance.
The "Original Class B-1 Subordination Level" is the percentage obtained by
dividing the sum of the initial Class B Subclass Principal Balances of the Class
B-2, Class B-3 and Class B-4 Certificates by the Cut-Off Date Aggregate
Principal Balance of the Mortgage Loans. The Original Class B-1 Subordination
Level is expected to be approximately 2.75%. The "Current Class B-1
Subordination Level" for any Distribution Date is the percentage obtained by
dividing the sum of the then-outstanding Class B Subclass Principal Balances of
the Class B-2, Class B-3 and Class B-4 Certificates by the sum of the Class A
Principal Balance, the Class M Principal Balance and the Class B Principal
Balance.
The "Original Class B-2 Subordination Level" is the percentage obtained by
dividing the sum of the initial Class B Subclass Principal Balances of the Class
B-3 and Class B-4 Certificates by the Cut-Off Date Aggregate Principal Balance
of the Mortgage Loans. The Original Class B-2 Subordination Level is expected to
be approximately 2.25%. The "Current Class B-2 Subordination Level" for any
Distribution Date is the percentage obtained by dividing the sum of the
then-outstanding Class B Subclass Principal Balances of the Class B-3 and Class
B-4 Certificates by the sum of the Class A Principal Balance, the Class M
Principal Balance and the Class B Principal Balance.
In the event that the Class B-3 Certificates are rated by a nationally
recognized statistical rating agency at the request of the Seller, the "Original
Class B-3 Subordination Level" is the percentage obtained by dividing the sum of
the initial Class B Subclass Principal Balance of the Class B-4 Certificates by
the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans. The Original
Class B-3 Subordination Level is expected to be 1.00%. The "Current Class B-3
Subordination Level" for any Distribution Date is the percentage obtained by
dividing the sum of the then-outstanding Class B Subclass Principal Balance of
the Class B-4 Certificates by the sum of the Class A Principal Balance, the
Class M Principal Balance and the Class B Principal Balance.
The initial Class B Subclass Principal Balance of each subclass of the Class
B Certificates will be determined based on the final subordination levels and
will be set forth in the Pooling and Servicing Agreement. However, in the
aggregate, the initial principal balance of the Class B Certificates will remain
at approximately $25,716,862.
ALLOCATION OF AMOUNT TO BE DISTRIBUTED TO THE CLASS A AND CLASS M CERTIFICATES
On each Distribution Date occurring prior to the Cross-Over Date, a portion
of the Class A Principal Distribution Amount, calculated by multiplying (x) the
fraction equal to $201,000 (I.E., the sum of the aggregate initial Subclass
Principal Balances of the Class A-11 and Class A-R Certificates) divided by the
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initial aggregate Subclass Principal Balance of the Class A Certificates (which
fraction, expressed as a percentage, is expected to be approximately 0.050428%)
by (y) the Class A Principal Distribution Amount, will be distributed in
reduction of the Subclass Principal Balances of the Class A-11 and Class A-R
Certificates pro rata based on their Subclass Principal Balances. The remainder
of the Class A Principal Distribution Amount on each Distribution Date occurring
prior to the Cross-Over Date will be allocated among and distributed in
reduction of the principal balances of the other Subclasses of Class A
Certificates as follows:
FIRST, concurrently, approximately 71.428571% to the Class A-1
Certificates and approximately 28.571429% to the Class A-7 Certificates,
until the Class A Subclass Principal Balance of the Class A-1 Certificates
has been reduced to zero;
SECOND, to the Class A-2 Certificates, until the Class A Subclass
Principal Balance thereof has been reduced to zero;
THIRD, concurrently, approximately 26.989482% to the Class A-3
Certificates, approximately 62.214725% to the Class A-4 Certificates and
approximately 10.795793% to the Class A-7 Certificates, until the Class A
Subclass Principal Balances of the Class A-3 Certificates and the Class A-4
Certificates have been reduced to zero;
FOURTH, concurrently, approximately 83.333333% to the Class A-5
Certificates and approximately 16.666667% to the Class A-7 Certificates,
until the Class A Subclass Principal Balance of the Class A-5 Certificates
has been reduced to zero;
FIFTH, concurrently, approximately 83.333333% to the Class A-6
Certificates and approximately 16.666667% to the Class A-7 Certificates,
until the Class A Subclass Principal Balances thereof have been reduced to
zero; and
SIXTH, sequentially, to the Class A-8, Class A-9 and Class A-10
Certificates, until the Class A Subclass Principal Balance of each such
Class A Subclass has been reduced to zero.
On each Distribution Date occurring on or after the Cross-Over Date, the
Class A Principal Distribution Amount will be distributed among the Subclasses
of Class A Certificates pro rata in accordance with their respective outstanding
Class A Subclass Principal Balances.
Amounts distributed on each Distribution Date to the holders of Class A
Certificates in reduction of principal balance will be allocated among the
holders of Class A Certificates of each Subclass pro rata in accordance with
their respective Percentage Interests.
Amounts distributed on any Distribution Date to the holders of Class M
Certificates in reduction of principal balance will be allocated among the
holders of Class M Certificates pro rata in accordance with their respective
Percentage Interests.
ADDITIONAL RIGHTS OF THE CLASS A-R CERTIFICATEHOLDERS
The Class A-R Certificates will remain outstanding for as long as the Trust
Estate shall exist, whether or not they are receiving current distributions of
principal or interest. The holders of the Class A-R Certificates 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 1992-37 Certificates, after
distributions in respect of any accrued but unpaid interest on the Series
1992-37 Certificates and after distributions in reduction of principal balance
have reduced the principal balances of the Series 1992-37 Certificates to zero.
It is not anticipated that there will be any assets remaining in the Trust
Estate on the final Distribution Date following the distributions of interest
and in reduction of principal balance made on the Series 1992-37 Certificates on
such date.
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In addition, Class A-R Certificateholders 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 such 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, the Servicer will be obligated to advance on or before the related
Distribution Date for the benefit of holders of the Series 1992-37 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
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.
In the event that, at some future date, Moody's should revise its assessment
of the ability of the Servicer to make Periodic Advances, and so notify the
Trustee in writing (the date on which such notification is received by the
Servicer being referred to herein as the "Reserve Fund Trigger Date"), a reserve
fund (the "Reserve Fund") will be established by the Servicer in accordance with
the provisions of the Pooling and Servicing Agreement to provide limited support
for the Servicer's obligation to make Periodic Advances, as described above. In
the event that, with respect to any Distribution Date occurring after the date
on which the Reserve Fund is funded, the Servicer fails to make any Periodic
Advance required to be made by it pursuant to the Pooling and Servicing
Agreement, the Trustee will cause to be withdrawn from the Reserve Fund an
advance in an amount equal to the least of (i) the Periodic Advance required to
be made by the Servicer which the servicer failed to make, (ii) the excess of
(A) the Class A Optimal Amount for such Distribution Date over (B) the Pool
Distribution Amount (determined without regard to any advance from the Reserve
Fund on such Distribution Date) and (iii) an amount equal to the amount then in
the Reserve Fund, less any reinvestment income or gain to be released from the
Reserve Fund as described in the following paragraph (the "Reserve Fund
Available Advance Amount"). The Pooling and Servicing Agreement will provide
that any such advance made from the Reserve Fund will be reimbursed to the
Reserve Fund if and to the extent that such reimbursement would be permitted
under the Pooling and Servicing Agreement if such advance had been a Periodic
Advance made by the Servicer. The Reserve Fund, if established, will not be a
part of the Trust Estate.
The Reserve Fund, if required, will be established as a trust account
pursuant to a depository agreement (the "Depository Agreement") by and among a
depository institution (the "Reserve Fund Depository"), the Servicer and the
Trustee and will be held by the Reserve Fund Depository. Following the Reserve
Fund Trigger Date, should such date occur, the Reserve Fund will be funded by
the deposit with the Reserve Fund Depository of an amount in cash equal to (i)
0.50% of the outstanding principal balance of the Mortgage Loans as of the close
of business on the Reserve Fund Trigger Date or (ii) such
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lesser amount as Moody's may specify (the "Reserve Fund Required Amount"). After
the Reserve Fund Required Amount has been deposited in the Reserve Fund, no
person will have any further obligation to deposit amounts in the Reserve Fund
or to maintain the amounts in the Reserve Fund at that level even if at some
future date amounts in the Reserve Fund fall below the Reserve Fund Required
Amount as a result of unreimbursed advances made from the Reserve Fund or
withdrawals permitted by Moody's. The amounts in the Reserve Fund may be
invested in investments that will not cause the then current ratings of the
Class A Certificates to be lowered by Moody's, and reinvestment income or gain
will be released to the Servicer (or its designee) on each Distribution Date
free and clear of any interest of the Trustee, the Reserve Fund Depository or
any other person. After the Class A Principal Balance has been reduced to zero,
any amounts in the Reserve Fund will be released to the Servicer (or its
designee).
An alternative method of limited support for the Servicer's obligation to
make Periodic Advances may be provided, if such change does not cause the then
current ratings of the Class A Certificates to be lowered by Moody's.
RESTRICTIONS ON TRANSFER OF THE CLASS A-R AND CLASS M CERTIFICATES
The Class A-R Certificates will be subject to the following restrictions on
transfer and will contain a legend describing such restrictions.
The Technical and Miscellaneous Revenue Act of 1988 amended the REMIC
provisions of the Code to impose a tax on transfers of residual interests to
Disqualified Organizations (as defined in the Prospectus). These changes will
apply to transferors of the Class A-R Certificates as well as holders of the
Class A-R Certificates that are Pass-Through Entities (as defined in the
Prospectus). The Pooling and Servicing Agreement will provide that no legal or
beneficial interest in a 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 items, such
transferee is not a Disqualified Organization, is not purchasing such Class A-R
Certificate as an agent for a Disqualified Organization (I.E., as a broker,
nominee, or other middleman thereof) and is not an entity (a "Book-Entry
Nominee") that holds REMIC residual securities as nominee to facilitate the
clearance and settlement of such securities through electronic book-entry
changes in accounts of participating organizations 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 understands that it must take into account the taxable income relating
to its Class A-R Certificate, that it has no intention to impede the assessment
or collection of any federal, state or local income taxes legally required to be
paid with respect to such Class A-R Certificate and that it will not transfer
such Class A-R Certificate to any person or entity that it has reason to believe
has the intention to impede the assessment or collection of such taxes.
In addition, a Class A-R Certificate may not be purchased by or transferred
to any person that is not a "U.S. Person," unless (i) such person holds such
Class A-R Certificate in connection with the conduct of a trade or business
within the United States and furnishes the transferor and the Trustee with an
effective Internal Revenue Service Form 4224 or (ii) the transferee delivers to
both the transferor and the Trustee an opinion of a nationally recognized tax
counsel to the effect that such transfer is in accordance with the requirements
of the Code and the regulations promulgated thereunder and that such transfer of
such 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 the Residual
Certificates" in the Prospectus.
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The Class A-R Certificates may not be purchased by or transferred to an
ERISA Plan. Because the Class M Certificates are subordinated to the Class A
Certificates, the Class M Certificates may not be purchased by or transferred to
an ERISA Plan except upon the delivery of an opinion of counsel as described
herein under "ERISA Considerations." 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 and Class
M 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 and to the Class M Certificates, any Class A Subclass Interest
Shortfall Amount arising with respect to each Subclass or any Class M Interest
Shortfall Amount on such Distribution Date, any remaining unpaid Class A
Subclass Interest Shortfall Amount with respect to each Subclass, or any
remaining unpaid Class M Interest Shortfall Amount, 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, the Class M Principal Balance, the Class A
Subclass Principal Balance of each Subclass of Class A Certificates after giving
effect to the distribution of principal and the allocation of Excess Special
Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses, if any, (iv)
the Adjusted Pool Amount and the Pool Scheduled Principal Balance of the
Mortgage Loans for such Distribution Date, (v) the Class A Percentage and Class
M Percentage for the following Distribution Date, 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-11 Certificates will also include the Class
A-11 Notional Amount and the weighted average Net Mortgage Interest Rate of the
Mortgage Loans applicable to such Distribution Date minus 7.50%. The statement
delivered to the holders of the Class A-R Certificates will also include the
Class A-R Notional Amount. 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 "The Pooling and Servicing
Agreement--Trustee" herein.
SUBORDINATION OF CLASS M AND CLASS B CERTIFICATES
The rights of the holders of the Class M 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 and 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 and Class M Certificates, all 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 M and Class B Certificates) and the holders of the
Class M 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 M and Class B Certificates) and the
holders of the Class M 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 and Class M 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 and Class M 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 M and 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
S-33
<PAGE>
distributions on the Mortgage Loans that would otherwise have been payable to
the holders of Class M and 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 protection afforded to the holders of Class M 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 M Certificateholders on each Distribution Date from the Pool
Distribution Amount with respect to such date (after all required payments on
the Class A Certificates have been made) 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 the Class B Certificates.
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 and the Class M 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 Subordinated Certificates are
entitled has been reduced to zero as a result of the allocation of losses to the
Subordinated Certificates, I.E., the date on which the Subordinated Percentage
has been reduced to zero (the "Cross-Over Date"). Prior to such time, such
Realized Losses will be allocated first to the subclasses of Class B
Certificates sequentially in their reverse numerical order, until the Class B
Subclass Principal Balances of each such subclass have been reduced to zero, and
then to the Class M Certificates until the Class M 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, the Class
M Principal Balance and the Class B Subclass Principal Balances to equal the
Adjusted Pool Amount.
Allocations to the Class M Certificates or 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 (iv) any interest
shortfalls resulting from the timing of partial principal prepayments, will
result from the priority of distributions first to the Class A
Certificateholders and then to the Class M 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 among the Class A, Class M 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
S-34
<PAGE>
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" among two or more Classes of 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 applicable Class
B Subclass Interest Accrual Amount, Class M Interest Accrual Amount or Class A
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 M and Class B Certificates. In general, 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, 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 M and 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 will be allocated solely to the Class B Certificates,
or following the reduction of the Class B Principal Balance to zero, solely to
the Class M Certificates, but only prior to the Special Hazard Termination Date.
The "Special Hazard Termination Date" will be the date on which Special Hazard
Losses exceed the Special Hazard Loss Amount (or, if earlier, the Cross-Over
Date). Upon initial issuance of the Series 1992-37 Certificates, the "Special
Hazard Loss Amount" with respect thereto will be equal to approximately 1.00%
(approximately $4,285,939) 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 or Class M 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 and (ii) twice the principal balance of the single
Mortgage Loan having the largest principal balance. Special Hazard Losses in
excess of the Special Hazard Loss Amount are "Excess Special Hazard Losses".
Fraud Losses will be allocated solely to the Class B Certificates, or
following the reduction of the Class B Principal Balance to zero, solely to the
Class M Certificates, but only prior to the Fraud Coverage Termination Date. The
"Fraud Coverage Termination Date" will be the date on which Fraud Losses exceed
the Fraud Loss Amount (or, if earlier, the Cross-Over Date). Upon initial
issuance of the Series 1992-37 Certificates, the "Fraud Loss Amount" with
respect thereto will be equal to approximately 2.00% (approximately $8,571,877)
of the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans. On each
Distribution Date thereafter, the Fraud Loss Amount will equal (X) prior to the
first anniversary of the Cut-Off Date an amount equal to the initial Fraud Loss
Amount minus the aggregate amount of Fraud Losses allocated solely to the Class
B or the Class M Certificates up to the related Determination Date, and (Y) from
the first through fifth anniversary of the Cut-Off Date, 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 or the Class M
Certificates with respect to Fraud Losses since the most recent anniversary of
the Cut-Off Date
S-35
<PAGE>
up to the related Determination Date. After the fifth anniversary of the Cut-Off
Date, the Fraud Loss Amount will be zero and thereafter any Fraud Losses will be
shared pro rata among the Class A, Class M and Class B Certificates. Fraud
Losses in excess of the Fraud Loss Amount are "Excess Fraud Losses."
Bankruptcy Losses will be allocated solely to the Class B Certificates, or
following the reduction of the Class B Principal Balance to zero, solely to the
Class M Certificates, but only prior to the Bankruptcy Coverage Termination
Date. The "Bankruptcy Coverage Termination Date" will be the date on which
Bankruptcy Losses exceed the Bankruptcy Loss Amount (or, if earlier, the
Cross-Over Date). Upon initial issuance of the Series 1992-37 Certificates, the
"Bankruptcy Loss Amount" with respect thereto will be equal to approximately
0.21% (approximately $920,450) 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 and Class M Certificates up to 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 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 or Class M 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 S&P that such reduction or modification will not adversely affect
the then-current ratings assigned to the Class A and Class M Certificates by
Moody's and S&P. Such a reduction or modification may adversely affect the
coverage provided by subordination with respect to Bankruptcy Losses. Bankruptcy
Losses in excess of the Bankruptcy Loss Amount are "Excess Bankruptcy Losses."
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 $25,716,862, the risk of Special Hazard Losses,
Fraud Losses and Bankruptcy Losses will be borne 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.
S-36
<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. The Mortgage Loans are expected to include 1,803 promissory notes, to
have an aggregate unpaid principal balance as of the Cut-Off Date (the "Cut-Off
Date Aggregate Principal Balance") of approximately $428,593,862, to be secured
by first liens (the "Mortgages") on one- to four-family residential properties
(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 $30,000 or more than $999,363, and the
average unpaid principal balance of the Mortgage Loans is expected to be
approximately $237,712. The latest stated maturity date of any of the Mortgage
Loans is expected to be October 1, 2022; 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, 1,710 of
the Mortgaged Properties, which secure approximately 96.88% of the Cut-Off Date
Aggregate Principal Balance of the Mortgage Loans, are expected to be owner
occupied primary residences and 93 of the Mortgaged Properties, which secure
approximately 3.12% 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 six of the Mortgage Loans, representing approximately
0.38% of the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans will
be Subsidy Loans. See "The Trust Estates-- Mortgage Loans" and "PHMC--Mortgage
Loan Underwriting" in the Prospectus.
- ------------
(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 1992-37 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
1992-37 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.
S-37
<PAGE>
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 RATES LOANS BALANCE BALANCE
- ------------------------------------------------------- ----------- ------------------- --------------
<S> <C> <C> <C>
7.750%................................................. 54 $ 9,857,217.08 2.30%
7.875%................................................. 119 26,494,642.94 6.18
8.000%................................................. 270 59,148,288.82 13.80
8.125%................................................. 307 76,764,058.12 17.92
8.250%................................................. 298 74,547,289.46 17.39
8.375%................................................. 250 62,075,118.74 14.48
8.500%................................................. 221 53,899,126.42 12.58
8.625%................................................. 119 29,105,633.65 6.79
8.750%................................................. 64 16,224,538.61 3.79
8.875%................................................. 28 5,782,121.55 1.35
9.000%................................................. 22 4,433,384.89 1.03
9.125%................................................. 13 2,945,916.06 0.69
9.250%................................................. 14 3,400,592.25 0.79
9.375%................................................. 9 1,495,259.09 0.35
9.500%................................................. 6 1,135,114.93 0.26
9.625%................................................. 6 772,496.64 0.18
9.750%................................................. 1 58,417.44 0.01
9.875%................................................. 2 454,644.87 0.11
----- ------------------- -------
Total.......................................... 1,803 $ 428,593,861.56 100.00%
----- ------------------- -------
----- ------------------- -------
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Interest Rate of the
Mortgage Loans is expected to be approximately 8.294% 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 8.094% per annum.
S-38
<PAGE>
REMAINING MONTHS 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>
350.................................................... 2 $ 382,975.73 0.09%
351.................................................... 4 995,148.55 0.23
353.................................................... 7 1,474,763.24 0.34
354.................................................... 13 2,660,347.94 0.62
355.................................................... 10 2,541,819.02 0.59
356.................................................... 17 3,731,591.76 0.87
357.................................................... 39 8,095,857.90 1.89
358.................................................... 96 19,463,064.46 4.54
359.................................................... 666 174,910,723.34 40.81
360.................................................... 949 214,337,569.62 50.02
----- ------------------- -------
Total.......................................... 1,803 $ 428,593,861.56 100.00%
----- ------------------- -------
----- ------------------- -------
</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.
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>
1991................................................... 7 $ 1,677,228.08 0.39%
1992................................................... 1,796 426,916,633.48 99.61
----- ------------------- -------
Total.......................................... 1,803 $ 428,593,861.56 100.00%
----- ------------------- -------
----- ------------------- -------
</TABLE>
It is expected that the earliest month and year of origination of any Mortgage
Loan was November 1991 and the latest month and year of origination was October
1992.
S-39
<PAGE>
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......................................... 141 $ 31,104,752.76 7.26%
50.01-55.00%........................................... 69 16,758,664.60 3.91
55.01-60.00%........................................... 97 23,964,220.26 5.59
60.01-65.00%........................................... 112 28,351,450.02 6.61
65.01-70.00%........................................... 178 47,143,422.45 11.00
70.01-75.00%........................................... 381 93,299,927.74 21.77
75.01-80.00%........................................... 579 137,050,351.56 31.98
80.01-85.00%........................................... 34 7,457,856.57 1.74
85.01-90.00%........................................... 212 43,463,215.60 10.14
----- ------------------- -------
Total.......................................... 1,803 $ 428,593,861.56 100.00%
----- ------------------- -------
----- ------------------- -------
</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 12.50% and 90.00%,
respectively, and the weighted average Loan-to-Value Ratio at origination of the
Mortgage Loans is expected to be approximately 72%. 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. See "The Trust Estates--Mortgage Loans" in the Prospectus. It
is expected that 131 of the Mortgage Loans having Loan-to-Value Ratios at
origination in excess of 80%, representing approximately 5.28% 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.
MORTGAGE LOAN DOCUMENTATION LEVELS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE CUT-OFF DATE
NUMBER OF UNPAID AGGREGATE
MORTGAGE PRINCIPAL PRINCIPAL
DOCUMENTATION LEVELS LOANS BALANCE BALANCE
- ------------------------------------------------------- ----------- ------------------- --------------
<S> <C> <C> <C>
Full Documentation..................................... 1,108 $ 277,510,011.96 64.75%
Asset and Income Verification.......................... 9 1,241,833.87 0.29
Asset and Mortgage Verification........................ 285 72,085,960.88 16.82
Income and Mortgage Verification....................... 106 18,383,287.94 4.29
Asset Verification..................................... 140 24,743,785.18 5.77
Income Verification.................................... 1 137,814.29 0.03
Mortgage Verification.................................. 100 26,299,060.98 6.14
Preferred Processing................................... 54 8,192,106.46 1.91
----- ------------------- -------
Total.......................................... 1,803 $ 428,593,861.56 100.00%
----- ------------------- -------
----- ------------------- -------
</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-40
<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......................... 662 $ 75,935,301.19 17.72%
$200,001-$250,000...................................... 341 78,042,711.60 18.21
$250,001-$300,000...................................... 353 97,061,158.78 22.64
$300,001-$350,000...................................... 178 57,823,027.58 13.49
$350,001-$400,000...................................... 107 40,304,461.70 9.40
$400,001-$450,000...................................... 68 28,755,658.00 6.71
$450,001-$500,000...................................... 55 26,349,042.63 6.15
$500,001-$550,000...................................... 11 5,787,682.81 1.35
$550,001-$600,000...................................... 18 10,683,625.26 2.49
$600,001-$650,000...................................... 1 648,000.00 0.15
$650,001-$700,000...................................... 2 1,325,000.00 0.31
$700,001-$750,000...................................... 3 2,221,376.38 0.52
$750,001-$800,000...................................... 1 799,515.36 0.19
$900,001-$950,000...................................... 1 906,500.00 0.21
$950,001-$1,000,000.................................... 2 1,950,800.27 0.46
----- ------------------- -------
Total.......................................... 1,803 $ 428,593,861.56 100.00%
----- ------------------- -------
----- ------------------- -------
</TABLE>
As of the Cut-Off Date, the average unpaid principal balance of the Mortgage
Loans is expected to be approximately $237,712. 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 62.00%
and 74.30%, 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................................. 1,600 $ 398,345,993.61 92.94%
Two- to four-family units.............................. 11 3,585,346.36 0.84
Condominiums
High-rise (four stories or more)................... 30 4,450,260.69 1.04
Low-rise (less than four stories).................. 149 20,026,510.90 4.67
Planned unit developments.............................. 8 1,532,500.00 0.36
Townhouses............................................. 5 653,250.00 0.15
Cooperative units...................................... 0 0.00 0.00
----- ------------------- -------
Total.......................................... 1,803 $ 428,593,861.56 100.00%
----- ------------------- -------
----- ------------------- -------
</TABLE>
S-41
<PAGE>
GEOGRAPHICAL 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>
Alabama......................................................... 4 $ 418,700.00 0.10%
Arizona......................................................... 18 3,135,881.86 0.73
Arkansas........................................................ 1 109,050.00 0.03
California...................................................... 826 245,271,516.64 57.19
Colorado........................................................ 22 3,204,839.85 0.75
Connecticut..................................................... 64 16,022,060.60 3.74
Delaware........................................................ 8 830,448.92 0.19
District of Columbia............................................ 7 1,569,747.18 0.37
Florida......................................................... 59 7,416,833.33 1.73
Georgia......................................................... 21 3,343,372.16 0.78
Hawaii.......................................................... 3 1,185,644.81 0.28
Idaho........................................................... 1 40,000.00 0.01
Illinois........................................................ 21 4,867,415.46 1.14
Indiana......................................................... 5 865,725.47 0.20
Iowa............................................................ 1 92,829.78 0.02
Kansas.......................................................... 2 375,868.77 0.09
Kentucky........................................................ 3 364,721.41 0.09
Louisiana....................................................... 1 65,600.00 0.02
Maine........................................................... 5 412,830.50 0.10
Maryland........................................................ 56 12,939,283.23 3.02
Massachusetts................................................... 38 8,192,054.71 1.91
Michigan........................................................ 12 1,618,602.85 0.38
Minnesota....................................................... 6 876,900.00 0.20
Mississippi..................................................... 1 67,500.00 0.02
Missouri........................................................ 2 105,000.00 0.02
Montana......................................................... 2 286,150.00 0.07
Nevada.......................................................... 5 1,083,320.84 0.25
New Hampshire................................................... 5 675,471.65 0.16
New Jersey...................................................... 214 37,408,219.52 8.73
New Mexico...................................................... 6 1,148,778.57 0.27
New York........................................................ 161 32,225,098.17 7.52
North Carolina.................................................. 13 2,097,062.04 0.49
Ohio............................................................ 5 521,465.51 0.12
Oklahoma........................................................ 1 111,446.97 0.03
Oregon.......................................................... 5 905,439.21 0.21
Pennsylvania.................................................... 47 8,268,111.31 1.93
Rhode Island.................................................... 3 231,369.42 0.05
South Carolina.................................................. 16 2,077,866.08 0.48
Tennessee....................................................... 8 970,305.82 0.23
Texas........................................................... 50 10,890,278.95 2.54
Utah............................................................ 3 466,407.67 0.11
Vermont......................................................... 4 427,900.00 0.10
Virginia........................................................ 42 9,926,962.63 2.32
Washington...................................................... 22 4,950,579.67 1.16
West Virginia................................................... 1 103,200.00 0.02
Wisconsin....................................................... 1 158,000.00 0.04
Wyoming......................................................... 2 268,000.00 0.06
----------- ------------------- -------
Total................................................... 1,803 $ 428,593,861.56 100.00%
----------- ------------------- -------
----------- ------------------- -------
</TABLE>
No more than approximately 0.95% 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-42
<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............................................... 758 $ 158,775,866.30 37.05%
Other Originators............................................... 1,045 269,817,995.26 62.95
----- ------------------- -------
Total................................................... 1,803 $ 428,593,861.56 100.00%
----- ------------------- -------
----- ------------------- -------
</TABLE>
It is expected that as of the Cut-Off Date, two of the "Other Originators" will
have accounted for approximately 5.68% and 5.39%, respectively, of the Cut-Off
Date Aggregate Principal Balance of the Mortgage Loans. No other single "Other
Originator" is expected to 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........................................................ 692 $ 143,407,788.59 33.46%
Rate/Term Refinance............................................. 875 227,131,751.26 52.99
Equity Take Out Refinance....................................... 236 58,054,321.71 13.55
----- ------------------- -------
Total................................................... 1,803 $ 428,593,861.56 100.00%
----- ------------------- -------
----- ------------------- -------
</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 1992-37
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. Any
such substitution may be made only upon receipt by the Trustee of an opinion of
counsel or other satisfactory evidence that, among other things, such
substitution will not subject the Trust Estate to tax or cause the Trust Estate
to fail to qualify as a REMIC. 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
S-43
<PAGE>
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.
ORIGINATION, DELINQUENCY AND FORECLOSURE EXPERIENCE
LOAN ORIGINATION
During the years ended December 31, 1990, December 31, 1991 and the nine
months ended September 30, 1992, PHMC originated or purchased, for its own
account or for the account of an affiliate, conventional mortgage loans having
aggregate principal balances of approximately $5,837,566,957, $9,742,858,764 and
$16,298,592,169 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, will be comparable
to that of the total Program Loans, the Fixed Program Loans or the Fixed
Non-relocation Program Loans.
S-44
<PAGE>
TOTAL PROGRAM LOANS
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1990 DECEMBER 31, 1991 SEPTEMBER 30, 1992
--------------------------- ------------------------- -------------------------
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......................... 99,196 $ 13,724,585 136,972 $ 21,489,014 188,533 $ 32,313,484
----------- -------------- --------- -------------- --------- --------------
----------- -------------- --------- -------------- --------- --------------
Period of Delinquency(1)
30 to 59 days................ 2,439 $ 319,663 2,973 $ 396,403 2,685 $ 381,626
60 to 89 days................ 697 93,302 706 103,710 607 96,478
90 days or more.............. 902 145,245 1,268 220,943 1,162 196,560
----------- -------------- --------- -------------- --------- --------------
Total Delinquent Loans......... 4,038 $ 558,210 4,947 $ 721,056 4,454 $ 674,664
----------- -------------- --------- -------------- --------- --------------
----------- -------------- --------- -------------- --------- --------------
Percent of Portfolio........... 4.07% 4.07% 3.61% 3.36% 2.36% 2.09%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1990 DECEMBER 31, 1991 SEPTEMBER 30, 1992
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Foreclosures(2)................ $ 132,326 $ 189,563 $ 255,997
Foreclosure Ratio(3)........... 0.96% 0.88% 0.79%
<CAPTION>
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1990 DECEMBER 31, 1991 SEPTEMBER 30, 1992
-------------------------- -------------------------- --------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net Gain (Loss)(4)............. $ (4,897) $ (11,103) $ (22,149)
Net Gain (Loss) Ratio(5)....... (0.04)% (0.05)% (0.07)%
</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-45
<PAGE>
FIXED PROGRAM LOANS
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1990 DECEMBER 31, 1991 SEPTEMBER 30, 1992
--------------------------- ------------------------- -------------------------
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................. 86,233 $ 11,687,518 120,333 $ 18,604,937 160,406 $ 27,118,998
----------- -------------- --------- -------------- --------- --------------
----------- -------------- --------- -------------- --------- --------------
Period of Delinquency(1)
30 to 59 days................ 1,823 $ 227,468 2,379 $ 311,415 2,209 $ 308,073
60 to 89 days................ 456 52,748 534 72,567 488 75,741
90 days or more.............. 538 72,393 859 133,313 891 141,606
----------- -------------- --------- -------------- --------- --------------
Total Delinquent Loans......... 2,817 $ 352,609 3,772 $ 517,295 3,588 $ 525,420
----------- -------------- --------- -------------- --------- --------------
----------- -------------- --------- -------------- --------- --------------
Percent of Fixed Program Loan
Portfolio..................... 3.27% 3.02% 3.13% 2.78% 2.24% 1.94%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1990 DECEMBER 31, 1991 SEPTEMBER 30, 1992
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Foreclosures(2)................ $ 48,681 $ 93,405 $ 147,081
Foreclosure Ratio(3)........... 0.42% 0.50% 0.54%
<CAPTION>
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1990 DECEMBER 31, 1991 SEPTEMBER 30, 1992
-------------------------- -------------------------- --------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net Gain (Loss)(4)............. $ (1,194) $ (4,050) $ (9,318)
Net Gain (Loss) Ratio(5)....... (0.01)% (0.02)% (0.03)%
</TABLE>
S-46
<PAGE>
FIXED NON-RELOCATION PROGRAM LOANS
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1990 DECEMBER 31, 1991 SEPTEMBER 30, 1992
-------------------------- --------------------------- -------------------------
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........................ 59,295 $ 7,990,152 84,246 $ 13,352,914 120,523 $ 21,246,557
----------- ------------- ----------- -------------- --------- --------------
----------- ------------- ----------- -------------- --------- --------------
Period of Delinquency(1)
30 to 59 days............... 1,603 $ 201,122 2,071 $ 272,540 1,964 $ 277,313
60 to 89 days............... 426 49,953 495 67,553 453 72,116
90 days or more............. 508 68,285 801 126,752 829 133,914
----------- ------------- ----------- -------------- --------- --------------
Total Delinquent Loans........ 2,537 $ 319,360 3,367 $ 466,845 3,246 $ 483,343
----------- ------------- ----------- -------------- --------- --------------
----------- ------------- ----------- -------------- --------- --------------
Percent of
Fixed Non-relocation Program
Loan Portfolio............... 4.28% 4.00% 4.00% 3.50% 2.69% 2.27%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1990 DECEMBER 31, 1991 SEPTEMBER 30, 1992
-------------------------- -------------------------- --------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Foreclosures(2)............... $ 47,755 $ 90,861 $ 143,766
Foreclosure Ratio(3).......... 0.60% 0.68% 0.68%
<CAPTION>
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1990 DECEMBER 31, 1991 SEPTEMBER 30, 1992
-------------------------- -------------------------- --------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net Gain (Loss)(4)............ $ (1,041) $ (3,861) $ (9,139)
Net Gain (Loss) Ratio(5)...... (0.01)% (0.03)% (0.04)%
</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.
The Seller believes that the changes in the delinquency, foreclosure and loan
loss experience of PHMC's respective servicing portfolios during the
S-47
<PAGE>
periods set forth in the preceding tables may be attributable to factors such as
those described above, although the Seller is unable to 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 and the Class M Certificates, the aggregate
amount of distributions on any Subclass of the Class A Certificates and the
Class M Certificates and the yield to maturity of any Subclass of the Class A
Certificates and the Class M 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 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
Class M Certificates or the aggregate amount of distributions on any Subclass of
Class A Certificates or the Class M 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 significantly 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.
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
S-48
<PAGE>
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 and Class M 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 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 1992-37 Certificates. See "Prepayment and Yield Considerations" in the
Prospectus.
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 or Class M 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 and
Class M Certificates would not be fully offset by a subsequent like reduction
(or increase) in the rate of principal payments.
The yield to maturity on the Class M Certificates will be more sensitive
than the Class A Certificates to losses due to defaults on the Mortgage Loans
(and the timing thereof), to the extent not covered by the Class B Certificates,
because the entire amount of such losses will be allocable to the Class M
Certificates prior to the Class A Certificates, except as otherwise provided
herein. To the extent not covered by Periodic Advances, delinquencies on
Mortgage Loans may also have a relatively greater effect on the yield to
investors in the Class M Certificates. Amounts otherwise distributable to
holders of the Class M Certificates will be made available to protect the
holders of the Class A Certificates against interruptions in distributions due
to certain mortgagor delinquencies. Such delinquencies, to the extent not
covered by the Class B Certificates, even if subsequently cured, may affect the
timing of the receipt of distributions by the holders of Class M Certificates,
because the entire amount of those delinquencies would be borne by the Class M
Certificates prior to the Class A Certificates.
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 or the Class M Certificates. An investor is urged to make an
investment decision with respect to any Subclass of Class A Certificates or the
Class M Certificates based on the anticipated yield to maturity of such Subclass
of Class A Certificates or the Class M 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 or the Class M Certificates are purchased at a discount
or a premium and the degree to which the timing of payments on such Subclass or
Class is sensitive to prepayments will determine the extent to which the yield
to maturity of such Subclass or Class may vary from the anticipated yield. An
investor should carefully consider the associated risks, including, in the case
of any Class A or Class M 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 or Class M 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 or Class M 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 or Class M
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 or Class M
Certificates, may
S-49
<PAGE>
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, a Class A-R
Certificateholder's REMIC taxable income and the tax liability thereon will
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 a 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 CERTIFICATES MAY BE
SIGNIFICANTLY LOWER THAN WOULD BE THE CASE IF THE CLASS A-R CERTIFICATES WERE
TAXED AS DEBT INSTRUMENTS.
As referred to herein, the weighted average life of a Subclass of Class A
Certificates and the Class M Certificates refers to the average amount of time
that will elapse from the date of issuance of such Subclass or Class until each
dollar in reduction of the principal balance of such Subclass or Class is
distributed to the investors. The weighted average life of each Subclass of the
Class A Certificates and the Class M 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, "50% SPA" assumes
prepayment rates equal to 50% 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 tables set forth below have 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
tables assume, 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 November
1, 1992, (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 October 31, 1992
at the respective constant percentages of SPA set forth in the tables and there
are no Prepayment Interest Shortfalls, (v) each Mortgage Loan has an original
term to maturity of 30 years and (vi) the Series 1992-37 Certificates will be
issued on October 30, 1992. 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 and initial principal balance
of the Class M Certificates outstanding, the actual
S-50
<PAGE>
weighted average lives of the Subclasses of Class A Certificates and the Class M
Certificates and the date on which the Class A Subclass Principal Balance of any
Subclass of Class A Certificates and the principal balance of the Class M
Certificates are reduced to zero.
Based upon the foregoing assumptions, the following tables indicate the
weighted average life of each Subclass and Class of Offered Certificates and set
forth the percentages of the initial Class A Subclass Principal Balance of each
such Subclass, and, in the case of the Class M Certificates, of the initial
principal balance of the Class M Certificates that would be outstanding after
each of the dates shown at various constant percentages of SPA.
S-51
<PAGE>
PERCENTAGE OF INITIAL CLASS A SUBCLASS PRINCIPAL BALANCE AND CLASS M PRINCIPAL
BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF SPA OF SPA
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
DISTRIBUTION
DATE 0% 50% 125% 240% 300% 425% 0% 50%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial............. 100 100 100 100 100 100 100 100
October 1993........ 95 90 82 70 64 51 100 100
October 1994........ 89 71 44 3 0 0 100 100
October 1995........ 83 45 0 0 0 0 100 100
October 1996........ 76 19 0 0 0 0 100 100
October 1997........ 69 0 0 0 0 0 100 93
October 1998........ 61 0 0 0 0 0 100 65
October 1999........ 52 0 0 0 0 0 100 38
October 2000........ 43 0 0 0 0 0 100 11
October 2001........ 33 0 0 0 0 0 100 0
October 2002........ 22 0 0 0 0 0 100 0
October 2003........ 10 0 0 0 0 0 100 0
October 2004........ 0 0 0 0 0 0 97 0
October 2005........ 0 0 0 0 0 0 80 0
October 2006........ 0 0 0 0 0 0 63 0
October 2007........ 0 0 0 0 0 0 43 0
October 2008........ 0 0 0 0 0 0 22 0
October 2009........ 0 0 0 0 0 0 0 0
October 2010........ 0 0 0 0 0 0 0 0
October 2011........ 0 0 0 0 0 0 0 0
October 2012........ 0 0 0 0 0 0 0 0
October 2013........ 0 0 0 0 0 0 0 0
October 2014........ 0 0 0 0 0 0 0 0
October 2015........ 0 0 0 0 0 0 0 0
October 2016........ 0 0 0 0 0 0 0 0
October 2017........ 0 0 0 0 0 0 0 0
October 2018........ 0 0 0 0 0 0 0 0
October 2019........ 0 0 0 0 0 0 0 0
October 2020........ 0 0 0 0 0 0 0 0
October 2021........ 0 0 0 0 0 0 0 0
October 2022........ 0 0 0 0 0 0 0 0
Weighted Average
Life (years)(1)... 6.85 2.77 1.78 1.31 1.17 0.98 14.60 6.59
<CAPTION>
CLASS A-3 AND CLASS A-4
CERTIFICATES AT THE
FOLLOWING PERCENTAGES
OF SPA
<S> <C>
DISTRIBUTION
DATE 125% 240% 300% 425% 0% 50% 125% 240% 300%
<S> <C>
Initial............. 100 100 100 100 100 100 100 100 100
October 1993........ 100 100 100 100 100 100 100 100 100
October 1994........ 100 100 79 29 100 100 100 100 100
October 1995........ 89 0 0 0 100 100 100 99 54
October 1996........ 31 0 0 0 100 100 100 4 0
October 1997........ 0 0 0 0 100 100 77 0 0
October 1998........ 0 0 0 0 100 100 27 0 0
October 1999........ 0 0 0 0 100 100 0 0 0
October 2000........ 0 0 0 0 100 100 0 0 0
October 2001........ 0 0 0 0 100 84 0 0 0
October 2002........ 0 0 0 0 100 58 0 0 0
October 2003........ 0 0 0 0 100 31 0 0 0
October 2004........ 0 0 0 0 100 6 0 0 0
October 2005........ 0 0 0 0 100 0 0 0 0
October 2006........ 0 0 0 0 100 0 0 0 0
October 2007........ 0 0 0 0 100 0 0 0 0
October 2008........ 0 0 0 0 100 0 0 0 0
October 2009........ 0 0 0 0 100 0 0 0 0
October 2010........ 0 0 0 0 74 0 0 0 0
October 2011........ 0 0 0 0 47 0 0 0 0
October 2012........ 0 0 0 0 16 0 0 0 0
October 2013........ 0 0 0 0 0 0 0 0 0
October 2014........ 0 0 0 0 0 0 0 0 0
October 2015........ 0 0 0 0 0 0 0 0 0
October 2016........ 0 0 0 0 0 0 0 0 0
October 2017........ 0 0 0 0 0 0 0 0 0
October 2018........ 0 0 0 0 0 0 0 0 0
October 2019........ 0 0 0 0 0 0 0 0 0
October 2020........ 0 0 0 0 0 0 0 0 0
October 2021........ 0 0 0 0 0 0 0 0 0
October 2022........ 0 0 0 0 0 0 0 0 0
Weighted Average
Life (years)(1)... 3.71 2.54 2.26 1.89 18.87 10.33 5.57 3.54 3.06
<CAPTION>
DISTRIBUTION
DATE 425%
Initial............. 100
October 1993........ 100
October 1994........ 100
October 1995........ 0
October 1996........ 0
October 1997........ 0
October 1998........ 0
October 1999........ 0
October 2000........ 0
October 2001........ 0
October 2002........ 0
October 2003........ 0
October 2004........ 0
October 2005........ 0
October 2006........ 0
October 2007........ 0
October 2008........ 0
October 2009........ 0
October 2010........ 0
October 2011........ 0
October 2012........ 0
October 2013........ 0
October 2014........ 0
October 2015........ 0
October 2016........ 0
October 2017........ 0
October 2018........ 0
October 2019........ 0
October 2020........ 0
October 2021........ 0
October 2022........ 0
Weighted Average
Life (years)(1)... 2.50
</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).
S-52
<PAGE>
PERCENTAGE OF INITIAL CLASS A SUBCLASS PRINCIPAL BALANCE AND CLASS M PRINCIPAL
BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-5 CLASS A-6
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF SPA OF SPA
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
DISTRIBUTION
DATE 0% 50% 125% 240% 300% 425% 0% 50% 125%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial............. 100 100 100 100 100 100 100 100 100
October 1993........ 100 100 100 100 100 100 100 100 100
October 1994........ 100 100 100 100 100 100 100 100 100
October 1995........ 100 100 100 100 100 53 100 100 100
October 1996........ 100 100 100 100 27 0 100 100 100
October 1997........ 100 100 100 0 0 0 100 100 100
October 1998........ 100 100 100 0 0 0 100 100 100
October 1999........ 100 100 75 0 0 0 100 100 100
October 2000........ 100 100 20 0 0 0 100 100 100
October 2001........ 100 100 0 0 0 0 100 100 81
October 2002........ 100 100 0 0 0 0 100 100 52
October 2003........ 100 100 0 0 0 0 100 100 26
October 2004........ 100 100 0 0 0 0 100 100 1
October 2005........ 100 73 0 0 0 0 100 100 0
October 2006........ 100 39 0 0 0 0 100 100 0
October 2007........ 100 5 0 0 0 0 100 100 0
October 2008........ 100 0 0 0 0 0 100 82 0
October 2009........ 100 0 0 0 0 0 100 60 0
October 2010........ 100 0 0 0 0 0 100 39 0
October 2011........ 100 0 0 0 0 0 100 18 0
October 2012........ 100 0 0 0 0 0 100 0 0
October 2013........ 78 0 0 0 0 0 100 0 0
October 2014........ 31 0 0 0 0 0 100 0 0
October 2015........ 0 0 0 0 0 0 87 0 0
October 2016........ 0 0 0 0 0 0 52 0 0
October 2017........ 0 0 0 0 0 0 14 0 0
October 2018........ 0 0 0 0 0 0 0 0 0
October 2019........ 0 0 0 0 0 0 0 0 0
October 2020........ 0 0 0 0 0 0 0 0 0
October 2021........ 0 0 0 0 0 0 0 0 0
October 2022........ 0 0 0 0 0 0 0 0 0
Weighted Average
Life (years)(1)... 21.63 13.71 7.49 4.54 3.86 3.05 24.06 17.52 10.16
<CAPTION>
CLASS A-7
CERTIFICATES AT THE
FOLLOWING PERCENTAGES
OF SPA
<S> <C> <C> <C> <C> <C> <C>
DISTRIBUTION
DATE 240% 300% 425% 0% 50% 125% 240% 300% 425%
<S> <C> <C> <C> <C> <C> <C>
Initial............. 100 100 100 100 100 100 100 100 100
October 1993........ 100 100 100 98 95 92 87 84 78
October 1994........ 100 100 100 95 87 75 57 56 56
October 1995........ 100 100 100 92 76 56 56 49 34
October 1996........ 100 100 26 89 64 56 42 30 7
October 1997........ 99 43 0 86 56 53 25 11 0
October 1998........ 44 0 0 83 56 46 11 0 0
October 1999........ 0 0 0 79 56 38 0 0 0
October 2000........ 0 0 0 75 56 29 0 0 0
October 2001........ 0 0 0 70 54 21 0 0 0
October 2002........ 0 0 0 65 50 13 0 0 0
October 2003........ 0 0 0 60 46 7 0 0 0
October 2004........ 0 0 0 56 43 0 0 0 0
October 2005........ 0 0 0 56 37 0 0 0 0
October 2006........ 0 0 0 56 32 0 0 0 0
October 2007........ 0 0 0 56 26 0 0 0 0
October 2008........ 0 0 0 56 21 0 0 0 0
October 2009........ 0 0 0 56 15 0 0 0 0
October 2010........ 0 0 0 52 10 0 0 0 0
October 2011........ 0 0 0 48 4 0 0 0 0
October 2012........ 0 0 0 44 0 0 0 0 0
October 2013........ 0 0 0 38 0 0 0 0 0
October 2014........ 0 0 0 31 0 0 0 0 0
October 2015........ 0 0 0 22 0 0 0 0 0
October 2016........ 0 0 0 13 0 0 0 0 0
October 2017........ 0 0 0 3 0 0 0 0 0
October 2018........ 0 0 0 0 0 0 0 0 0
October 2019........ 0 0 0 0 0 0 0 0 0
October 2020........ 0 0 0 0 0 0 0 0 0
October 2021........ 0 0 0 0 0 0 0 0 0
October 2022........ 0 0 0 0 0 0 0 0 0
Weighted Average
Life (years)(1)... 5.93 4.95 3.79 15.33 9.37 5.38 3.32 2.84 2.25
<CAPTION>
CLASS A-8
CERTIFICATES AT THE
FOLLOWING PERCENTAGES
OF SPA
DISTRIBUTION
DATE 0% 50% 125% 240% 300% 425%
Initial............. 100 100 100 100 100 100
October 1993........ 100 100 100 100 100 100
October 1994........ 100 100 100 100 100 100
October 1995........ 100 100 100 100 100 100
October 1996........ 100 100 100 100 100 100
October 1997........ 100 100 100 100 100 30
October 1998........ 100 100 100 100 81 0
October 1999........ 100 100 100 96 22 0
October 2000........ 100 100 100 47 0 0
October 2001........ 100 100 100 8 0 0
October 2002........ 100 100 100 0 0 0
October 2003........ 100 100 100 0 0 0
October 2004........ 100 100 100 0 0 0
October 2005........ 100 100 72 0 0 0
October 2006........ 100 100 45 0 0 0
October 2007........ 100 100 20 0 0 0
October 2008........ 100 100 0 0 0 0
October 2009........ 100 100 0 0 0 0
October 2010........ 100 100 0 0 0 0
October 2011........ 100 100 0 0 0 0
October 2012........ 100 95 0 0 0 0
October 2013........ 100 67 0 0 0 0
October 2014........ 100 39 0 0 0 0
October 2015........ 100 11 0 0 0 0
October 2016........ 100 0 0 0 0 0
October 2017........ 100 0 0 0 0 0
October 2018........ 64 0 0 0 0 0
October 2019........ 6 0 0 0 0 0
October 2020........ 0 0 0 0 0 0
October 2021........ 0 0 0 0 0 0
October 2022........ 0 0 0 0 0 0
Weighted Average
Life (years)(1)... 26.26 21.63 13.89 8.02 6.55 4.83
</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).
S-53
<PAGE>
PERCENTAGE OF INITIAL CLASS A SUBCLASS PRINCIPAL BALANCE AND CLASS M PRINCIPAL
BALANCE OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A-9 CLASS A-10
CERTIFICATES AT THE CERTIFICATES AT THE
FOLLOWING PERCENTAGES FOLLOWING PERCENTAGES
OF SPA OF SPA
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
DISTRIBUTION
DATE 0% 50% 125% 240% 300% 425% 0% 50% 125% 240%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial............. 100 100 100 100 100 100 100 100 100 100
October 1993........ 100 100 100 100 100 100 100 100 100 100
October 1994........ 100 100 100 100 100 100 100 100 100 100
October 1995........ 100 100 100 100 100 100 100 100 100 100
October 1996........ 100 100 100 100 100 100 100 100 100 100
October 1997........ 100 100 100 100 100 100 100 100 100 100
October 1998........ 100 100 100 100 100 71 100 100 100 100
October 1999........ 100 100 100 100 100 35 100 100 100 100
October 2000........ 100 100 100 100 83 11 100 100 100 100
October 2001........ 100 100 100 100 57 0 100 100 100 100
October 2002........ 100 100 100 82 38 0 100 100 100 100
October 2003........ 100 100 100 62 22 0 100 100 100 100
October 2004........ 100 100 100 45 9 0 100 100 100 100
October 2005........ 100 100 100 30 0 0 100 100 100 100
October 2006........ 100 100 100 18 0 0 100 100 100 100
October 2007........ 100 100 100 8 0 0 100 100 100 100
October 2008........ 100 100 98 0 0 0 100 100 100 98
October 2009........ 100 100 82 0 0 0 100 100 100 80
October 2010........ 100 100 67 0 0 0 100 100 100 66
October 2011........ 100 100 54 0 0 0 100 100 100 53
October 2012........ 100 100 42 0 0 0 100 100 100 43
October 2013........ 100 100 30 0 0 0 100 100 100 34
October 2014........ 100 100 19 0 0 0 100 100 100 27
October 2015........ 100 100 9 0 0 0 100 100 100 21
October 2016........ 100 87 0 0 0 0 100 100 100 16
October 2017........ 100 66 0 0 0 0 100 100 80 12
October 2018........ 100 45 0 0 0 0 100 100 61 8
October 2019........ 100 23 0 0 0 0 100 100 44 6
October 2020........ 58 1 0 0 0 0 100 100 28 3
October 2021........ 8 0 0 0 0 0 100 50 13 1
October 2022........ 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (years)(1)... 28.18 25.78 19.54 11.97 9.64 6.72 29.59 29.04 26.79 20.20
<CAPTION>
CLASS M
CERTIFICATES AT THE FOLLOWING
FOLLOWING PERCENTAGES PERCENTAGES
OF SPA OF SPA
<S> <C> <C> <C> <C>
DISTRIBUTION
DATE 300% 425% 0% 50% 125% 240% 300% 425% 0% 50%
<S> <C> <C> <C> <C>
Initial............. 100 100 100 100 100 100 100 100 100 100
October 1993........ 100 100 99 98 97 95 95 93 99 99
October 1994........ 100 100 98 96 91 85 82 76 98 98
October 1995........ 100 100 97 92 83 72 66 55 97 97
October 1996........ 100 100 96 88 76 60 52 38 96 96
October 1997........ 100 100 95 84 69 49 41 26 95 95
October 1998........ 100 100 94 80 63 41 32 18 94 93
October 1999........ 100 100 93 77 57 34 25 12 93 91
October 2000........ 100 100 91 73 51 28 20 9 91 88
October 2001........ 100 90 90 70 47 24 16 6 90 84
October 2002........ 100 65 88 66 42 20 13 4 88 80
October 2003........ 100 48 86 63 38 17 10 3 86 76
October 2004........ 100 35 84 60 35 14 8 2 84 72
October 2005........ 97 25 82 57 31 12 7 2 82 68
October 2006........ 78 18 80 53 28 10 5 1 80 64
October 2007........ 62 13 77 50 25 8 4 1 77 60
October 2008........ 49 9 75 47 23 7 3 1 75 57
October 2009........ 38 7 72 44 20 5 3 0 72 53
October 2010........ 30 5 68 40 18 4 2 0 68 49
October 2011........ 23 3 65 37 15 4 2 0 65 45
October 2012........ 18 2 61 34 13 3 1 0 61 41
October 2013........ 14 2 57 31 12 2 1 0 57 37
October 2014........ 10 1 53 27 10 2 1 0 53 33
October 2015........ 8 1 48 24 8 1 1 0 48 29
October 2016........ 6 1 42 21 7 1 0 0 42 25
October 2017........ 4 0 37 17 5 1 0 0 37 21
October 2018........ 3 0 30 14 4 1 0 0 30 17
October 2019........ 2 0 24 11 3 0 0 0 24 13
October 2020........ 1 0 16 7 2 0 0 0 16 9
October 2021........ 0 0 8 3 1 0 0 0 8 4
October 2022........ 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life (years)(1)... 16.95 11.80 20.62 15.17 10.29 6.54 5.44 4.02 20.62 17.50
<CAPTION>
DISTRIBUTION
DATE 125% 240% 300% 425%
Initial............. 100 100 100 100
October 1993........ 99 99 99 99
October 1994........ 98 98 98 98
October 1995........ 97 97 97 97
October 1996........ 96 96 96 96
October 1997........ 95 95 95 95
October 1998........ 92 90 89 86
October 1999........ 88 83 81 76
October 2000........ 83 75 71 62
October 2001........ 76 65 59 49
October 2002........ 69 54 48 36
October 2003........ 63 46 38 26
October 2004........ 57 38 31 19
October 2005........ 51 32 25 14
October 2006........ 46 27 20 10
October 2007........ 41 22 16 7
October 2008........ 37 18 12 5
October 2009........ 33 15 10 4
October 2010........ 29 12 8 3
October 2011........ 25 10 6 2
October 2012........ 22 8 5 1
October 2013........ 19 6 3 1
October 2014........ 16 5 3 1
October 2015........ 14 4 2 0
October 2016........ 11 3 1 0
October 2017........ 9 2 1 0
October 2018........ 7 2 1 0
October 2019........ 5 1 0 0
October 2020........ 3 1 0 0
October 2021........ 1 0 0 0
October 2022........ 0 0 0 0
Weighted Average
Life (years)(1)... 14.35 11.57 10.66 9.39
</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).
S-54
<PAGE>
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, the holders of the Class M
Certificates and the holders of each subclass of the Class B Certificates.
Interest shortfalls resulting from the timing of the receipt of partial
principal prepayments on the Mortgage Loans 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, second to the Class M Certificates until the Class M
Principal Balance has been reduced to zero and finally 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 and Class M 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 and the Class M Certificates will
be less than the yield otherwise produced by their respective Pass-Through Rates
and the prices at which the Class A and Class M 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).
POOLING AND SERVICING AGREEMENT
GENERAL
The Series 1992-37 Certificates will be issued pursuant to a Pooling and
Servicing Agreement to be dated as of the date of initial issuance of the Series
1992-37 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 1992-37 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 and of the Class M
Certificates) 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 (other than the Class A-R Certificates)
evidencing at least a $5,000,000 initial principal balance or any holder of a
Class A-R Certificate evidencing a $100,000 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 and Class M
Certificate will be made only upon presentation and surrender of such Class A or
Class M Certificate at the office or agency appointed by the Trustee specified
in the notice of final distribution with respect to the related Subclass or
Class.
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
1992-37 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, and the holders of the Class M Certificates
will collectively be entitled to the then applicable percentage of the aggregate
Voting Interest represented by all Series 1992-37 Certificates obtained by
dividing the then-outstanding Class M Principal Balance by the sum of the then-
S-55
<PAGE>
outstanding Class A Principal Balance, Class M Principal Balance and Class B
Principal Balance and the holders of the Class B Certificates will collectively
be entitled to the balance of the aggregate Voting Interest represented by all
Series 1992-37 Certificates. The aggregate Voting Interests of the Class A
Certificates other than the Class A-11 Certificates, on any date will be 97% of
the Class A Percentage on such date. The aggregate Voting Interest of the Class
A-11 Certificates on any date will be 3% of the Class A Percentage on such date.
The aggregate Voting Interests of each Subclass of Class A Certificates other
than the Class A-11 Certificates on any date will be equal to the product of (a)
97% 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-11 Certificates on such date. The aggregate Voting
Interests of the Class M Certificates on any date will be 100% of the percentage
described above for the Class M 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 1992-37 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 1992-37
Certificates and administrative services provided by it (the "Servicing Fee")
will be 0.20% per annum of the outstanding principal balance of each such
Mortgage Loan. 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 holders of the Class A-R Certificates who are individuals, estates, or trusts
(whether such Certificates are 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 1992-37
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 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.
S-56
<PAGE>
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, Class
A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class A-7, Class A-8, Class A-9
and Class A-10 Certificates and the Class M Certificates (collectively, the
"Regular Certificates"), together with the Class A-11 Certificates and each
subclass of the Class B Certificates, will be designated as regular interests in
the REMIC and the Class A-R Certificates will be designated as the residual
interest in the REMIC. The Class A-R Certificates are "Residual Certificates"
for purposes of the Prospectus.
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. Holders 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-3, Class A-6,
Class A-10 and Class M Certificates will be issued with original issue discount
for federal income tax purposes, in an amount equal to the excess of the initial
principal balances of such subclasses (plus five days of interest at the
pass-through rates thereon) over their issue prices (including accrued
interest). It is further anticipated that the Class A-1, Class A-2, Class A-4,
Class A-5, Class A-7 and Class A-8 Certificates will be issued at a premium and
that the Class A-9 Certificates will be issued with DE MINIMIS original issue
discount for federal income tax purposes. The Class A-11 Certificates (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 by a
holder of a Regular Certificate to amortize premium, will be calculated using
240% SPA. No representation is made as to the actual rate at which the Mortgage
Loans will prepay.
RESIDUAL CERTIFICATES
The holders of the Class A-R Certificates must include the taxable income or
loss of the REMIC in determining their federal taxable income. The Class A-R
Certificates will remain outstanding for federal income tax purposes until there
are no Certificates of any other Class outstanding. PROSPECTIVE INVESTORS ARE
CAUTIONED THAT THE CLASS A-R CERTIFICATEHOLDERS' REMIC TAXABLE INCOME AND THE
TAX LIABILITY THEREON WILL EXCEED CASH DISTRIBUTIONS TO SUCH HOLDERS DURING
CERTAIN PERIODS, IN WHICH EVENT A HOLDER THEREOF 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 holders of the Class A-R Certificates will be treated as
"excess inclusion" income, resulting in (i) the inability of such holders to use
net operating losses to offset such taxable income (ii) the treatment of such
taxable income as "unrelated business taxable income" to certain holders who are
otherwise tax-exempt, and (iii) the treatment of such taxable income as subject
to 30% withholding tax to certain non-U.S. investors, with no exemption or
treaty reduction.
Under proposed Treasury regulations (the "Proposed REMIC Regulations")
released by the Internal Revenue Service on September 27, 1991, since the fair
market value of the Class A-R Certificates will not exceed 2% of the fair market
value of the REMIC, the Class A-R Certificates 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
Proposed REMIC Regulations, the Class A-R Certificates will be considered
"noneconomic residual interests," with the result that transfers thereof would
be disregarded for federal income tax purposes if any significant purpose of the
transfer was to impede the assessment or collection of tax. Accordingly, the
transferee affidavit used for transfers of the Class A-R
S-57
<PAGE>
Certificates will require the transferee to state, among other things, that it
has no intention to impede the assessment or collection of any federal, state or
local income taxes legally required to be paid with respect to its Class A-R
Certificate and that it will not transfer such Class A-R Certificate to any
person or entity that it has reason to believe has the intention to impede the
assessment or collection of such taxes. Finally, the Class A-R Certificates
generally may not be transferred to persons who are not U.S. Persons (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 the 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 a Class A-R Certificate (whether
such Certificate is held directly or indirectly through certain pass-through
entities) also may have additional gross income with respect to, but may be
subject to limitations on the deductibility of, Servicing Fees on the Mortgage
Loans and other administrative expenses of the REMIC in computing such holder's
regular tax liability, and may not be able to deduct such fees or expenses to
any extent in computing such holder's alternative minimum tax liability. In
addition, some portion of a purchaser's basis, if any, in a Class A-R
Certificate may not be recovered until termination of the REMIC. Furthermore,
the federal income tax consequences of any consideration paid to a transferee on
a transfer of a Class A-R Certificate are unclear; any such transferee receiving
such consideration should consult its tax advisors.
Legislation has been passed by Congress that would generally treat all
partners in a "large partnership" as Disqualified Organizations (as defined in
the Prospectus), thus subjecting such a partnership to tax annually as a
Pass-Through Entity (as defined in the Prospectus) on all of its excess
inclusion income at the highest corporate rate. The legislation would also
disallow 70% of any large partnership's miscellaneous itemized deductions,
including the deductions for Servicing Fees on the Mortgage Loans and other
administrative expenses properly allocable to the Class A-R Certificates,
although the remaining deductions would not be subject to the applicable
limitations at the partner level. A "large partnership" generally would include
a partnership having 250 or more partners. This legislation, proposed to be
effective for taxable years ending on or after December 31, 1992, is awaiting
signature by the President. No prediction can be made regarding whether such
legislation will be signed. 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" and "-- Limitations on Deduction of Certain Expenses" in the
Prospectus.
DUE TO THE SPECIAL TAX TREATMENT OF RESIDUAL INTERESTS, THE EFFECTIVE
AFTER-TAX RETURN OF THE CLASS A-R CERTIFICATES MAY BE SIGNIFICANTLY LOWER THAN
WOULD BE THE CASE IF THE CLASS A-R CERTIFICATES WERE TAXED AS DEBT INSTRUMENTS.
ERISA CONSIDERATIONS
The Class A-R Certificates may not be purchased by or transferred to any
person which is an employee benefit plan within the meaning of Section 3(3) of,
and which is subject to the fiduciary duty rules of Title 1, Sections 401-414
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"). Accordingly, the following discussion does not purport
to discuss the considerations under ERISA or Code Section 4975 with respect to
the purchase, acquisition or resale of the Class A-R Certificates.
In addition, under current law the purchase and holding of the Class M
Certificates by or on behalf of an ERISA Plan may result in "prohibited
transactions" within the meaning of ERISA and Code Section 4975. Transfer of the
Class M Certificates will not be made unless the transferee (i) executes a
representation letter in form and substance satisfactory to the Trustee stating
that it is not, and is not acting on behalf of, any such ERISA Plan or using the
assets of any such ERISA Plan to effect such purchase or (ii) provides an
opinion of counsel in form and substance satisfactory to the Trustee that the
purchase or
S-58
<PAGE>
holding of the Class M Certificates by or on behalf of such ERISA Plan will not
result in the assets of the Trust Estate being deemed to be "plan assets" and
subject to the prohibited transaction provisions of ERISA and the Code and will
not subject the Servicer, the Seller or the Trustee to any obligation in
addition to those undertaken in the Pooling and Servicing Agreement. The Class M
Certificates will contain a legend describing such restrictions on transfer and
the Pooling and Servicing Agreement will provide that any attempted or purported
transfer in violation of these transfer restrictions will be null and void and
will vest no rights in any purported transferee. Accordingly, the following
discussion does not purport to discuss the considerations under ERISA or Code
Section 4975 with respect to the purchase, acquisition or resale of the Class
A-R or Class M Certificates.
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. For example, unless exempted, investment
by an ERISA Plan in the Offered Certificates may constitute a prohibited
transaction under ERISA or the Code. 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 the individual
administrative exemption and PTE 83-1, including the necessary conditions to
their applicability, and other important factors to be considered by an ERISA
Plan contemplating investing in the Offered Certificates, see "ERISA
Considerations" in the Prospectus.
On October 17, 1989, the DOL issued to the Underwriters an individual
administrative exemption, Prohibited Transaction Exemption 89-88, 54 Fed. Reg.
42581 (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 Offered Certificates, other than the
Class A-R or Class M 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 Offered Certificates, other
than the Class A-R and Class M Certificates, is the condition that the ERISA
Plan investing in the Offered 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 1933, as amended (the "Securities Act").
Before purchasing an Offered Certificate, other than the Class A-R or Class
M Certificates, 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 Offered Certificates, other than the Class A-R and Class M Certificates. Any
fiduciary of an ERISA Plan considering whether to purchase an Offered
Certificate, other than the Class A-R and Class M Certificates, 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 Offered Certificates 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
S-59
<PAGE>
agencies before purchasing any of the Offered Certificates, as certain
Subclasses of the Class A Certificates or the Class M 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 or the Class M 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 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 offered hereby
prior to the issuance thereof. The Underwriters intend to act as market makers
in the Offered Certificates, subject to applicable provisions of federal and
state securities laws and other regulatory requirements, but are 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 September 24, 1992 (the "Underwriting Agreement") among the Seller, PHMC and
Goldman, Sachs & Co., as underwriters (the "Underwriters"), the Offered
Certificates offered hereby are being purchased from the Seller by the
Underwriters upon issuance. The Underwriters are committed to purchase all of
the Offered Certificates if any Offered Certificates are purchased. The
Underwriters have advised the Seller that they propose 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 99.281250% of the
initial aggregate principal balance of the Offered Certificates, plus accrued
interest thereon and on the aggregate initial principal balance of the Class
A-11 Certificates at the rate of 7.50% per annum from October 1, 1992 to (but
not including) October 30, 1992, before deducting expenses payable by the
Seller. The Underwriters, which are not affiliates of the Seller, have advised
the Seller that the Underwriters have not allocated the purchase price paid to
the Seller among the Subclasses or Classes of Offered Certificates. The
Underwriters and any dealers that participate with the Underwriters 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 Underwriters against certain civil liabilities under the Securities Act or
contribute to payments which the Underwriters may be required to make in respect
thereof.
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 Underwriters by Brown & Wood, New York, New York.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Offered Certificates
offered hereby will be applied by the Seller to the purchase from PHMC of the
Mortgage Loans represented by the Series 1992-37 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 1992-37 Certificates.
S-60
<PAGE>
RATINGS
It is a condition to the issuance of the Class A Certificates that each
Subclass will have been rated "Aaa" by Moody's and "AAA" by S&P. It is a
condition to the issuance of the Class M Certificates that they shall have been
rated "Aa2" by Moody's and "AA" by S&P. 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, issues and tax-related 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 S&P on mortgage pass-through certificates address the
likelihood of the receipt that certificateholders of payments required under the
related pooling and servicing agreement. S&P ratings take into consideration the
credit quality of the mortgage pool, including any credit support providers,
structural and legal aspects associated with the certificates, and the extent to
which the payment stream on the mortgage pool is adequate to make payments
required under the certificates. S&P's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
mortgages.
The ratings of Moody's and S&P 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 or Class by any rating agency other than Moody's and S&P and has not
provided any information with respect to the Mortgage Loans to any other rating
agency. There can be no assurance that any rating assigned by any other rating
agency to the Offered Certificates will be as high as those assigned by Moody's
and S&P.
S-61
<PAGE>
INDEX OF SIGNIFICANT
PROSPECTUS SUPPLEMENT DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Adjusted Pool Amount..................................................................................... S-23
Bankruptcy Coverage Termination Date..................................................................... S-36
Bankruptcy Loss.......................................................................................... S-26
Bankruptcy Loss Amount................................................................................... S-36
Beneficial Owner......................................................................................... S-18
Book-Entry Certificates.................................................................................. S-6
Book-Entry Nominee....................................................................................... S-32
Cede..................................................................................................... S-18
Class A Certificates..................................................................................... Cover
Class A Distribution Amount.............................................................................. S-21
Class A Optimal Amount................................................................................... S-24
Class A Optimal Principal Amount......................................................................... S-25
Class A Percentage....................................................................................... S-26
Class A Prepayment Percentage............................................................................ S-26
Class A Principal Balance................................................................................ S-22
Class A Principal Distribution Amount.................................................................... S-25
Class A Subclass Interest Accrual Amount................................................................. S-21
Class A Subclass Interest Shortfall Amount............................................................... S-24
Class A Subclass Principal Balance....................................................................... S-22
Class A-11 Notional Amount............................................................................... S-23
Class A-R Notional Amount................................................................................ S-23
Class B Certificates..................................................................................... Cover
Class B Principal Balance................................................................................ S-23
Class B Subclass Interest Accrual Amount................................................................. S-22
Class B Subclass Principal Balance....................................................................... S-22
Class M Certificates..................................................................................... Cover
Class M Distribution Amount.............................................................................. S-21
Class M Interest Accrual Amount.......................................................................... S-22
Class M Interest Shortfall Amount........................................................................ S-24
Class M Optimal Amount................................................................................... S-24
Class M Optimal Principal Amount......................................................................... S-27
Class M Percentage....................................................................................... S-28
Class M Prepayment Percentage............................................................................ S-28
Class M Principal Balance................................................................................ S-22
Class M Principal Distribution Amount.................................................................... S-27
Code..................................................................................................... S-17
Cooperatives............................................................................................. S-33
Co-op Shares............................................................................................. S-33
Cross-Over Date.......................................................................................... S-34
Current Class B-1 Subordination Level.................................................................... S-29
Current Class B-2 Subordination Level.................................................................... S-29
Current Class B-3 Subordination Level.................................................................... S-29
Current Class M Subordination Level...................................................................... S-29
Cut-Off Date Aggregate Principal Balance................................................................. S-37
Debt Service Reduction................................................................................... S-26
Deficient Valuation...................................................................................... S-26
Definitive Certificates.................................................................................. S-18
Depository Agreement..................................................................................... S-31
Determination Date....................................................................................... S-20
Distribution Date........................................................................................ S-20
DTC...................................................................................................... S-6
</TABLE>
S-62
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------------------------------------------------------------------------- ---------
Enhancement Act.......................................................................................... S-59
<S> <C>
ERISA.................................................................................................... S-17
ERISA Plan............................................................................................... S-58
Excess Bankruptcy Losses................................................................................. S-36
Excess Fraud Losses...................................................................................... S-36
Excess Special Hazard Losses............................................................................. S-35
Exemption................................................................................................ S-59
Fixed Non-Relocation Program Loans....................................................................... S-44
Fixed Program Loans...................................................................................... S-44
Fraud Coverage Termination Date.......................................................................... S-35
Fraud Loss............................................................................................... S-26
Fraud Loss Amount........................................................................................ S-35
Indirect Participants.................................................................................... S-18
Liquidated Loan.......................................................................................... S-26
Liquidated Loan Loss..................................................................................... S-26
Moody's.................................................................................................. S-4
Mortgage Loans........................................................................................... S-2
Mortgaged Properties..................................................................................... S-37
Mortgages................................................................................................ S-37
Net Foreclosure Profits.................................................................................. S-31
Net Mortgage Interest Rate............................................................................... S-23
Non-Supported Interest Shortfall......................................................................... S-23
Offered Certificates..................................................................................... Cover
Original Class B-1 Subordination Level................................................................... S-29
Original Class B-2 Subordination Level................................................................... S-29
Original Class B-3 Subordination Level................................................................... S-29
Original Class M Subordination Level..................................................................... S-29
Original Subordinated Principal Balance.................................................................. S-27
Participants............................................................................................. S-18
Percentage Interest...................................................................................... S-21
Periodic Advance......................................................................................... S-31
PHMC..................................................................................................... S-2
Pool Distribution Amount................................................................................. S-20
Pool Distribution Amount Allocation...................................................................... S-21
Pool Scheduled Principal Balance......................................................................... S-26
Pooling and Servicing Agreement.......................................................................... S-55
Prepayment Interest Shortfalls........................................................................... S-23
Program Loans............................................................................................ S-44
Proposed REMIC Regulations............................................................................... S-57
PTE 83-1................................................................................................. S-59
Realized Losses.......................................................................................... S-26
Record Date.............................................................................................. S-26
Regular Certificates..................................................................................... S-57
Relocation Mortgage Loans................................................................................ S-44
REMIC.................................................................................................... S-2
Reserve Fund............................................................................................. S-31
Reserve Fund Available Advance Amount.................................................................... S-31
Reserve Fund Depository.................................................................................. S-31
Reserve Fund Required Amount............................................................................. S-32
Reserve Fund Trigger Date................................................................................ S-31
S&P...................................................................................................... S-4
Scheduled Principal Balance.............................................................................. S-26
Securities Act........................................................................................... S-59
Seller................................................................................................... S-2
</TABLE>
S-63
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- --------------------------------------------------------------------------------------------------------- ---------
Series 1992-37 Certificates.............................................................................. Cover
<S> <C>
Servicer................................................................................................. S-2
Servicing Fee............................................................................................ S-56
SPA...................................................................................................... S-50
Special Hazard Loss...................................................................................... S-26
Special Hazard Loss Amount............................................................................... S-35
Special Hazard Termination Date.......................................................................... S-35
Subclass................................................................................................. Cover
Subordinated Certificates................................................................................ Cover
Subordinated Percentage.................................................................................. S-27
Subordinated Prepayment Percentage....................................................................... S-27
Trust Estate............................................................................................. S-2
Underwriters............................................................................................. S-60
Underwriting Agreement................................................................................... S-60
</TABLE>
S-64
<PAGE>
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER OR GOLDMAN, SACHS &
CO. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION CONTAINED HEREIN
OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-------------
INDEX
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Table of Contents................................ S-3
Summary Information.............................. S-4
Description of the Certificates.................. S-18
Description of the Mortgage Loans................ S-37
Origination, Delinquency and Foreclosure
Experience...................................... S-44
Prepayment and Yield Considerations.............. S-48
Pooling and Servicing Agreement.................. S-55
Federal Income Tax Considerations................ S-57
ERISA Considerations............................. S-58
Legal Investment................................. S-59
Secondary Market................................. S-60
Underwriting..................................... S-60
Legal Matters.................................... S-60
Use of Proceeds.................................. S-60
Ratings.......................................... S-61
Index of Significant Prospectus Supplement
Definitions..................................... S-62
PROSPECTUS
Reports.......................................... 2
Additional Information........................... 2
Additional Detailed Information.................. 2
Table of Contents................................ 3
Summary of Prospectus............................ 7
The Trust Estates................................ 12
Description of the Certificates.................. 22
Credit Support................................... 34
Prepayment and Yield Considerations.............. 39
The Seller....................................... 41
PHMC............................................. 42
Use of Proceeds.................................. 48
Servicing of the Mortgage Loans.................. 48
The Pooling and Servicing Agreement.............. 58
Certain Legal Aspects of the Mortgage Loans...... 61
Certain Federal Income Tax Consequences.......... 67
ERISA Considerations............................. 91
Legal Investment................................. 95
Plan of Distribution............................. 96
Legal Matters.................................... 97
Rating........................................... 97
Index of Significant Definitions................. 98
</TABLE>
$402,876,000
(APPROXIMATE)
THE PRUDENTIAL HOME
MORTGAGE SECURITIES
COMPANY, INC.
SELLER
MORTGAGE PASS-THROUGH
CERTIFICATES, SERIES 1992-37
--------------
PROSPECTUS SUPPLEMENT
--------------
GOLDMAN, SACHS & CO.
OCTOBER 23, 1992
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
<PAGE>
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 October 12, 1992
<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
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TABLE OF CONTENTS
PROSPECTUS
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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............................................................................... 8
B. Stripped Certificates............................................................................... 8
C. Shifting Interest Certificates...................................................................... 8
D. Multi-Class Certificates............................................................................ 8
Cut-Off Date............................................................................................... 8
Distribution Dates......................................................................................... 8
Record Dates............................................................................................... 9
Interest................................................................................................... 9
Principal (Including Prepayments).......................................................................... 9
Distributions in Reduction of Stated Amount................................................................ 9
Credit Enhancement......................................................................................... 9
Periodic Advances.......................................................................................... 11
Optional Purchase of Mortgage Loans........................................................................ 11
ERISA Limitations.......................................................................................... 11
Tax Status................................................................................................. 11
Rating..................................................................................................... 11
The Trust Estates.......................................................................................... 12
General.................................................................................................... 12
Mortgage Loans............................................................................................. 12
INSURANCE POLICIES..................................................................................... 15
ACQUISITION OF THE MORTGAGE
LOANS FROM PHMC...................................................................................... 16
ASSIGNMENT OF MORTGAGE LOANS
TO THE TRUSTEE....................................................................................... 16
REPRESENTATIONS AND WARRANTIES......................................................................... 18
OPTIONAL REPURCHASES................................................................................... 21
Description of The Certificates............................................................................ 22
General.................................................................................................... 22
Percentage Certificates.................................................................................... 23
Multi-Class Certificates................................................................................... 24
Distributions to Percentage
Certificateholders........................................................................................ 24
CERTIFICATES OTHER THAN SHIFTING
INTEREST CERTIFICATES................................................................................ 24
CALCULATION OF DISTRIBUTABLE AMOUNTS................................................................... 24
DETERMINATION OF AMOUNTS TO
BE DISTRIBUTED....................................................................................... 26
SHIFTING INTEREST CERTIFICATES......................................................................... 28
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Example of Distribution to
Percentage Certificateholders............................................................................. 30
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Distributions to Multi-Class Certificateholders............................................................ 31
VALUATION OF MORTGAGE LOANS............................................................................ 32
SPECIAL DISTRIBUTIONS.................................................................................. 33
LAST SCHEDULED DISTRIBUTION DATE....................................................................... 33
Credit Support............................................................................................. 34
Subordination.............................................................................................. 34
CERTIFICATES OTHER THAN SHIFTING INTEREST CERTIFICATES................................................. 34
SHIFTING INTEREST CERTIFICATES......................................................................... 36
Other Credit Enhancement................................................................................... 38
LIMITED GUARANTEE...................................................................................... 38
LETTER OF CREDIT....................................................................................... 38
POOL INSURANCE POLICIES................................................................................ 38
SPECIAL HAZARD INSURANCE POLICIES...................................................................... 38
MORTGAGOR BANKRUPTCY BOND.............................................................................. 38
Prepayment and Yield Considerations........................................................................ 39
Pass-Through Rates and Interest Rates...................................................................... 39
Scheduled Delays in Distributions.......................................................................... 39
Effect of Principal Prepayments............................................................................ 39
Weighted Average Life of Certificates...................................................................... 40
The Seller................................................................................................. 41
PHMC....................................................................................................... 42
General.................................................................................................... 42
Mortgage Loan Production Sources........................................................................... 43
Mortgage Loan Underwriting................................................................................. 44
Mortgage Origination Processing............................................................................ 48
Servicing.................................................................................................. 48
Use of Proceeds............................................................................................ 48
Servicing of the Mortgage Loans............................................................................ 48
The Servicer............................................................................................... 48
Payments on Mortgage Loans................................................................................. 48
Periodic Advances and Limitations Thereon.................................................................. 51
Adjustment to Servicing Fee in Connection with Prepaid Mortgage Loans...................................... 51
Reports to Certificateholders.............................................................................. 52
Reports to the Trustee..................................................................................... 53
Collection and Other Servicing Procedures.................................................................. 54
Enforcement of Due-on-Sale Clauses;
Realization Upon Defaulted Mortgage Loans................................................................. 54
Fixed Retained Yield, Servicing Compensation and Payment of Expenses....................................... 55
Evidence as to Compliance.................................................................................. 56
Certain Matters Regarding the Servicer..................................................................... 57
The Pooling and Servicing Agreement........................................................................ 58
Events of Default.......................................................................................... 58
Rights Upon Event of Default............................................................................... 58
Amendment.................................................................................................. 59
Termination; Purchase of Mortgage Loans.................................................................... 60
The Trustee................................................................................................ 60
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Certain Legal Aspects of the Mortgage Loans................................................................ 61
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General.................................................................................................... 61
Foreclosure................................................................................................ 61
Foreclosure on Shares of Cooperatives...................................................................... 62
Rights of Redemption....................................................................................... 63
Anti-Deficiency Legislation and Other Limitations on Lenders............................................... 63
Soldiers' and Sailors' Civil Relief Act and Similar Laws................................................... 64
Environmental Considerations............................................................................... 64
"Due-on-Sale" Clause....................................................................................... 65
Applicability of Usury Laws................................................................................ 66
Enforceability of Certain Provisions....................................................................... 66
Certain Federal Income Tax Consequences.................................................................... 67
Federal Income Tax Consequences for REMIC Certificates..................................................... 67
General.................................................................................................. 67
Status of REMIC Certificates............................................................................. 67
Qualification as a REMIC................................................................................. 68
Taxation of Regular Certificates......................................................................... 70
GENERAL................................................................................................ 70
ORIGINAL ISSUE DISCOUNT................................................................................ 70
VARIABLE RATE REGULAR CERTIFICATES..................................................................... 72
MARKET DISCOUNT........................................................................................ 73
PREMIUM................................................................................................ 74
SALE OR EXCHANGE OF REGULAR CERTIFICATES............................................................... 74
Taxation of Residual Certificates.......................................................................... 74
TAXATION OF REMIC INCOME............................................................................... 74
BASIS AND LOSSES....................................................................................... 75
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE................................................. 76
ORIGINAL ISSUE DISCOUNT.............................................................................. 76
MARKET DISCOUNT...................................................................................... 76
PREMIUM.............................................................................................. 77
LIMITATIONS OF OFFSET OR EXEMPTION OF REMIC INCOME................................................... 77
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL CERTIFICATES.......................................... 78
DISQUALIFIED ORGANIZATIONS............................................................................. 78
NONECONOMIC RESIDUAL INTERESTS......................................................................... 79
FOREIGN INVESTORS...................................................................................... 80
SALE OR EXCHANGE OF A RESIDUAL CERTIFICATE........................................................... 80
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL............................................................ 80
PROHIBITED TRANSACTIONS.............................................................................. 80
CONTRIBUTIONS TO THE REMIC POOL AFTER THE STARTUP DAY................................................ 81
NET INCOME FROM FORECLOSURE PROPERTY................................................................. 81
LIQUIDATION OF THE REMIC POOL........................................................................ 81
ADMINISTRATIVE MATTERS............................................................................... 81
Limitations on Deduction of Certain Expenses............................................................... 82
Taxation of Certain Foreign Investors...................................................................... 82
REGULAR CERTIFICATES................................................................................... 82
RESIDUAL CERTIFICATES.................................................................................. 82
Backup Withholding......................................................................................... 83
Reporting Requirements..................................................................................... 83
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Federal Income Tax Consequences for Certificates as to Which No REMIC Election Is Made..................... 84
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Standard Certificates...................................................................................... 84
GENERAL................................................................................................ 84
TAX STATUS............................................................................................. 84
PREMIUM AND DISCOUNT................................................................................... 85
PREMIUM.............................................................................................. 85
ORIGINAL ISSUE DISCOUNT.............................................................................. 85
MARKET DISCOUNT...................................................................................... 86
RECHARACTERIZATION OF SERVICING FEES................................................................. 86
SALE OR EXCHANGE OF STANDARD CERTIFICATES.............................................................. 87
Stripped Certificates...................................................................................... 87
GENERAL................................................................................................ 87
STATUS OF STRIPPED CERTIFICATES........................................................................ 88
TAXATION OF STRIPPED CERTIFICATES...................................................................... 89
ORIGINAL ISSUE DISCOUNT................................................................................ 89
SALE OR EXCHANGE OF STRIPPED CERTIFICATES............................................................ 89
PURCHASE OF MORE THAN ONE CLASS OF STRIPPED CERTIFICATES............................................. 90
POSSIBLE ALTERNATIVE CHARATERIZATIONS................................................................ 90
Reporting Requirements and Backup Withholding.............................................................. 90
Taxation of Certain Foreign Investors...................................................................... 90
ERISA Considerations....................................................................................... 91
General.................................................................................................... 91
Certain Requirements Under ERISA........................................................................... 91
GENERAL................................................................................................ 91
PARTIES IN INTEREST/DISQUALIFIED PERSONS............................................................... 91
DELEGATION OF FIDUCIARY DUTY........................................................................... 92
Administrative Exemptions.................................................................................. 92
INDIVIDUAL ADMINISTRATIVE EXEMPTIONS................................................................... 92
Exempt Plans............................................................................................... 94
Unrelated Business Taxable Income--Residual Certificates................................................... 94
Legal Investment........................................................................................... 95
Plan of Distribution....................................................................................... 96
Legal Matters.............................................................................................. 97
Rating..................................................................................................... 97
Index of Significant Definitions........................................................................... 98
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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,
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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 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 Certificates--Dis-
tributions 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.
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8
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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 "Ser-
vicing 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 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 Cer-
tificateholders."
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
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9
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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 Subordinated 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
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."
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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 applica-
ble 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 Rev-
enue 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 two 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.
</TABLE>
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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
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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.
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
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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, 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
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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 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.
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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.
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
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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 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
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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;
(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
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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;
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(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;
(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
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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;
(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.
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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 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 of an affidavit signed by the transferee stating that the transferee
is not a disqualified organization within the meaning of Code Section 860E(e) or
an agent (including a broker, nominee, or middleman) thereof or a Book-Entry
Nominee (as defined herein). 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.
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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 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
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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
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
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(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 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,
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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 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;
(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;
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(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
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
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<PAGE>
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 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
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<PAGE>
(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
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<PAGE>
Certificates of a Series has been issued), unless otherwise specified in the
applicable 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 17(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
(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 two 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. 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.
- --------------------------------------------------------------------------------
(FOOTNOTES CONTINUED FROM PRECEDING PAGE)
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.
(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 February
17, 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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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 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
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<PAGE>
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.
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.
33
<PAGE>
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 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.
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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.
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
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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.
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
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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 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
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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
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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."
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
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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.
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.
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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.
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
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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 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
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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 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,
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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 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
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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 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. 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 permit projected rental income from
such property to be included in the applicant's monthly gross income if
necessary to satisfy 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 related mortgage loan. Consistent with this practice, the
appraisals with respect to
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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 it 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.
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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.
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. On May
31, 1991, PHMC entered into a Subservicing Agreement with AMC pursuant to which
PHMC will sub-service AMC's current servicing portfolio of FHA/VA and
conventional loans. PHMC is an approved servicer of FNMA, FHLMC and GNMA. As of
December 31, 1991, PHMC had a net worth of approximately $213 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 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
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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 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
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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.
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
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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 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.
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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;
(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
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(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 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).
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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 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
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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. 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 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)
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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).
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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 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 exercise of its reasonable
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 is not
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reasonably likely to be qualified, downgraded or withdrawn as a result of such
assignment, sale or transfer and the Certificates are not reasonably likely to
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).
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
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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 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, (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," or (vi) 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
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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
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 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 REMIC 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.
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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 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.
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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 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.
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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.
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.
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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 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.
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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
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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 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 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
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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.
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 enactment of the Tax Reform Act of
1986 (the "1986 Act") and the Technical and Miscellaneous Revenue Act of 1988
("TAMRA"), as well as proposed regulations (the "Proposed REMIC Regulations")
promulgated by the U.S. Department of the Treasury on September 27, 1991.
Investors should be aware that the Proposed REMIC Regulations are subject to
change and are not binding authority until adopted as final or temporary
regulations. However, to the extent adopted as currently drafted, the Proposed
REMIC Regulations may apply to the REMIC Certificates retroactively as binding
authority. 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, particularly with respect to federal
income tax changes effected by the 1986 Act, TAMRA and the Proposed REMIC
Regulations.
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 which does not
include the Fixed Retained Yield.
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
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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 REMIC 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. The Proposed REMIC Regulations provide
that, 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 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 Proposed 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 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. 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.
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Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment 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, and such investment must earn a return
in the nature of interest. 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 to
provide additional security for payments due on the regular or residual
interests that otherwise may be delayed or defaulted upon because of default
(including delinquencies) on the qualified mortgages or lower than expected
reinvestment returns. It is currently unclear whether reserve funds for other
purposes (such as a reserve fund in connection with the use of graduated payment
mortgages) constitute qualified reserve assets. 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 possible extensions.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more classes of regular interests or
(ii) a single class of residual interests on which distributions, if any, are
made pro rata. A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount (or
other similar amount), and provides that interest payments (or other similar
amounts), if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate, or consist of a specified, nonvarying portion of
the interest payments on qualified mortgages. Under the Proposed REMIC
Regulations, 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. The Proposed REMIC Regulations
provide that 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
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.
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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 proposed Treasury regulations under
Code Sections 1271 through 1273 and 1275 (the "Proposed OID Regulations") and in
part on the provisions of the 1986 Act. Regular Certificateholders should be
aware, however, that the Proposed OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Regular
Certificates, and are subject to change and are not binding authority before
being adopted as final or temporary regulations. However, to the extent adopted
as currently drafted, the Proposed OID Regulations may apply to the Regular
Certificates retroactively as binding authority.
Under the Proposed OID Regulations, 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 "Retail Class
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 is the price at which a substantial amount of Regular Certificates
of that Class are first sold to the public. The issue price of a Regular
Certificate also includes the amount paid by an initial Regular
Certificateholder for accrued interest that relates to a period prior to the
issue date of the Regular Certificate. The stated redemption price at maturity
of a Regular Certificate always includes the original principal amount of (in
the case of Standard or Stripped Certificates) or initial Stated Amount of (in
the case of Multi-Class Certificates) the Regular Certificate, but generally
will not include distributions of stated interest if such interest distributions
constitute "qualified periodic interest payments." Under the Proposed OID
Regulations, a qualified periodic interest payment generally means interest
payable at a single fixed rate or a qualified variable rate (as described below)
provided that such interest payments are actually and unconditionally payable at
fixed, periodic 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, may not constitute qualified periodic 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. Moreover, if the interval between the issue date and the first
Distribution Date on a Regular Certificate is longer than the interval between
subsequent Distribution Dates, the Internal Revenue Service could contend that
the initial interval should be divided into a short accrual period followed by a
period corresponding to the interval between subsequent Distribution Dates, and
that because no distribution of interest is made on the date that the short
accrual period ends, the stated interest distributions on such Regular
Certificate do not constitute qualified periodic interest payments. Accordingly,
the Internal Revenue Service could contend that all distributions on such
Regular Certificate should be includible in the stated redemption price at
maturity, or that some other adjustment should be made. Furthermore, a portion
of the interest distributed on the first Distribution Date may be
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treated as nonqualified periodic interest includible in the stated redemption
price at maturity to the extent such interest distribution is attributable to a
period in excess of the number of days between the issue date and such first
Distribution Date. Regular Certificateholders should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Regular Certificate.
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. Although currently unclear, it appears 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.
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. Although not free from doubt,
the Seller intends to treat the monthly period ending on each Distribution Date
as the accrual period, rather than the monthly period corresponding to the prior
calendar month. 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 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 Retail Class 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 either
an exact or approximate method set forth in the Proposed OID Regulations or some
other reasonable method, provided that such method is consistent with the method
used to determine the yield to maturity of the Regular Certificate.
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
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Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. To the extent
specified in the applicable Prospectus Supplement, 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 Retail Class Certificate, the yield to maturity of such
Certificate will be determined 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 Retail Class 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 Retail Class 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 Retail Class 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.
A purchaser of a Regular Certificate at a price greater than its "revised
issue price," as defined below, 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 revised issue price and the denominator of which is the
remaining original issue discount. The revised issue price of a Regular
Certificate is the sum of its original issue price and the original issue
discount that would have been previously accrued by an original holder less any
prior distributions included in the stated redemption price at maturity.
VARIABLE RATE REGULAR CERTIFICATES
Regular Certificates may provide for interest based on a variable rate.
Under the Proposed OID Regulations, a qualified periodic interest payment
includes any one of a series of payments equal to the product of the outstanding
principal balance of a Regular Certificate and a variable rate tied to a single
objective index of market interest rates, provided that such interest payments
are actually and unconditionally payable at fixed, periodic intervals of one
year or less during the entire term of the Regular Certificate. In the case of a
Regular Certificate, however, that pays interest based on a combination of fixed
or qualifying variable rates or at a variable rate that is subject to one or
more maximum rate ceilings or certain other adjustments, it is unclear under the
Proposed OID Regulations whether interest payments on such a Regular Certificate
constitute qualified periodic interest payments, or instead are either
includible in the stated redemption price at maturity of the Regular Certificate
or treated as contingent interest payments includible in income as they become
fixed. Further, the Proposed REMIC Regulations generally provide that a Regular
Certificate (i) bearing a floating rate tied to an objective index (or the
highest, lowest or average of two or more objective indices) of market interest
rates (including a rate based on the average cost of funds of one or more
financial institutions) or that represents a weighted average of rates on some
or all of the Mortgage Loans that bear either a fixed rate or a qualifying
variable rate, including such a rate that is subject to one or more caps or
floors, or (ii) bearing one or more such qualifying variable rates for one or
more periods, or one or more fixed rates for one or more periods, qualifies as a
regular interest in a REMIC.
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 to be determined by assuming that the interest rate
index applicable to the first Distribution Date remains constant throughout the
life of the Regular Certificate. Ordinary income reportable for any period will
be adjusted based on subsequent changes in the applicable
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interest rate index. Where the issue price of a Regular Certificate exceeds the
original principal amount or Stated Amount of the Regular Certificate, it
appears appropriate to reduce the ordinary income reportable for an accrual
period by a portion of such excess in a manner similar to the amortization of
premium on the level yield method. Absent clarification, original issue discount
will be reported to the Internal Revenue Service and to holders of variable rate
Regular Certificates in the manner described in this paragraph using the
Prepayment Assumption.
In the case of Regular Certificates bearing an interest rate that is a
weighted average of the net interest rates on Mortgage Loans having adjustable
rates, the applicable index used to compute interest on the Mortgage Loans in
effect on the issue date (or possibly the pricing 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. If the Pass-Through Rate for one or
more periods is less than it would be based upon the fully indexed rate, the
excess of the interest payments projected at the assumed index over interest
projected at such initial rate may be treated as original issue discount. In
such case, a Regular Certificateholder may have ordinary income in excess of
interest received at the initial Pass-Through Rate. An adjustment would be made
in each period either increasing or decreasing the amount of ordinary income
reportable to reflect the actual Pass-Through Rate on the Regular Certificate.
Unless and until clarified by applicable Treasury regulations, the Seller does
not intend to report such excess as original issue discount.
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 Proposed 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 revised issue
price of such Regular Certificate at the time of purchase, as described above.
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 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.
By analogy to the Proposed 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
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price at maturity of such Regular Certificate multiplied by the weighted average
maturity of the Regular Certificate (determined as described above in the fourth
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 as well as the advisability of making any of the
elections with respect thereto.
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.
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). Gain from the
disposition of a Regular Certificate that might otherwise be capital gain will
be treated as ordinary income to the extent that such gain does not exceed the
excess, if any, of (i) the amount that would have been includible in the gross
income of the holder if his yield on such Regular Certificate were 110% of the
applicable Federal rate under Code Section 1274(d) as of the date of purchase,
over (ii) the amount of income actually includible in the gross income of such
holder with respect to the Regular Certificate. In addition, gain or loss
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). The preferential rates applicable to long-term capital gains were
eliminated by the 1986 Act. However, the Revenue Reconciliation Act of 1990
restored a preferential rate applicable to long-term capital gains with respect
to certain individuals.
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 limitation on deductibility of investment
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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. REMIC taxable income generally means the REMIC Pool's gross income,
including interest, original issue discount income, and market discount income,
if any, on the Mortgage Loans, plus income on reinvestment of cash flows and
reserve assets, minus deductions, including interest and original issue discount
expense on the Regular Certificates, servicing fees on the Mortgage Loans and
other administrative expenses of the REMIC Pool, and amortization of premium, if
any, with respect to 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 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 the 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.
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
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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.
In such event, it is unclear whether its issue price would be considered to be
zero or such negative amount for purposes of determining the REMIC Pool's basis
in its assets. The Proposed REMIC Regulations do not address whether residual
interests could have a negative basis and a negative issue price. However, the
preamble to the Proposed REMIC Regulations indicates that, while existing tax
rules do not accommodate such concepts, the Internal Revenue Service is
considering the tax treatment of these types of residual interests, including
whether such residual interests may have a negative basis or a negative issue
price. The Seller does not intend to treat a Class of Residual Certificates as
having a value of less than zero for purposes of determining the basis of the
related REMIC Pool in its assets.
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 Treasury regulations yet to be issued provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The
Proposed REMIC Regulations 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
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 Proposed 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. In respect of
Mortgage Loans that have market discount to which Code Section 1276 applies, 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."
However, the rules of Code Section 1276 concerning market discount income will
not apply in the case of Mortgage Loans originated on or prior to July 18, 1984,
if any. With respect to such Mortgage Loans, market discount is generally
includible in REMIC taxable income or ordinary gross income pro rata as
principal payments are received. The deduction of a portion of the interest
expense on the Regular Certificates allocable to such discount may be deferred
until such discount is included in income, and any gain on the sale or exchange
thereof will be treated as ordinary income to the extent of the deferred
interest deductible at that time.
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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 Proposed REMIC Regulations do not
adopt 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, under Treasury regulations yet
to be issued, if a real estate investment trust owns a Residual Certificate, a
portion of dividends paid by the real estate investment trust 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. This
treatment may be extended under Treasury regulations to regulated investment
companies, common trust funds, and certain cooperatives.
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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 deductions
to offset excess inclusions if necessary or appropriate to prevent the avoidance
of tax. The Proposed REMIC Regulations provide that 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 life (I.E., final maturity) of
the REMIC Pool. The anticipated weighted average life of the Residual
Certificates is based on the anticipated principal payments to be received with
respect thereto (using the Prepayment Assumption), except that all anticipated
distributions are to be used if the Residual Certificate is not entitled to any
principal payments, or is entitled to a disproportionately small principal
amount relative to interest payments thereon. The principal amount will be
considered disproportionately small if the issue price of the Residual
Certificates exceeds 125% of their initial principal amount. Finally, an
ordering rule under the Proposed 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 Proposed 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 Proposed 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 equal to the remaining term of the REMIC, and 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 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
Treasury Department 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
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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.
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 provides to the
Seller and the Trustee an affidavit to the effect that such transferee is not a
Disqualified Organization, is not purchasing such Residual Certificates on
behalf of a Disqualified Organization (I.E., as a broker, nominee, or middleman
thereof) and is not an entity that holds REMIC residual securities as nominee to
facilitate the clearance and settlement of such securities through electronic
book-entry changes in accounts of participating organizations, 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 Proposed 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 Proposed REMIC
Regulations, a transfer of a "noneconomic residual interest" (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 unless no significant purpose of the transfer 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. The anticipated excess inclusions and the present value rate are
determined in the same manner as set forth above under "Disqualified
Organizations." The Proposed REMIC Regulations do not explain when a substantial
purpose of a transfer will be deemed to be to impede the assessment or
collection of tax. While complete assurance as to how to meet this standard
cannot be provided, the Indenture will require the transferee of a Residual
Certificate to state as part of the affidavit described above under the heading
"Disqualified Organizations"
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that such transferee has no intention to impede the assessment or collection of
any federal, state or local income taxes required to be paid with respect to the
Residual Certificate, and the transferor must have no reason to believe that
such statement is untrue.
FOREIGN INVESTORS. The Proposed 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 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 him 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 his Residual Certificate remaining when his interest in the
REMIC Pool terminates, and if he holds such Residual Certificate as a capital
asset under Code Section 1221, then he will recognize a capital loss at that
time in the amount of such remaining adjusted basis.
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
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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
Proposed 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 clause, or the conversion of an interest rate by a
mortgagor pursuant to the terms of a convertible adjustable rate Mortgage Loan.
CONTRIBUTIONS TO THE REMIC POOL AFTER THE STARTUP DAY. In general, the
REMIC Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided for
cash contributions to the REMIC Pool (i) during the three months following the
Startup Day, (ii) made to a qualified reserve fund by a Residual Holder, (iii)
in the nature of a guarantee, (iv) made to facilitate a qualified liquidation or
clean-up call, and (v) as otherwise permitted in Treasury regulations yet to be
issued.
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 and the Trustee adopt a plan of complete liquidation, within
the meaning of Code Section 860F(a)(4)(A)(i), and sell all of its assets (other
than cash) within a 90-day period beginning on the date of the adoption of the
plan of liquidation, then 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. Under
TAMRA, 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.
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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), 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, 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
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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 20% 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.
REPORTING REQUIREMENTS
Reports of accrued interest and original issue 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. Treasury regulations provide that information necessary to compute the
accrual of any market discount on the Regular Certificates must be furnished for
calendar years beginning after 1990.
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,
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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. 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 his 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 his 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), 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, 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
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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 Internal Revenue Service has stated in
published rulings that, in circumstances similar to those described herein, the
original issue discount rules 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
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. Such original issue discount could
arise by the charging of points by the originator of the mortgages in an
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amount greater than a statutory DE MINIMIS exception, to the extent that the
points are not currently deductible under applicable Code provisions or are not
for services provided by the lender. It is generally not anticipated that
adjustable rate Mortgage Loans will be treated as issued with original issue
discount. However, the application of the Proposed OID Regulations to adjustable
rate mortgage loans with incentive interest rates or annual or lifetime interest
rate caps is unclear and may result in original issue discount if not further
clarified.
Original issue discount must generally 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." 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
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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 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 would be capital gain or loss if the Standard Certificate was
held as a capital asset. The preferential rates applicable to long-term capital
gains were eliminated by the Tax Reform Act of 1986, but were restored by the
Revenue Reconciliation Act of 1990 with respect to certain individuals.
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 the 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 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
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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 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, 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
Proposed OID Regulations. While under Code Section 1286 computations with
respect to Stripped Certificates arguably should be made in one of the ways
described below under "Taxation of Stripped Certificates--Possible Alternative
Characterizations," the Proposed OID Regulations state, in general, that all
debt instruments issued in connection with the same transaction must be treated
as a single debt instrument. The Pooling and Servicing Agreement requires that
the Trustee make and report all computations described below using this
aggregate approach, unless substantial legal authority requires otherwise.
Furthermore, proposed Treasury regulations issued August 8, 1991 support the
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 proposed 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 suggests that the interest component of such a Stripped
Certificate would be treated as qualified periodic interest under the Proposed
OID Regulations. Further, the August 1991 proposed 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.
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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 Proposed 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 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 an ordinary 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 the Proposed OID
Regulations. If the rules of the Proposed OID Regulations relating to contingent
payments apply, treatment of a Stripped Certificate under such rules depends on
whether the aggregate amount of principal payments, if any, to be made on the
Stripped Certificate is less than or greater than its issue price. If the
aggregate principal payments are greater than or equal to the issue price, the
principal payments would be treated as a separate installment obligation issued
at a price equal to the purchase price for the Stripped Certificate. In such
case, original issue discount would be calculated and accrued under the method
described above without consideration of the interest payments with respect to
the Stripped Certificate. Such payments of interest would be includible in the
Stripped Certificateholder's gross income in the taxable year in which the
amounts become fixed. If the aggregate amount of principal payments to be made
on the Stripped Certificate is less than its issue price, each payment of
principal would be treated as a return of basis. Each payment of interest would
be treated as includible in gross income to the extent of the applicable Federal
rate under Code Section 1274(d), as applied to the adjusted basis of the
Stripped Certificate, while amounts received in excess of the applicable Federal
rate, as applied to the adjusted basis of the Stripped Certificate, would be
characterized as a return of basis until the total amount of interest payments
treated as a return of basis equalled the excess of the purchase price over the
aggregate stated principal payments. Any additional interest payments thereafter
would be treated as ordinary income. 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 Proposed OID Regulations to apply to
interest with respect to the Stripped Certificates.
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
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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. Where 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.
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, 20% 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
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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 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 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.
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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;
(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)
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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.
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
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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.
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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.
LEGAL INVESTMENT
Except for Standard Certificates which are not rated, as discussed below
under "Rating", 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 Secondary Mortgage
Market Enhancement Act of 1984 (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, effective December
2, 1991, that 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).
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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.
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
96
<PAGE>
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-Bache Securities Inc. (which conducts its corporate, governmental and
institutional business under the name Prudential-Bache Capital Funding), may act
as underwriter or dealer with respect to Certificates of any Series. Any such
affiliate will be identified in the applicable Prospectus Supplement.
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 two
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.
97
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
- ----------------------------------------------------------------------------------------------------------- -----
<S> <C>
Aggregate Losses........................................................................................... 34
Assumed Reinvestment Rate.................................................................................. 33
Balloon Loan............................................................................................... 15
Balloon Period............................................................................................. 15
Buy-Down Fund.............................................................................................. 15
Buy-Down Loans............................................................................................. 15
Certificate Account........................................................................................ 48
Certificates............................................................................................... 1
Class...................................................................................................... 1
Code....................................................................................................... 11
Compound Interest Certificates............................................................................. 24
Cross-Over Date............................................................................................ 29
Curtailments............................................................................................... 24
Cut-Off Date............................................................................................... 8
Depository................................................................................................. 48
Determination Date......................................................................................... 24
Distributable Amount....................................................................................... 24
Distribution Date.......................................................................................... 8
Due Date................................................................................................... 13
Due Period................................................................................................. 32
Eligible Investments....................................................................................... 35
ERISA...................................................................................................... 11
FDIC....................................................................................................... 49
FHLMC...................................................................................................... 14
Fixed Retained Yield....................................................................................... 9
FNMA....................................................................................................... 14
Initial Deposit............................................................................................ 34
Interest Rate.............................................................................................. 1
Last Scheduled Distribution Date........................................................................... 33
Late Payment............................................................................................... 25
Late Payment Period........................................................................................ 25
Liquidation Proceeds....................................................................................... 49
Loan-to-Value Ratio........................................................................................ 13
Mortgage Interest Rate..................................................................................... 9
Mortgage Loans............................................................................................. 1
Mortgage Notes............................................................................................. 12
Mortgaged Properties....................................................................................... 12
Mortgages.................................................................................................. 12
Multi-Class Certificate Distribution Amount................................................................ 32
Multi-Class Certificates................................................................................... 1
Net Foreclosure Profits.................................................................................... 27
Net Mortgage Interest Rate................................................................................. 9
OTS........................................................................................................ 65
Payment Deficiencies....................................................................................... 34
Pass-Through Rate.......................................................................................... 9
Percentage Certificates.................................................................................... 23
Periodic Advances.......................................................................................... 11
PHMC....................................................................................................... 1
PMCC....................................................................................................... 42
Pool Distribution Amount................................................................................... 26
Pool Scheduled Principal Balance........................................................................... 29
Pool Value................................................................................................. 32
</TABLE>
98
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ----------------------------------------------------------------------------------------------------------- -----
Pool Value Group........................................................................................... 32
<S> <C>
Pooling and Servicing Agreement............................................................................ 7
Prepayment Interest Shortfall.............................................................................. 25
Prudential Insurance....................................................................................... 7
Rating Agency.............................................................................................. 11
Record Date................................................................................................ 9
Registration Statement..................................................................................... 2
Regular Certificateholder.................................................................................. 70
Regular Certificates....................................................................................... 22
REMIC...................................................................................................... 1
Residual Certificates...................................................................................... 22
Scheduled Principal........................................................................................ 24
Scheduled Principal Balance................................................................................ 25
Seller..................................................................................................... 1
Senior Certificates........................................................................................ 1
Senior Class............................................................................................... 24
Senior Class Carryover Shortfall........................................................................... 27
Senior Class Distributable Amount.......................................................................... 24
Senior Class Distribution Amount........................................................................... 28
Senior Class Principal Portion............................................................................. 24
Senior Class Pro Rata Share................................................................................ 27
Senior Class Shortfall..................................................................................... 27
Senior Class Shortfall Accruals............................................................................ 28
Series..................................................................................................... 1
Servicer................................................................................................... 1
Servicing Fee.............................................................................................. 9
Shifting Interest Certificate.............................................................................. 23
Special Distributions...................................................................................... 33
Special Hazard Loss Amount................................................................................. 37
Special Hazard Mortgage Loan............................................................................... 37
Special Hazard Termination Date............................................................................ 37
Specified Subordination Reserve Fund Balance............................................................... 34
Spread..................................................................................................... 32
Standard Certificates...................................................................................... 1
Standard Hazard Insurance Policy........................................................................... 15
Stated Amount.............................................................................................. 1
Stripped Certificates...................................................................................... 1
Subclass................................................................................................... 1
Subordinated Amount........................................................................................ 9
Subordinated Certificates.................................................................................. 1
Subordinated Class Distributable Amount.................................................................... 25
Subordinated Class Principal Portion....................................................................... 25
Subordinated Class Pro Rata Share.......................................................................... 27
Subordination Reserve Fund................................................................................. 10
Subsidy Account............................................................................................ 14
Subsidy Loans.............................................................................................. 14
Treasury Regulations....................................................................................... 17
Trust Estate............................................................................................... 1
Trustee.................................................................................................... 60
UCC........................................................................................................ 62
Unpaid Interest Shortfall.................................................................................. 28
Voting Interests........................................................................................... 58
</TABLE>
99
<PAGE>
SUPPLEMENT
(TO PROSPECTUS SUPPLEMENT DATED OCTOBER 23, 1992 AND PROSPECTUS DATED OCTOBER
12, 1992)
THE PRUDENTIAL HOME MORTGAGE SECURITIES COMPANY, INC. [LOGO]
SELLER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1992-37
PRINCIPAL AND INTEREST PAYABLE MONTHLY, COMMENCING IN MAY 1996
VARIABLE RATE(1) CLASS A-11 CERTIFICATES
(1) ON THE CLASS A-11 NOTIONAL AMOUNT
-------------------
The Series 1992-37 Mortgage Pass-Through Certificates (the "Series 1992-37
Certificates") are the Series 1992-37 Certificates described in the accompanying
Prospectus Supplement dated October 23, 1992 (the "Prospectus Supplement") and
the accompanying Prospectus dated October 12, 1992 (the "Prospectus"). The
Series 1992-37 Certificates consist of one class of senior certificates (the
"Class A Certificates") and two classes of subordinated certificates (the "Class
M Certificates" and "Class B Certificates," respectively). The Class A
Certificates consist of twelve subclasses (each, a "Subclass") of Certificates
designated as the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class
A-6, Class A-7, Class A-8, Class A-9, Class A-10, Class A-11 and Class A-R
Certificates. The Class M Certificates are not divided into subclasses. The
Class B Certificates consist of four subclasses of Certificates designated as
the Class B-1, Class B-2, Class B-3 and Class B-4 Certificates. Only the Class
A-11 Certificates are being offered hereby. The Series 1992-37 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. 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 and "Risk Factors
and Special Considerations" herein.
PROSPECTIVE INVESTORS IN THE CLASS A-11 CERTIFICATES SHOULD CONSIDER THE
FACTORS DISCUSSED UNDER "RISK FACTORS AND SPECIAL CONSIDERATIONS" HEREIN ON PAGE
S1-3.
The credit enhancement for the Series 1992-37 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-11 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-11
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-11 Certificates are being offered by PaineWebber 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 Class A-11 Certificates will be approximately
1.37% of the Pool Scheduled Principal Balance as of the Distribution Date in May
1996 without giving effect to partial principal prepayments or net partial
liquidation proceeds received on or after the Determination Date in April 1996,
plus accrued interest from April 1, 1996 to (but not including) April 16, 1996,
before deducting expenses payable by the Seller estimated to be $45,000. See
"Underwriting" herein.
The Class A-11 Certificates are offered subject to receipt and acceptance by
the Underwriter, to prior sale and to the Underwriter's right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the Class A-11 Certificates will be made
at the office of PaineWebber Incorporated, 1285 Avenue of the Americas, New
York, New York 10019, on or about April 16, 1996.
---------------------
PAINEWEBBER INCORPORATED
-----------
The date of this Supplement is April 11, 1996.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Class A-11 Certificates may not be appropriate investments for
individual investors. The Class A-11 Certificates are offered in minimum
denominations of $71,423,000 initial Class A-11 Notional Amount as described
herein under "Description of the Certificates." Except as set forth below, it is
intended that the Class A-11 Certificates not be directly or indirectly held or
beneficially owned by any person in amounts lower than such minimum
denomination. The Class A-11 Certificates may be transferred to persons in
amounts lower than the minimum denomination but only if any such person delivers
to the Trustee an affidavit concerning certain matters related to the financial
sophistication and net worth of such person. See "Description of the
Certificates"and "Restrictions on Transfer of the Class A-11 Certificates"
herein.
There is currently no secondary market for the Class A-11 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-11 Certificates. The
Underwriter intends to act as a market maker in the Class A-11 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-11 Certificate at a price equal to or
greater than the price at which such Certificate was purchased.
Distributions in respect of interest and of principal are made on the 25th
day of each month, or if such day is not a business day, the next succeeding
business day to the holders of record of the Class A-11 Certificates on the last
business day of the preceding month, to the extent that their allocable portion
of the Pool Distribution Amount (as defined herein) is sufficient therefor.
Interest will accrue monthly on the Class A-11 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 7.50%, on
the Class A-11 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-11 Certificates as described in the Prospectus
Supplement under "Description of the Certificates--Interest." The Class A
Subclass Principal Balance of the Class A-11 Certificates as of the
Determination Date in April 1996 will be approximately $479. The Class A
Subclass Principal Balance as of the Determination Date in May 1996 will be
equal to such balance as of the Determination Date in April 1996 reduced by the
amount of any distributions or other reductions of principal on the Distribution
Date in April 1996. Distributions in reduction of the principal balance of the
Class A Certificates will be made monthly on each Distribution Date in an
aggregate amount equal to the Class A Principal Distribution Amount (as defined
in the Prospectus Supplement). Distributions in reduction of the principal
balance of the Class A Certificates each month will be allocated among the
Subclasses of Class A Certificates in the manner described in the Prospectus
Supplement under "Description of the Certificates--Principal (Including
Prepayments)." Distributions on the Class A-11 Certificates will be made pro
rata among Certificateholders of such Subclass based on their Percentage
Interests (as defined in the Prospectus Supplement).
This Supplement does not contain complete information regarding the Class
A-11 Certificates and should be read only in conjunction with the Prospectus
Supplement and the Prospectus. Sales of the Class A-11 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 JULY 15, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A-11
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, each
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 1992-37 Certificates were issued on October 30, 1992. The Class
A-11 Certificates were not offered to the public at the time of the issuance of
the Series 1992-37 Certificates.
RISK FACTORS AND SPECIAL CONSIDERATIONS
YIELD CONSIDERATIONS
The yield to maturity of the Class A-11 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-11 Certificates may be affected by the
geographic concentration of the Mortgaged Properties securing the Mortgage
Loans. As of March 15, 1996, Mortgaged Properties located in the following
states secured at least 5.00% of the Aggregate Unpaid Principal Balance of the
Mortgage Loans: California (52.57%), New Jersey (11.05%) and New York (10.13%).
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-11 Certificates. See "Description of the
Mortgage Loans" herein.
AN INVESTOR THAT PURCHASES CLASS A-11 CERTIFICATES, WHICH ARE EXPECTED TO BE
OFFERED AT A SUBSTANTIAL 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 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-11
Certificates" herein and "Prepayment and Yield Considerations" in the Prospectus
Supplement.
S1-3
<PAGE>
RECENT DEVELOPMENTS AFFECTING THE SELLER AND SERVICER
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 January 29, 1996, Prudential Insurance announced
that it had entered into a definitive agreement (the "Sale Agreement") to sell a
substantial portion of its residential mortgage operations to Norwest Mortgage,
Inc., a California corporation ("Norwest Mortgage"), and Norwest Bank Minnesota
National Association, a national banking association ("Norwest Bank" and,
collectively with Norwest Mortgage, "Norwest"). In connection therewith, on the
closing date specified pursuant to the Sale Agreement (the "Sale Date"), which
is currently expected to be on or about April 30, 1996, Norwest Mortgage will
acquire from the Servicer substantially all of its assets and businesses, other
than certain mortgage loans and the Servicer's right to service mortgage loans
underlying series of mortgage pass-through certificates representing interests
in trusts formed by the Seller or by Securitized Asset Sales, Inc., an affiliate
of the Seller and the Servicer ("SASI"), including the Mortgage Loans in the
Trust Estate, and certain other mortgage servicing rights (all such servicing
rights collectively, the "Retained Servicing"). It is the present intention of
the Servicer to sell the Retained Servicing, from time to time as market
conditions warrant, in one or more transactions to one or more purchasers, which
may include Norwest Mortgage, and to effectively exit the mortgage loan
origination and servicing business as of the Sale Date.
In order to assure the performance of the Servicer's obligations as servicer
under the Pooling and Servicing Agreement as well as under other pooling and
servicing agreements pursuant to which various series of the Seller's mortgage
pass-through certificates were issued and other agreements pursuant to which the
Servicer performs Retained Servicing with respect to mortgage loans underlying
series of mortgage pass-through certificates representing interests in trusts
formed by the Seller or SASI (each, a "Servicing Agreement") and under each
other agreement pursuant to which the Servicer performs Retained Servicing with
respect to mortgage loans not underlying series of mortgage pass-through
certificates representing interests in trusts formed by the Seller or SASI
(each, an "Other Servicing Agreement"), the Servicer, Prudential Insurance and
Norwest intend to enter into the following arrangements:
1. SUBSERVICING AGREEMENT. The Servicer, Prudential Insurance and Norwest
Mortgage will enter into a subservicing agreement (the "Subservicing
Agreement"), pursuant to which the Servicer will delegate to Norwest Mortgage,
and Norwest Mortgage will agree to perform, all of the Servicer's duties and
obligations as mortgage loan servicer under the Pooling and Servicing Agreement
and each Servicing Agreement and Other Servicing Agreement, other than the
Servicer's duties with respect to the administration and disposition of real
estate acquired upon foreclosure, which latter duties will remain the
responsibility of the Servicer with the particular functions to be delegated by
the Servicer to Prudential Asset Recovery, Inc., an affiliate of the Seller, the
Servicer, SASI and Prudential Insurance, or other third party contractors. With
respect to the Series 1992-37 Certificates, such duties include collection of
mortgage payments, maintenance of tax and insurance escrows, advancing for
borrower delinquencies and unpaid taxes, to the extent required by the Pooling
and Servicing Agreement, and foreclosure or other realization activities in
connection with defaulted Mortgage Loans.
Under the Subservicing Agreement, Norwest Mortgage will be obligated to make
any principal and interest or other advances required to be made by the Servicer
under the Pooling and Servicing Agreement as well as under each Servicing
Agreement or Other Servicing Agreement, provided that the aggregate unreimbursed
amount of such advances at any time does not exceed $100 million. The Servicer
will be obligated to reimburse Norwest Mortgage for the amount of any such
advances, plus interest, from its own funds. The Servicer will remain obligated
under the Pooling and Servicing Agreement and each Servicing Agreement and Other
Servicing Agreement for all required advances which are not made by Norwest
Mortgage for any reason. In order to provide for its obligation to make advances
after the Sale Date, the Servicer will enter into a Loan Agreement with
Prudential Funding Corporation, an affiliate of the Seller, the Servicer, SASI
and Prudential Insurance ("Funding"), pursuant to which Funding will provide the
Servicer with a committed borrowing line (the "Loan Facility") in the amount of
$40 million for the sole purpose of supporting advances required of the Servicer
under the Pooling and Servicing Agreement and Servicing Agreements. Although the
Servicer expects that the combination of Norwest Mortgage's advance
S1-4
<PAGE>
obligation under the Subservicing Agreement and the Loan Facility will be
adequate to provide for the continuation of all such advances, there can be no
assurance that such mechanisms will be sufficient, or that after the Sale Date
the Servicer will have sufficient other assets, to ensure that all required
advances will be made.
The Servicer will pay Norwest Mortgage a portion of the Servicer's servicing
compensation under the Pooling and Servicing Agreement for its activities as
subservicer. The Subservicing Agreement will have an initial term of five years
from the Sale Date and may be extended for consecutive three year terms by the
Servicer, at its option, provided that the Servicer and Norwest Mortgage agree,
in the exercise of good faith, on the subservicing compensation for each such
renewal term. The Subservicing Agreement will be terminable by the Servicer,
from time to time, with respect to any Mortgage Loans as to which the Servicer
arranges to sell the Retained Servicing.
2. CERTIFICATE ADMINISTRATION AGREEMENT. The Servicer and Norwest Bank
will enter into an agreement (the "Certificate Administration Agreement"),
pursuant to which the Servicer will delegate to Norwest Bank, and Norwest Bank
will agree to perform, all of the Servicer's obligations with respect to
administrative and reporting functions under the Pooling and Servicing
Agreement. Such duties include calculation of distributions, preparation and
filing of tax returns, preparation of reports to investors and preparation and
filing of periodic reports under the Securities Exchange Act of 1934, as
amended.
The Subservicing Agreement and the Certificate Administration Agreement will
collectively provide for the delegation of substantially all of the Servicer's
duties and obligations under the Pooling and Servicing Agreement. While the
Pooling and Servicing Agreement provides that the Servicer will remain liable
for its obligations thereunder until the related Retained Servicing is
transferred in the manner permitted thereby, from and after the Sale Date the
Servicer is not expected to have any servicing capability or employees with
which to perform such obligations.
Under the Pooling and Servicing Agreement, the Seller is required, with
respect to any Mortgage Loan found to have defective documentation or in respect
of which the Seller has breached a representation or warranty, either to
repurchase such Mortgage Loan or to substitute a new mortgage loan therefor.
Each such Mortgage Loan was, in turn, acquired by the Seller from the Servicer
pursuant to an agreement under which the Servicer is required to repurchase or
substitute for any such Mortgage Loan so repurchased or substituted for by the
Seller. Although after the Sale Date the Servicer will continue to own the
Retained Servicing, the Servicer intends to sell the Retained Servicing as
expeditiously as market conditions permit. Accordingly, there can be no
assurance that at any time after the Sale Date the Servicer will have any
material assets with which to satisfy such obligations to the Seller. In such
event, the Seller would be unable to fulfill its repurchase or substitution
obligations under the Pooling and Servicing Agreement. However with respect to
any Mortgage Loan subserviced pursuant to the Subservicing Agreement, Prudential
Insurance will agree in the Subservicing Agreement to provide the funds to
repurchase such Mortgage Loan.
According to information provided by Norwest Mortgage, at December 31, 1995,
Norwest Mortgage was the nation's largest mortgage originator and had a
servicing portfolio of more than $107 billion. In 1995, Norwest Mortgage
originated over $33 billion of residential mortgage loans. Headquartered in Des
Moines, Iowa, Norwest Mortgage has more than 700 loan production offices in all
50 states. While derived from sources believed to be reliable, neither the
Seller, the Servicer nor the Underwriter makes any representation or warranty
regarding the accuracy or completeness of the information contained in this
paragraph.
S1-5
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The Class A-11 Certificates will be offered in fully registered,
certificated form in minimum denominations of $71,423,000 initial Class A-11
Notional Amount; provided, however, that the Class A-11 Certificates may be
issued in minimum denominations of $3,571,000 initial Class A-11 Notional Amount
to persons who deliver to the Trustee an affidavit stating that such person:
(a)(i) is a substantial, sophisticated, institutional investor having knowledge
and experience in financial and business matters, and in particular in such
matters related to securities similar to the Class A-11 Certificates, such that
such investor is capable of evaluating the merits and risks of an investment in
the Class A-11 Certificates, and (ii) has a net worth of at least $10,000,000;
or (b) will hold the Class A-11 Certificates solely as nominee for a person
meeting the criteria set forth in clause (a). The Class A-11 Certificates may be
issued in any amounts in excess of any such minimum denominations. The Class A
Subclass Principal Balance of the Class A-11 Certificates as of the
Determination Date in April 1996 will be approximately $479. The Class A
Subclass Principal Balance of the Class A-11 Certificates as of the
Determination Date in May 1996 will be equal to such balance as of the
Determination Date in April 1996 reduced by the amount of distributions or other
reductions of principal on the Distribution Date in April 1996.
Distributions of interest and in reduction of principal balance to holders
of Class A-11 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 May 1996.
Distributions (other than the final distribution in retirement of the Class
A-11 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-11
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 Class A-11 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-11
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) 7.50% and (ii) the Class A-11 Notional Amount.
The Class A Subclass Interest Accrual Amount for the Class A-11 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-11 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-11 Notional Amount with
respect to the Distribution Date in March 1996 was approximately $222,288,528.
The Class A-11 Notional Amount with respect to the Distribution Date in May 1996
will be equal to the Class A-11 Notional Amount with respect to the Distribution
Date in March 1996, less the difference between the Pool Scheduled Principal
Balance with respect to the Distribution Date in March 1996 and the Pool
Scheduled Principal Balance with respect to the Distribution Date in May 1996. 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-11
Notional Amount was approximately $428,539,924.
Notwithstanding anything contained in the Prospectus Supplement or the
Prospectus to the contrary, 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
S1-6
<PAGE>
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, (ii) all withdrawals from any reserve fund established to
provide support for the Servicer's obligation to make advances, as described
under "Description of the Certificates--Periodic Advances" in the Prospectus
Supplement and (iii) 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 or an unreimbursed advance has been made from the Reserve
Fund, if established;
(b) any unreimbursed Periodic Advances or unreimbursed advances from the
Reserve Fund, if established, with respect to Liquidated Loans;
(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 "Description of the
Certificates--Interest" in the Prospectus Supplement;
(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,
received on or after the Due Date occurring in the month in which such
Distribution Date occurs, and all partial principal prepayments 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; and
(j) Net Foreclosure Profits.
Notwithstanding anything contained in the Prospectus Supplement or the
Prospectus to the contrary, 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 make
Periodic Advances on or before the related Distribution Date for the benefit of
holders of the Series 1992-37 Certificates.
As described under "Pooling and Servicing Agreement--Optional Termination"
in the Prospectus Supplement, the Servicer has the right, but is not required,
to purchase from the Trust Estate all remaining Mortgage Loans, and thereby
effect early retirement of the Series 1992-37 Certificates, on any Distribution
Date when the Pool Scheduled Principal Balance is less than 10% of the Cut-Off
Date Aggregate Principal Balance (as defined in the Prospectus Supplement).
However, the Servicer will agree that for so long as the Class A-11 Certificates
are outstanding, without the consent of holders of 66 2/3% Percentage Interest
of the Class A-11 Certificates, the Servicer will not exercise such right unless
the Pool Scheduled Principal Balance of the Mortgage Loans is equal to or less
than 1% of the Cut-Off Date Aggregate Principal Balance.
The Prospectus Supplement and the Prospectus contain significant additional
information concerning the characteristics of the Class A-11 Certificates.
Investors are urged to read "Description of the Certificates" in the Prospectus
Supplement and in the Prospectus.
S1-7
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
As of March 15, 1996, 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 March 15, 1996 is its unpaid principal balance as of such
date assuming no delinquencies and no prepayments in full. As of March 15, 1996,
the Mortgage Loans included 1,092 promissory notes, having an aggregate Unpaid
Principal Balance (the "Aggregate Unpaid Principal Balance") of approximately
$219,977,544, secured by first liens (the "Mortgages") on one- to four-family
residential properties (the "Mortgaged Properties"). As of March 15, 1996 two
such Mortgage Loans having an aggregate Unpaid Principal Balance of
approximately $326,064 have prepaid in full. Prepayments in full occurring in
March 1996 will reduce the Class A-11 Notional Amount with respect to the
Distribution Date in May 1996. The Mortgage Loans 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' Clause" and "Servicing of the
Mortgage Loans--Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted
Mortgage Loans" in the Prospectus.
As of March 15, 1996 each Mortgage Loan had an Unpaid Principal Balance of
not less than $4,350 or more than $738,988, and the average Unpaid Principal
Balance of the Mortgage Loans was approximately $201,445. The latest stated
maturity date of any of the Mortgage Loans was July 1, 2023; 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, 1,019 of the Mortgaged Properties, which secure approximately
95.68% of the Aggregate Unpaid Principal Balance of the Mortgage Loans, were
owner occupied primary residences and 73 of the Mortgaged Properties, which
secure approximately 4.32% 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 March 15, 1996, four of the Mortgage Loans, representing approximately
0.48% of the Aggregate Unpaid Principal Balance of the Mortgage Loans were
Subsidy Loans. See "The Trust Estates--Mortgage Loans" and "PHMC--Mortgage Loan
Underwriting" in the Prospectus.
S1-8
<PAGE>
Set forth below is a description of certain additional characteristics of
the Mortgage Loans as of March 15, 1996 (except as otherwise indicated).
MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF UNPAID UNPAID
MORTGAGE PRINCIPAL PRINCIPAL
MORTGAGE INTEREST RATE LOANS BALANCE BALANCE
- ---------------------------------------- --------- --------------- --------------
<S> <C> <C> <C>
7.750%.................................. 45 $ 7,973,898.63 3.62 %
7.875%.................................. 83 15,485,506.92 7.04
8.000%.................................. 192 37,857,834.36 17.23
8.125%.................................. 174 37,099,050.56 16.86
8.250%.................................. 172 35,286,657.46 16.04
8.375%.................................. 143 31,043,580.56 14.11
8.500%.................................. 126 26,618,686.47 12.10
8.625%.................................. 66 12,591,751.65 5.72
8.750%.................................. 40 7,765,996.07 3.53
8.875%.................................. 15 2,568,179.52 1.17
9.000%.................................. 11 1,659,453.57 0.75
9.125%.................................. 7 1,400,741.91 0.64
9.250%.................................. 6 1,106,048.62 0.50
9.375%.................................. 6 924,455.26 0.42
9.500%.................................. 2 325,186.91 0.15
9.625%.................................. 2 160,240.35 0.07
9.750%.................................. 1 32,298.08 0.01
9.875%.................................. 1 77,977.54 0.04
--------- --------------- -------
Total........................... 1,092 $219,977,544.44 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
As of March 15, 1996, the weighted average Mortgage Interest Rate of the
Mortgage Loans was approximately 8.260% 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 March 15,
1996, the weighted average Net Mortgage Interest Rate of the Mortgage Loans was
approximately 8.060% 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>
309..................................... 2 $ 372,819.54 0.17 %
310..................................... 2 534,539.96 0.24
312..................................... 4 754,091.39 0.34
313..................................... 7 1,175,422.56 0.53
314..................................... 3 497,668.94 0.23
315..................................... 6 770,427.27 0.35
316..................................... 20 3,309,313.20 1.50
317..................................... 60 9,759,908.29 4.44
318..................................... 374 84,836,572.10 38.57
319..................................... 611 117,176,932.95 53.27
322..................................... 1 261,266.45 0.12
327..................................... 1 297,992.33 0.14
328..................................... 1 230,589.46 0.10
--------- --------------- -------
Total........................... 1,092 $219,977,544.44 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
As of March 15, 1996, the weighted average remaining term to stated maturity of
the Mortgage Loans was approximately 318 months.
S1-9
<PAGE>
YEAR 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>
1991.................................... 4 $ 907,359.50 0.41 %
1992.................................... 1,088 219,070,184.94 99.59
--------- --------------- -------
Total........................... 1,092 $219,977,544.44 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
As of March 15, 1996 the earliest month and year of origination of any Mortgage
Loan was November 1991 and the latest month and year of origination of any
Mortgage Loan was October 1992.
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........................... 87 $ 14,185,289.49 6.45 %
50.1-55.0%.............................. 41 8,425,228.49 3.83
55.1-60.0%.............................. 57 11,934,843.36 5.43
60.1-65.0%.............................. 61 12,875,179.34 5.85
65.1-70.0%.............................. 103 21,240,359.87 9.66
70.1-75.0%.............................. 223 46,333,317.76 21.06
75.1-80.0%.............................. 360 74,636,826.01 33.93
80.1-85.0%.............................. 25 4,979,239.76 2.26
85.1-90.0%.............................. 135 25,367,260.36 11.53
--------- --------------- -------
Total........................... 1,092 $219,977,544.44 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
As of March 15, 1996 the minimum and maximum Loan-to-Value Ratios at origination
of the Mortgage Loans were 12.5% and 90.0%, respectively, and the weighted
average Loan-to-Value Ratio at origination of the Mortgage Loans was
approximately 72.6%. 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 March 15, 1996, 87 of the
Mortgage Loans having Loan-to-Value Ratios at origination in excess of 80%,
representing approximately 6.30% of the Aggregate Unpaid Principal Balance of
the Mortgage Loans, were originated without primary mortgage insurance. See
"PHMC--Mortgage Loan Underwriting" in the Prospectus.
S1-10
<PAGE>
MORTGAGE LOAN DOCUMENTATION LEVELS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF UNPAID UNPAID
MORTGAGE PRINCIPAL PRINCIPAL
DOCUMENTATION LEVEL LOANS BALANCE BALANCE
- ---------------------------------------- --------- --------------- --------------
<S> <C> <C> <C>
Full Documentation...................... 610 $127,353,035.02 57.91 %
Asset & Income Verification............. 5 620,502.39 0.28
Asset & Mortgage Verification........... 186 42,573,538.38 19.35
Income & Mortgage Verification.......... 69 10,697,549.88 4.86
Asset Verification...................... 113 17,207,946.65 7.82
Income Verification..................... 0 0.00 0.00
Mortgage Verification................... 67 15,849,362.35 7.20
Preferred Processing.................... 42 5,675,609.77 2.58
--------- --------------- -------
Total........................... 1,092 $219,977,544.44 100.00 %
--------- --------------- -------
--------- --------------- -------
</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.
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.......... 513 $ 54,518,571.42 24.79 %
$200,001-$250,000....................... 194 42,412,124.62 19.28
$250,001-$300,000....................... 186 49,017,954.70 22.28
$300,001-$350,000....................... 86 26,659,076.23 12.12
$350,001-$400,000....................... 43 15,347,217.24 6.98
$400,001-$450,000....................... 35 14,144,342.90 6.43
$450,001-$500,000....................... 23 10,584,310.57 4.81
$500,001-$550,000....................... 3 1,493,164.81 0.68
$550,001-$600,000....................... 4 2,275,900.34 1.03
$650,001-$700,000....................... 1 642,353.84 0.29
$700,001-$750,000....................... 3 2,143,540.19 0.97
$750,001-$800,000....................... 1 738,987.58 0.34
--------- --------------- -------
Total........................... 1,092 $219,977,544.44 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
As of March 15, 1996, the average Unpaid Principal Balance of the Mortgage Loans
was approximately $201,445. As of March 15, 1996, 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 62.6% and 74.3%, respectively. See "The
Trust Estates--Mortgage Loans" and "PHMC--Mortgage Loan Underwriting" in the
Prospectus.
S1-11
<PAGE>
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.................. 946 $201,327,789.96 91.52 %
Two- to four-family Units............... 7 1,787,277.70 0.81
Condominiums............................ 130 15,414,778.02 7.01
Townhouses.............................. 4 418,183.58 0.19
Planned Unit Developments............... 5 1,029,515.18 0.47
--------- --------------- -------
Total........................... 1,092 $219,977,544.44 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
S1-12
<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>
Alabama................................. 2 $ 298,888.05 0.14 %
Arizona................................. 8 806,916.04 0.37
Arkansas................................ 1 105,769.35 0.05
California.............................. 438 115,692,163.76 52.57
Colorado................................ 11 1,365,169.50 0.62
Connecticut............................. 30 6,228,716.51 2.83
Delaware................................ 5 511,950.86 0.23
District of Columbia.................... 5 947,922.72 0.43
Florida................................. 39 3,560,720.24 1.62
Georgia................................. 12 1,046,587.18 0.48
Hawaii.................................. 2 812,457.90 0.37
Idaho................................... 1 38,739.13 0.02
Illinois................................ 12 2,040,498.92 0.93
Indiana................................. 2 274,764.75 0.12
Iowa.................................... 1 90,120.87 0.04
Kansas.................................. 2 361,436.86 0.16
Kentucky................................ 2 126,769.54 0.06
Louisiana............................... 1 61,461.10 0.03
Maine................................... 5 398,199.76 0.18
Maryland................................ 37 7,635,585.83 3.47
Massachusetts........................... 21 4,415,832.15 2.01
Michigan................................ 7 799,053.56 0.36
Minnesota............................... 4 543,073.14 0.25
Missouri................................ 2 101,949.95 0.05
Montana................................. 2 254,638.44 0.12
Nevada.................................. 2 602,182.02 0.27
New Hampshire........................... 3 521,447.57 0.24
New Jersey.............................. 159 24,297,821.72 11.05
New Mexico.............................. 5 961,057.70 0.44
New York................................ 124 22,284,143.40 10.13
North Carolina.......................... 9 1,517,248.37 0.69
Ohio.................................... 5 505,166.74 0.23
Oklahoma................................ 1 108,390.62 0.05
Oregon.................................. 3 367,438.11 0.17
Pennsylvania............................ 35 5,289,065.37 2.40
Rhode Island............................ 3 224,351.96 0.10
South Carolina.......................... 10 817,195.86 0.37
Tennessee............................... 6 561,675.93 0.26
Texas................................... 26 4,451,101.07 2.02
Utah.................................... 2 316,616.40 0.14
Vermont................................. 4 413,827.54 0.19
Virginia................................ 26 5,462,072.84 2.48
Washington.............................. 13 2,249,833.98 1.02
West Virginia........................... 1 99,311.35 0.05
Wisconsin............................... 1 153,020.21 0.07
Wyoming................................. 2 255,189.57 0.12
--------- --------------- -------
Total........................... 1,092 $219,977,544.44 100.00 %
--------- --------------- -------
--------- --------------- -------
</TABLE>
As of March 15, 1996, no more than approximately 0.88% of the Aggregate Unpaid
Principal Balance of the Mortgage Loans was secured by Mortgaged Properties
located in any one zip code.
S1-13
<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....................... 510 $ 90,957,107.41 41.35 %
Other Originators....................... 582 129,020,437.03 58.65
--------- --------------- -------
Total........................... 1,092 $219,977,544.44 100.00 %
--------- --------------- -------
--------- --------------- -------
</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................................ 450 $ 78,733,173.36 35.79 %
Rate/term refinance..................... 494 109,789,814.97 49.91
Equity take out......................... 148 31,454,556.11 14.30
--------- --------------- -------
Total........................... 1,092 $219,977,544.44 100.00 %
--------- --------------- -------
--------- --------------- -------
</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....................... 7 $ 1,458,911.38 0.66 %
60 to 89 days....................... 1 258,514.43 0.12
90 days or more..................... 1 145,958.82 0.07
Loans in Foreclosure................ 7 1,877,394.94 0.85
REO Mortgage Loans.................. 2 688,444.24 0.31
--
----------------- ---
Total....................... 18 $ 4,429,223.81 2.01 %
--
--
----------------- ---
----------------- ---
</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 March 15, 1996.
(2) As of March 15, 1996.
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 March 15, 1996, approximately 21.14% 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.
S1-14
<PAGE>
As of January 16, 1995 and March 16, 1995, as a result of flooding, 38 and
49 counties in California, respectively, (the "January 1995 Flood Counties" and
"March 1995 Flood Counties," respectively, and together, the "1995 Flood
Counties") were declared federal disaster areas eligible for federal disaster
assistance. As of March 15, 1996, approximately 50.38% of the Aggregate Unpaid
Principal Balance of the Mortgage Loans was secured by Mortgaged Properties that
are located in the January 1995 Flood Counties and approximately 41.65% of the
Aggregate Unpaid Principal Balance of the Mortgage Loans was secured by
Mortgaged Properties that are located in the March 1995 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 March 15,
1996, 0.33% 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.
As of March 8, 1996, as a result of recent flooding (the "Northeast
Floods"), all counties in the Commonwealth of Pennsylvania, all counties in the
State of Maryland, 28 counties in the State of West Virginia, 28 counties in the
State of New York, 13 counties in the Commonwealth of Virginia and 12 counties
in the State of Ohio (the "Northeast Flood Counties") were declared federal
disaster areas eligible for federal disaster assistance. As of March 15, 1996,
approximately 6.92% of the Aggregate Unpaid Principal Balance of the Mortgage
Loans was secured by Mortgaged Properties that are located in the Northeast
Flood Counties. In addition, other counties may have been and may become
affected by the Northeast Floods. 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 February 28, 1996, as a result of recent flooding (the "Northwest
Floods"), 26 counties in the State of Oregon, 21 counties in the State of
Washington and 10 counties in the State of Idaho (the "Northwest Flood
Counties") were declared federal disaster areas eligible for federal disaster
assistance. As of March 15, 1996, approximately 1.16% of the Aggregate Unpaid
Principal Balance of the Mortgage Loans was secured by Mortgage Properties that
are located in the Northwest Flood Counties. In addition, other counties may
have been and may become affected by the Northwest Floods. 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 March 15, 1996, ten of
the delinquent Mortgage Loans shown in the preceding table, representing
approximately 0.99% of the Aggregate Unpaid Principal Balance of the Mortgage
Loans or approximately $2,186,553, were secured by Mortgaged Properties located
in the Earthquake Counties, the Hurricane Counties, the 1995 Flood Counties, the
Northeast Flood Counties or the Northwest Flood Counties.
ORIGINATION, DELINQUENCY AND FORECLOSURE EXPERIENCE
During the years ended December 31, 1993, December 31, 1994 and December 31,
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 $35,805,498,813, $16,201,648,701 and $11,488,362,184,
respectively.
The following tables reflect delinquency, foreclosure and loan loss
experience of mortgage loans serviced by PHMC. As described under "Risk Factors
and Special Considerations--Recent Developments," PHMC intends, as of the Sale
Date, to cease its mortgage loan origination and servicing business. Norwest
Mortgage, as subservicer for PHMC, will perform foreclosure and other
realization activities in connection with defaulted Mortgage Loans and
Prudential Asset Recovery, Inc. or another third party contractor will
administer and dispose of real estate acquired upon foreclosure.
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, 1990,
December 31, 1991 and the nine months ended September 30, 1992 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, 1993, December 31, 1994 and December
31, 1995.
S1-15
<PAGE>
TOTAL PROGRAM LOANS
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1993 DECEMBER 31, 1994 DECEMBER 31, 1995
---------------------- ---------------------- ----------------------
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..... 337,156 $57,687,887 379,075 $62,175,544 423,895 $65,496,977
-------- ----------- -------- ----------- -------- -----------
-------- ----------- -------- ----------- -------- -----------
Period of
Delinquency(1)
30 to 59 days.... 3,190 $ 489,235 3,548 $ 548,524 5,103 $ 710,246
60 to 89 days.... 703 109,529 797 128,053 959 141,847
90 days or
more............. 1,398 271,637 1,418 308,124 729 122,554
-------- ----------- -------- ----------- -------- -----------
Total Delinquent
Loans............. 5,291 $ 870,401 5,763 $ 984,701 6,791 $ 974,647
-------- ----------- -------- ----------- -------- -----------
-------- ----------- -------- ----------- -------- -----------
Percent of
Portfolio......... 1.57% 1.51% 1.52% 1.58% 1.60% 1.49%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1993 DECEMBER 31, 1994 DECEMBER 31, 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Foreclosures(2).................. $ 277,533 $ 354,028 $ 360,645
Foreclosure Ratio(3)............. 0.48% 0.57% 0.55%
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1994 DECEMBER 31, 1995
------------------ ------------------ ------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net Gain (Loss)(4)............... $ (112,507) $ (194,956) $ (228,775)
Net Gain (Loss) Ratio(5)......... (0.20)% (0.31)% (0.35)%
</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.
S1-16
<PAGE>
FIXED PROGRAM LOANS
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1993 DECEMBER 31, 1994 DECEMBER 31, 1995
----------------------- ----------------------- -----------------------
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
-------- ------------ -------- ------------ -------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio of Fixed Program
Loans.................................. 288,556 $ 48,156,806 307,975 $ 48,602,956 358,021 $ 53,576,591
-------- ------------ -------- ------------ -------- ------------
-------- ------------ -------- ------------ -------- ------------
Period of Delinquency(1)
30 to 59 days......................... 2,609 $ 380,197 2,708 $ 389,236 4,101 $ 528,824
60 to 89 days......................... 571 86,136 591 87,687 743 98,269
90 days or more....................... 1,117 211,870 965 188,414 545 82,595
-------- ------------ -------- ------------ -------- ------------
Total Delinquent Loans.................. 4,297 $ 678,203 4,264 $ 665,337 5,389 $ 709,688
-------- ------------ -------- ------------ -------- ------------
-------- ------------ -------- ------------ -------- ------------
Percent of Fixed Program Loan
Portfolio.............................. 1.49% 1.41% 1.38% 1.37% 1.51% 1.32%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
--------------- ---------------- ---------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Foreclosures(2)......................... $ 195,361 $ 208,253 $ 218,951
Foreclosure Ratio(3).................... 0.41% 0.43% 0.41%
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
--------------- ---------------- ---------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net Gain (Loss)(4)...................... $ (63,705) $ (133,523) $ (164,734)
Net Gain (Loss) Ratio(5)................ (0.13)% (0.27)% (0.31)%
</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.
S1-17
<PAGE>
FIXED NON-RELOCATION PROGRAM LOANS
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1993 DECEMBER 31, 1994 DECEMBER 31, 1995
----------------------- ----------------------- -----------------------
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
-------- ------------ -------- ------------ -------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio of Fixed Non-relocation
Program Loans.......................... 247,792 $ 42,030,123 262,159 $ 41,589,441 303,943 $ 45,251,942
-------- ------------ -------- ------------ -------- ------------
-------- ------------ -------- ------------ -------- ------------
Period of Delinquency(1)
30 to 59 days......................... 2,326 $ 344,861 2,424 $ 350,629 3,658 $ 470,877
60 to 89 days......................... 530 81,444 539 80,843 679 89,665
90 days or more....................... 1,054 203,444 903 179,493 498 76,452
-------- ------------ -------- ------------ -------- ------------
Total Delinquent Loans.................. 3,910 $ 629,749 3,866 $ 610,965 4,835 $ 636,994
-------- ------------ -------- ------------ -------- ------------
-------- ------------ -------- ------------ -------- ------------
Percent of Fixed Non-relocation Program
Loan Portfolio......................... 1.58% 1.50% 1.47% 1.47% 1.59% 1.41%
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
--------------- ---------------- ---------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Foreclosures(2)......................... $ 190,293 $ 199,379 $ 208,865
Foreclosure Ratio(3).................... 0.45% 0.48% 0.46%
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
--------------- ---------------- ---------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net Gain (Loss)(4)...................... $ (61,387) $ (131,788) $ (161,810)
Net Gain (Loss) Ratio(5)................ (0.15)% (0.32)% (0.36)%
</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.
S1-18
<PAGE>
RESTRICTIONS ON TRANSFER OF THE CLASS A-11 CERTIFICATES
Class A-11 Certificates with denominations of less than $71,423,000 initial
Class A-11 Notional Amount but not less than $3,571,000 initial Class A-11
Notional Amount may be transferred to persons who deliver to the Trustee an
affidavit stating that such person: (a)(i) is a substantial, sophisticated,
institutional investor having knowledge and experience in financial and business
matters, and in particular in such matters related to securities similar to the
Class A-11 Certificates, such that such investor is capable of evaluating the
merits and risks of an investment in the Class A-11 Certificates, and (ii) has a
net worth of at least $10,000,000; or (b) will hold the Class A-11 Certificates
solely as nominee for a person meeting the criteria set forth in clause (a).
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 1992-37 Certificates were issued on October 30, 1992. Set forth
below are the approximate annualized prepayment rates of the Mortgage Loans
underlying the Series 1992-37 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>
November 1992................................................. 0.34%
December 1992................................................. 0.81%
January 1993.................................................. 0.26%
February 1993................................................. 3.66%
March 1993.................................................... 1.90%
April 1993.................................................... 5.23%
May 1993...................................................... 5.48%
June 1993..................................................... 14.04%
July 1993..................................................... 15.01%
August 1993................................................... 14.66%
September 1993................................................ 32.41%
October 1993.................................................. 54.23%
November 1993................................................. 63.31%
December 1993................................................. 65.57%
January 1994.................................................. 56.51%
February 1994................................................. 32.67%
March 1994.................................................... 38.22%
April 1994.................................................... 36.30%
May 1994...................................................... 12.51%
June 1994..................................................... 10.31%
July 1994..................................................... 5.20%
<CAPTION>
MONTH PERCENTAGE OF CPR
- -------------------------------------------------------------- -----------------
<S> <C>
August 1994................................................... 8.46%
September 1994................................................ 10.30%
October 1994.................................................. 0.70%
November 1994................................................. 6.39%
December 1994................................................. 4.60%
January 1995.................................................. 3.89%
February 1995................................................. 2.35%
March 1995.................................................... 2.06%
April 1995.................................................... 4.38%
May 1995...................................................... 3.48%
June 1995..................................................... 3.21%
July 1995..................................................... 9.88%
August 1995................................................... 8.17%
September 1995................................................ 10.44%
October 1995.................................................. 6.45%
November 1995................................................. 4.18%
December 1995................................................. 8.17%
January 1996.................................................. 7.86%
February 1996................................................. 7.60%
March 1996.................................................... 10.88%
</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 1992-37 Certificates with respect to November
1992, reduced by one month for each month thereafter. The prepayment history of
the Mortgage Loans underlying the Series 1992-37 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-11
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-11 CERTIFICATE.
S1-19
<PAGE>
SENSITIVITY OF THE PRE-TAX YIELD AND WEIGHTED
AVERAGE LIFE OF THE CLASS A-11 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-11 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-11 CERTIFICATES, WHICH ARE EXPECTED TO
BE OFFERED AT A SUBSTANTIAL PREMIUM, 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-11 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-11 Certificate is the average amount of time that will elapse from April
16, 1996 until each dollar in reduction of the principal balance of the Series
1992-37 Certificates is distributed to the holders thereof. The weighted average
life of the Class A-11 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 March 15, 1996, as
described above under "Description of the Mortgage Loans," adjusted to reflect
calculated payments of principal on April 1, 1996 assuming a constant prepayment
rate equal to 0% CPR for the month of March 1996. 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 S1-9. The following 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-11 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 fourth full
paragraph beginning on page S-50 of the Prospectus Supplement, and on the
further assumptions that (i) the Class A-11 Certificates will be purchased on
April 16, 1996 for an aggregate purchase price equal to approximately
$3,130,067, which includes accrued interest from April 1, 1996 to (but not
including) April 16, 1996, (ii) distributions to holders of Class A-11
Certificates will be made on the 25th day of each month commencing in May 1996,
(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 May 1996, (iv) principal prepayments on the Mortgage Loans will be
received on the last day of each month commencing in April 1996 at the
respective percentages of CPR set forth in the table and there are no Prepayment
Interest Shortfalls, (v) the Class A-11 Notional Amount applicable to the
Distribution Date occurring in May 1996 will be approximately $219,785,240 and
(vi) the Class A Subclass Principal Balance of the Class A-11 Certificates as of
the Determination Date occurring in May 1996 will be approximately $479.
SENSITIVITY OF THE PRE-TAX YIELD AND WEIGHTED AVERAGE LIFE
OF THE CLASS A-11 CERTIFICATES TO PREPAYMENTS
<TABLE>
<CAPTION>
PERCENTAGES OF CPR
----------------------------------------
5% 10% 15% 20% 25% 33%
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Pre-Tax Yield to Maturity (CBE)....... 34.83% 28.83% 22.65% 16.27% 9.69% (1.33)%
Weighted Average Life (years)......... 11.15 7.58 5.51 4.22 3.37 2.48
</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-11 Certificates, would cause the
discounted present value of such assumed stream of cash flows to equal an
assumed purchase price for the Class A-11 Certificates of approximately
$3,130,067 which includes accrued interest from April 1, 1996 to (but not
S1-20
<PAGE>
including) April 16, 1996, 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-11 Certificates and consequently does
not purport to reflect the return on any investment in the Class A-11
Certificates when such reinvestment rates are considered.
The weighted average lives of the Class A-11 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 1992-37
Certificates by the number of years from April 16, 1996 to the related
Distribution Date, (ii) adding the results and (iii) dividing the sum by the
aggregate distributions in reduction of the principal balance of the Series
1992-37 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. As a result of these factors, the pre-tax
yield and weighted average life of the Class A-11 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, Class A-2, Class A-3, Class A-4,
Class A-5, Class A-6, Class A-7, Class A-8, Class A-9, Class A-10 and Class A-11
Certificates, the Class M Certificates and the Class B-1, Class B-2, Class B-3
and Class B-4 Certificates are designated as the regular interests in the REMIC
and the Class A-R Certificates are designated as the residual interests in the
REMIC. The Proposed REMIC Regulations discussed in the Prospectus under the
heading "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for REMIC Certificates" were finalized in substantially the same
form on December 23, 1992.
The Class A-11 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-11 Certificates generally are treated as debt instruments
originated on the date of original issuance of the Series 1992-37 Certificates
for federal income tax purposes. Holders of the Class A-11 Certificates will be
required to report income thereon in accordance with the accrual method of
accounting. The Proposed OID Regulations discussed in the Prospectus were
withdrawn by subsequently proposed Treasury regulations on December 22, 1992.
Final and temporary Treasury regulations regarding original issue discount (the
"OID Regulations") were issued on February 2, 1994. Although there is no
directly applicable authority with respect to the issuance of the Series 1992-37
Certificates, the Seller believes that the Class A-11 Certificates should be
considered to have been issued with original issue discount in an amount equal
to the excess of all distributions of principal and interest expected to be
received thereon over their issue price (including accrued interest). This
treatment is consistent with the OID Regulations. Any "negative" amounts of
original issue discount on the Class A-11 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-11
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-11
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 1992-37 Certificates, less distribution made, and losses, if any,
incurred, on the Class A-11 Certificates since the date of original issuance of
the Series 1992-37 Certificates. A purchase price for a Class A-11 Certificate
that is less than or greater than the adjusted issue price of such Class A-11
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."
S1-21
<PAGE>
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.
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement and a terms
agreement (together, the "Underwriting Agreement") among the Seller, PHMC and
PaineWebber Incorporated, as underwriter (the "Underwriter") and, as to the
terms agreement, Prudential Insurance, the Class A-11 Certificates offered
hereby are being purchased from the Seller by the Underwriter on or about April
16, 1996. The Underwriter is committed to purchase all of the Class A-11
Certificates offered hereby if any Class A-11 Certificates are purchased. The
Underwriter has advised the Seller that it proposes to offer the Class A-11
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-11 Certificates are expected to be approximately 1.37%
of the Pool Scheduled Principal Balance as of the Distribution Date in May 1996
without giving effect to partial principal prepayments or net partial
liquidation proceeds received on or after the Determination Date in April 1996,
plus accrued interest from April 1, 1996 to (but not including) April 16, 1996.
The Underwriter and any dealers that participate with the Underwriter in the
distribution of the Class A-11 Certificates may be deemed to be underwriters,
and any discounts or commissions received by them and any profit on the resale
of Class A-11 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, PHMC and Prudential
Insurance 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-11 Certificates
offered hereby prior to the offering thereof. The Underwriter intends to act as
a market maker in the Class A-11 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-11 Certificates will develop or, if such a market does develop,
that it will provide holders of Class A-11 Certificates with liquidity of
investment at any particular time or for the life of the Class A-11
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 on certain persons who perform services for
governmental plans. For example, unless exempted, investment by an ERISA Plan in
the Class A-11 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-11 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-11
Certificates, see "ERISA Considerations" in the Prospectus.
S1-22
<PAGE>
On June 25, 1990, the DOL issued to the Underwriter an individual
administrative exemption, Prohibited Transaction Exemption 90-36, 55 Fed. Reg.
25903 (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-11 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-11 Certificates, is the
condition that the ERISA Plan investing in the Class A-11 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.
Before purchasing a Class A-11 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-11 Certificates. Any fiduciary
of an ERISA Plan considering whether to purchase a Class A-11 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-11 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-11 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-11 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-11
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-11 Certificates constitute
legal investments for such investors. See "Legal Investment" in the Prospectus.
LEGAL MATTERS
The validity of the Class A-11 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-11 Certificates
will be applied by the Seller to the purchase from an affiliate of the Class
A-11 Certificates.
RATINGS
The Class A-11 Certificates have been rated "Aaa" by Moody's and "AAAr" by
S&P. See "Ratings" in the Prospectus Supplement for a further discussion of the
ratings of the Certificates. S&P assigns the additional rating of "r" to
highlight classes of securities that S&P believes may experience high volatility
or high variability in expected returns due to non-credit risks.
S1-23
<PAGE>
The ratings of Moody's on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions of
principal and interest 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 and
consequently any adverse effect the timing of such prepayments could have on an
investor's anticipated yield.
S&P's ratings on mortgage pass-through certificates address the likelihood
of receipt by certificateholders of timely payments of interest and ultimate
return of principal. S&P's ratings take into consideration the credit quality of
the mortgage pool including any credit support providers, structural and legal
aspects associated with the certificates, and the extent to which the payment
stream of the mortgage pool is adequate to make payment required under the
certificates. S&P's ratings on the certificates do not, however, constitute a
statement regarding the frequency of prepayments on the mortgage loans. S&P's
rating does not address the possibility that investors may suffer a lower than
anticipated yield as a result of prepayments of the underlying mortgages. In
addition, it should be noted that in some structures a default on a mortgage is
treated as a prepayment and may have the same effect on yield as a prepayment.
The ratings of Moody's and S&P 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-11 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 the Seller 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-11 Certificates. The Seller 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-11 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 the Seller'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-11 Certificates, other
than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Seller should be
directed to: The Prudential Home Mortgage Securities Company, Inc., 5325
Spectrum Drive, Frederick, Maryland 21701, telephone number (301) 846-8199.
S1-24
<PAGE>
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS SUPPLEMENT, THE
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
SELLER OR BY THE UNDERWRITER. 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 SECURITIES OFFERED HEREBY NOR AN OFFER TO ANY
PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH IT WOULD BE UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS
SUPPLEMENT, THE PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR
RESPECTIVE DATES.
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TABLE OF CONTENTS
SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
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<S> <C>
General.................................................................. S1-3
Risk Factors and Special Considerations.................................. S1-3
Description of the Certificates.......................................... S1-6
Description of the Mortgage Loans........................................ S1-8
Origination, Delinquency and Foreclosure Experience...................... S1-15
Restrictions on Transfer of the Class A-11 Certificates.................. S1-19
Historical Prepayments................................................... S1-19
Sensitivity of the Pre-Tax Yield and Weighted Average Life of the Class
A-11 Certificates...................................................... S1-20
Certain Federal Income Tax Consequences.................................. S1-21
Underwriting............................................................. S1-22
Secondary Market......................................................... S1-22
ERISA Considerations..................................................... S1-22
Legal Investment......................................................... S1-23
Legal Matters............................................................ S1-23
Use of Proceeds.......................................................... S1-23
Ratings.................................................................. S1-23
Incorporation of Certain Information by Reference........................ S1-24
PROSPECTUS SUPPLEMENT
Table of Contents........................................................ S-3
Summary Information...................................................... S-4
Description of the Certificates.......................................... S-18
Description of the Mortgage Loans........................................ S-37
Origination, Delinquency and Foreclosure Experience...................... S-44
Prepayment and Yield Considerations...................................... S-48
Pooling and Servicing Agreement.......................................... S-55
Federal Income Tax Considerations........................................ S-57
ERISA Considerations..................................................... S-58
Legal Investment......................................................... S-59
Secondary Market......................................................... S-60
Underwriting............................................................. S-60
Legal Matters............................................................ S-60
Use of Proceeds.......................................................... S-60
Ratings.................................................................. S-61
Index of Significant Prospectus Supplement
Definitions............................................................ S-62
PROSPECTUS
Reports.................................................................. 2
Additional Information................................................... 2
Additional Detailed Information.......................................... 2
Table of Contents........................................................ 3
Summary of Prospectus.................................................... 7
The Trust Estates........................................................ 12
Description of the Certificates.......................................... 22
Credit Support........................................................... 34
Prepayment and Yield Considerations...................................... 39
The Seller............................................................... 41
PHMC..................................................................... 42
Use of Proceeds.......................................................... 48
Servicing of the Mortgage Loans.......................................... 48
The Pooling and Servicing Agreement...................................... 58
Certain Legal Aspects of the Mortgage Loans.............................. 61
Certain Federal Income Tax Consequences.................................. 67
ERISA Considerations..................................................... 91
Legal Investment......................................................... 95
Plan of Distribution..................................................... 96
Legal Matters............................................................ 97
Rating................................................................... 97
Index of Significant Definitions......................................... 98
</TABLE>
THE PRUDENTIAL HOME
MORTGAGE SECURITIES
COMPANY, INC.
SELLER
MORTGAGE PASS-THROUGH
CERTIFICATES, SERIES 1992-37
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SUPPLEMENT
-------------------
VARIABLE RATE1
CLASS A-11 CERTIFICATES
1ON THE CLASS A-11 NOTIONAL AMOUNT
PAINEWEBBER INCORPORATED
APRIL 11, 1996
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