<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration No. 33-80740
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JULY 25, 1996)
GREENWICH CAPITAL ACCEPTANCE, INC.
Depositor
$187,965,310 CLASS A, VARIABLE PASS-THROUGH RATE
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1996-CHL1
DISTRIBUTIONS PAYABLE ON THE 25TH DAY OF EACH MONTH, COMMENCING IN AUGUST 1996
---------------
COUNTRYWIDE HOME LOANS, INC.
Seller and Servicer
---------------
The Series 1996-CHL1 Certificates will consist of the Class A Certificates
(the "Class A Certificates"), the Class B-IO Certificates (the "Class B-IO
Certificates") and the Class R Certificates (the "Residual Certificates" and,
together with the Class B-IO Certificates, the "Subordinate Certificates" ).
The Class A Certificates and the Subordinate Certificates are collectively
referred to herein as the "Certificates." Only the Class A Certificates are
offered hereby.
Greenwich Capital Acceptance, Inc. (the "Depositor") has caused Financial
Security Assurance Inc. (the "Certificate Insurer") to issue a certificate
guaranty insurance policy (the "Certificate Insurance Policy") for the benefit
of the Class A Certificateholders pursuant to which the Certificate Insurer
will guarantee certain payments to such Certificateholders as described herein.
[LOGO] FSA
The Certificates will represent the entire beneficial ownership interest in a
trust fund (the "Trust Fund") to be created pursuant to a Pooling and Servicing
Agreement, dated as of July 1, 1996, among the Depositor, Countrywide Home
Loans, Inc., as servicer and seller (referred to herein as "Countrywide", the
"Servicer" or the "Seller," as applicable), and The Bank of New York, as
trustee (the "Trustee"). The Trust Fund will consist primarily of a pool of
conventional, adjustable-rate mortgage loans (the "Mortgage Loans") secured by
first liens on one- to four-family residential properties. The Mortgage Loans
will be subject to semi-annual mortgage rate adjustments based upon changes in
the average of the London interbank offered rates for six-month U.S. dollar
deposits in the London market (the "Mortgage Index"), as described herein under
"The Mortgage Pool."
The Trust Fund is subject to optional termination under the limited
circumstances described herein. Any such optional termination will result in an
early retirement of the Certificates. Distributions to Certificateholders will
be made on the 25th day of each month or, if such 25th day is not a Business
Day, on the first Business Day thereafter (each, a "Distribution Date"),
commencing in August 1996.
The Class A Certificates will have an initial aggregate principal balance of
approximately $187,965,310 and will evidence a senior beneficial ownership
interest in the Trust Fund. The remaining beneficial ownership interest in the
Trust Fund will be evidenced by the Subordinate Certificates.
The interests of the owners of the Class A Certificates will be represented
by book-entries on the records of The Depository Trust Company (the
"Depository") and participating members thereof. No person acquiring a
beneficial interest in a Class A Certificate will be entitled to receive a
physical certificate representing such Certificate, except in the limited
circumstances described herein. See "Description of the Certificates--Book-
Entry Certificates" herein.
Except for certain representations and warranties relating to the Mortgage
Loans, Countrywide's obligations with respect to the Certificates are limited
to its contractual servicing obligations. The Class A Certificates evidence
interests in the Trust Fund only and are payable solely from amounts received
with respect thereto and from amounts payable pursuant to the Certificate
Insurance Policy. The Class A Certificates do not constitute an obligation of
or an interest in the Depositor, the Trustee or Countrywide, or any of their
respective affiliates, and will not be insured or guaranteed by any
governmental agency.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
[LOGO OF GREENWICH CAPITAL]
[LOGO OF COUNTRYWIDE SECURITIES]
July 25, 1996
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THE YIELD TO INVESTORS ON THE CLASS A CERTIFICATES WILL BE SENSITIVE TO,
AMONG OTHER THINGS, THE LEVEL OF THE LONDON INTERBANK OFFERED RATE FOR ONE-
MONTH UNITED STATES DOLLAR DEPOSITS ("ONE-MONTH LIBOR") AND TO THE ADDITIONAL
LIMITATIONS ON THE PASS-THROUGH RATE FOR THE CLASS A CERTIFICATES, AS DESCRIBED
HEREIN. IN ADDITION, THE YIELD TO MATURITY OF THE CLASS A CERTIFICATES MAY VARY
FROM THE ANTICIPATED YIELD TO THE EXTENT SUCH CLASS IS PURCHASED AT A DISCOUNT
OR PREMIUM AND TO THE EXTENT THE RATE AND TIMING OF PAYMENTS THEREON ARE
SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS)
OF THE MORTGAGE LOANS. CERTIFICATEHOLDERS SHOULD CONSIDER, IN THE CASE OF ANY
CLASS A CERTIFICATE PURCHASED AT A DISCOUNT, THE RISK THAT A LOWER THAN
ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS
LOWER THAN THE ANTICIPATED YIELD AND, IN THE CASE OF ANY CLASS A CERTIFICATE
PURCHASED AT A PREMIUM, THE RISK THAT A FASTER THAN ANTICIPATED RATE OF
PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE
ANTICIPATED YIELD.
An election will be made to treat the Trust Fund as a real estate mortgage
investment conduit (the "REMIC") for federal income tax purposes.
Greenwich Capital Markets, Inc. and Countrywide Securities Corporation (each,
an "Underwriter") intend to make a secondary market in the Class A Certificates
but have no obligation to do so. There is currently no secondary market for the
Class A Certificates and there can be no assurance that such a market will
develop or, if it does develop, that it will continue.
----------------
The Class A Certificates are being offered by the Underwriters from time to
time in negotiated transactions or otherwise at varying prices to be determined
at the time of sale. Proceeds to the Depositor are expected to be approximately
$187,495,397 before deducting issuance expenses payable by the Depositor.
The Class A Certificates are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to approval of certain legal matters by counsel. It is expected that delivery
of the Class A Certificates will be made in book-entry form only through the
facilities of the Depository on or about July 31, 1996.
----------------
This Prospectus Supplement does not contain complete information about the
offering of the Class A Certificates. Additional information is contained in
the Prospectus dated July 25, 1996 (the "Prospectus") which accompanies this
Prospectus Supplement and purchasers are urged to read both this Prospectus
Supplement and the Prospectus in full. Sales of the Class A Certificates may
not be consummated unless the purchaser has received both this Prospectus
Supplement and the Prospectus.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
S-2
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SUMMARY OF TERMS
This Summary of Terms is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary of
Terms are defined elsewhere in this Prospectus Supplement or in the Prospectus.
Title of
Certificates....... Mortgage Pass-Through Certificates, Series 1996-CHL1 (the
"Certificates"), consisting of (i) the Class A
Certificates (the "Class A Certificates"), (ii) the Class
B-IO Certificates (the "Class B-IO Certificates") and
(iii) the Class R Certificates (the "Residual
Certificates" and, together with the Class B-IO
Certificates, the "Subordinate Certificates"). Only the
Class A Certificates are offered hereby.
The Depositor....... Greenwich Capital Acceptance, Inc. (the "Depositor"), a
Delaware corporation that is an indirect limited purpose
finance subsidiary of The Long-Term Credit Bank of Japan,
Limited and an affiliate of Greenwich Capital Markets,
Inc., one of the Underwriters. National Westminster Bank
Plc has entered into an agreement to acquire the parent
company of the Depositor. Completion of that acquisition
is subject to receipt of regulatory approval and is
expected to occur in late 1996. See "The Depositor" in
the Prospectus and "Method of Distribution" herein. None
of the Depositor, The Long-Term Credit Bank of Japan,
Limited or any of their respective affiliates or any
other person or entity (other than the Certificate
Insurer, to the extent described herein, with respect to
the Class A Certificates) will insure or guarantee or
otherwise be obligated with respect to the Certificates.
Seller and
Servicer........... Countrywide Home Loans, Inc. ("Countrywide" or the
"Seller" and, in its capacity as servicer of the Mortgage
Loans, the "Servicer"). See "Servicing of Mortgage
Loans--The Servicer" herein. The Mortgage Loans were
originated or acquired by the Seller in the normal course
of its business.
Trustee............. The Bank of New York, a New York banking corporation, not
in its individual capacity but solely as trustee on
behalf of the Certificateholders and the Certificate
Insurer (the "Trustee").
Certificate
Insurer............. Financial Security Assurance Inc. (the "Certificate
Insurer"). See "Financial Security Assurance Inc."
herein.
Cut-off Date........ July 1, 1996.
Closing Date........ On or about July 31, 1996.
Description of
Certificates
A. General......... The Certificates will be issued pursuant to a Pooling and
Servicing Agreement, dated as of July 1, 1996 (the
"Pooling and Servicing Agreement"), among the Depositor,
the Servicer, the Seller and the Trustee.
The Class A Certificates and the Subordinate Certificates
will represent the entire beneficial ownership interest
in a trust fund (the "Trust Fund"), which will consist
primarily of a pool (the "Mortgage Pool") of
conventional, adjustable-rate mortgage loans (the
"Mortgage Loans") secured by first liens on one- to four-
family residential properties (the "Mortgaged
Properties").
B. Form of
Certificates....... The Class A Certificates will be issued in book-entry
form. So long as such Certificates are Book-Entry
Certificates (as defined herein), such Certificates
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will be evidenced by one or more certificates registered
in the name of CEDE & Co. ("CEDE"), as nominee of The
Depository Trust Company (the "Depository"). No person
acquiring a beneficial ownership interest in the Class A
Certificates will be entitled to receive a Definitive
Certificate (as defined herein) representing such
person's interest, except in the event Definitive
Certificates are issued under the limited circumstances
described herein.
C. Distributions... Distributions on the Class A Certificates will be made on
the 25th day of each month or, if such day is not a
Business Day, on the first Business Day thereafter,
commencing in August 1996 (each, a "Distribution Date").
Distributions on each Distribution Date will be made to
Certificateholders of record as of the last Business Day
of the month preceding the month of such Distribution
Date (each, a "Record Date"), except that the final
distribution on the Class A Certificates will be made
only upon presentation and surrender of the Class A
Certificates at the office or agency of the Trustee in
New York, New York. Distributions on the Mortgage Loans
will be applied to the payment of principal and interest
on the Certificates in accordance with the priorities
described below. The rights of the Subordinate
Certificateholders to receive distributions with respect
to the Mortgage Loans are subordinate to the rights of
the Class A Certificateholders, to the extent described
herein.
1. Interest... On each Distribution Date, to the
extent funds (including Insured
Payments) are available therefor,
interest will be paid on the Class A
Certificates in an amount (the "Class A
Interest Distribution Amount") equal to
the sum of (i) interest accrued (based
on a 360-day year and the actual number
of days elapsed during the related
Accrual Period (as defined herein)) at
the Pass-Through Rate (as defined
herein) on the Certificate Principal
Balance of the Class A Certificates,
subject to reduction in the event of
Prepayment Interest Shortfalls (as
defined herein), to the extent not
covered by one-half of the Servicing
Fee as described herein, and Relief Act
Shortfalls (as defined herein) and (ii)
that portion of the Class A Carry-
Forward Amount (as defined herein)
relating to certain shortfalls in
interest. See "Description of the
Certificates--Allocation of Available
Funds" herein.
2. Principal.. On each Distribution Date, to the
extent funds (including Insured
Payments) are available therefor after
distributions of interest on the Class
A Certificates, Holders of the Class A
Certificates will be entitled to
receive, as payment of principal, the
difference between (a) the sum (without
duplication) of (i) all scheduled
installments of Mortgage Loan principal
due during the related Due Period and
received by the Servicer on or
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before the related Determination Date,
and all unscheduled collections of
principal on, and recoveries of
principal and certain other amounts
with respect to, the Mortgage Loans, as
described in more detail herein, during
the related Prepayment Period
(excluding certain amounts received in
respect of scheduled principal on the
Mortgage Loans due after the related
Due Date), together with all Advances
(as defined herein) in respect of
principal made by the Servicer, (ii)
any Subordination Deficit (as defined
herein) for such Distribution Date,
(iii) that portion of any Class A
Carry-Forward Amount that relates to a
shortfall in a distribution of a
Subordination Deficit, and (iv) an
amount necessary to increase the
Subordinated Amount (as defined herein)
to the Required Subordinated Amount (as
defined herein), and (b) the
Subordination Reduction Amount (as
defined herein), if any, for such
Distribution Date (such difference, the
"Class A Principal Distribution
Amount"). See "Description of the
Certificates--Allocation of Available
Funds" herein.
Pass-Through Rate... The Pass-Through Rate for a particular Distribution Date
will be equal to the least of (i) the sum of (a) One-
Month LIBOR and (b) the applicable Class A Pass-Through
Margin, (ii) the Class A Available Funds Cap and (iii)
13.00% per annum (the "Fixed Rate Cap"). The Class A
Pass-Through Margin will be equal to 0.35% (35 basis
points) per annum until the aggregate Stated Principal
Balance of the Mortgage Loans included in the Trust Fund
(the "Pool Stated Principal Balance") is less than or
equal to 10% of the Cut-off Date Principal Balance (as
defined herein), at which time the Class A Pass-Through
Margin will equal 0.70% (70 basis points) per annum. As
to any Distribution Date, the "Class A Available Funds
Cap" is a per annum rate equal to a fraction, expressed
as a percentage, the numerator of which equals the excess
of (i) the sum of (a) the aggregate amount of interest
due on the Mortgage Loans on the related Due Date and (b)
the Subordination Reduction Amount, if any, for such
Distribution Date over (ii) the sum of (a) the servicing
fee (the "Servicing Fee") as described herein under
"Servicing of the Mortgage Loans--Servicing Compensation
and Payment of Expenses," (b) the Premium Amount payable
to the Certificate Insurer and (c) the Available Funds
Rate Adjustment and the denominator of which is equal to
(1) the Certificate Principal Balance of the Class A
Certificates for such Distribution Date multiplied by (2)
the actual number of days elapsed in the related Accrual
Period divided by 360. The Premium Amount for any
Distribution Date will be equal to the Insurance Premium
Rate (as set forth in the Pooling and Servicing
Agreement) times one-twelfth the Certificate Principal
Balance of the Class A Certificates on such Distribution
Date before giving effect to distributions to be made
thereon on such date. The Available Funds Rate Adjustment
for any Distribution Date will be equal to the product of
(x) one-twelfth of 0.50% (50 basis points) and (y) the
Pool Stated
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Principal Balance on such date. The initial Pass-Through
Rate for the Distribution Date in August 1996 will not be
established until July 29, 1996, the date on which One-
Month LIBOR for such Distribution Date will be
determined. See "Description of the Certificates--
Calculation of One-Month LIBOR" herein for an explanation
of how One-Month LIBOR is determined. The One-Month LIBOR
value on July 25, 1996 was approximately 5.438% per
annum.
Credit Enhancement.. The credit enhancement provided for the benefit of the
Class A Certificateholders consists solely of (a) any
overcollateralization resulting from the internal cash
flows of the Trust Fund and (b) the Certificate Insurance
Policy (as defined below).
Overcollateralization. The allocation provisions of the
Trust Fund result in a limited acceleration of principal
of the Class A Certificates relative to the amortization
of the Mortgage Loans. The acceleration of principal
achieved by the application of certain excess interest
amounts to reduce the Certificate Principal Balance of
the Class A Certificates results in overcollateralization
to the extent the Pool Stated Principal Balance (as
defined herein) of the Mortgage Loans exceeds the
Certificate Principal Balance of the Class A
Certificates. Once the required level of
overcollateralization is reached, and subject to the
provisions described in the next paragraph, further
application of the acceleration feature will cease,
unless necessary to maintain the required level of
overcollateralization.
The Pooling and Servicing Agreement provides that,
subject to certain trigger tests, the required level of
overcollateralization may increase or decrease over time.
An increase would result in a temporary period of
accelerated amortization of the Class A Certificates to
increase the actual level of overcollateralization to its
required level; a decrease would result in a temporary
period of decelerated amortization to reduce the actual
level of overcollateralization to its required level. See
"Description of the Certificates--Overcollateralization
Provisions."
The Certificate Insurance Policy. The Class A
Certificateholders will have the benefit of a certificate
guaranty insurance policy (the "Certificate Insurance
Policy") to be issued by the Certificate Insurer. The
Certificate Insurance Policy is being issued as a means
of providing additional credit enhancement to the Class A
Certificates. Under the Certificate Insurance Policy, the
Certificate Insurer will pay the Trustee, for the benefit
of the Holders of the Class A Certificates, as further
described herein, an amount that will insure the payment
on each Distribution Date of (i) the sum of (a) the Class
A Interest Distribution Amount and (b) any Subordination
Deficit (such sum, the "Insured Distribution Amount") and
(ii) any unpaid Preference Amount. A payment by the
Certificate Insurer under the Certificate Insurance
Policy is referred to herein as an "Insured Payment." See
"Description of the Certificates--The Certificate
Guaranty Insurance Policy" herein.
Mortgage Rate....... As described under "The Mortgage Pool--General," the
Mortgage Rate for each Mortgage Loan will be subject to
adjustment semi-annually to equal the
sum, rounded to the nearest 0.125%, of the applicable
Mortgage Index value
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and the Gross Margin for such Mortgage Loan, subject to
the effects of any applicable Periodic Rate Cap, Maximum
Mortgage Rate and Minimum Mortgage Rate (each as defined
herein).
Mortgage Index...... The Mortgage Index value applicable to any semi-annual
Adjustment Date (as defined herein) for a Mortgage Loan
will be the average of the London interbank offered rates
for six-month U.S. dollar deposits in the London market,
as set forth in The Wall Street Journal, or, if the
Mortgage Index ceases to be published in The Wall Street
Journal or becomes unavailable for any reason, then the
Mortgage Index shall be a new index selected by the
Trustee, as holder of the related Mortgage Note, based on
comparable information, in each case as most recently
announced as of a date 45 days prior to such Adjustment
Date. The Mortgage Index value published on July 25, 1996
was 5.844%.
Servicing........... Countrywide will serve as the Servicer of the Mortgage
Loans under the Pooling and Servicing Agreement. The
Servicer will be responsible for the servicing of the
Mortgage Loans and will receive from interest collected
on the Mortgage Loans a monthly servicing fee on each
Mortgage Loan equal to the Stated Principal Balance
thereof multiplied by one-twelfth of the Servicing Fee
Rate (such product, the "Servicing Fee"). See "Servicing
of Mortgage Loans--Servicing Compensation and Payment of
Expenses" herein.
The Servicer is obligated to make advances ("Advances")
with respect to delinquent payments of principal of and
interest on any Mortgage Loan to the extent described
herein. The Trustee will be obligated to make any such
Advance if the Servicer fails in its obligation to do so,
to the extent provided in the Pooling and Servicing
Agreement. See "Servicing of Mortgage Loans--Advances"
herein.
Optional
Termination........ On any Distribution Date on which the Pool Stated
Principal Balance is less than or equal to 10% of the
Pool Stated Principal Balance of the Mortgage Loans as of
the Cut-off Date (the "Cut-off Date Principal Balance"),
the Servicer (and, if Countrywide is no longer the
Servicer, the Certificate Insurer) will have the option
(but not the obligation) to purchase, in whole, the
Mortgage Loans and the REO Property (as defined herein),
if any, remaining in the Trust Fund and thereby effect
the early retirement of all Certificates. See
"Description of the Certificates--Optional Termination"
herein.
Federal Income Tax
Considerations..... An election will be made to treat the Trust Fund as a
"real estate mortgage investment conduit" (the "REMIC")
for federal income tax purposes. The Class A Certificates
and the Class B-IO Certificates will constitute "regular
interests" in the REMIC and the Class R Certificates will
constitute the sole class of "residual interests" in the
REMIC. The Class A Certificates may be issued with
original issue discount for federal income tax purposes.
For purposes of determining the amount and rate of
accrual of original issue discount and market discount,
the Depositor intends to assume that there will be
Principal Prepayments on the Mortgage Loans at a constant
prepayment rate ("CPR") equal to 22% per annum. No
representation is made as to
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whether the Mortgage Loans will prepay at that rate or
any other rate. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
ERISA
Considerations..... The acquisition of a Class A Certificate by an employee
benefit plan subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or a plan or
arrangement subject to Section 4975 of the Code (each of
the foregoing, a "Plan") could, in some instances, result
in a "prohibited transaction" or other violation of the
fiduciary responsibility provisions of ERISA and Code
Section 4975.
Any Plan fiduciary considering whether to purchase any
Class A Certificates on behalf of a Plan should consult
with its counsel regarding the applicability of the
provisions of ERISA and the Code. See "ERISA
Considerations" herein and in the Prospectus.
Legal Investment.... The Class A Certificates will constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA") so long
as they are rated in one of the two highest rating
categories by at least one nationally recognized
statistical rating organization and, as such, are legal
investments for certain entities to the extent provided
for in SMMEA. Institutions whose investment activities
are subject to review by federal or state regulatory
authorities should consult with their counsel or the
applicable authorities to determine whether an investment
in the Class A Certificates complies with applicable
guidelines, policy statements or restrictions. See "Legal
Investment" in the Prospectus.
Ratings............. It is a condition of the issuance of the Class A
Certificates that they be rated AAA by Standard & Poor's,
a division of the McGraw-Hill Companies ("S&P"), and Aaa
by Moody's Investors Service, Inc. ("Moody's" and,
together with S&P, the "Rating Agencies"). The security
ratings of the Class A Certificates should be evaluated
independently from similar ratings on other types of
securities. A security rating is not a recommendation to
buy, sell or hold securities and may be subject to
revision or withdrawal at any time by the Rating
Agencies. See "Ratings" herein.
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THE MORTGAGE POOL
GENERAL
The following discussion applies to the origination, sales and servicing
practices of Countrywide in effect at the time of the origination of the
Mortgage Loans.
The Mortgage Pool will consist of Mortgage Loans with an aggregate unpaid
principal balance as of the Cut-off Date (the "Cut-off Date Principal Balance")
expected to be approximately $187,965,310.34. The Mortgage Loans provide for
the amortization of the amount financed over a series of monthly payments. All
the Mortgage Loans provide for payments due as of the first day of each month.
The Mortgage Loans to be included in the Mortgage Pool were originated or
purchased by Countrywide Home Loans, Inc. ("Countrywide") and were originated
substantially in accordance with Countrywide's underwriting criteria for sub-
prime ("B&C") quality mortgage loans described herein. Sub-prime mortgage loans
are generally first mortgage loans made to borrowers with prior credit
difficulties.
All percentages described herein are approximate percentages (except as
otherwise stated) by Cut-off Date Principal Balance. At origination,
approximately 99.3% of the Mortgage Loans had a stated term to maturity of 30
years. Scheduled monthly payments made by the Mortgagors on the Mortgage Loans
("Scheduled Payments") either earlier or later than the scheduled due dates
thereof will not affect the amortization schedule or the relative application
of such payments to principal and interest. All of the Mortgage Notes provide
for a fifteen (15) day grace period for monthly payments. Any Mortgage Loan may
be prepaid in full or in part at any time; however, approximately 32.98% of the
Mortgage Loans provide for the payment by the borrower of a prepayment charge
in limited circumstances on full prepayments made within five years from the
date of execution of the related Mortgage Note. In general, the Mortgage Note
provides that a prepayment charge will apply if, during the first five years
from the date of origination of such Mortgage Loan, the borrower prepays such
Mortgage Loan in full. The amount of the prepayment charge will generally be
equal to six months' advance interest calculated on the basis of the rate in
effect at the time of such prepayment on the amount prepaid in excess of 20% of
the original balance of such Mortgage Loan.
Each Mortgage Loan has a Mortgage Rate subject to semi-annual adjustment on
the first day of the months specified in the related Mortgage Note (each such
date, an "Adjustment Date") to equal the sum, rounded to the nearest 0.125%, of
(i) the average of the London interbank offered rates for six-month U.S. dollar
deposits in the London market, as set forth in The Wall Street Journal, or, if
the Mortgage Index ceases to be published in The Wall Street Journal or becomes
unavailable for any reason, then the Mortgage Index shall be a new index
selected by the Trustee, as holder of the related Mortgage Note, based on
comparable information, in each case as most recently announced as of a date 45
days prior to such Adjustment Date (the "Mortgage Index"), and (ii) a fixed
percentage amount specified in the related Mortgage Note (the "Gross Margin");
provided, however, that the Mortgage Rate will not increase or decrease by more
than 1.50% on any Adjustment Date (the "Periodic Rate Cap"). Substantially all
of the Mortgage Loans were originated with Mortgage Rates less than the sum of
the then applicable Mortgage Index values and the related Gross Margins,
rounded as described herein. Approximately 49.98% of the Mortgage Loans (the
"2/28 Mortgage Loans") will have fixed Mortgage Rates for 24 months after
origination thereof before becoming subject to the semi-annual adjustment
described in the preceding sentence. All the Mortgage Loans provide that over
the life of the Mortgage Loan the Mortgage Rate will in no event be more than
the initial Mortgage Rate plus 7.0% (such rate, the "Maximum Mortgage Rate").
Each Mortgage Loan provides that in no event will the Mortgage Rate be less
than the initial Mortgage Rate (such rate, the "Minimum Mortgage Rate").
Effective with the first payment due on a Mortgage Loan after each related
Adjustment Date, the monthly payment will be adjusted to an amount which will
fully amortize the outstanding principal balance of the Mortgage Loan over its
remaining term.
As of the Cut-off Date, approximately 2.18% of the Mortgage Loans were
contractually delinquent for thirty or more days; however, approximately 56
Mortgage Loans, aggregating approximately 3.94% of the
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Cut-off Date Principal Balance, had been contractually delinquent for thirty or
more days more than once in the twelve months preceding the Cut-off Date.
The Mortgage Loans had the following characteristics as of the Cut-off Date
(expressed as percentages of the Cut-off Date Principal Balance, except as
otherwise stated):
The next Adjustment Date following the Cut-off Date for each of the Mortgage
Loans other than the 2/28 Mortgage Loans will occur on the first day of the
following months, with the percentages of such Mortgage Loans (based on the
aggregate principal balance thereof as of the Cut-off Date) indicated on an
approximate basis in the following table:
<TABLE>
<CAPTION>
ADJUSTMENT DATE PERCENTAGE
--------------- ----------
<S> <C>
July 1996...................................................... 5.20%
August 1996.................................................... 1.79
September 1996................................................. 0.69
October 1996................................................... 8.27
November 1996.................................................. 38.00
December 1996.................................................. 27.11
January 1997................................................... 18.82
February 1997.................................................. 0.06
December 1997.................................................. 0.07
------
100.00%
======
</TABLE>
The initial Adjustment Date for each of the 2/28 Mortgage Loans will occur on
the first day of the following months, with the percentages of such Mortgage
Loans (based on the aggregate principal balance thereof as of the Cut-off Date)
indicated on an approximate basis in the following table:
<TABLE>
<CAPTION>
ADJUSTMENT DATE PERCENTAGE
--------------- ----------
<S> <C>
December 1997.................................................. 1.28%
January 1998................................................... 2.79
February 1998.................................................. 7.08
March 1998..................................................... 7.31
April 1998..................................................... 9.37
May 1998....................................................... 17.29
June 1998...................................................... 26.66
July 1998...................................................... 28.12
August 1998.................................................... 0.09
------
100.00%
======
</TABLE>
None of the Mortgage Loans had a first payment date prior to October 1, 1995.
The latest maturity date of any of the Mortgage Loans is August 1, 2026.
Approximately 28.88% of the Mortgage Loans are Mortgage Loans the proceeds of
which were used to purchase the related Mortgaged Property. Approximately
71.12% of the Mortgage Loans are Mortgage Loans the proceeds of which were used
to refinance an existing mortgage loan.
Approximately 83.81% of the Mortgage Loans are secured by detached one-family
dwelling units and approximately 10.51% of the Mortgage Loans are secured by
dwelling units in Planned Unit Developments ("PUDs"). No more than
approximately 2.57% of the Mortgage Loans are secured by units in condominiums.
No more than approximately 3.12% of the Mortgage Loans are secured by two- to
four-family dwelling units. On the basis of representations made by the
mortgagors in their loan applications, no more than approximately 5.35% of the
Mortgage Loans are secured by investor properties.
None of the Mortgage Loans are subject to any buydown agreement.
None of the Mortgage Loans are insured by any primary mortgage insurance
policy.
S-10
<PAGE>
The weighted average Loan-to-Value Ratio (as defined below) of the Mortgage
Loans as of the Cut-off Date (weighted based on the Cut-off Date Principal
Balances) is expected to be approximately 73.83%. The Loan-to-Value Ratios of
the Mortgage Loans as of the Cut-off Date are expected to be distributed as
follows (the sum of the percentages in the following table may not equal the
total due to rounding):
<TABLE>
<CAPTION>
% OF
LOAN-TO- NUMBER OF AGGREGATE
VALUE MORTGAGE CUT-OFF DATE CUT-OFF DATE
RATIO LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------- --------- ----------------- -----------------
<S> <C> <C> <C>
23.73 - 50.00%.......... 85 $ 5,607,402.91 2.98%
50.01 - 55.00........... 49 3,855,678.01 2.05
55.01 - 60.00........... 81 8,233,848.28 4.38
60.01 - 65.00........... 168 14,910,566.76 7.93
65.01 - 70.00........... 314 30,712,430.55 16.34
70.01 - 75.00........... 378 41,860,513.12 22.27
75.01 - 80.00........... 360 44,226,416.87 23.53
80.01 - 85.00........... 315 37,694,363.20 20.05
85.01 - 90.00........... 7 669,593.17 0.36
95.01 - 97.50........... 1 194,497.47 0.10
----- --------------- ------
TOTAL................. 1,758 $187,965,310.34 100.00%
===== =============== ======
</TABLE>
The Loan-to-Value Ratio of a Mortgage Loan is equal to (i) the principal
balance of such Mortgage Loan at the date of origination, divided by (ii) the
Collateral Value of the related Mortgaged Property. The Collateral Value of a
Mortgaged Property is the lesser of (x) the appraised value based on an
appraisal made for Countrywide by an independent fee appraiser at the time of
the origination of the related Mortgage Loan, and (y) the sales price of such
Mortgaged Property at such time of origination. With respect to a Mortgage Loan
the proceeds of which were used to refinance an existing mortgage loan, the
Collateral Value is the appraised value of the Mortgaged Property based upon
the appraisal obtained at the time of refinancing. No assurance can be given
that the values of the Mortgaged Properties have remained or will remain at
their levels as of the dates of origination of the related Mortgage Loans. If
the residential real estate market should experience an overall decline in
property values such that the outstanding balances of the Mortgage Loans become
equal to or greater than the value of the Mortgaged Properties, actual losses
on the Mortgage Loans could be higher than losses now generally experienced in
the mortgage lending industry.
S-11
<PAGE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans (weighted based on the Cut-off Date Principal Balances) is expected to be
approximately 9.45% per annum. The Mortgage Rates of the Mortgage Loans are
expected to be distributed as follows as of the Cut-off Date (the sum of the
percentages in the following table may not equal the total due to rounding):
<TABLE>
<CAPTION>
NUMBER OF % OF AGGREGATE
MORTGAGE CUT-OFF DATE CUT-OFF DATE
MORTGAGE RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- --------- ----------------- -----------------
<S> <C> <C> <C>
6.000%................. 1 $ 156,686.64 0.08%
6.001 - 6.250......... 2 84,350.00 0.04
6.501 - 6.750......... 4 324,056.27 0.17
6.751 - 7.000......... 3 354,458.55 0.19
7.001 - 7.250......... 16 1,775,369.18 0.94
7.251 - 7.500......... 53 6,588,530.05 3.51
7.501 - 7.750......... 79 10,831,407.16 5.76
7.751 - 8.000......... 63 8,977,857.27 4.78
8.001 - 8.250......... 91 11,085,343.36 5.90
8.251 - 8.500......... 98 11,915,892.11 6.34
8.501 - 8.750......... 101 10,750,780.80 5.72
8.751 - 9.000......... 170 20,309,816.86 10.81
9.001 - 9.250......... 85 10,934,555.62 5.82
9.251 - 9.500......... 122 13,434,146.98 7.15
9.501 - 9.750......... 119 14,124,457.34 7.51
9.751 - 10.000......... 123 11,443,581.09 6.09
10.001 - 10.250......... 70 6,393,268.98 3.40
10.251 - 10.500......... 82 8,509,265.83 4.53
10.501 - 10.750......... 99 8,570,928.18 4.56
10.751 - 11.000......... 83 8,106,131.47 4.31
11.001 - 11.250......... 49 3,894,289.52 2.07
11.251 - 11.500......... 71 5,478,484.28 2.91
11.501 - 11.750......... 48 4,298,221.04 2.29
11.751 - 12.000......... 53 4,695,860.84 2.50
12.001 - 12.250......... 28 1,562,660.23 0.83
12.251 - 12.500......... 16 1,131,412.88 0.60
12.501 - 12.750......... 11 611,958.67 0.33
12.751 - 13.000......... 11 1,350,182.41 0.72
13.001 - 13.250......... 2 100,136.73 0.05
13.501 - 13.750......... 3 93,697.21 0.05
14.001 - 14.250......... 1 12,497.79 0.01
14.501 - 14.625......... 1 65,025.00 0.03
----- --------------- ------
TOTAL................. 1,758 $187,965,310.34 100.00%
===== =============== ======
</TABLE>
S-12
<PAGE>
As of the Cut-off Date, the weighted average Gross Margin (weighted based on
the Cut-off Date Principal Balances) is expected to be approximately 6.35% per
annum. The Gross Margins set forth in the Mortgage Notes with respect to the
Mortgage Loans are expected to be distributed as follows as of the Cut-off Date
(the sum of the percentages in the following table may not equal the total due
to rounding):
<TABLE>
<CAPTION>
NUMBER OF % OF AGGREGATE
MORTGAGE CUT-OFF DATE CUT-OFF DATE
GROSS MARGIN LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ --------- ----------------- -----------------
<S> <C> <C> <C>
4.500%.................. 6 $ 702,889.10 0.37%
4.501 - 4.750........... 20 1,974,807.96 1.05
4.751 - 5.000........... 68 7,115,154.72 3.79
5.001 - 5.250........... 95 10,872,429.96 5.78
5.251 - 5.500........... 91 10,588,140.05 5.63
5.501 - 5.750........... 144 16,597,979.65 8.83
5.751 - 6.000........... 171 17,894,069.64 9.52
6.001 - 6.250........... 221 26,383,814.46 14.04
6.251 - 6.500........... 244 29,458,870.48 15.67
6.501 - 6.750........... 120 11,540,705.92 6.14
6.751 - 7.000........... 277 28,845,633.10 15.35
7.001 - 7.250........... 109 9,420,548.79 5.01
7.251 - 7.500........... 89 8,068,240.51 4.29
7.501 - 7.750........... 36 3,521,922.49 1.87
7.751 - 8.000........... 39 3,126,950.81 1.66
8.001 - 8.250........... 13 970,555.46 0.52
8.251 - 8.500........... 12 640,995.39 0.34
8.751 - 9.000........... 2 164,368.61 0.09
9.251 - 9.375........... 1 77,233.24 0.04
----- --------------- ------
TOTAL................. 1,758 $187,965,310.34 100.00%
===== =============== ======
</TABLE>
S-13
<PAGE>
As of the Cut-off Date, the weighted average Maximum Mortgage Rate with
respect to the Mortgage Loans (weighted based on the Cut-off Date Principal
Balances) is expected to be approximately 16.37% per annum. The Maximum
Mortgage Rates with respect to the Mortgage Loans are expected to be
distributed as follows as of the Cut-off Date (the sum of the percentages in
the following table may not equal the total due to rounding):
<TABLE>
<CAPTION>
% OF
MAXIMUM NUMBER OF AGGREGATE
MORTGAGE MORTGAGE CUT-OFF DATE CUT-OFF DATE
RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------- --------- ----------------- -----------------
<S> <C> <C> <C>
9.250%......... 1 $ 116,366.12 0.06%
12.751 - 13.000......... 1 156,686.64 0.08
13.001 - 13.250......... 2 84,350.00 0.04
13.501 - 13.750......... 5 534,918.41 0.28
13.751 - 14.000......... 5 683,078.10 0.36
14.001 - 14.250......... 17 1,840,563.30 0.98
14.251 - 14.500......... 55 6,818,659.81 3.63
14.501 - 14.750......... 80 11,257,333.14 5.99
14.751 - 15.000......... 65 9,262,258.44 4.93
15.001 - 15.250......... 97 12,518,020.18 6.66
15.251 - 15.500......... 101 12,073,970.48 6.42
15.501 - 15.750......... 106 11,700,986.80 6.23
15.751 - 16.000......... 175 21,040,034.23 11.19
16.001 - 16.250......... 89 11,208,468.14 5.96
16.251 - 16.500......... 125 14,310,002.53 7.61
16.501 - 16.750......... 113 12,569,389.94 6.69
16.751 - 17.000......... 119 11,000,250.19 5.85
17.001 - 17.250......... 67 5,966,428.26 3.17
17.251 - 17.500......... 75 7,548,918.70 4.02
17.501 - 17.750......... 94 8,143,704.22 4.33
17.751 - 18.000......... 78 6,945,874.75 3.70
18.001 - 18.250......... 48 3,809,837.92 2.03
18.251 - 18.500......... 70 5,435,117.26 2.89
18.501 - 18.750......... 46 3,765,513.84 2.00
18.751 - 19.000......... 53 4,341,808.53 2.31
19.001 - 19.250......... 27 1,527,731.88 0.81
19.251 - 19.500......... 16 1,171,425.97 0.62
19.501 - 19.750......... 10 512,073.42 0.27
19.751 - 20.000......... 11 1,350,182.41 0.72
20.001 - 21.625......... 7 271,356.73 0.14
----- --------------- ------
TOTAL................... 1,758 $187,965,310.34 100.00%
===== =============== ======
</TABLE>
S-14
<PAGE>
As of the Cut-off Date, the weighted average Minimum Mortgage Rate with
respect to the Mortgage Loans (weighted based on the Cut-off Date Principal
Balances) is expected to be approximately 9.38% per annum. The Minimum Mortgage
Rates with respect to the Mortgage Loans are expected to be distributed as
follows as of the Cut-off Date (the sum of the percentages in the following
table may not equal the total due to rounding):
<TABLE>
<CAPTION>
% OF
MINIMUM NUMBER OF AGGREGATE
MORTGAGE MORTGAGE CUT-OFF DATE CUT-OFF DATE
RATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------- --------- ----------------- -----------------
<S> <C> <C> <C>
6.000%................. 1 $ 156,686.64 0.08%
6.001 - 6.500......... 2 84,350.00 0.04
6.501 - 7.000......... 10 1,217,996.51 0.65
7.001 - 7.500......... 72 8,659,223.11 4.61
7.501 - 8.000......... 145 20,519,591.58 10.92
8.001 - 8.500......... 198 24,591,990.66 13.08
8.501 - 9.000......... 281 32,741,021.03 17.42
9.001 - 9.500......... 215 25,634,836.79 13.64
9.501 - 10.000......... 232 23,569,640.13 12.54
10.001 - 10.500......... 142 13,515,346.96 7.19
10.501 - 11.000......... 172 15,089,578.97 8.03
11.001 - 11.500......... 118 9,244,955.18 4.92
11.501 - 12.000......... 99 8,107,322.37 4.31
12.001 - 12.500......... 43 2,699,157.85 1.44
12.501 - 13.000......... 21 1,862,255.83 0.99
13.001 - 13.500......... 2 100,136.73 0.05
13.501 - 14.000......... 3 93,697.21 0.05
14.001 - 14.500......... 1 12,497.79 0.01
14.501 - 14.625......... 1 65,025.00 0.03
----- --------------- ------
TOTAL................. 1,758 $187,965,310.34 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average remaining term to maturity of
the Mortgage Loans (weighted based on the Cut-off Date Principal Balances) is
expected to be approximately 357 months. The distribution of the remaining
terms to maturity (in months) of the Mortgage Loans as of the Cut-off Date is
expected to be as follows (the sum of the percentages in the following table
may not equal the total due to rounding):
<TABLE>
<CAPTION>
REMAINING % OF
TERM TO NUMBER OF AGGREGATE
MATURITY MORTGAGE CUT-OFF DATE CUT-OFF DATE
(IN MONTHS) LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------- --------- ----------------- -----------------
<S> <C> <C> <C>
178...................... 3 $ 153,325.58 0.08%
179...................... 11 722,510.24 0.38
180...................... 6 452,212.28 0.24
351...................... 1 65,194.12 0.03
352...................... 7 724,955.33 0.39
353...................... 17 3,053,867.96 1.62
354...................... 43 6,498,474.63 3.46
355...................... 67 7,512,188.38 4.00
356...................... 59 8,334,605.64 4.43
357...................... 67 7,448,112.10 3.96
358...................... 168 15,697,664.67 8.35
359...................... 447 48,194,391.68 25.64
360...................... 862 89,107,807.73 47.41
----- --------------- ------
TOTAL.................. 1,758 $187,965,310.34 100.00%
===== =============== ======
</TABLE>
S-15
<PAGE>
As of the Cut-off Date, the average of the Cut-off Date Principal Balances of
the Mortgage Loans is expected to be approximately $106,920. The distribution
of the Cut-off Date Principal Balance of the Mortgage Loans is expected to be
as follows (the sum of the percentages in the following table may not equal the
total due to rounding):
<TABLE>
<CAPTION>
% OF
NUMBER OF AGGREGATE
CUT-OFF DATE MORTGAGE CUT-OFF DATE CUT-OFF DATE
PRINCIPAL BALANCE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- --------- ----------------- -----------------
<S> <C> <C> <C>
$ 9,614 - $ 50,000......... 335 $12,449,614.13 6.62%
$ 50,001 - $100,000......... 772 57,385,062.10 30.53
$100,001 - $150,000......... 329 40,471,219.78 21.53
$150,001 - $200,000......... 139 24,196,020.86 12.87
$200,001 - $250,000......... 88 19,481,249.41 10.36
$250,001 - $300,000......... 39 10,574,523.29 5.63
$300,001 - $350,000......... 19 6,189,665.74 3.29
$350,001 - $400,000......... 10 3,785,679.63 2.01
$400,001 - $450,000......... 8 3,443,277.08 1.83
$450,001 - $500,000......... 9 4,352,274.96 2.32
$500,001 - $550,000......... 3 1,556,972.59 0.83
$550,001 - $600,000......... 6 3,462,863.41 1.84
$600,001 - $616,887......... 1 616,887.36 0.33
----- --------------- ------
TOTAL..................... 1,758 $187,965,310.34 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the geographic distribution of the Mortgage Loans is
expected to be as follows (the sum of the percentages in the following table
may not equal the total due to rounding):
<TABLE>
<CAPTION>
% OF
NUMBER OF AGGREGATE
MORTGAGE CUT-OFF DATE CUT-OFF DATE
STATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------- --------- ----------------- -----------------
<S> <C> <C> <C>
California................... 267 $ 46,218,643.89 24.59%
Colorado..................... 122 13,243,370.67 7.05
Idaho........................ 135 11,779,358.54 6.27
Arizona...................... 91 8,889,958.13 4.73
Illinois..................... 70 7,925,314.39 4.22
Alabama...................... 95 7,894,324.56 4.20
Washington................... 70 7,493,331.38 3.99
Hawaii....................... 29 6,796,916.70 3.62
Florida...................... 69 6,463,358.35 3.44
New Mexico................... 52 5,772,722.04 3.07
Pennsylvania................. 76 5,752,411.33 3.06
Ohio......................... 64 4,956,329.17 2.64
Texas........................ 50 4,508,141.16 2.40
Utah......................... 45 4,258,187.61 2.27
Louisiana.................... 52 4,081,001.54 2.17
Other(1)..................... 471 41,931,940.88 22.31
----- --------------- ------
TOTAL...................... 1,758 $187,965,310.34 100.00%
===== =============== ======
</TABLE>
- --------
(1) Other includes 32 other states and the District of Columbia with under 2%
concentration individually. No more than approximately 0.58% of the Mortgage
Loans will be secured by Mortgaged Properties in any one zip code area.
S-16
<PAGE>
ASSIGNMENT OF THE MORTGAGE LOANS
Pursuant to the Pooling and Servicing Agreement, the Depositor on the Closing
Date will sell, transfer, assign, set over and otherwise convey without
recourse to the Trustee in trust for the benefit of the Certificateholders and
the Certificate Insurer all right, title and interest of the Depositor in and
to each Mortgage Loan and all right, title and interest in and to all other
assets included in the Trust Fund, including all principal and interest
received on or with respect to the Mortgage Loans, exclusive of principal due
on or before, and interest accruing prior to, the Cut-off Date.
In connection with such transfer and assignment, the Depositor will deliver
on the Closing Date the following documents (collectively constituting the
"Trustee's Mortgage File") with respect to each Mortgage Loan:
(i) the original Mortgage Note, endorsed by Countrywide or the originator
of the Mortgage Loan, without recourse in the following form: "Pay to the
order of without recourse," with all intervening endorsements that
show a complete chain of endorsement from the originator to Countrywide;
(ii) the original recorded Mortgage;
(iii) a duly executed assignment of the Mortgage to "The Bank of New
York, a New York banking corporation, as trustee under the Pooling and
Servicing Agreement dated as of July 1, 1996, Greenwich Capital Acceptance,
Inc., Series 1996-CHL1, without recourse"; in recordable form, as described
in the Pooling and Servicing Agreement;
(iv) the original recorded assignment or assignments of the Mortgage
together with all interim recorded assignments of such Mortgage;
(v) the original or copies of each assumption, modification, written
assurance or substitution agreement, if any; and
(vi) the original or duplicate original lender's title policy and all
riders thereto or, in the event such original title policy has not been
received from the insurer, any one of an original title binder, an original
preliminary title report or an original title commitment, or a copy thereof
certified by the title company, with the original policy of title insurance
to be delivered within one year of the Closing Date.
Assignments of the Mortgage Loans to the Trustee (or its nominee) will be
recorded in the appropriate public office for real property records, except in
states (such as California) as to which an opinion of counsel is delivered to
the effect that such recording is not required to protect the Trustee's
interests in the Mortgage Loan against the claim of any subsequent transferee
or any successor to or creditor of the Depositor or the Seller. As to any
Mortgage Loan, the recording requirement exception described in the preceding
sentence is applicable only so long as the related Mortgage File is maintained
in the possession of the Trustee in one of the states to which such exception
applies. In the event any such assignment is delivered to the Trustee in blank
and the related Mortgage File is released by the Trustee pursuant to applicable
provisions of the Pooling and Servicing Agreement, the Trustee shall complete
such assignment as provided in subparagraph (iii) above prior to any such
release. In the event such recording is required to protect the interest of the
Trustee in the Mortgage Loans, the Servicer is required to cause each
previously unrecorded assignment to be submitted for recording.
The Trustee will review the Mortgage Loan documents on or prior to the
Closing Date and will hold such documents in trust for the benefit of the
Holders of the Certificates and the Certificate Insurer. After the Closing
Date, if any document is found to be missing or defective in any material
respect, the Trustee is required to notify the Servicer, Countrywide and the
Certificate Insurer in writing. If Countrywide cannot or does not cure such
omission or defect within 90 days of its receipt of notice from the Trustee,
Countrywide is required to repurchase the related Mortgage Loan from the Trust
Fund at a price (the "Purchase Price") equal to 100% of the Stated Principal
Balance thereof plus accrued and unpaid interest thereon, at a rate equal to
the difference between the Mortgage Rate and the Servicing Fee Rate (the "Net
Mortgage Rate")
S-17
<PAGE>
(or, if Countrywide is no longer the Servicer, at the applicable Mortgage Rate)
to the first day of the month in which the Purchase Price is to be distributed
to Certificateholders. Rather than repurchase the Mortgage Loan as provided
above, Countrywide may remove such Mortgage Loan (a "Deleted Mortgage Loan")
from the Trust Fund and substitute in its place another Mortgage Loan of like
kind (a "Replacement Mortgage Loan"); however, such substitution is only
permitted within two years after the Closing Date, and may not be made unless
an opinion of counsel is provided to the effect that such substitution would
not disqualify the Trust Fund as a REMIC or result in a prohibited transaction
tax under the Code. Any Replacement Mortgage Loan generally will, on the date
of substitution, among other characteristics set forth in the Pooling and
Servicing Agreement, (i) have a Stated Principal Balance, after deduction of
the principal portion of the scheduled payment due in the month of
substitution, not in excess of, and not less than ninety percent (90%) of, the
Stated Principal Balance of the Deleted Mortgage Loan (the amount of any
shortfall to be deposited by Countrywide in the Certificate Account not later
than the succeeding Determination Date and held for distribution to the holders
of the Certificates on the related Distribution Date), (ii) have a Maximum
Mortgage Rate not more than 1% per annum higher or lower than the Maximum
Mortgage Rate of the Deleted Mortgage Loan, and have a Minimum Mortgage Rate
not more than 1% per annum higher or lower than) the Minimum Mortgage Rate of
the Deleted Mortgage Loan, (iii) have the same Mortgage Index and Periodic Rate
Cap as the Deleted Mortgage Loan and a Gross Margin not more than 1% per annum
higher or lower than that of the Deleted Mortgage Loan, (iv) be accruing
interest at a rate not more than 1% per annum higher or lower than that of the
Deleted Mortgage Loan, (v) have a Loan-to-Value Ratio no higher than that of
the Deleted Mortgage Loan, (vi) have a remaining term to maturity not more than
two years greater than (and not more than one year less than) that of the
Deleted Mortgage Loan, (vii) not permit conversion of the related Mortgage Rate
to a fixed Mortgage Rate, (viii) provide for a prepayment charge on terms
substantially similar to those of the prepayment charge, if any, of the Deleted
Mortgage Loan and (ix) comply with all of the representations and warranties
set forth in the related Pooling and Servicing Agreement as of the date of
substitution. This cure, repurchase or substitution obligation constitutes the
sole remedy available to the Certificateholders, the Trustee, the Depositor or
the Certificate Insurer for omission of, or a material defect in, a Mortgage
Loan document.
UNDERWRITING STANDARDS
The following is a description of the underwriting procedures customarily
employed by Countrywide with respect to B&C quality mortgage loans.
Countrywide produces its B&C quality mortgage loans through its Wholesale
Lending Division, which works with mortgage brokers and other entities located
throughout the United States. Prior to the funding of any B&C quality mortgage
loan, Countrywide underwrites the related mortgage loan in accordance with the
underwriting standards established by Countrywide. The mortgage loans are
underwritten centrally by a specialized group of underwriters who are familiar
with the unique characteristics of B&C mortgage loans. As a matter of policy,
Countrywide does not purchase any B&C quality mortgage loan that it has not
itself underwritten.
Countrywide's underwriting standards are primarily intended to evaluate the
value and adequacy of the mortgaged property as collateral for the proposed
mortgage loan but also take into consideration the borrower's credit standing
and repayment ability. On a case by case basis, Countrywide may determine that,
based upon compensating factors, a prospective borrower not strictly qualifying
under the underwriting risk category guidelines described below warrants an
underwriting exception. Compensating factors may include low loan-to-value
ratio, low debt-to-income ratio, stable employment and time in the same
residence. It is expected that a number of the Mortgage Loans to be included in
the Mortgage Pool have been originated based on such underwriting exceptions.
Each prospective borrower completes an application which includes information
with respect to the applicant's liabilities, income, credit history and
employment history, as well as certain other personal
S-18
<PAGE>
information. Countrywide requires an independent credit bureau report on the
credit history of each applicant in order to evaluate the applicant's ability
to repay. The report typically contains information relating to such matters as
credit history with local and national merchants and lenders, installment debt
payments and any record of defaults, bankruptcy, repossession, suits or
judgments.
Countrywide's underwriting standards are applied in accordance with
applicable federal and state laws and regulations and require an independent
appraisal of the mortgaged property which conforms to Federal Home Loan
Mortgage Corporation ("FHLMC") and Federal National Mortgage Corporation
("FNMA") standards. Each appraisal includes a market data analysis based on
recent sales of comparable homes in the area and, where deemed appropriate,
replacement cost analysis based on the current cost of constructing a similar
home and generally is required to have been made not earlier than 180 days
prior to the date of origination of the mortgage loan. Every independent
appraisal is reviewed by a Countrywide representative before the loan is
funded, and an additional drive-by appraisal is generally performed in
connection with loan amounts over $350,000 with 80% or higher loan-to-value
ratios. A drive-by appraisal is an exterior examination of the premises by the
appraiser to determine that the property is in good condition. In most cases,
properties that are not in good condition (including properties requiring major
deferred maintenance) are not acceptable as collateral for a B&C loan.
Countrywide's underwriting standards permit loans with loan-to-value ratios
at origination of up to 85% depending on the program, type and use of the
property, creditworthiness of the borrower and debt-to-income ratio. The
maximum combined loan-to-value ratio for purchase money mortgage loans,
including any second deeds of trust subordinate to Countrywide's first deed of
trust, is 90%.
Countrywide requires title insurance on all B&C quality mortgage loans.
Countrywide also requires that fire and extended coverage casualty insurance be
maintained on the mortgaged property in an amount at least equal to the
principal balance or the replacement cost of the mortgaged property, whichever
is less.
As part of its quality control process, Countrywide reverifies information
with respect to the foregoing matters that has been provided by the mortgage
brokerage company prior to funding a loan and periodically audits files based
on a random sample of closed loans. If the loan-to-value ratio is greater than
70%, Countrywide generally verifies the source funds for the down payment;
Countrywide does not verify the source of such funds if the loan-to-value ratio
is 70% or less.
Countrywide's B&C mortgage loan underwriting standards are less stringent
than the standards generally acceptable to FNMA and FHLMC with regard to the
borrower's credit standing and repayment ability because the standards focus
more on the value of the mortgaged property. Borrowers who qualify generally
have payment histories and debt-to-income ratios which would not satisfy FNMA
and FHLMC underwriting guidelines and may have a record of major derogatory
credit items such as outstanding judgments or prior bankruptcies. Countrywide's
B&C mortgage loan underwriting guidelines establish the maximum permitted loan-
to-value ratio for each loan type based upon these and other risk factors.
Countrywide underwrites or originates B&C quality mortgage loans pursuant to
alternative sets of underwriting criteria under its Full Documentation Loan
Program (the "Full Doc Program"), Simple Documentation Loan Program (the
"Simple Doc Program") and Stated Income Loan Program (the "Stated Income
Program"). Under each of the underwriting programs, Countrywide verifies the
loan applicant's sources of income (except under the Stated Income Program),
calculates the amount of income from all sources indicated on the loan
application, reviews the credit history of the applicant, calculates the debt-
to-income ratio to determine the applicant's ability to repay the loan, and
reviews the appraisal of the mortgaged property for compliance with
Countrywide's underwriting standards.
The Simple Doc Program is an alternative documentation program whereby income
is verified using methods other than those employed by FNMA and FHLMC. Under
the Simple Doc Program, acceptable documentation of income consists of six
months' bank statements. In the case of self-employed individuals,
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acceptable alternative documentation consists of a profit and loss statement
supported by a record of bank statements. Maximum loan-to-value ratios and
maximum loan amounts are generally lower than those permitted under the Full
Doc Program.
Under the Stated Income Program, the borrower's employment and income sources
must be stated on the borrower's application. The borrower's income as stated
must be reasonable for the related occupation and such determination as to
reasonableness is subject to the loan underwriter's discretion. However, the
borrower's income as stated on the application is not independently verified.
Maximum loan-to-value ratios are generally lower than those permitted under the
Full Doc Program. Except as otherwise stated above, the same mortgage credit,
consumer credit and collateral related underwriting guidelines apply.
Under the Full Doc, Simple Doc, and Stated Income Programs, various risk
categories are used to grade the likelihood that the mortgagor will satisfy the
repayment conditions of the mortgage loan. These risk categories establish the
maximum permitted loan-to-value ratio, debt-to-income ratio and loan amount,
given the occupancy status of the mortgaged property, the borrower's credit
history and the type of mortgaged property. In general, loans with more
derogatory credit items are graded in a higher credit risk category.
SERVICING OF THE MORTGAGE LOANS
GENERAL
The Servicer will service the Mortgage Loans in accordance with the terms set
forth in the Pooling and Servicing Agreement. The Servicer may perform any of
its obligations under the Pooling and Servicing Agreement through one or more
subservicers. Notwithstanding any such subservicing arrangement, the Servicer
will remain liable for its servicing duties and obligations under the Pooling
and Servicing Agreement as if the Servicer alone were servicing the Mortgage
Loans. As of the Closing Date, the Servicer will service the Mortgage Loans
without subservicing arrangements.
The information set forth in the following section through and including the
section captioned "Delinquency Status as of June 30, 1996" has been provided by
Countrywide. No representation is made by the Depositor or any of its
affiliates as to the accuracy or completeness of any such information.
THE SERVICER
Countrywide Home Loans, Inc. ("Countrywide"), a New York corporation and a
subsidiary of Countrywide Credit Industries, Inc., will act as the Servicer of
the Mortgage Loans pursuant to the Pooling and Servicing Agreement. Countrywide
is engaged primarily in the mortgage banking business, and as such, originates,
purchases, sells and services mortgage loans. Countrywide originates mortgage
loans through a retail branch system and through mortgage loan brokers and
correspondents nationwide. Countrywide's mortgage loans are principally first-
lien, fixed or adjustable rate mortgage loans secured by single-family
residences.
As of June 30, 1996, Countrywide provided servicing for approximately $213
million in B&C quality mortgages. As of June 30, 1996, Countrywide also
provided servicing for prime quality mortgage loans with an aggregate principal
balance of approximately $145 billion, substantially all of which are being
serviced for unaffiliated persons.
The principal executive offices of Countrywide are located at 155 North Lake
Avenue, Pasadena, California 91101-7139. Its telephone number is (818) 304-
8400. Countrywide conducts operations from its headquarters in Pasadena and
from offices throughout the nation.
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LOAN SERVICING
Countrywide services substantially all of the mortgage loans it originates or
acquires. Countrywide has established standard policies for the servicing and
collection of B&C quality mortgage loans. Servicing includes, but is not
limited to, collecting and remitting mortgage loan payments, accounting for
principal and interest, holding escrow (impound) funds for payment of taxes and
insurance, making inspections as required of the mortgaged properties,
preparation of tax related information in connection with the mortgage loans,
supervision of delinquent mortgage loans, loss mitigation efforts, foreclosure
proceedings and, if applicable, the disposition of mortgaged properties, and
generally administering the mortgage loans, for which it receives servicing
fees.
Billing statements with respect to B&C mortgage loans are mailed monthly by
Countrywide. The statements detail all debits and credits and specify the
payment due. Notice of changes in the applicable loan rate are provided by
Countrywide to the mortgagor with such statements. All payments are due by the
first day of the month.
COLLECTION PROCEDURES
When a mortgagor fails to make a payment on a mortgage loan, Countrywide
attempts to cause the deficiency to be cured by corresponding with the
mortgagor. In most cases, deficiencies are cured promptly. Pursuant to
Countrywide's B&C servicing procedures, Countrywide generally mails to the
mortgagor a notice of intent to foreclose after the loan becomes 31 days past
due (two payments due but not received) and, within 60 days thereafter, if the
loan remains delinquent, institutes appropriate legal action to foreclose on
the mortgaged property. Foreclosure proceedings may be terminated if the
delinquency is cured. Mortgage loans to borrowers in bankruptcy proceedings may
be restructured in accordance with law and with a view to maximizing recovery
of such loans, including any deficiencies.
Once foreclosure is initiated by Countrywide, a foreclosure tracking system
is used to monitor the progress of the proceedings. The system includes state
specific parameters to monitor whether proceedings are progressing within the
time frame typical for the state in which the mortgaged property is located.
During the foreclosure proceeding, Countrywide determines the amount of the
foreclosure bid and whether to liquidate the mortgage loan.
After foreclosure, Countrywide may liquidate the mortgaged property and
charge-off the loan balance which was not recovered through liquidation
proceeds. If foreclosed, the mortgaged property is sold at a public or private
sale and may be purchased by Countrywide.
Servicing and charge-off policies and collection practices may change over
time in accordance with, among other things, Countrywide's business judgment,
changes in the servicing portfolio and applicable laws and regulations.
FORECLOSURE AND DELINQUENCY EXPERIENCE
The following table summarizes the delinquency experience of Countrywide's
B&C quality mortgage loans as of June 30, 1996. A mortgage loan is
characterized as delinquent if the borrower has not paid the minimum payment
due by the due date. The table below excludes mortgage loans where the mortgage
loan is in foreclosure or the borrower has filed for bankruptcy. Since
Countrywide only began servicing B&C quality mortgage loans in August 1995, the
delinquency percentages may be affected by the size and relative lack of
seasoning of the servicing portfolio because many of such loans were not
outstanding long enough to give rise to some or all of the periods of
delinquency indicated in the chart below. Accordingly, the information should
not be considered as a basis for assessing the likelihood, amount, or severity
of delinquency or losses on the Mortgage Loans, and no assurances can be given
that the foreclosure experience presented in the paragraph below the table will
be indicative of such experience on the Mortgage Loans.
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DELINQUENCY STATUS AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
DOLLARS PERCENT UNITS PERCENT
--------------- ------- ----- -------
<S> <C> <C> <C> <C>
Current............................. $208,454,418.08 97.74% 2,034 98.12%
30-59 Days.......................... $ 3,428,732.49 1.61% 29 1.40%
60-89 Days.......................... $ 1,002,366.00 0.47% 7 0.34%
90+Days............................. $ 392,580.00 0.18% 3 0.14%
--------------- ------- ----- -------
Total........................... $213,278,096.57 100.00% 2,073 100.00%
=============== ======= ===== =======
</TABLE>
Delinquencies shown in the table are reported on a contractual basis. As of
June 30, 1996, eleven mortgage loans with an aggregate principal balance of
$2,161,556.45 were in foreclosure. There was one loan in bankruptcy with a
principal balance of $90,254.40. The table does not include 340 mortgage loans
with principal balances aggregating $39,959,965.65 that were sold, but were
being serviced on an interim basis pending transfer of servicing, as of June
30, 1996. As of the date hereof, servicing with respect to such mortgage loans
has been transferred.
Historically, a variety of factors, including the appreciation of real estate
values, have limited the loss and delinquency experience on B&C quality
mortgage loans. There can be no assurance that factors beyond Countrywide's
control, such as national or local economic conditions or downturn in the real
estate markets of its lending areas, will not result in increased rates of
delinquencies and foreclosure losses in the future.
Over the last several years, there has been a general deterioration of the
real estate market and weakening economy in many regions of the country,
including California. The general deterioration of the real estate market has
been reflected in increases in delinquencies of loans secured by real estate,
slower absorption rates of real estate into the market and lower sales prices
for real estate. The general weakening of the economy has been reflected in
decreases in the financial strength of borrowers and decreases in the value of
collateral serving as security for loans. If the real estate market and economy
continue to decline, Countrywide may experience an increase in delinquencies on
the loans it services and higher net losses on liquidated B&C loans.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be paid a monthly fee from interest collected with respect
to each Mortgage Loan (as well as from any liquidation proceeds from a
Liquidated Mortgage Loan that are applied to accrued and unpaid interest) equal
to one-twelfth of the Stated Principal Balance thereof multiplied by the
Servicing Fee Rate (such product, the "Servicing Fee"). The Servicing Fee Rate
for each Mortgage Loan will equal 0.50% per annum. The amount of the monthly
Servicing Fee is subject to adjustment with respect to prepaid Mortgage Loans,
as described herein under "--Adjustment to Servicing Fee in Connection with
Certain Prepaid Mortgage Loans." The Servicer is also entitled to receive, as
additional servicing compensation, amounts in respect of interest paid on
Principal Prepayments (as defined below) received from the 2nd day through the
15th day of a month ("Prepayment Interest Excess"), all late payment fees,
assumption fees, prepayment penalties and other similar charges and all
reinvestment income earned on amounts on deposit in the Certificate Account and
Distribution Account. The Servicer is obligated to pay certain ongoing expenses
associated with the Mortgage Loans and incurred by the Trustee in connection
with its responsibilities under the Pooling and Servicing Agreement.
ADJUSTMENT TO SERVICING FEE IN CONNECTION WITH CERTAIN PREPAID MORTGAGE LOANS
When a borrower prepays all or a portion of a Mortgage Loan between scheduled
monthly payment dates ("Due Dates"), the borrower pays interest on the amount
prepaid only to the date of prepayment. Principal Prepayments (as defined
below) received from the 2nd day through the 15th day of a month are included
in the distribution on the 25th day of the same month, and accordingly no
shortfall in interest otherwise distributable to Certificateholders results.
Conversely, Principal Prepayments received from the 16th day to the last day of
a month are not distributed until the 25th day of the following month, and
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accordingly an interest shortfall (a "Prepayment Interest Shortfall") would
result. In order to mitigate the effect of any such shortfall in interest
distributions to Certificateholders on any Distribution Date, one-half of the
amount of the Servicing Fee otherwise payable to the Servicer for such month
shall, to the extent of such shortfall, be deposited by the Servicer in the
Certificate Account for distribution to Certificateholders on such Distribution
Date. However, any such reduction in the Servicing Fee will be made only to the
extent of one-half of the Servicing Fee otherwise payable to the Servicer with
respect to Scheduled Payments having the Due Date to which such Distribution
Date relates. Any such deposit by the Servicer will be reflected in the
distributions to Certificateholders made on the Distribution Date on which the
Principal Prepayment received would be distributed. See "Description of the
Certificates--Example of Distributions" herein.
ADVANCES
Subject to the following limitations, on the Business Day prior to each
Distribution Date, the Servicer will be required to advance its own funds, or
funds in the Certificate Account that do not constitute Available Funds (as
defined below) for such Distribution Date, in an amount equal to the aggregate
of payments of principal and interest on the Mortgage Loans (adjusted to the
applicable Net Mortgage Rate) that were due during the related Due Period and
delinquent on the related Determination Date, together with an amount
equivalent to interest (adjusted to the applicable Net Mortgage Rate) deemed
due on each Mortgage Loan as to which the related Mortgaged Property has been
acquired by the Servicer through foreclosure or deed-in-lieu of foreclosure in
connection with a defaulted Mortgage Loan ("REO Property"), such latter amount
to be calculated after taking into account any rental income from such
Mortgaged Property (any such advance, an "Advance", and the date of any such
Advance, as described herein, a "Servicer Advance Date").
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Certificates rather than to guarantee or insure
against losses. The Servicer is obligated to make Advances with respect to
delinquent payments of principal of or interest on each Mortgage Loan (with
such payments of interest adjusted to the related Net Mortgage Rate) to the
extent that such Advances are, in its judgment, reasonably recoverable from
future payments and collections or insurance payments or proceeds of
liquidation of the related Mortgage Loan. If the Servicer determines on any
Determination Date to make an Advance, such Advance will be included with the
distribution to Certificateholders on the related Distribution Date. Any
failure by the Servicer to make an Advance as required under the Pooling and
Servicing Agreement will constitute an event of default thereunder, in which
case the Trustee, as successor servicer, or such other entity as may be
appointed as successor servicer, will be obligated to make any such Advance in
accordance with the terms of the Pooling and Servicing Agreement.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Class A Certificates will be issued pursuant to a Pooling and Servicing
Agreement, dated as of July 1, 1996 (the "Pooling and Servicing Agreement"),
among the Depositor, the Servicer, the Seller and the Trustee. Set forth below
are summaries of the specific terms and provisions pursuant to which the Class
A Certificates will be issued. The following summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, the provisions of the Pooling and Servicing Agreement. When particular
provisions or terms used in the Pooling and Servicing Agreement are referred
to, the actual provisions (including definitions of terms) are incorporated by
reference.
The Series 1996-CHL1 Certificates will consist of (i) the Class A
Certificates (the "Class A Certificates"), (ii) the Class B-IO Certificates
(the "Class B-IO Certificates") and (iii) the Class R Certificates (the
"Residual Certificates" and, together with the Class B-IO Certificates, the
"Subordinate Certificates"). The Class A Certificates and the Subordinate
Certificates are collectively referred to herein as the "Certificates." Only
the Class A Certificates are offered hereby.
The Class A Certificates will have an initial Certificate Principal Balance
of approximately $187,965,310 and will evidence a senior beneficial ownership
interest in the Trust Fund. The remaining beneficial ownership interest in the
Trust Fund will be evidenced by the Class B-IO Certificates, which are
interest-only Certificates issued with a notional principal balance equal to
the aggregate principal balance of the Mortgage Loans, and by the Residual
Certificates, which do not have a principal balance and will evidence a
residual interest in the Trust Fund. The rights of the Subordinate
Certificateholders to receive distributions with respect to the Mortgage Loans
will be subordinate to the rights of the Class A Certificateholders, to the
extent described herein.
The Class A Certificates will be issued in book-entry form as described
below. The Class A Certificates will be issued in minimum dollar denominations
of $1,000 and integral multiples thereof. The assumed final maturity date of
the Class A Certificates is the Distribution Date occurring in March 2028,
which is eighteen months after the Distribution Date immediately following the
latest scheduled maturity date of any Mortgage Loan in the Mortgage Pool.
BOOK-ENTRY CERTIFICATES
The Class A Certificates will be book-entry Certificates. The Class A
Certificates will be issued in one or more certificates, the initial aggregate
principal balance of which will equal the original Class A Certificate
Principal Balance and will be held by a nominee of The Depository Trust Company
(together with any successor depository selected by the Depositor, the
"Depository"). Beneficial interests in the Class A Certificates will be
indirectly held by investors through the book-entry facilities of the
Depository, as described herein. The Depositor has been informed by the
Depository that its nominee will be CEDE & Co. ("CEDE"). Accordingly, CEDE is
expected to be the holder of record of the Class A Certificates. Except as
described below, no person acquiring a Class A Certificate (each, a "beneficial
owner") will be entitled to receive a physical certificate representing such
Certificate (a "Definitive Certificate").
The beneficial owner's ownership of a Book-Entry Certificate will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of the Depository (or of a participating firm that acts as agent for
the Financial Intermediary, whose interest will in turn be recorded on the
records of the Depository, if the beneficial owner's Financial Intermediary is
not a Depository participant). Therefore,
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the beneficial owner must rely on the foregoing procedures to evidence its
beneficial ownership of a Class A Certificate. Beneficial ownership of a Class
A Certificate may be transferred only in compliance with the procedures of such
Financial Intermediaries and Depository participants.
The Depository, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own the Depository. In accordance with its normal procedures,
the Depository is expected to record the positions held by each Depository
participant in the Class A Certificates, whether held for its own account or as
a nominee for another person. In general, beneficial ownership of the Class A
Certificates will be subject to the rules, regulations and procedures governing
the Depository and Depository participants as in effect from time to time.
Distributions on the Class A Certificates will be made on each Distribution
Date by the Trustee to the Depository. The Depository will be responsible for
crediting the amount of such payments to the accounts of the applicable
Depository participants in accordance with the Depository's normal procedures.
Each Depository participant will be responsible for disbursing such payments to
the beneficial owners of the Class A Certificates that it represents and to
each Financial Intermediary for which it acts as agent. Each such Financial
Intermediary will be responsible for disbursing funds to the beneficial owners
of the Class A Certificates that it represents.
Under a book-entry format, beneficial owners of the Class A Certificates may
experience some delay in their receipt of payments, since such payments will be
forwarded by the Trustee to CEDE. Neither the Trustee nor the Depositor shall
be responsible or liable for such delays in the application of such payments to
such beneficial owners. Because the Depository can only act on behalf of
Financial Intermediaries, the ability of a beneficial owner to pledge Class A
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of the Class A Certificates, may
be limited due to the absence of physical certificates for the Class A
Certificates. In addition, issuance of the Class A Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary market
since certain potential investors may be unwilling to purchase Certificates for
which they cannot obtain physical certificates.
Unless and until definitive certificates are issued, it is anticipated that
the only "Certificateholder" of the Class A Certificates will be CEDE, as
nominee of the Depository. Beneficial owners of the Class A Certificates will
not be Certificateholders, as that term is used in the Pooling and Servicing
Agreement. Beneficial owners are only permitted to exercise the rights of
Certificateholders indirectly through Financial Intermediaries and the
Depository. Reports on the Trust Fund provided by the Servicer to CEDE, as
nominee of the Depository, may be made available to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose
Depository accounts the Class A Certificates of such beneficial owners are
credited.
The Depository has advised the Depositor and the Trustee that, unless and
until Definitive Certificates are issued, the Depository will take any action
permitted to be taken by the Holders of the Class A Certificates under the
Pooling and Servicing Agreement only at the direction of one or more Financial
Intermediaries to whose Depository accounts the Class A Certificates are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Class A Certificates.
Definitive Certificates will be issued to beneficial owners of the Class A
Certificates, or their nominees, rather than to the Depository, only if (a) the
Depositor advises the Trustee in writing that the Depository is no longer
willing, qualified or able to discharge properly its responsibilities as
nominee and depository with respect to the Class A Certificates and the
Depositor or the Trustee is unable to locate a qualified successor; (b) the
Depositor, at its sole option, advises the Trustee that it elects to terminate
a book-entry system through the Depository; or (c) with the consent of the
Certificate Insurer after the occurrence of an Event of Default (as described
below), beneficial owners of the Class A Certificates having not less than 51%
of the Voting
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Rights (as defined herein) evidenced by the Class A Certificates advise the
Trustee and the Depository through the Financial Intermediaries in writing that
the continuation of a book-entry system with respect to such Book-Entry
Certificates through the Depository (or a successor thereto) is no longer in
the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the Class A Certificates through the Depository of the occurrence of
such event and the availability of Definitive Certificates. Upon surrender by
the Depository of the global certificate or certificates representing the Class
A Certificates and instructions for reregistration, the Trustee will issue the
Definitive Certificates, and thereafter the Trustee will recognize the holders
of such Definitive Certificates as Certificateholders under the Pooling and
Servicing Agreement.
DISTRIBUTIONS
General. Distributions on the Certificates will be made by the Trustee on the
25th day of each month, or if such day is not a Business Day, on the first
Business Day thereafter, commencing on August 26, 1996 (each, a "Distribution
Date"), to the persons in whose names such Certificates are registered at the
close of business on the last Business Day of the month preceding the month of
such Distribution Date (the "Record Date").
Distributions on each Distribution Date will be made by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register or, in the case of any Certificateholder that holds Class A
Certificates evidencing a Percentage Interest aggregating at least 10% and that
has so notified the Trustee in writing in accordance with the Pooling and
Servicing Agreement, by wire transfer in immediately available funds to the
account of such Certificateholder at a bank or other depository institution
having appropriate wire transfer facilities; provided, however, that the final
distribution in retirement of the Class A Certificates will be made only upon
presentation and surrender of such Certificates at the Corporate Trust Office
of the Trustee. On each Distribution Date, a Holder of a Class A Certificate
will receive such Holder's Percentage Interest of the amounts required to be
distributed with respect to the Class A Certificates. The "Percentage Interest"
evidenced by a Class A Certificate will equal the percentage derived by
dividing the denomination of such Class A Certificate by the aggregate
denominations of all Class A Certificates.
DEPOSITS TO THE CERTIFICATE ACCOUNT
The Trustee shall establish and, initially, maintain an account (the
"Certificate Account") on behalf of the Certificateholders and the Certificate
Insurer. Within two business days after receipt, the Servicer shall remit to
the Trustee (or, in the event the Certificate Account is maintained with
another institution pursuant to the Pooling and Servicing Agreement, to such
institution) for deposit into the Certificate Account the following payments
and collections received or made by it subsequent to the Cut-off Date (to the
extent not applied in computing the Cut-off Date Principal Balance):
(i) all payments on account of principal, including Principal
Prepayments, on the Mortgage Loans;
(ii) all payments on account of interest (other than interest accruing on
the Mortgage Loans prior to the Cut-off Date) on the Mortgage Loans, net of
the related Servicing Fee;
(iii) all proceeds of any insurance policies (to the extent such proceeds
are not applied to the restoration of the property or released to the
mortgagor in accordance with the Servicer's normal servicing procedures),
other than proceeds that represent reimbursement of the Servicer's costs
and expenses incurred in connection with presenting claims under the
related insurance policies ("Insurance Proceeds"), all other net proceeds
received in connection with the partial or complete liquidation of Mortgage
Loans (whether through trustee's sale, foreclosure sale or otherwise) or in
connection with any condemnation or partial release of a Mortgaged
Property, together with the net proceeds received with respect to any
Mortgage Properties acquired by the Servicer by foreclosure or deed in lieu
of
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foreclosure in connection with defaulted Mortgage Loans (other than the
amount of such net proceeds representing any profit realized by the
Servicer in connection with the disposition of any such properties)
(together with Insurance Proceeds, "Liquidation Proceeds");
(iv) all payments made by the Servicer in respect of Prepayment Interest
Shortfalls;
(v) any amount required to be deposited by the Servicer in connection
with any losses on investment of funds in the Certificate Account;
(vi) any amounts required to be deposited by the Servicer with respect to
any deductible clause in any blanket hazard insurance policy maintained by
the Servicer in lieu of requiring each mortgagor to maintain a primary
hazard insurance policy;
(vii) all amounts required to be deposited in connection with shortfalls
in the principal amount of Replacement Mortgage Loans; and
(viii) all Advances.
WITHDRAWALS FROM THE CERTIFICATE ACCOUNT
The Servicer (or the Depositor or the Seller, as applicable) may from time to
time direct the Trustee to withdraw funds from the Certificate Account for the
following purposes:
(i) to pay to the Servicer the Servicing Fee to the extent not previously
paid to or withheld by the Servicer (subject to reduction as described
above under "--Adjustment to Servicing Fee in Connection with Prepaid
Mortgage Loans") and, as additional servicing compensation, prepayment
penalties, assumption fees, late payment charges, net earnings on or
investment income with respect to funds in or credited to the Certificate
Account, the amount of Prepayment Interest Excess for the related
Prepayment Period and any Excess Proceeds;
(ii) to reimburse the Servicer for Advances, such right of reimbursement
with respect to any Mortgage Loan pursuant to this clause (ii) being
limited to amounts received that represent late recoveries of payments of
principal and/or interest on the Mortgage Loan (or Insurance Proceeds or
Liquidation Proceeds with respect thereto) with respect to which such
Advance was made;
(iii) to reimburse the Servicer for any Advances previously made that the
Servicer has determined to be nonrecoverable;
(iv) to reimburse the Servicer from Insurance Proceeds for expenses
incurred by the Servicer and covered by the related insurance policies;
(v) to pay the Servicer any unpaid Servicing Fees and to reimburse it for
any unreimbursed out-of-pocket costs and expenses incurred by the Servicer
in the performance of its servicing obligations, such right of
reimbursement pursuant to this clause (v) being limited to amounts received
representing late recoveries of the payments of such costs and expenses (or
Liquidation Proceeds, purchase proceeds or repurchase proceeds with respect
thereto);
(vi) to pay to the Depositor, the Seller or the Servicer, as applicable,
with respect to each Mortgage Loan or property acquired in respect thereof
that has been purchased by the Seller or the Servicer from the Trust Fund
pursuant to the Pooling and Servicing Agreement, all amounts received
thereon and not taken into account in determining the related Stated
Principal Balance of such repurchased Mortgage Loan;
(vii) to reimburse the Seller, the Servicer or the Depositor for expenses
incurred and reimbursable pursuant to the Pooling and Servicing Agreement;
(viii) to withdraw any amount deposited in the Certificate Account and
not required to be deposited therein; and
(ix) to clear and terminate the Certificate Account upon termination of
the Pooling and Servicing Agreement.
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<PAGE>
In addition, not later than 1:00 p.m. Pacific Time on each Servicer Advance
Date, the Trustee shall withdraw from the Certificate Account the amount of
Available Funds, to the extent on deposit, and the Trustee shall deposit such
amount in the Distribution Account, as described below.
DEPOSITS TO THE DISTRIBUTION ACCOUNT
The Trustee shall establish and maintain a distribution account (the
"Distribution Account") on behalf of the Certificateholders and the Certificate
Insurer. The Trustee shall, promptly upon receipt, deposit in the Distribution
Account and retain therein the following:
(i) the aggregate amount withdrawn by it from the Certificate Account;
(ii) any amount required to be deposited by the Servicer in connection
with any losses on investment of funds in the Distribution Account; and
(iii) any Insured Payment made by the Certificate Insurer.
WITHDRAWALS FROM THE DISTRIBUTION ACCOUNT
The Trustee shall withdraw funds from the Distribution Account for
distribution to the Certificate Insurer and the Certificateholders as described
below under "--Allocation of Available Funds" and may from time to time make
withdrawals from the Distribution Account for the following purposes:
(i) to pay to the Servicer, as additional servicing compensation,
earnings on or investment income with respect to funds in or credited to
the Distribution Account;
(ii) to withdraw any amount deposited in the Distribution Account and not
required to be deposited therein; and
(iii) to clear and terminate the Distribution Account upon the
termination of the Pooling and Servicing Agreement.
ALLOCATION OF AVAILABLE FUNDS
Distributions to Certificateholders will be made on each Distribution Date in
an amount not to exceed the amount of Available Funds. "Available Funds" as of
any Distribution Date, is the sum of the following amounts (without
duplication):
(i) the aggregate amount on deposit in the Certificate Account as of the
close of business on the immediately preceding Determination Date;
(ii) Advances with respect to such Distribution Date; and
(iii) any amounts deposited by the Servicer in the Certificate Account in
respect of Prepayment Interest Shortfalls during the related Prepayment
Period,
less the sum of:
(x) the portion thereof representing (A) Principal Prepayments and
Liquidation Proceeds received after the last day of the related Prepayment
Period and (B) all Scheduled Payments or portions thereof received in
respect of scheduled principal and interest on the Mortgage Loans due after
the preceding Due Date; and
(y) amounts permitted to be withdrawn from the Certificate Account
pursuant to clauses (i)-(viii), inclusive under "--Withdrawals from the
Certificate Account" above.
S-28
<PAGE>
On each Distribution Date, the Trustee will withdraw from the Distribution
Account (a) the amount of any Insured Payment and (b) all Available Funds then
on deposit and will distribute the same in the following order of priority:
(i)to the Certificate Insurer, the Premium Amount (so long as the
Certificate Insurer has not failed to make a payment required under the
Certificate Insurance Policy in accordance with its terms);
(ii)to the Class A Certificateholders, an amount equal to the Class A
Interest Distribution Amount;
(iii)to the Class A Certificateholders, an amount equal to the Class A
Principal Distribution Amount; and
(iv)to the Certificate Insurer, the Reimbursement Amount.
As more fully described in the Pooling and Servicing Agreement, the remaining
Available Funds, if any, for such Distribution Date will be distributed to the
Holders of the Subordinate Certificates.
OVERCOLLATERALIZATION PROVISIONS
Overcollateralization Resulting from Cash Flow Structure. The Pooling and
Servicing Agreement requires that, on each Distribution Date, any Net Monthly
Excess Cashflow is to be applied to accelerate payment of principal on the
Class A Certificates until the Subordinated Amount is equal to the Required
Subordinated Amount for such Distribution Date. This application of the Net
Monthly Excess Cashflow has the effect of accelerating the amortization of the
Class A Certificates relative to the amortization of the Mortgage Loans, and of
increasing the Subordinated Amount.
The Pooling and Servicing Agreement provides that in the event of a permitted
reduction in the Required Subordinated Amount, a portion of the amount that
would otherwise be distributed as principal to Holders of the Class A
Certificates on such date shall instead be distributed to the Holders of the
Subordinate Certificates. This application of principal has the effect of
decelerating the amortization of the Class A Certificates relative to the
amortization of the Mortgage Loans, and of reducing the Subordinated Amount.
The Pooling and Servicing Agreement provides that, on any Distribution Date,
all unscheduled collections on account of principal (other than any such
amounts applied to the payment of a Subordination Reduction Amount) during the
related Prepayment Period are to be distributed to the Holders of the Class A
Certificates on such Distribution Date. If any Mortgage Loan became a
Liquidated Loan during such Prepayment Period, a Realized Loss could result.
The Pooling and Servicing Agreement does not contain any provision that
requires the amount of any Realized Loss to be distributed to the Holders of
the Class A Certificates on the Distribution Date immediately following the
event of loss; i.e., the Pooling and Servicing Agreement does not require the
current recovery of losses. However, the occurrence of a Realized Loss would
reduce the Subordinated Amount, which, to the extent that such reduction caused
the Subordinated Amount to be less than the Required Subordinated Amount for
such Distribution Date, would require the payment of a Subordination Increase
Amount on such Distribution Date (or, in the event of insufficient Available
Funds on such Distribution Date, on subsequent Distribution Dates, until the
Subordinated Amount equaled the applicable Required Subordinated Amount). The
effect of the foregoing is to allocate losses to the Holders of the Subordinate
Certificates by reducing, or eliminating entirely, payments of Net Monthly
Excess Cashflow and of Subordination Reduction Amounts that such Holders would
otherwise receive.
Overcollateralization and the Certificate Insurance Policy. The Pooling and
Servicing Agreement requires the Trustee to make a claim for an Insured Payment
under the Certificate Insurance Policy not later than the Servicer Advance Date
prior to any Distribution Date as to which the Trustee has determined that an
Available Funds Shortfall is likely to occur, for the purpose of applying the
proceeds of such Insured Payment as a payment of Insured Distribution Amount on
such Distribution Date. Investors in the Class A Certificates should realize
that, under extreme loss or delinquency scenarios, they may temporarily receive
no distributions of principal.
S-29
<PAGE>
DEFINITIONS
The "Accrual Period" for a given Distribution Date is the period commencing
on the Distribution Date occurring in the month immediately preceding the month
in which such given Distribution Date occurs (or, in the case of the initial
Accrual Period, commencing on the Closing Date) and ending on the day
immediately preceding such given Distribution Date.
The "Available Funds Rate Adjustment" as of any Distribution Date is equal to
the product of (i) one-twelfth of the Pool Stated Principal Balance on such
date and (ii) 0.50% (50 basis points).
The "Available Funds Shortfall" as of any Distribution Date is an amount
equal to the sum of (a) the Class A Interest Distribution Amount minus the
Available Funds (net of the Premium Amount) for such Distribution Date (but not
less than zero) and (b) the Subordination Deficit.
The "Certificate Principal Balance" of the Class A Certificates, as of any
Distribution Date, will be equal to the Certificate Principal Balance thereof
on the Closing Date (the "Original Certificate Principal Balance") minus all
distributions in respect of principal allocated thereto on previous
Distribution Dates.
The "Class A Available Funds Cap" as of any Distribution Date is a per annum
rate equal to the percentage equivalent of a fraction whose numerator is equal
to (i) the aggregate amount of interest due on the Mortgage Loans on the
related Due Date plus (ii) the Subordination Reduction Amount, if any, for such
Distribution Date, minus (iii) the sum of the Servicing Fee, the Premium Amount
and the Available Funds Rate Adjustment related to such Distribution Date, and
whose denominator is (a) the Certificate Principal Balance of the Class A
Certificates for such Distribution Date multiplied by (b) the actual number of
days elapsed in the related Accrual Period divided by 360.
The "Class A Carry-Forward Amount" as of any Distribution Date equals the sum
of (i) the amount, if any, by which (a) the Insured Distribution Amount for the
immediately preceding Distribution Date exceeded (b) the amount actually
distributed to the Holders of the Class A Certificates on such Distribution
Date in respect of such Insured Distribution Amount (including, without
limitation, any Insured Payments (as defined herein)) and (ii) 30 days'
interest on such amount in clause (i) at the applicable Pass-Through Rate for
such Distribution Date.
The "Class A Interest Distribution Amount" for any Distribution Date equals
the sum of (i) interest accrued for the related Accrual Period on the
Certificate Principal Balance of the Class A Certificates at the applicable
Pass-Through Rate, as reduced by the sum of (a) Prepayment Interest Shortfalls,
if any, for such Distribution Date to the extent not covered by one-half of the
Servicing Fee as described above under "Servicing of the Mortgage Loans--
Adjustment to Servicing Fee in Connection with Certain Prepaid Mortgage Loans"
and (b) shortfalls resulting from the Soldiers' and Sailors' Civil Relief Act
of 1940 ("Relief Act Shortfalls") and (ii) that portion of the Class A Carry-
Forward Amount relating to a shortfall (other than a Prepayment Interest
Shortfall or Relief Act Shortfall) in a distribution of a Class A Interest
Distribution Amount in respect of the Class A Certificates. The Class A
Interest Distribution Amount is calculated on the basis of a 360-day year and
the actual number of days elapsed during the related Accrual Period.
The "Class A Pass-Through Margin" will equal 0.35% (35 basis points) per
annum until the Pool Stated Principal Balance is less than or equal to 10% of
the Cut-off Date Principal Balance, at which time the Class A Pass-Through
Margin will equal 0.70% (70 basis points) per annum.
The "Class A Principal Distribution Amount" for any Distribution Date equals
the lesser of (a) the excess of (i) the sum, as of such Distribution Date, of
(A) the Available Funds less the Premium Amount for such Distribution Date and
(B) any Insured Payment over (ii) the Class A Interest Distribution Amount for
such Distribution Date and (b) the sum, without duplication, of (i) the portion
of any Class A Carry-Forward Amount that relates to a shortfall in a
distribution of a Subordination Deficit, (ii) all scheduled installments of
Mortgage Loan principal due during the related Due Period that were received by
the Servicer on or before the related Determination Date or as to which the
Servicer made an Advance on the related Servicer Advance
S-30
<PAGE>
Date, together with all unscheduled recoveries of principal on the Mortgage
Loans received by the Servicer during the related Prepayment Period (excluding
certain amounts received in respect of scheduled principal on the Mortgage
Loans due after the related Due Date), (iii) the Stated Principal Balance of
each Mortgage Loan that either was purchased or repurchased, as the case may
be, by the Seller, the Depositor or the Servicer during the related Prepayment
Period, (iv) any Substitution Adjustment Amounts delivered by the Seller during
the related Prepayment Period in connection with the substitution of Mortgage
Loans, (v) all Liquidation Proceeds collected by the Servicer during the
related Prepayment Period (to the extent such Liquidation Proceeds are related
to principal), (vi) the amount of any Subordination Deficit for such
Distribution Date, (vii) the proceeds received by the Trustee of any
termination of the Trust Fund (to the extent such proceeds are related to
principal) and (viii) the amount of any Subordination Increase Amount for such
Distribution Date; minus (ix) the amount of any Subordination Reduction Amount
for such Distribution Date. In no event will the Class A Principal Distribution
Amount with respect to any Distribution Date be less than zero or greater than
the then outstanding Certificate Principal Balance of the Class A Certificates.
A "Due Period" with respect to any Distribution Date is the period beginning
on the second day of the calendar month preceding the calendar month in which
such Distribution Date occurs and ending on the Due Date in the month in which
such Distribution Date occurs.
"Excess Proceeds" with respect to any Liquidated Loan, is the amount by which
Liquidation Proceeds (as defined herein) in respect of such Liquidated Loan
exceeds the sum of (i) the Stated Principal Balance of such Liquidated Loan as
of the date of such liquidation and (ii) interest at the Mortgage Rate from the
Due Date as to which interest was last paid or advanced to Certificateholders
up to the Due Date in the month in which such Liquidation Proceeds are required
to be distributed on the Stated Principal Balance of such Liquidated Loan
outstanding during each Due Period as to which such interest was not paid or
advanced.
The "Excess Subordinated Amount" with respect to any Distribution Date is the
amount, if any, by which (i) the Subordinated Amount that would apply on such
Distribution Date after taking into account all distributions to be made on
such Distribution Date (without giving effect to any reductions in such
Subordination Amount attributable to Subordination Reduction Amounts on such
Distribution Date) exceeds (ii) the Required Subordinated Amount for such
Distribution Date.
The "Insured Distribution Amount" for any Distribution Date is the sum of the
Class A Interest Distribution Amount and the amount of the Subordination
Deficit, if any, in each case with respect to such Distribution Date.
An "Insured Payment" is the sum of (i) with respect to each Distribution
Date, the Available Funds Shortfall for such Distribution Date and (ii) any
unpaid Preference Amount (as defined herein).
The "Net Monthly Excess Cashflow" for any Distribution Date equals the
amount, if any, by which (i) the Available Funds for such Distribution Date
(less the Premium Amount for such Distribution Date) exceeds (ii) the sum of
(a) the Class A Interest Distribution Amount for such Distribution Date plus
the amount described in clause (b) of the definition of Class A Principal
Distribution Amount (calculated for this purpose without regard to any
Subordination Increase Amount or portion thereof included therein) and (b) any
Reimbursement Amount owed to the Certificate Insurer.
The "Pass-Through Rate" as to the Class A Certificates for any Distribution
Date shall be the per annum rate equal to the least of (i) One-Month LIBOR (as
defined in "--Calculation of One-Month LIBOR" below) plus the applicable Class
A Pass-Through Margin, (ii) 13.00% per annum (the "Fixed Rate Cap") and (iii)
the Class A Available Funds Cap for such Distribution Date.
The "Premium Amount" payable to the Certificate Insurer on any Distribution
Date (commencing with the second Distribution Date) equals one-twelfth of the
product of a per annum rate (the "Insurance Premium
S-31
<PAGE>
Rate") set forth in the Pooling and Servicing Agreement and the Certificate
Principal Balance of the Class A Certificates for such Distribution Date;
provided, however, that for any Distribution Date on which a Certificate
Insurer Default has occurred and is continuing, the Premium Amount will be
equal to zero.
A "Principal Prepayment" with respect to any Distribution Date is any
mortgagor payment or other recovery of principal on a Mortgage Loan (including
all proceeds allocable to principal of any Mortgage Loan or property acquired
in respect thereof that has been repurchased by the Seller or purchased by the
Servicer) that is received in advance of its scheduled Due Date and is not
accompanied by an amount representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment.
A "Realized Loss" (i) with respect to any defaulted Mortgage Loan that is
finally liquidated (a "Liquidated Loan") is the amount of loss realized equal
to the portion of the Stated Principal Balance remaining unpaid after
application of all amounts recovered (net of amounts reimbursable to the
Servicer for related Advances, expenses and Servicing Fees) towards interest
and principal owing on such Liquidated Loan and (ii) with respect to certain
Mortgage Loans the principal balances or the scheduled payments of principal
and interest of which have been reduced in connection with bankruptcy
proceedings, the amount of such reduction.
The "Reimbursement Amount" as of any Distribution Date is the amount of all
Insured Payments made by the Certificate Insurer pursuant to the Certificate
Insurance Policy and certain other amounts owed to the Certificate Insurer
pursuant to the Insurance Agreement (together with interest thereon at the
Pass-Through Rate for the Class A Certificates for such Distribution Date) that
have not been previously repaid as of such Distribution Date.
The "Required Subordinated Amount" as of any Distribution Date will initially
equal a percentage, calculable in accordance with the Pooling and Servicing
Agreement and the Insurance and Indemnity Agreement dated as of July 1, 1996
(the "Insurance Agreement") among the Certificate Insurer, the Depositor,
Countrywide Home Loans, Inc. and the Trustee, of the Cut-off Date Principal
Balance of the Mortgage Loans. The Pooling and Servicing Agreement and
Insurance Agreement generally provide that the Required Subordinated Amount
may, over time, decrease or increase, subject to certain floors, caps and
triggers.
The "Stated Principal Balance" of any Mortgage Loan or related REO Property
equals (i) as of the Cut-off Date and each day thereafter to and including the
first Distribution Date, the Cut-off Date Principal Balance thereof, and (ii)
as of any Distribution Date after the first Distribution Date, such Cut-off
Date Principal Balance minus the sum of (a) the principal portion of the
Scheduled Payments due with respect to such Mortgage Loan or REO Property
during each Due Period ending prior to the immediately preceding Distribution
Date which were received by the Servicer as of the close of business on the
Determination Date related to such preceding Distribution Date or with respect
to which Advances were made on each Servicer Advance Date prior to such
preceding Distribution Date, (b) all Principal Prepayments with respect to such
Mortgage Loan or REO Property, and all Liquidation Proceeds to the extent
applied by the Servicer as recoveries of principal with respect to such
Mortgage Loan or REO Property, which were received by the Servicer as of the
close of business on the Determination Date related to such preceding
Distribution Date, and (c) any Realized Loss with respect thereto applied prior
to the close of business on the Determination Date relating to such preceding
Distribution Date; provided, however, that the Stated Principal Balance of any
Mortgage Loan that becomes a Liquidated Loan will be zero immediately following
the Distribution Date that follows the Prepayment Period in which such Mortgage
Loan becomes a Liquidated Loan.
The "Subordinated Amount" as of any Distribution Date is the amount (not less
than zero), if any, by which (i) the Pool Stated Principal Balance immediately
following such Distribution Date exceeds (ii) the Certificate Principal Balance
of the Class A Certificates as of such Distribution Date after giving effect to
the payment of the Class A Principal Distribution Amount on such Distribution
Date.
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<PAGE>
A "Subordination Deficiency Amount" with respect to any Distribution Date is
the amount, if any, by which the Required Subordinated Amount as of such
Distribution Date exceeds the Subordinated Amount as of such Distribution Date
before taking into account the payment of any related Subordination Increase
Amounts on such Distribution Date.
A "Subordination Deficit" with respect to any Distribution Date is the
amount, if any, by which (i) the Certificate Principal Balance of the Class A
Certificates as of such Distribution Date, after giving effect to the payment
of the Class A Principal Distribution Amount on such Distribution Date (except
for any payment to be made as to principal constituting an Insured Payment),
exceeds (ii) the Pool Stated Principal Balance of the Mortgage Loans
immediately following such Distribution Date.
A "Subordination Increase Amount" with respect to any Distribution Date is
the lesser of (a) the Subordination Deficiency Amount as of such Distribution
Date (after taking into account the payment of the Class A Principal
Distribution Amount on such Distribution Date (other than any Subordination
Increase Amount)) and (b) the amount of Net Monthly Excess Cashflow on such
Distribution Date.
The "Subordination Reduction Amount" as of any Distribution Date equals the
lesser of (i) the Excess Subordinated Amount for such Distribution Date and
(ii) the sum, without duplication, of the amounts specified in clauses (b)(ii)
through (v) and (vii) of the definition of "Class A Principal Distribution
Amount" above.
The "Substitution Adjustment Amount" as of the date of substitution by the
Seller of one or more Replacement Mortgage Loans for one or more Mortgage Loans
that are removed from the Trust Fund equals the amount (if any) by which the
aggregate principal balance of such Replacement Mortgage Loans is less than the
aggregate Stated Principal Balance (after application of the scheduled
principal portion of the monthly payments due in the month of substitution) of
all such removed Mortgage Loans.
CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period (each such date, an "Interest Determination
Date"), the Trustee will determine the London interbank offered rate for one-
month United States dollar deposits ("One-Month LIBOR") for such Accrual Period
for the Class A Certificates on the basis of the offered rates of the Reference
Banks for one-month United States dollar deposits, as such rates appear on the
Reuters Screen LIBO Page, as of 11:00 a.m. (London time) on such Interest
Determination Date. As used in this section, "LIBOR Business Day" means a day
on which banks are open for dealing in foreign currency and exchange in London
and New York City; "Reuters Screen LIBO Page" means the display designated as
page "LIBO" on the Reuters Monitor Money Rates Service (or such other page as
may replace the LIBO page on that service for the purpose of displaying London
interbank offered rates of major banks); and "Reference Banks" means leading
banks selected by the Trustee and engaged in transactions in Eurodollar
deposits in the international Eurocurrency market (i) with an established place
of business in London, (ii) whose quotations appear on the Reuters Screen LIBO
Page on the Interest Determination Date in question, (iii) which have been
designated as such by the Trustee and (iv) not controlling, controlled by, or
under common control with, the Depositor, Countrywide or any successor
Servicer.
On each Interest Determination Date, One-Month LIBOR for the related Accrual
Period for the Class A Certificates will be established by the Trustee as
follows:
(a) If on such Interest Determination Date two or more Reference Banks
provide such offered quotations, One-Month LIBOR for the related Accrual
Period shall be the arithmetic mean of such offered quotations (rounded
upwards if necessary to the nearest whole multiple of 0.0625%).
(b) If on such Interest Determination Date fewer than two Reference Banks
provide such offered quotations, One-Month LIBOR for the related Accrual
Period shall be the higher of (x) One-Month
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LIBOR as determined on the previous Interest Determination Date and (y) the
Reserve Interest Rate. The "Reserve Interest Rate" shall be the rate per
annum that the Trustee determines to be either (i) the arithmetic mean
(rounded upwards if necessary to the nearest whole multiple of 0.0625%) of
the one-month United States dollar lending rates which New York City banks
selected by the Trustee are quoting on the relevant Interest Determination
Date to the principal London offices of leading banks in the London
interbank market or, in the event that the Trustee can determine no such
arithmetic mean, (ii) the lowest one-month United States dollar lending
rate which New York City banks selected by the Trustee are quoting on such
Interest Determination Date to leading European banks.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Trustee and the Trustee's calculation of the rate of interest applicable
to the Class A Certificates for the related Accrual Period shall (in the
absence of manifest error) be final and binding.
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of distributions on the
Certificates for the first month of the Trust Fund's existence:
<TABLE>
<S> <C> <C>
July 1, 1996............ Cut-off Date.
July 2-August 15, 1996.. (A) Prepayment Period. The Servicer receives Principal
Prepayments and interest thereon to the date of such
prepayment. For succeeding Distribution Dates, the
Prepayment Period will commence on the 16th day of the
preceding calendar month and end on the 15th day of the
month of such Distribution Date.
July 31................. (B) Record Date (the last Business Day of the month preceding
the month of the related Distribution Date).
August 1................ (C) Due Date (the first calendar day of the month in which the
related Distribution Date occurs). Scheduled Payments of
principal and interest on the Mortgage Loans are due from
Mortgagors.
Through August 15....... (D) The Servicer receives Scheduled Payments due on August 1
during this period.
August 15............... (E) Determination Date (the 15th day of each month or, if such
day is not a Business Day, the immediately preceding
Business Day).
August 23............... (E) Servicer Advance Date (the Business Day preceding each
Distribution Date).
August 26............... (F) Distribution Date.
</TABLE>
Succeeding monthly periods follow the pattern of (A) through (F), except that
the Prepayment Period is as indicated in the description above.
- --------
(A) Principal Prepayments received during this period will be distributed to
Certificateholders on August 26, 1996 (to the extent not applied in
computing the Cut-off Date Principal Balance). When a Mortgage Loan is
prepaid in full, interest on the amount prepaid is collected only from the
last scheduled Due Date to the date of prepayment. Interest in respect of
Principal Prepayments received during the period from the 2nd through the
15th day of a month will be paid to the Servicer as additional servicing
compensation. With respect to Prepayment Interest Shortfalls resulting
from Principal Prepayments received during the period from the 16th
through the last day of a calendar month, the Servicer will reduce its
Servicing Fee (in an amount up to one-half thereof) for such month and
make a corresponding deposit in the Certificate Account, in each case to
the extent described under "Servicing of Mortgage Loans--Adjustment to
Servicing Fee in Connection with Certain Prepaid Mortgage Loans" herein.
(B) Distributions of principal and interest on August 26, 1996 will be made to
Certificateholders of record as of the close of business on the Record
Date.
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<PAGE>
(C) Scheduled Payments are due on this date and, when received, will be passed
through on the related Distribution Date, with interest payable to the
Certificateholders as described herein.
(D) All required amounts will be deposited by the Servicer in the Certificate
Account within two Business Days of receipt. Such payments will include
the scheduled principal payments, plus interest at the applicable Net
Mortgage Rate on the Cut-off Date Principal Balance, in the case of the
initial Distribution Date, and on the Pool Stated Principal Balance, in
the case of each Distribution Date thereafter.
(E) No later than each Servicer Advance Date, the Trustee will determine, as
of the related Determination Date, the amount of principal and interest
(including the amount, if any, of Advances to be made by the Servicer)
which will be passed through to Certificateholders. The Trustee will be
obligated to distribute on the related Distribution Date those scheduled
payments due on August 1, 1996 which have been received on or before
August 15, 1996 (or which were the subject of an Advance), as well as all
Principal Prepayments received on Mortgage Loans during the related
Prepayment Period (the day after the Cut-off Date through August 15,
1996). In the event a Prepayment Interest Shortfall occurs during such
Prepayment Period, up to one-half of the Servicing Fee otherwise payable
to the Servicer for such month shall, to the extent of such Prepayment
Interest Shortfall, be deposited by the Servicer in the Certificate
Account for distribution to Certificateholders on August 26, 1996.
(F) The Trustee will make distributions to Certificateholders on the 25th day
of the month in which the related Due Date occurs, or if such day is not a
Business Day, on the next Business Day.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will forward to each
Certificateholder, the Servicer, the Depositor and the Certificate Insurer a
statement generally setting forth, among other information:
(i) the amount of the related distribution to Class A Certificateholders
allocable to principal, separately identifying (A) the aggregate amount of
any Principal Prepayments included therein, and (B) the aggregate of all
scheduled payments of principal included therein;
(ii) the amount of such distribution to Holders of the Class A
Certificates allocable to interest;
(iii) the amount of any Insured Payment included in the amounts
distributed to the Class A Certificateholders on such Distribution Date;
(iv) the Class A Carry-Forward Amount;
(v) the Certificate Principal Balance of the Class A Certificates after
giving effect to the distribution of principal on such Distribution Date;
(vi) the Pool Stated Principal Balance for the following Distribution
Date;
(vii) the Required Subordinated Amount and the Subordinated Amount as of
such Distribution Date;
(viii) the related amount of the Servicing Fee paid to or retained by the
Servicer;
(ix) the Pass-Through Rate for the Class A Certificates for such
Distribution Date;
(x) the amount of Advances included in the distribution on such
Distribution Date;
(xi) the number and aggregate principal amounts of Mortgage Loans (A)
delinquent (exclusive of Mortgage Loans in foreclosure) (1) 30 days, (2) 31
to 60 days, (3) 61 to 90 days and (4) 91 or more days, and (B) in
foreclosure and delinquent (1) 30 days, (2) 31 to 60 days, (3) 61 to 90
days and (4) 91 or more days, in each case as of the close of business on
the last day of the calendar month preceding such Distribution Date;
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<PAGE>
(xii) with respect to any Mortgage Loan that became an REO Property
during the preceding calendar month, the loan number and Stated Principal
Balance of such Mortgage Loan as of the close of business on the
Determination Date preceding such Distribution Date and the date of
acquisition thereof;
(xiii) the total number and principal balance of any REO Properties as of
the close of business on the Determination Date preceding such Distribution
Date;
(xiv) the aggregate Stated Principal Balance of all Liquidated Loans and
the aggregate of all Realized Losses relating thereto;
(xv) with respect to any Liquidated Loan, the loan number, Stated
Principal Balance and Realized Losses relating thereto; and
(xvi) the amount of any Subordination Deficit after giving effect to the
distribution of principal on such Distribution Date.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each Certificateholder
of record during the previous calendar year a statement containing information
necessary to enable Certificateholders to prepare their tax returns. Such
statements will not have been examined and reported upon by an independent
public accountant.
AMENDMENT
The Pooling and Servicing Agreement may be amended by the Depositor, the
Servicer, the Seller and the Trustee, without the consent of Certificateholders
but only with the consent of the Certificate Insurer, for any of the purposes
set forth under "The Pooling and Servicing Agreement--Amendment" in the
Prospectus. In addition, the Pooling and Servicing Agreement may be amended by
the Depositor, the Servicer, the Seller and the Trustee with the consent of the
Certificate Insurer and the Holders of a Majority in Interest of each Class of
Certificates affected thereby for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Pooling and
Servicing Agreement or of modifying in any manner the rights of the
Certificateholders; provided, however, that no such amendment may (i) reduce in
any manner the amount of, or delay the timing of, payments required to be
distributed on any Certificate without the consent of the Holder of such
Certificate; (ii) adversely affect in any material respect the interests of the
Holders of any Class of Certificates in a manner other than as described in
clause (i) above, without the consent of the Holders of Certificates of such
Class evidencing, as to such Class, Percentage Interests aggregating 66%; or
(iii) reduce the aforesaid percentage of aggregate outstanding principal
amounts of Certificates of each Class, the Holders of which are required to
consent to any such amendment, without the consent of the Holders of all
Certificates of such Class.
OPTIONAL TERMINATION
The Servicer (and, if Countrywide is no longer the Servicer, the Certificate
Insurer) will have the right to repurchase all remaining Mortgage Loans and REO
Properties in the Trust Fund and thereby effect early retirement of all the
Certificates, subject to the Pool Stated Principal Balance of the Mortgage
Loans and REO Properties at the time of repurchase being less than or equal to
10% of the Cut-off Date Principal Balance thereof. In the event such option is
exercised, the repurchase will be made at a price equal to the sum of (i) 100%
of the Stated Principal Balance of each Mortgage Loan (other than in respect of
REO Property) plus accrued interest thereon at the applicable Mortgage Rate
(or, if such option is exercised by the Servicer, at the applicable Net
Mortgage Rate), (ii) the appraised value of any REO Property (up to the Stated
Principal Balance of the related Mortgage Loan) and (iii) any unreimbursed out-
of-pocket costs and expenses and the principal portion of Advances, in each
case previously incurred by the Servicer in the
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performance of its servicing obligations. Proceeds from such repurchase will be
included in Available Funds and will be distributed to the Certificateholders.
Any repurchase of the Mortgage Loans and REO Properties will result in an early
retirement of the Certificates.
OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any Mortgage Loan which is delinquent in payment by 91 days or more,
the Servicer may, at its option, purchase such Mortgage Loan from the Trust
Fund at a price equal to 100% of the Stated Principal Balance thereof plus
accrued interest thereon at the applicable Net Mortgage Rate from the date
through which interest was last paid by the related mortgagor or advanced to
the first day of the month in which such amount is to be distributed.
EVENTS OF DEFAULT; SERVICER TERMINATION TRIGGER EVENT
Events of Default will consist of: (i) any failure by the Servicer to deposit
in the Certificate Account or the Distribution Account the required amounts or
remit to the Trustee any payment (including an Advance required to be made
under the terms of the Pooling and Servicing Agreement) which continues
unremedied for five calendar days after written notice of such failure shall
have been given to the Servicer by the Trustee, the Certificate Insurer or the
Depositor, or to the Servicer and the Trustee by the Holders of Certificates
evidencing not less than 25% of the Voting Rights evidenced by the
Certificates; (ii) any failure by the Servicer to observe or perform in any
material respect any other of its covenants or agreements in the Pooling and
Servicing Agreement, which continues unremedied for 60 days after the giving of
written notice of such failure to the Servicer by the Trustee, the Certificate
Insurer or the Depositor, or to the Servicer and the Trustee by the Holders of
Certificates evidencing not less than 25% of the Voting Rights evidenced by the
Certificates; or (iii) insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings, and certain actions by or on behalf of
the Servicer indicating its insolvency or inability to pay its obligations. A
"Servicer Termination Trigger Event" will occur if certain loss or delinquency
levels are exceeded with respect to the Mortgage Loans, as described in the
Insurance Agreement. As of any date of determination, (i) Holders of the Class
A Certificates will be allocated a percentage of all of the Voting Rights equal
to 100% minus the fraction (expressed as a percentage) whose numerator is the
Required Subordinated Amount on such date and whose denominator is the Pool
Stated Principal Balance on such date and (ii) Holders of the Class B-IO and
Class R Certificates will in the aggregate be allocated all of the remaining
Voting Rights. Voting Rights will be allocated among the Certificates of each
such Class in accordance with their respective Percentage Interests.
RIGHTS UPON EVENT OF DEFAULT OR SERVICER TERMINATION TRIGGER EVENT
So long as an Event of Default under the Pooling and Servicing Agreement
remains unremedied, the Trustee shall, but only upon the receipt of
instructions from the Certificate Insurer or the Holders of Certificates having
not less than 25% of the Voting Rights evidenced by the Certificates (with the
prior written consent of the Certificate Insurer), terminate all of the rights
and obligations of the Servicer under the Pooling and Servicing Agreement and
in and to the Mortgage Loans, whereupon the Trustee will succeed to all of the
responsibilities and duties of the Servicer under the Pooling and Servicing
Agreement, including the obligation to make Advances. If a Servicer Termination
Trigger Event occurs, the Trustee shall, but only upon receipt of written
instructions from the Certificate Insurer,terminate all of the rights and
obligations of the Servicer under the Pooling and Servicing Agreement and in
and to the Mortgage Loans as described in the preceding sentence. No assurance
can be given that termination of the rights and obligations of the Servicer
under the Pooling and Servicing Agreement would not adversely affect the
servicing of the Mortgage Loans, including the delinquency experience of the
Mortgage Loans.
No Certificateholder, solely by virtue of such Holder's status as a
Certificateholder, will have any right under the Pooling and Servicing
Agreement to institute any proceeding with respect thereto, unless such Holder
previously has given to the Trustee written notice of the continuation of an
Event of Default and
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unless the Holders of Certificates having not less than 25% of the Voting
Rights evidenced by the Certificates have made written request to the Trustee
to institute such proceeding in its own name as Trustee thereunder and have
offered to the Trustee reasonable indemnity, the Certificate Insurer shall have
consented thereto and the Trustee for 60 days has neglected or refused to
institute any such proceeding.
THE TRUSTEE
The Bank of New York will be the Trustee under the Pooling and Servicing
Agreement. The Depositor and Countrywide may maintain other banking
relationships in the ordinary course of business with the Trustee. Class A
Certificates may be surrendered at the Corporate Trust Office of the Trustee
located at 101 Barclay Street, 12 E., New York, New York 10286, Attention:
Corporate Trust Window or at such other addresses as the Trustee may designate
from time to time.
CERTIFICATE GUARANTY INSURANCE POLICY
The following summary of the provisions of the Certificate Insurance Policy
does not purport to be complete and is qualified in its entirety by reference
to the Certificate Insurance Policy, a copy of which may be obtained from the
Trustee upon request. The Certificate Insurer, in consideration of the payment
of the premium and subject to the terms of the Certificate Insurance Policy,
unconditionally and irrevocably guarantees to any Holder of a Class A
Certificate that an amount equal to each full and complete Insured Payment will
be received by the Trustee, on behalf of the Holders, for distribution to each
such Holder of such Holder's proportionate share of the Insured Distribution
Amount.
Notwithstanding the foregoing paragraph, the Certificate Insurance Policy
does not cover the liability of the Trust Fund, the REMIC or the Trustee for
withholding taxes, if any (including interest and penalties in respect of any
such liability).
Payment of claims on the Certificate Insurance Policy made in respect of an
Insured Payment will be made by the Certificate Insurer following Receipt by
the Certificate Insurer of the appropriate notice for payment on the later to
occur of (i) 12:00 noon New York City time, on the Business Day following
Receipt of such notice for payment and (ii) 12:00 noon New York City time, on
the date on which such payment was due on the Class A Certificates.
If payment of any amount guaranteed by the Certificate Insurer pursuant to
the Certificate Insurance Policy is avoided as a preference payment (such
amount, the "Preference Amount") under applicable bankruptcy, insolvency,
receivership or similar law, the Certificate Insurer will pay such amount out
of the funds of the Certificate Insurer on the later of (a) the date when due
to be paid pursuant to the Order referred to below or (b) the first to occur of
(i) the fourth Business Day following Receipt by the Certificate Insurer from
the Trustee of (A) a certified copy of the order (the "Order") of the court or
other governmental body which exercised jurisdiction to the effect that the
Holder of a Class A Certificate is required to return all or a portion of any
Insured Distribution Amount distributed with respect to the Class A
Certificates during the term of the Certificate Insurance Policy because such
distributions were avoidable as preference payments under applicable bankruptcy
law, (B) a certificate of the Holder of the Class A Certificate that the Order
has been entered and is not subject to any stay and (C) an assignment duly
executed and delivered by the Holder of the Class A Certificate, in such form
as is reasonably required by the Certificate Insurer and provided to the Holder
of the Class A Certificate by the Certificate Insurer, irrevocably assigning to
the Certificate Insurer all rights and claims of the Holder of the Class A
Certificate relating to or arising under the Class A Certificates against the
debtor which made such preference payment or otherwise with respect to such
preference payment, or (ii) the date of Receipt by the Certificate Insurer from
the Trustee of the items referred to in clauses (A), (B) and (C) above if, at
least four Business Days prior to such date of Receipt, the Certificate Insurer
shall have received written notice from the Trustee that such items were to be
delivered on such date and such date was specified in such notice. Such payment
shall be disbursed to the receiver, conservator, debtor-in-possession or
trustee in bankruptcy named in the Order and not to the Trustee or any Holder
of a Class A Certificate directly (unless a Holder of the Class A Certificate
has previously paid such amount to the receiver, conservator, debtor-in-
possession or trustee in bankruptcy named in the Order in which case such
payment shall be disbursed to the Trustee for distribution to such Holder of
the Class A Certificate upon proof of such payment reasonably satisfactory to
the Certificate Insurer).
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The terms "Receipt" and "Received," with respect to the Certificate Insurance
Policy, mean actual delivery to the Certificate Insurer and to its fiscal agent
appointed by the Certificate Insurer at its option, if any, prior to 12:00
noon, New York City time, on a Business Day; delivery either on a day that is
not a Business Day or after 12:00 noon, New York City time, shall be deemed to
be Receipt on the next succeeding Business Day. If any notice or certificate
given under each Certificate Insurance Policy by the Trustee is not in proper
form or is not properly completed, executed or delivered, it shall be deemed
not to have been Received, and the Certificate Insurer or the fiscal agent
shall promptly so advise the Trustee and the Trustee may submit an amended
notice.
Under the Certificate Insurance Policy, "Business Day" means any day other
than (i) a Saturday or Sunday or (ii) a day on which banking institutions in
the City of New York, the State of California or the city in which the
Corporate Trust Office of the Trustee is located, are authorized or obligated
by law, executive order or governmental decree to be closed.
The Certificate Insurer's obligations under the Certificate Insurance Policy
in respect of an Insured Distribution Amount shall be discharged to the extent
funds equal to such Insured Distribution Amount are transferred to the Trustee
as provided in the Certificate Insurance Policy, whether or not such funds are
properly applied by the Trustee.
The Certificate Insurer shall be subrogated to the rights of each Holder of a
Class A Certificate to receive payments of principal and interest, as
applicable, with respect to distributions on the Class A Certificates to the
extent of any payment by the Certificate Insurer under the Certificate
Insurance Policy. To the extent the Certificate Insurer makes Insured Payments
either directly or indirectly (as by paying through the Trustee) to the Holders
of Class A Certificates, the Certificate Insurer will be subrogated to the
rights of such Holders with respect to such Insured Payments, shall be deemed
to the extent of the payments so made to be a registered Holder of Class A
Certificates for purposes of payment and shall receive all future Reimbursement
Amounts until all such Insured Payments by the Certificate Insurer have been
fully reimbursed, provided that the Holders of Class A Certificates have
received the full amount of the Insured Distribution Amounts.
The terms of the Certificate Insurance Policy cannot be modified, altered or
affected by any other agreement or instrument, or by the merger, consolidation
or dissolution of the Depositor. The Certificate Insurance Policy by its terms
may not be canceled or revoked. The Certificate Insurance Policy is governed by
the laws of the State of New York.
The Certificate Insurance Policy is not covered by the Property/Casualty
Insurance Security fund specified in Article 76 of the New York Insurance Law.
The Certificate Insurance Policy is not covered by the Florida Insurance
Guaranty Association created under Part II of Chapter 631 of the Florida
Insurance Code. In the event the Certificate Insurer were to become insolvent,
any claims arising under the Certificate Insurance Policy are excluded from
coverage by the California Insurance Guaranty Association, established pursuant
to Article 14.2 of Chapter 1 of part 2 of Division 1 of the California
Insurance Code.
Pursuant to the terms of the Pooling and Servicing Agreement, unless a
Certificate Insurer Default (as defined in the Pooling and Servicing Agreement)
exists, the Certificate Insurer shall be deemed to be the holder of the Class A
Certificates for certain purposes (other than with respect to payment on the
Class A Certificates), will be entitled to exercise all rights of the Class A
Certificateholders thereunder, without the consent of such holders, and the
Class A Certificateholders may exercise such rights only with the prior written
consent of the Certificate Insurer. In addition, the Certificate Insurer will
have certain additional rights as third party beneficiary to the Pooling and
Servicing Agreement.
In the absence of payments under the Certificate Insurance Policy, Class A
Certificateholders will bear directly the credit and other risks associated
with their beneficial ownership interest in the Trust Fund.
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RIGHTS OF THE CERTIFICATE INSURER
The Pooling and Servicing Agreement provides that the Trustee is permitted to
distribute Insured Payments only for purposes of paying the Holders of the
Class A Certificates any Insured Distribution Amount and any unpaid Preference
Amount for which, in each case, a claim was made to the Certificate Insurer.
In the event an Insured Payment is made, the Certificate Insurer, until all
such Insured Payments have been fully reimbursed, will be entitled to receive
the Reimbursement Amount. However, the Certificate Insurer will not be entitled
to reimbursement on any Distribution Date unless on such Distribution Date the
Certificate Insurer shall have paid all amounts required to have been paid by
it under the Certificate Insurance Policy on or prior to such Distribution
Date.
Provided no Certificate Insurer Default has occurred and is continuing, the
Certificate Insurer shall have the right to direct certain actions of the
Servicer and Trustee.
The Certificate Insurance Policy does not guarantee to the Holders of the
Class A Certificates any specified rate of Principal Prepayments.
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FINANCIAL SECURITY ASSURANCE INC.
The following information has been supplied by Financial Security Assurance
Inc. ("Financial Security" or the "Certificate Insurer") for inclusion in this
Prospectus Supplement. Accordingly, neither the Depositor nor Countrywide makes
any representation as to the accuracy or completeness of such information.
GENERAL
Financial Security is a monoline insurance company incorporated in 1984 under
the laws of the State of New York. Financial Security is licensed to engage in
financial guaranty insurance business in all 50 states, the District of
Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged exclusively in the
business of writing financial guaranty insurance, principally in respect of
securities offered in domestic and foreign markets. In general, financial
guaranty insurance consists of the issuance of a guaranty of scheduled payments
of an issuer's securities -- thereby enhancing the credit rating of those
securities -- in consideration for the payment of a premium to the insurer.
Financial Security and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset-backed securities are generally
supported by residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities consist largely of
general obligation bonds, special revenue bonds and other special obligations
of state and local governments. Financial Security insures both newly issued
securities sold in the primary market and outstanding securities sold in the
secondary market that satisfy Financial Security's underwriting criteria.
Financial Security is a wholly-owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprises Holdings,
Inc., US WEST Capital Corporation and The Tokio Marine and Fire Insurance Co.,
Ltd. No shareholder of Holdings is obligated to pay any debt of Financial
Security or any claim under any insurance policy issued by Financial Security
or to make any additional contribution to the capital of Financial Security.
The principal executive offices of Financial Security are located at 350 Park
Avenue, New York, New York 10022, and its telephone number at that location is
(212) 826-0100.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by Financial Security or any
of its domestic operating insurance company subsidiaries are reinsured among
such companies on an agreed-upon percentage substantially proportional to their
respective capital, surplus and reserves, subject to applicable statutory risk
limitations. In addition, Financial Security reinsures a portion of its
liabilities under certain of its financial guaranty insurance policies with
other reinsurers under various quota share treaties and on a transaction-by-
transaction basis. Such reinsurance is utilized by Financial Security as a risk
management device and to comply with certain statutory and rating agency
requirements; it does not alter or limit Financial Security's obligations under
any financial guaranty insurance policy.
RATINGS OF CLAIMS-PAYING ABILITY
Financial Security's claims-paying ability is rated "Aaa" by Moody's and
"AAA" by S&P, Nippon Investors Service Inc. and Standard & Poor's (Australia)
Pty. Ltd. Such ratings reflect only the views of the respective rating
agencies, are not recommendations to buy, sell or hold securities and are
subject to revision or withdrawal at any time by such rating agencies. See
"Ratings" in this Prospectus Supplement.
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CAPITALIZATION
The following table sets forth the capitalization of Financial Security and
its wholly owned subsidiaries on the basis of generally accepted accounting
principles as of March 31, 1996 (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1996
(UNAUDITED)
--------------
<S> <C>
Unearned Premium Reserve (net of prepaid reinsurance pre-
miums)................................................... $ 340,226
----------
Shareholder's Equity:
Common Stock............................................ 15,000
Additional Paid-In Capital.............................. 681,470
Unrealized Loss on Investments (net of deferred income
taxes)................................................. (737)
Accumulated Earnings.................................... 83,444
----------
Total Shareholder's Equity............................ $ 779,177
----------
Total Unearned Premium Reserve and Shareholder's Equi-
ty................................................... $1,119,403
==========
</TABLE>
For further information concerning the Certificate Insurer, see the
Consolidated Financial Statements of the Certificate Insurer and Subsidiaries,
and the notes thereto, incorporated by reference herein. Copies of the
statutory quarterly and annual statements filed with the State of New York
Insurance Department by Financial Security are available upon request to the
State of New York Insurance Department.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The consolidated financial statements of the Certificate Insurer and
Subsidiaries included as an exhibit to the Annual Report on Form 10-K for the
period ended December 31, 1995 and the unaudited financial statements of the
Certificate Insurer and Subsidiaries for the three-month period ended March 31,
1996 included as an exhibit to the Quarterly Report on Form 10-Q for the period
ended March 31, 1996, each of which has been filed with the Commission by
Holdings, are hereby incorporated by reference in this Prospectus Supplement.
All financial statements of the Certificate Insurer included in documents
filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the Class
A Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing of such documents.
INSURANCE REGULATION
Financial Security is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of New York, its
state of domicile. In addition, Financial Security and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial
guaranty insurance corporation licensed to do business in the State of New
York, Financial Security is subject to Article 69 of the New York Insurance Law
which, among other things, limits the business of each such insurer to
financial guaranty insurance and related lines, requires that each such insurer
maintain a minimum surplus to policyholders, establishes contingency, loss and
unearned premium reserve requirements for each such insurer, and limits the
size of individual transactions ("single risks") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer. Other
provisions of the New York Insurance Law, applicable to non-life insurance
companies such as Financial Security, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liability for
borrowings.
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The Certificate Insurance Policy is not covered by the Property/Casualty
Insurance Security Fund specified in Article 76 of the New York Insurance Law.
Financial Security does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding Financial Security set forth under the heading
"Financial Security Assurance Inc."
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
INTEREST RATE FLUCTUATIONS
The yield to investors on the Class A Certificates will be sensitive to,
among other things, the level of One-Month LIBOR on each Interest Determination
Date and to the additional limitations specified herein affecting the Pass-
Through Rate for the Class A Certificates. As described herein, the Pass-
Through Rate may in no event exceed the lesser of 13.00% and the applicable
Class A Available Funds Cap, which depends, in large part, on the Net Mortgage
Rates in effect during the preceding calendar month. Disproportionate principal
payments (whether resulting from full or partial prepayments) on Mortgage Loans
having Net Mortgage Rates higher or lower than the Pass-Through Rate for the
Class A Certificates (as calculated solely pursuant to clauses (i) and (ii) of
the definition of "Pass-Through Rate" herein) could therefore affect the yield
on such Certificates. In particular, the yield to maturity of the Class A
Certificates could be lower than that otherwise produced if disproportionate
principal payments (including prepayments) are made on Mortgage Loans having
Net Mortgage Rates that exceed the Pass-Through Rate. In addition, the Mortgage
Rate applicable to any Adjustment Date will be based on the Mortgage Index
value most recently announced as of a date 45 days prior to such Adjustment
Date. Thus, if the Mortgage Index value with respect to a Mortgage Loan rises,
the lag in time before the corresponding Mortgage Rate increases will, all
other things being equal, slow the upward adjustment of the Class A Available
Funds Cap. See "The Mortgage Pool" herein.
The extent to which the yield to maturity of a Class A Certificate may vary
from the anticipated yield will depend upon the degree to which it is purchased
at a discount or premium and, correspondingly, the degree to which the timing
of payments thereon is sensitive to prepayments, liquidations and purchases of
the Mortgage Loans. In particular, in the case of a Class A Certificate
purchased at a discount, an investor should consider the risk that a slower
than anticipated rate of principal payments, liquidations and purchases of 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 Certificate
purchased at a premium, the risk that a faster than anticipated rate of
principal payments, liquidations and purchases of the Mortgage Loans could
result in an actual yield to such investor that is lower than the anticipated
yield.
DEFAULTS AND DELINQUENT PAYMENTS
The yield to maturity of the Class A Certificates will be sensitive to
defaults and delinquent payments on the Mortgage Loans. If a purchaser of a
Class A Certificate calculates its anticipated yield based on an assumed rate
of default and amount of losses that is lower than the default rate and amount
of losses actually incurred and not covered by the Certificate Insurance
Policy, its actual yield to maturity will be lower than that so calculated and
could, in the event of substantial losses, be negative. The timing of Realized
Losses that are not covered by payments under the Certificate Insurance Policy
will also affect an investor's actual yield to maturity even if the rate of
defaults and severity of such losses are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater is the effect
on an investor's yield to maturity. There can be no assurance as to the
delinquency, foreclosure or loss experience with respect to the Mortgage Loans.
Because the Mortgage Loans are B&C quality mortgage loans, which are
underwritten in accordance with standards less stringent than those generally
acceptable to FNMA and FHLMC with regard to a borrower's credit standing and
repayment ability, the risk of delinquencies with respect to, and losses on,
the Mortgage Loans will be greater than that of mortgage loans underwritten in
accordance with FNMA and FHLMC standards.
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PREPAYMENT CONSIDERATIONS AND RISKS
The rates of principal payments on the Class A Certificates, the aggregate
amount of distributions on the Class A Certificates and the yield to maturity
of the Class A Certificates will be related to, among other things, the rate
and timing of payments of principal on the Mortgage Loans. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans (which will change periodically to
accommodate adjustments to the Mortgage Rates) and by the rate of Principal
Prepayments thereon (including for this purpose, prepayments resulting from (i)
refinancing, (ii) liquidations of the Mortgage Loans due to defaults,
casualties and condemnations and (iii) repurchases by Countrywide or the
Servicer). The Mortgage Loans may be prepaid by the mortgagors at any time;
however, with respect to approximately 32.98% of the Mortgage Loans (by Cut-off
Date Principal Balance) a prepayment charge may apply to full prepayments by
borrowers during the first five years after origination under the limited
circumstances described above under "The Mortgage Pool--General." Increases in
the required monthly payments on the Mortgage Loans in excess of those assumed
in underwriting such Mortgage Loans may result in a default rate higher than
that which may have been experienced had the Mortgage Loans borne fixed
interest rates. The Mortgage Loans are subject to the "due-on-sale" provisions
included therein. Prepayments, liquidations and purchases of the Mortgage Loans
(including any optional purchase by Countrywide or the Servicer of a defaulted
Mortgage Loan or any purchase by the Servicer or the Certificate Insurer of the
remaining Mortgage Loans and REO Property in connection with the optional
termination of the Trust Fund) will, subject to certain conditions, result in
distributions to Class A Certificateholders of principal amounts that would
otherwise be distributed over the remaining terms of the Mortgage Loans. Since
the rate of payment of principal on the Mortgage Loans will depend on future
events and a variety of factors, no assurance can be given as to such rate or
the rate of Principal Prepayments.
All of the Mortgage Loans are adjustable rate mortgage loans ("ARMs"). The
rate of principal prepayments with respect to ARMs has fluctuated in recent
years. As is the case with conventional fixed-rate mortgage loans, ARMs may be
subject to a greater rate of principal prepayments in a declining interest rate
environment. For example, if prevailing interest rates were to fall
significantly, ARMs could be subject to higher prepayment rates than if
prevailing interest rates were to remain constant because the availability of
fixed-rate mortgage loans at competitive interest rates may encourage
mortgagors to refinance their ARMs to "lock in" lower fixed interest rates. The
rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors,
including changes in mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgaged properties and servicing decisions. No
assurances can be given as to the rate of prepayments on the Mortgage Loans in
stable or changing interest rate environments.
The timing of changes in the rate of prepayments on the Mortgage Loans may
significantly affect an investor's actual yield to maturity, even if the
average rate of principal payments is consistent with an investor's
expectation. In general, the earlier a prepayment of principal on the Mortgage
Loans, the greater the effect on an investor's yield to maturity. The effect on
an investor's yield 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 Certificates may not be offset by a subsequent
like decrease (or increase) in the rate of principal payments.
LIMITATION ON ADJUSTMENTS
Although each of the Mortgage Loans bears interest at an adjustable Mortgage
Rate, the semi-annual adjustments of the Mortgage Rate for any Mortgage Loan
will not exceed the Periodic Rate Cap, and the Mortgage Rate will in no event
exceed the Maximum Mortgage Rate for such Mortgage Loan, regardless of the
level of interest rates generally or the rate otherwise produced by adding the
Index and the Gross Margin. In addition, such adjustments will be subject to
rounding to the nearest one-eighth of 1%.
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USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Class A
Certificates against the purchase price of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Trust Fund as a "real estate mortgage
investment conduit" (a "REMIC") for federal income tax purposes. The Class A
Certificates and Class B-IO Certificates will constitute "regular interests" in
the REMIC and the Class R Certificates will constitute the sole class of
"residual interests" in the REMIC.
ORIGINAL ISSUE DISCOUNT
The Class A Certificates may be issued with original issue discount for
federal income tax purposes. For purposes of determining the amount and rate of
accrual of original issue discount and market discount, the Depositor intends
to assume that there will be prepayments on the Mortgage Loans at a rate equal
to 22% CPR. No representation is made as to whether the Mortgage Loans will
prepay at that rate or any other rate. See "Yield, Prepayment and Maturity
Considerations" herein and "Certain Federal Income Tax Consequences" in the
Prospectus.
The Class A Certificates may be treated as being issued at a premium. In such
case, the Class A Certificateholders may elect under Section 171 of the Code to
amortize such premium under the constant yield method and to treat such
amortizable premium as an offset to interest income on the Certificates. Such
election, however, applies to all the Certificateholder's debt instruments
acquired on or after the first taxable year in which the election is first
made, and should only be made after consulting with a tax adviser.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificateholder, such Certificateholder will be permitted to offset such
amounts only against the respective future income, if any, from such
Certificate. Although the tax treatment is uncertain, a Certificateholder may
be permitted to deduct a loss to the extent that such Holder's respective
remaining basis in such Certificate exceeds the maximum amount of future
payments to which such Holder is entitled, assuming no further Principal
Prepayments of the Mortgage Loans are received. Although the matter is not free
from doubt, any such loss might be treated as a capital loss.
SPECIAL TAX ATTRIBUTES OF THE CLASS A CERTIFICATES
As is described more fully under "Certain Federal Income Tax Consequences" in
the Prospectus, the Class A Certificates will represent qualifying assets under
Sections 593(d), 856(c)(5)(A) and 7701(a)(19)(C)(v) of the Code, and net
interest income attributable to the Class A Certificates will be "interest on
obligations secured by mortgages on real property" within the meaning of
Section 856(c)(3)(B) of the Code, to the extent the assets of the Trust Fund
are assets described in such sections. The Class A Certificates will represent
qualifying assets under Section 860G(a)(3) if acquired by a REMIC within the
prescribed time periods of the Code.
PROHIBITED TRANSACTIONS TAX AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived from
"prohibited transactions" (the "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Mortgage Loan, the receipt of income from a source other than
a Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust Fund
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
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<PAGE>
In addition, certain contributions to a trust fund that elects to be treated
as a REMIC made after the day on which such trust fund issues all of its
interests could result in the imposition of a tax on the trust fund equal to
100% of the value of the contributed property (the "Contributions Tax"). The
Trust Fund will not accept contributions that would subject it to such tax.
In addition, a trust fund that elects to be treated as a REMIC may also 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. "Net income from foreclosure property" generally
means gain from the sale of a foreclosure property other than qualifying rents
and other qualifying income for a real estate investment trust. It is not
anticipated that the Trust Fund will recognize net income from foreclosure
property subject to federal income tax.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net income
from foreclosure property or state or local income or franchise tax that may be
imposed on the REMIC arises out of a breach of the Servicer's or the Trustee's
obligations, as the case may be, under the Pooling and Servicing Agreement and
in respect of compliance with then applicable law, such tax will be borne by
the Servicer or Trustee in either case out of its own funds. In the event that
either the Servicer or the Trustee, as the case may be, fails to pay or is not
required to pay any such tax as provided above, such tax will be paid by the
Trust Fund first with amounts otherwise distributable to the Holders of
Certificates in the manner provided in the Pooling and Servicing Agreement. It
is not anticipated that any material state or local income or franchise tax
will be imposed on the Trust Fund.
For further information regarding the federal income tax consequences of
investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences--REMIC Certificates" in the Prospectus.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Class A Certificates under the tax
laws of any state. Investors considering an investment in the Certificates
should consult their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the Class A Certificates.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an employee
benefit plan subject to ERISA and/or a plan or other arrangement subject to the
excise tax provisions set forth under Section 4975 of the Code (each of the
foregoing, a "Plan") from engaging in certain transactions involving such Plan
and its assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes on
prohibited transactions involving plans described under that Section; ERISA
authorizes the imposition of civil penalties for prohibited transactions
involving plans not covered under Section 4975 of the Code. Any Plan fiduciary
which proposes to cause a Plan to acquire any of the Class A Certificates
should consult with its counsel with respect to the potential consequences
under ERISA and the Code of the Plan's acquisition and ownership of such
Certificates. See "ERISA Considerations" in the Prospectus.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in the Class A Certificates without regard to the
ERISA considerations described herein and in the Prospectus, subject to the
provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
may nonetheless be subject to the prohibited transaction rules set forth in
Section 503 of the Code.
S-46
<PAGE>
Except as noted above, investments by Plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary which decides to
invest the assets of a Plan in the Class A Certificates should consider, among
other factors, the extreme sensitivity of the investments to the rate of
principal payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor has granted to Greenwich Capital Markets, Inc.
an administrative exemption (Prohibited Transaction Exemption 90-59; Exemption
Application No. D-8374) (the "Exemption") from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section
4975 of the Code with respect to the initial purchase, the holding and the
subsequent resale by Plans of certificates in pass-through trusts that consist
of certain receivables, loans and other obligations that meet the conditions
and requirements of the Exemption. The Exemption applies to mortgage loans such
as the Mortgage Loans in the Trust Fund.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) the acquisition of the 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 interest evidenced by the certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by other
certificates of the trust fund;
(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 Standard & Poor's, a division of the McGraw-Hill Companies
("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit
Rating Co. ("DCR") or Fitch Investors Service, L.P. ("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 underwriters in
connection with the distribution of the 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 loans to the trust fund represents not more than the fair market
value of such loans; the sum of all payments made to and retained by the
servicer and any other servicer represents not more than reasonable
compensation for such person's services under the agreement pursuant to
which the loans are pooled and reimbursements 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 fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of the
type that have been included in other investment pools;
(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 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 certificates.
Moreover, the Exemption provides relief from certain self-dealing/conflict of
interest prohibited transactions that may occur when the Plan fiduciary causes
a Plan to acquire certificates in a trust as to which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust provided that,
among other
S-47
<PAGE>
requirements, (i) in the case of an acquisition in connection with the initial
issuance of certificates, at least fifty percent (50%) of each class of
certificates in which Plans have invested is acquired by persons independent of
the Restricted Group; (ii) such fiduciary (or its affiliate) is an obligor with
respect to five percent (5%) or less of the fair market value of the
obligations contained in the trust; (iii) the Plan's investment in certificates
of any Class does not exceed twenty-five percent (25%) 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 (25%) 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 serviced by the same entity. The Exemption does not
apply to Plans sponsored by either Underwriter, the Trustee, the Servicer, any
obligor with respect to Mortgage Loans included in the Trust Fund constituting
more than five percent of the aggregate unamortized principal balance of the
assets in the Trust Fund, or any affiliate of such parties (the "Restricted
Group").
It is expected that the Exemption will apply to the acquisition and holding
of the Class A Certificates by Plans and that all conditions of the Exemption
other than those within the control of the investors will be met. In addition,
as of the date hereof, there is no single Mortgagor that is the obligor on five
percent (5%) of the Mortgage Loans included in the Trust Fund by aggregate
unamortized principal balance of the assets of the Trust Fund.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1
described in the Prospectus and the Exemption, and the potential consequences
in their specific circumstances, prior to making an investment in the Class A
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Class A Certificates is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of the
Plan's investment portfolio.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Depositor, Greenwich Capital Markets, Inc. (an affiliate of the
Depositor) and Countrywide Securities Corporation (an affiliate of the Seller
and Servicer and, together with Greenwich Capital Markets, Inc., the
"Underwriters"), the Depositor has agreed to sell the Class A Certificates to
the Underwriters, and Greenwich Capital Markets, Inc. and Countrywide
Securities Corporation have respectively agreed to purchase $137,965,310.34 and
$50,000,000.00 initial Certificate Principal Balance of Class A Certificates
from the Depositor. Distribution of the Class A Certificates will be made by
the respective Underwriters from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. In connection
with the sale of the Class A Certificates, the Underwriters may be deemed to
have received compensation from the Depositor in the form of underwriting
discounts.
The Depositor has been advised by each Underwriter that it intends to make a
market in the Class A Certificates, but neither Underwriter has any obligation
to do so. There can be no assurance that a secondary market for the Class A
Certificates will develop or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor, the Underwriters
and Countrywide by Brown & Wood LLP, New York, New York.
S-48
<PAGE>
RATINGS
It is a condition of the issuance of the Class A Certificates that they be
rated AAA and Aaa by S&P and Moody's, respectively (Moody's, together with S&P,
the "Rating Agencies").
The security ratings assigned to the Class A Certificates should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the Rating Agencies.
The ratings assigned by S&P to mortgage pass-through certificates address the
likelihood of the receipt of all distributions on the mortgage loans by the
related certificateholders under the agreements pursuant to which such
certificates are issued. S&P's ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with such certificates, and the extent
to which the payment stream on such mortgage pool is adequate to make payments
required by such certificates. S&P's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans.
The ratings assigned by Moody's to mortgage pass-through certificates address
the likelihood of the receipt by certificateholders of all distributions to
which such certificateholders are entitled. Moody's ratings on mortgage pass-
through certificates do not represent any assessment of the likelihood or rate
of principal prepayments. The ratings do not address the possibility that
certificateholders might suffer a lower than anticipated yield as a result of
prepayments.
The Depositor has not requested a rating of the Class A Certificates by any
rating agency other than S&P and Moody's. However, there can be no assurance as
to whether any other rating agency will rate the Class A Certificates or, if it
does, what ratings would be assigned by such other rating agency. The ratings
assigned by such other rating agency to the Class A Certificates could be lower
than the respective ratings assigned by the Rating Agencies.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of income, changes in shareholder's equity and cash flows for each
of the three years in the period ended December 31, 1995, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
S-49
<PAGE>
PROSPECTUS
GREENWICH CAPITAL ACCEPTANCE, INC.
Depositor
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
---------------
This Prospectus relates to Mortgage Pass-Through Certificates (the
"Certificates"), which may be sold from time to time in one or more Series
(each, a "Series") by Greenwich Capital Acceptance, Inc. (the "Depositor") on
terms determined at the time of sale and described in this Prospectus and the
related Prospectus Supplement. The Certificates of a Series will evidence
beneficial ownership of a trust fund (a "Trust Fund"). As specified in the
related Prospectus Supplement, the Trust Fund for a Series of Certificates will
include certain mortgage related assets (the "Mortgage Assets") consisting of
(i) first lien mortgage loans (or participation interests therein) secured by
one- to four-family residential properties ("Single Family Loans"), (ii) first
lien mortgage loans (or participation interests therein) secured by multifamily
residential properties, including cooperative apartment buildings ("Multifamily
Loans"), (iii) conditional sales contracts and installment sales or loan
agreements secured by manufactured housing ("Contracts"), (iv) mortgage pass-
through securities (the "Agency Securities") issued or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC") or (v) Private Mortgage-Backed Securities (defined herein). Single
Family Loans, Multifamily Loans and Contracts are sometimes collectively
referred to as "Mortgage Loans". The Mortgage Assets will be acquired by the
Depositor, either directly or indirectly, from one or more institutions (each,
a "Seller"), which may be affiliates of the Depositor, and conveyed by the
Depositor to the related Trust Fund. A Trust Fund also may include insurance
policies, cash accounts, reinvestment income, guaranties, letters of credit or
other assets to the extent described in the related Prospectus Supplement.
Each Series of Certificates will be issued in one or more classes. Each class
of Certificates of a Series will evidence beneficial ownership of a specified
percentage (which may be 0%) or portion of future interest payments and a
specified percentage (which may be 0%) or portion of future principal payments
on the Mortgage Assets in the related Trust Fund. A Series of Certificates may
include one or more classes that are senior in right of payment to one or more
other classes of Certificates of such Series. One or more classes of
Certificates of a Series may be entitled to receive distributions of principal,
interest or any combination thereof prior to one or more other classes of
Certificates of such Series or after the occurrence of specified events, in
each case as specified in the related Prospectus Supplement.
Distributions to Certificateholders will be made monthly, quarterly, semi-
annually or at such other intervals and on the dates specified in the related
Prospectus Supplement. Distributions on the Certificates of a Series will be
made from the assets of the related Trust Fund or Funds or other assets pledged
for the benefit of the Certificateholders as specified in the related
Prospectus Supplement.
The Certificates of any Series will not be insured or guaranteed by any
governmental agency or instrumentality or, unless otherwise specified in the
related Prospectus Supplement, by any other person. Unless otherwise specified
in the related Prospectus Supplement, the only obligations of the Depositor
with respect to a Series of Certificates will be to obtain certain
representations and warranties from each Seller and to assign to the Trustee
for the related Series of Certificates the Depositor's rights with respect to
such representations and warranties. The principal obligations of the Master
Servicer named in the related Prospectus Supplement with respect to the related
Series of Certificates will be limited to obligations pursuant to certain
representations and warranties and to its contractual servicing obligations,
including any obligation it may have to advance delinquent payments on the
Mortgage Assets in the related Trust Fund.
The yield on each class of Certificates of a Series will be affected by,
among other things, the rate of payment of principal (including prepayments) on
the Mortgage Assets in the related Trust Fund and the timing of receipt of such
payments as described herein and in the related Prospectus Supplement. A Trust
Fund may be subject to early termination under the circumstances described
herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, one or more elections may be made to
treat the related Trust Fund or specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes. See
"Certain Federal Income Tax Consequences".
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
Prior to issuance there will have been no market for the Certificates of any
Series and there can be no assurance that a secondary market for any
Certificates will develop, or if it does develop, that it will continue. This
Prospectus may not be used to consummate sales of a Series of Certificates
unless accompanied by a Prospectus Supplement.
Offers of the Certificates may be made through one or more different methods,
including offerings through underwriters, as more fully described under "Method
of Distribution" herein and in the related Prospectus Supplement. All
Certificates will be distributed by, or sold by underwriters managed by:
---------------
[LOGO OF GREENWICH CAPITAL]
July 25, 1996
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to the
Certificates of each Series to be offered hereunder will, among other things,
set forth with respect to such Certificates, as appropriate: (i) a description
of the class or classes of Certificates and the Pass-Through Rate or method of
determining the amount of interest, if any, to be passed through to each such
class; (ii) the aggregate principal amount and Distribution Dates relating to
such Series and, if applicable, the initial and final scheduled Distribution
Dates for each class; (iii) information as to the assets comprising the Trust
Fund, including the general characteristics of the Mortgage Assets included
therein and, if applicable, the insurance, surety bonds, guaranties, letters of
credit or other instruments or agreements included in the Trust Fund, and the
amount and source of any Reserve Account; (iv) the circumstances, if any, under
which the Trust Fund may be subject to early termination; (v) the method used
to calculate the amount of principal to be distributed with respect to each
class of Certificates; (vi) the order of application of distributions to each
of the classes within such Series, whether sequential, pro rata, or otherwise;
(vii) the Distribution Dates with respect to such Series; (viii) additional
information with respect to the plan of distribution of such Certificates; (ix)
whether one or more REMIC elections will be made and designation of the regular
interests and residual interests; (x) the aggregate original percentage
ownership interest in the Trust Fund to be evidenced by each class of
Certificates; (xi) information as to the Trustee; (xii) information as to the
nature and extent of subordination with respect to any class of Certificates
that is subordinate in right of payment to any other class; and (xiii)
information as to the Master Servicer.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed or
caused to be filed by Greenwich Capital Acceptance, Inc. ("GCA") with respect
to a Trust Fund pursuant to Section 13(a), 14 or 15(d) of the Exchange Act
prior to the termination of the offering of Certificates evidencing interests
therein. Upon request by any person to whom this Prospectus is delivered in
connection with the offering of one or more classes of Certificates, GCA will
provide or cause to be provided without charge a copy of any such documents
and/or reports incorporated herein by reference, in each case to the extent
such documents or reports relate to such classes of Certificates, other than
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to GCA should be
directed in writing to: William K. Komperda, Greenwich Capital Acceptance,
Inc., 600 Steamboat Road, Greenwich, Connecticut 06830, telephone number (203)
625-2700. GCA has determined that its financial statements are not material to
the offering of any Certificates.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus, which forms a part
of the Registration Statement, and the Prospectus Supplement relating to each
Series of Certificates contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of
the Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits
can be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at its Public Reference Section, 450
Fifth Street, N. W., Washington, D.C. 20549, and at its Regional Offices
located as follows: Chicago Regional Office, Kluczynsky Federal Building, 230
South Dearborn Street, Chicago, Illinois 60604; and New York Regional Office, 7
World Trade Center, New York, New York 10048.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby nor an offer of the Certificates to any person in
any state or other jurisdiction in which such offer would be unlawful. The
delivery of this Prospectus at any time does not imply that information herein
is correct as of any time subsequent to its date.
2
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related
Prospectus Supplement with respect to the Series offered thereby and to the
related Pooling and Servicing Agreement (each, an "Agreement") among the
Depositor, the Master Servicer and the Trustee (as such terms are defined
below) which will be prepared in connection with each Series of Certificates.
Unless otherwise specified, capitalized terms used and not defined in this
Summary of Terms have the meanings given to them in this Prospectus and in the
related Prospectus Supplement.
Title of Securities....... Mortgage Pass-Through Certificates (issuable in Se-
ries) (the "Certificates").
Depositor................. Greenwich Capital Acceptance, Inc., a Delaware cor-
poration and an indirect limited purpose finance
subsidiary of The Long-Term Credit Bank of Japan,
Limited and an affiliate of Greenwich Capital Mar-
kets, Inc. See "The Depositor".
Trustee................... The trustee (the "Trustee") for each Series of Cer-
tificates will be specified in the related Prospec-
tus Supplement. See "The Pooling and Servicing
Agreement" herein for a description of the Trust-
ee's rights and obligations.
Master Servicer........... The entity or entities named as Master Servicer
(the "Master Servicer") in the related Prospectus
Supplement, which may be an affiliate of the Depos-
itor. See "The Pooling and Servicing Agreement--
Certain Matters Regarding the Master Servicer and
the Depositor".
Trust Fund Assets......... The Trust Fund for a Series of Certificates will
include certain mortgage related assets (the "Mort-
gage Assets") consisting of (a) Mortgage Loans, (b)
Agency Securities or (c) Private Mortgage-Backed
Securities, together with payments in respect of
such Mortgage Assets and certain other accounts,
obligations or agreements, in each case as speci-
fied in the related Prospectus Supplement. For pur-
poses hereof, "Mortgage Loans" consist of "Single
Family Loans", "Multifamily Loans" and "Contracts".
A. Single Family
Loans................. Unless otherwise specified in the related Prospec-
tus Supplement, Single Family Loans will be secured
by first mortgage liens on one- to four-family res-
idential properties. If so specified, the Single
Family Loans may include cooperative apartment
loans ("Cooperative Loans") secured by security in-
terests in shares issued by private, nonprofit, co-
operative housing corporations ("Cooperatives") and
in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy spe-
cific dwelling units in such Cooperatives' build-
ings. If so specified in the related Prospectus
Supplement, the Mortgage Assets of the related
Trust Fund may include mortgage participation cer-
tificates evidencing interests in Single Family
Loans. Such Single Family Loans may be conventional
loans (i.e., loans that are not insured or guaran-
teed by any governmental agency), insured by the
Federal Housing Authority ("FHA") or partially
guaranteed
3
<PAGE>
by the Veterans' Administration ("VA") as specified
in the related Prospectus Supplement. Unless other-
wise specified in the related Prospectus Supple-
ment, Single Family Loans will all have individual
principal balances at origination of not less than
$25,000 and not more than $1,000,000, and original
terms to stated maturity of 10-40 years.
B. Multifamily Loans... Unless otherwise specified in the related Prospec-
tus Supplement, Multifamily Loans will be secured
by first mortgage liens on rental apartment build-
ings or projects containing five or more residen-
tial units, including apartment buildings owned by
Cooperatives. If so specified in the related Pro-
spectus Supplement, the Mortgage Assets of the re-
lated Trust Fund may include mortgage participation
certificates evidencing interests in Multifamily
Loans. Such loans may be conventional loans or in-
sured by the FHA, as specified in the related Pro-
spectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, Multifamily
Loans will all have individual principal balances
at origination of not less than $25,000 and origi-
nal terms to stated maturity of not more than 40
years.
C. Contracts........... Contracts will consist of conditional sales and in-
stallment sales or loan agreements secured by new
or used Manufactured Homes (as defined herein).
Contracts may be conventional loans, insured by the
FHA or partially guaranteed by the VA, as specified
in the related Prospectus Supplement. Unless other-
wise specified in the related Prospectus Supple-
ment, each Contract will be fully amortizing and
will bear interest at a fixed percentage rate
("APR"). Unless otherwise specified in the related
Prospectus Supplement, Contracts will all have in-
dividual principal balances at origination of not
less than $10,000 and not more than $1,000,000 and
original terms to stated maturity of 5-30 years.
D. General Attributes
of Mortgage Loans... The payment terms of the Mortgage Loans to be in-
cluded in a Trust Fund will be described in the re-
lated Prospectus Supplement and may include any of
the following features or combinations thereof or
other features described in the related Prospectus
Supplement:
(a) Interest may be payable at a fixed rate, a rate
adjustable from time to time in relation to an
index (which will be specified in the related
Prospectus Supplement), a rate that is fixed
for a period of time or under certain
circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to
time, or a rate that is convertible from an
adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic
limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued
interest may be deferred and added to the
principal of a loan for such periods and under
such circumstances as may be specified in the
related Prospectus Supplement. Mortgage Loans
may provide for the payment of interest at a
rate lower than the specified Mortgage
4
<PAGE>
Rate for a period of time or for the life of the
loan, and the amount of any difference may be
contributed from funds supplied by the Seller of
the Mortgaged Property or another source.
(b) Principal may be payable on a level debt
service basis to fully amortize the loan over
its term, may be calculated on the basis of an
assumed amortization schedule that is
significantly longer than the original term to
maturity or on an interest rate that is
different from the interest rate on the
Mortgage Loan or may not be amortized during
all or a portion of the original term. Payment
of all or a substantial portion of the
principal may be due on maturity ("balloon
payments"). Principal may include interest that
has been deferred and added to the principal
balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may
be fixed for the life of the loan, may increase
over a specified period of time or may change
from period to period. Mortgage Loans may
include limits on periodic increases or
decreases in the amount of monthly payments and
may include maximum or minimum amounts of
monthly payments.
(d) Prepayments of principal may be subject to a
prepayment fee, which may be fixed for the life
of the Mortgage Loan or may decline over time,
and may be prohibited for the life of the
Mortgage Loan or for certain periods ("lockout
periods"). Certain Mortgage Loans may permit
prepayments after expiration of the applicable
lockout period and may require the payment of a
prepayment fee in connection with any such
subsequent prepayment. Other Mortgage Loans may
permit prepayments without payment of a fee
unless the prepayment occurs during specified
time periods. The Mortgage Loans may include
"due-on-sale" clauses which permit the
mortgagee to demand payment of the entire
Mortgage Loan in connection with the sale or
certain transfers of the related Mortgaged
Property. Other Mortgage Loans may be assumable
by persons meeting the then applicable
underwriting standards of the Seller.
The real property constituting security for re-
payment of a Mortgage Loan may be located in any
one of the fifty states, the District of Colum-
bia, Guam, Puerto Rico or any other territory of
the United States. Unless otherwise specified in
the related Prospectus Supplement, all of the
Mortgage Loans will be covered by standard haz-
ard insurance policies insuring against losses
due to fire and various other causes. The Mort-
gage Loans will be covered by primary mortgage
insurance policies to the extent provided in the
related Prospectus Supplement.
All Mortgage Loans will have been purchased by the
Depositor, either directly or through an affiliate,
from one or more Sellers.
5
<PAGE>
E. Agency Securities... The Agency Securities evidenced by a Series of Cer-
tificates will consist of (i) mortgage participa-
tion certificates issued and guaranteed as to
timely payment of interest and, unless otherwise
specified in the related Prospectus Supplement, ul-
timate payment of principal by the Federal Home
Loan Mortgage Corporation ("FHLMC Certificates"),
(ii) Guaranteed Mortgage Pass-Through Certificates
issued and guaranteed as to timely payment of prin-
cipal and interest by the Federal National Mortgage
Association ("FNMA Certificates"), (iii) fully mod-
ified pass-through mortgage-backed certificates
guaranteed as to timely payment of principal and
interest by the Government National Mortgage Asso-
ciation ("GNMA Certificates"), (iv) stripped mort-
gage-backed securities representing an undivided
interest in all or a part of either the principal
distributions (but not the interest distributions)
or the interest distributions (but not the princi-
pal distributions) or in some specified portion of
the principal and interest distributions (but not
all of such distributions) on certain FHLMC, FNMA
or GNMA Certificates and, unless otherwise speci-
fied in the related Prospectus Supplement, guaran-
teed to the same extent as the underlying securi-
ties, (v) another type of pass-through certificate
issued or guaranteed by GNMA, FNMA or FHLMC and de-
scribed in the related Prospectus Supplement, or
(vi) a combination of such Agency Securities. All
GNMA Certificates will be backed by the full faith
and credit of the United States. No FHLMC or FNMA
Certificates will be backed, directly or indirect-
ly, by the full faith and credit of the United
States.
The Agency Securities may consist of pass-through
securities issued under FHLMC's Cash or Guarantor
Program, the GNMA I Program, the GNMA II Program or
another program specified in the related Prospectus
Supplement. The payment characteristics of the
Mortgage Loans underlying the Agency Securities
will be described in the related Prospectus Supple-
ment.
F. Private Mortgage-
Backed Securities... Private Mortgage-Backed Securities may include (a)
mortgage pass-through certificates representing
beneficial interests in certain Mortgage Loans or
(b) collateralized mortgage obligations secured by
such Mortgage Loans. Private Mortgage-Backed Secu-
rities may include stripped mortgage-backed securi-
ties representing an undivided interest in all or a
part of either the principal distributions (but not
the interest distributions) or the interest distri-
butions (but not the principal distributions) or in
some specified portion of the principal and inter-
est distributions (but not all of such distribu-
tions) on certain Mortgage Loans. Although individ-
ual Mortgage Loans underlying a Private Mortgage-
Backed Security may be insured or guaranteed by the
United States or an agency or instrumentality
thereof, they need not be, and the Private Mort-
gage-Backed Securities themselves will not be so
insured or guaranteed. Unless otherwise specified
in the related Prospectus Supplement relating to a
Series of Certificates, payments on the Private
Mortgage-Backed Securities will be distrib-
6
<PAGE>
uted directly to the Trustee as registered owner of
such Private Mortgage-Backed Securities. See "The
Trust Fund--Private Mortgage-Backed Securities"
herein.
The related Prospectus Supplement for a Series will
specify, among other things, (i) the approximate
aggregate principal amount and type of any Private
Mortgage-Backed Securities to be included in the
Trust Fund for such Series; (ii) certain character-
istics of the Mortgage Loans which comprise the un-
derlying assets for the Private Mortgage-Backed Se-
curities including (A) the payment features of such
Mortgage Loans, (B) the approximate aggregate prin-
cipal amount, if known, of the underlying Mortgage
Loans which are insured or guaranteed by a govern-
mental entity, (C) the servicing fee or range of
servicing fees with respect to the Mortgage Loans,
and (D) the minimum and maximum stated maturities
of the Mortgage Loans at origination; (iii) the
maximum original term to stated maturity of the
Private Mortgage-Backed Securities; (iv) the
weighted average term-to-stated maturity of the
Private Mortgage-Backed Securities; (v) the pass-
through or certificate rate or ranges thereof for
the Private Mortgage-Backed Securities; (vi) the
weighted average pass-through or certificate rate
of the Private Mortgage-Backed Securities; (vii)
the issuer of the Private Mortgage-Backed Securi-
ties (the "PMBS Issuer"), the servicer of the Pri-
vate Mortgage-Backed Securities (the "PMBS
Servicer") and the trustee of the Private Mortgage-
Backed Securities (the "PMBS Trustee"); (viii) cer-
tain characteristics of credit support, if any,
such as reserve funds, insurance policies, surety
bonds, letters of credit or guaranties, relating to
the Mortgage Loans underlying the Private Mortgage-
Backed Securities, or to such Private Mortgage-
Backed Securities themselves; (ix) the terms on
which underlying Mortgage Loans for such Private
Mortgage-Backed Securities may, or are required to,
be repurchased prior to stated maturity; and (x)
the terms on which substitute Mortgage Loans may be
delivered to replace those initially deposited with
the PMBS Trustee. See "The Trust Fund" herein.
Description of the
Certificates............. Each Certificate will represent a beneficial owner-
ship interest in a Trust Fund created by the Depos-
itor pursuant to an Agreement among the Depositor,
the Master Servicer and the Trustee for the related
Series. The Certificates of any Series may be is-
sued in one or more classes as specified in the re-
lated Prospectus Supplement. A Series of Certifi-
cates may include one or more classes of senior
Certificates (collectively, the "Senior Certifi-
cates") and one or more classes of subordinate Cer-
tificates (collectively, the "Subordinated Certifi-
cates"). Certain Series or classes of Certificates
may be covered by insurance policies or other forms
of credit enhancement, in each case as described
herein and in the related Prospectus Supplement.
One or more classes of Certificates of each Series
(i) may be entitled to receive distributions allo-
cable only to principal, only to interest or to any
combination thereof; (ii) may be entitled to re-
ceive distribu-
7
<PAGE>
tions only of prepayments of principal throughout
the lives of the Certificates or during specified
periods; (iii) may be subordinated in the right to
receive distributions of scheduled payments of
principal, prepayments of principal, interest or
any combination thereof to one or more other clas-
ses of Certificates of such Series throughout the
lives of the Certificates or during specified peri-
ods; (iv) may be entitled to receive such distribu-
tions only after the occurrence of events specified
in the related Prospectus Supplement; (v) may be
entitled to receive distributions in accordance
with a schedule or formula or on the basis of col-
lections from designated portions of the assets in
the related Trust Fund; (vi) as to Certificates en-
titled to distributions allocable to interest, may
be entitled to receive interest at a fixed rate or
a rate that is subject to change from time to time;
and (vii) as to Certificates entitled to distribu-
tions allocable to interest, may be entitled to
distributions allocable to interest only after the
occurrence of events specified in the related Pro-
spectus Supplement and may accrue interest until
such events occur, in each case as specified in the
related Prospectus Supplement. The timing and
amounts of such distributions may vary among clas-
ses, over time, or otherwise as specified in the
related Prospectus Supplement.
Distributions on the
Certificates............. Distributions on the Certificates entitled thereto
will be made monthly, quarterly, semi-annually or
at such other intervals and on the dates specified
in the related Prospectus Supplement (each, a "Dis-
tribution Date") out of the payments received in
respect of the assets of the related Trust Fund or
Funds or other assets pledged for the benefit of
the Certificates as specified in the related Pro-
spectus Supplement. The amount allocable to pay-
ments of principal and interest on any Distribution
Date will be determined as specified in the related
Prospectus Supplement. Unless otherwise specified
in the related Prospectus Supplement, all distribu-
tions will be made pro rata to Certificateholders
of the class entitled thereto.
Unless otherwise specified in the related Prospec-
tus Supplement, the aggregate original principal
balance of the Certificates will equal the aggre-
gate distributions allocable to principal that such
Certificates will be entitled to receive. If speci-
fied in the related Prospectus Supplement, the Cer-
tificates will have an aggregate original principal
balance equal to the aggregate unpaid principal
balance of the Mortgage Assets as of the first day
of the month of creation of the Trust Fund and will
bear interest in the aggregate at a rate equal to
the interest rate borne by the underlying Mortgage
Loans (the "Mortgage Rate"), Agency Securities or
Private Mortgage-Backed Securities, net of the ag-
gregate servicing fees and any other amounts speci-
fied in the related Prospectus Supplement (the
"Pass-Through Rate"). If specified in the related
Prospectus Supplement, the aggregate original prin-
cipal balance of the Certificates and interest
rates on the classes of Certificates will be deter-
mined based on the cash flow on the Mortgage As-
sets.
8
<PAGE>
The rate at which interest will be passed through
to holders of each class of Certificates entitled
thereto may be a fixed rate or a rate that is sub-
ject to change from time to time from the time and
for the periods, in each case, as specified in the
related Prospectus Supplement. Any such rate may be
calculated on a loan-by-loan, weighted average or
other basis, in each case as described in the re-
lated Prospectus Supplement.
Credit Enhancement........ The assets in a Trust Fund or the Certificates of
one or more classes in the related Series may have
the benefit of one or more types of credit enhance-
ment as described in the related Prospectus Supple-
ment. The protection against losses afforded by any
such credit support may be limited. The type, char-
acteristics and amount of credit enhancement will
be determined based on the characteristics of the
Mortgage Loans underlying or comprising the Mort-
gage Assets and other factors and will be estab-
lished on the basis of requirements of each Rating
Agency rating the Certificates of such Series. See
"Credit Enhancement" herein.
A. Subordination....... Unless the related Prospectus Supplement provides
otherwise, the rights of the holders of the Subor-
dinated Certificates of a Series to receive distri-
butions with respect to the assets in the related
Trust Fund will be subordinated to such rights of
the holders of the Senior Certificates of the same
Series to the extent described in the related Pro-
spectus Supplement. This subordination is intended
to enhance the likelihood of regular receipt by
holders of Senior Certificates of the full amount
of their scheduled monthly payments of principal
and interest. The protection afforded to the hold-
ers of Senior Certificates of a Series by means of
the subordination feature will be accomplished by
(i) the preferential right of such holders to re-
ceive, prior to any distribution being made in re-
spect of the related Subordinated Certificates, the
amounts of principal and interest due them on each
Distribution Date out of the funds available for
distribution on such date in the related Certifi-
cate Account and, to the extent described in the
related Prospectus Supplement, by the right of such
holders to receive future distributions on the as-
sets in the related Trust Fund that would otherwise
have been payable to the holders of Subordinated
Certificates; (ii) reducing the ownership interest
of the related Subordinated Certificates; (iii) a
combination of clauses (i) and (ii) above; or (iv)
as otherwise described in the related Prospectus
Supplement. If so specified in the related Prospec-
tus Supplement, subordination may apply only in the
event of certain types of losses not covered by
other forms of credit support, such as hazard
losses not covered by standard hazard insurance
policies, losses due to the bankruptcy or fraud of
the borrower. The related Prospectus Supplement
will set forth information concerning, among other
things, the amount of subordination of a class or
classes of Subordinated Certificates in a Series,
the circumstances in which such subordination will
be applicable, and the manner, if any, in which the
amount of subordination will decrease over time.
9
<PAGE>
B. Reserve Account..... One or more reserve accounts may be established and
maintained for each Series. The related Prospectus
Supplement will specify whether or not such reserve
accounts will be included in the corpus of the
Trust Fund for such Series and will also specify
the manner of funding the related reserve accounts
and the conditions under which the amounts in any
such reserve accounts will be used to make distri-
butions to holders of Certificates of a particular
class or released from the related Trust Fund.
C. Mortgage Pool
Insurance Policy.... A mortgage pool insurance policy or policies may be
obtained and maintained for each Series pertaining
to Single Family Loans, Multifamily Loans or Con-
tracts, which shall be limited in scope, covering
defaults on the related Single Family Loans or Con-
tracts in an initial amount equal to a specified
percentage of the aggregate principal balance of
all Single Family Loans or Contracts included in
the Mortgage Pool as of the first day of the month
of issuance of the related Series of Certificates
or such other date as is specified in the related
Prospectus Supplement (the "Cut-off Date").
D. Special Hazard
Insurance Policy.... In the case of Single Family Loans, Multifamily
Loans or Contracts, certain physical risks that are
not otherwise insured against by standard hazard
insurance policies may be covered by a Special Haz-
ard Insurance Policy or Policies. Each Special Haz-
ard Insurance Policy will be limited in scope and
will cover losses pursuant to the provisions of
each such Special Hazard Insurance Policy as de-
scribed in the related Prospectus Supplement.
E. Bankruptcy Bond..... Bankruptcy Bond or Bonds may be obtained covering
certain losses resulting from action which may be
taken by a bankruptcy court in connection with a
Single Family Loan, Multifamily Loan or Contract.
The level of coverage and the limitations in scope
of each Bankruptcy Bond will be specified in the
related Prospectus Supplement.
F. FHA Insurance and
VA Guarantee........ All or a portion of the Mortgage Loans in a Mort-
gage Pool may be insured by FHA insurance ("FHA In-
surance") and all or a portion of the Single Family
Loans or Contracts in a Mortgage Pool may be par-
tially guaranteed by the VA ("VA Insurance").
G. Cross Support....... If specified in the related Prospectus Supplement,
the beneficial ownership of separate groups of as-
sets included in a Trust Fund may be evidenced by
separate classes of the related Series of Certifi-
cates. In such case, credit support may be provided
by a cross-support feature which requires that dis-
tributions be made with respect to Certificates ev-
idencing beneficial ownership of one or more asset
groups prior to distributions to Subordinated Cer-
tificates evidencing a beneficial ownership inter-
est in other asset groups within the same Trust
Fund.
10
<PAGE>
If specified in the related Prospectus Supplement,
all classes of Senior Certificates relating to the
asset groups in a Trust Fund may have the benefit
of a Special Hazard Insurance Policy. If specified
in the related Prospectus Supplement, the coverage
provided by one or more forms of credit support may
apply concurrently to two or more separate Trust
Funds. If applicable, the related Prospectus Sup-
plement will identify the Trust Funds to which such
credit support relates and the manner of determin-
ing the amount of the coverage provided thereby and
of the application of such coverage to the identi-
fied Trust Funds.
H. Other Arrangements.. Other arrangements as described in the related Pro-
spectus Supplement including, but not limited to,
one or more letters of credit, surety bonds, other
insurance, reserve accounts or third party guaran-
ties, may be used to provide coverage for certain
risks of defaults or various types of losses.
Advances.................. Unless otherwise specified in the related Prospec-
tus Supplement, the Master Servicer and, if appli-
cable, each mortgage servicing institution that
services a Mortgage Loan in a Mortgage Pool on be-
half of the Master Servicer (a "Sub-Servicer") will
be obligated to advance amounts (each, an "Ad-
vance") corresponding to delinquent principal and
interest payments on such Mortgage Loan (including,
in the case of Cooperative Loans, unpaid mainte-
nance fees or other charges under the related pro-
prietary lease) until the first day of the month
following the date on which the related Mortgaged
Property is sold at a foreclosure sale or the re-
lated Mortgage Loan is otherwise liquidated. Any
obligation to make Advances may be subject to limi-
tations as specified in the related Prospectus Sup-
plement.
The obligation of the Master Servicer or a Sub-
Servicer to make Advances may be supported by the
delivery to the Trustee of a support letter from an
affiliate of the Master Servicer or such Sub-
Servicer or an unaffiliated third party (a "Support
Servicer") guaranteeing the payment of such Ad-
vances by the Master Servicer or Sub-Servicer, as
the case may be, as specified in the related Pro-
spectus Supplement.
Unless otherwise specified in the related Prospec-
tus Supplement, in the event the Master Servicer,
Support Servicer or Sub-Servicer fails to make a
required Advance, the Trustee will be obligated to
advance such amounts otherwise required to be ad-
vanced by the Master Servicer, Support Servicer or
Sub-Servicer. See "Description of the Certifi-
cates--Advances".
Optional Termination...... The Master Servicer, or, if specified in the re-
lated Prospectus Supplement, the holder of the re-
sidual interest in a REMIC, may have the option to
effect early retirement of a Series of Certificates
through the purchase of the Mortgage Assets and
other assets in the related Trust Fund under the
circumstances and in the manner described in "The
Pooling and Servicing Agreement--Termination; Op-
tional Termination" herein and in the related Pro-
spectus Supplement.
11
<PAGE>
Legal Investment.......... The Prospectus Supplement for each series of Cer-
tificates will specify which, if any, of the Clas-
ses of Certificates offered thereby constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984
("SMMEA"). Classes of Certificates that qualify as
"mortgage related securities" will be legal invest-
ments for certain types of institutional investors
to the extent provided in SMMEA, subject, in any
case, to any other regulations which may govern in-
vestments by such institutional investors. Institu-
tions whose investment activities are subject to
review by federal or state authorities should con-
sult with their counsel or the applicable authori-
ties to determine whether an investment in a par-
ticular Class of Certificates (whether or not such
Class constitutes a "mortgage related security")
complies with applicable guidelines, policy state-
ments or restrictions. See "Legal Investment".
Certain Federal Income
Tax Consequences......... The Federal income tax consequences to
Certificateholders will vary depending on whether
one or more elections are made to treat the Trust
Fund or specified portions thereof as a "real es-
tate mortgage investment conduit" ("REMIC") under
the provisions of the Internal Revenue Code of
1986, as amended (the "Code"). The Prospectus Sup-
plement for each Series of Certificates will spec-
ify whether such an election will be made. See
"Certain Federal Income Tax Consequences".
ERISA Considerations...... A fiduciary of any employee benefit plan or other
retirement plan or arrangement subject to the Em-
ployee Retirement Income Security Act of 1974, as
amended ("ERISA"), or the Code should carefully re-
view with its legal advisors whether the purchase
or holding of Certificates could give rise to a
transaction prohibited or not otherwise permissible
under ERISA or the Code. See "ERISA Considera-
tions". Certain classes of Certificates may not be
transferred unless the Trustee and the Depositor
are furnished with a letter of representation or an
opinion of counsel to the effect that such transfer
will not result in a violation of the prohibited
transaction provisions of ERISA and the Code and
will not subject the Trustee, the Depositor or the
Master Servicer to additional obligations. Addi-
tionally, unless otherwise specified in the related
Prospectus Supplement, Certificates representing an
interest in a Mortgage Pool consisting of Multifam-
ily Loans or Contracts may not be transferred to an
employee benefit plan or other retirement plan or
arrangement subject to ERISA. See "Description of
the Certificates--General" and "ERISA Considera-
tions".
12
<PAGE>
THE TRUST FUND
The Trust Fund for each Series will be held by the Trustee for the benefit of
the related Certificateholders. Each Trust Fund will consist of certain
mortgage-related assets (the "Mortgage Assets") consisting of (A) a mortgage
pool (a "Mortgage Pool") comprised of (i) Single Family Loans, (ii) Multifamily
Loans or (iii) Contracts, (B) Agency Securities, or (C) Private Mortgage-Backed
Securities, in each case, as specified in the related Prospectus Supplement,
together with payments in respect of such Mortgage Assets and certain other
accounts, obligations or agreements, in each case as specified in the related
Prospectus Supplement.
The Certificates will be entitled to payment from the assets of the related
Trust Fund or Funds or other assets pledged for the benefit of the
Certificateholders as specified in the related Prospectus Supplement and will
not be entitled to payments in respect of the assets of any other trust fund
established by the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Assets of any Trust Fund will consist of
Mortgage Loans, Agency Securities or Private Mortgage-Backed Securities but not
a combination thereof.
The Mortgage Loans and Agency Securities will be acquired by the Depositor,
either directly or through affiliates, from originators or sellers which may be
affiliates of the Depositor (the "Sellers"), and conveyed by the Depositor to
the related Trust Fund. Mortgage Loans acquired by the Depositor will have been
originated in accordance with the underwriting criteria specified below under
"Mortgage Loan Program--Underwriting Standards" or as otherwise described in a
related Prospectus Supplement. See "Mortgage Loan Program--Underwriting
Standards".
The following is a brief description of the Mortgage Assets expected to be
included in the Trust Funds. If specific information respecting the Mortgage
Assets is not known at the time the related Series of Certificates initially is
offered, more general information of the nature described below will be
provided in the related Prospectus Supplement, and specific information will be
set forth in a report on Form 8-K to be filed with the Securities and Exchange
Commission within fifteen days after the initial issuance of such Certificates
(the "Detailed Description"). A copy of the Agreement with respect to each
Series of Certificates will be attached to the Form 8-K and will be available
for inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Mortgage Assets relating to
such Series will be attached to the Agreement delivered to the Trustee upon
delivery of the Certificates.
THE MORTGAGE LOANS--GENERAL
For purposes hereof, "Single Family Loans", "Multifamily Loans" and
"Contracts" are collectively referred to as "Mortgage Loans", and the real
property and Manufactured Homes, as the case may be, which secure repayment of
the Mortgage Loans are collectively referred to as "Mortgaged Properties". The
Mortgaged Properties may be located in any one of the fifty states, the
District of Columbia, Guam, Puerto Rico or any other territory of the United
States. Mortgage Loans with certain Loan-to-Value Ratios and/or certain
principal balances may be covered wholly or partially by primary mortgage
guaranty insurance policies (each, a "Primary Mortgage Insurance Policy"). The
existence, extent and duration of any such coverage will be described in the
applicable Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans in a Mortgage Pool will have monthly payments due on the first
day of each month. The payment terms of the
- --------
*Whenever the terms "Mortgage Pool" and "Certificates" are used in this
Prospectus, such terms will be deemed to apply, unless the context indicates
otherwise, to one specific Mortgage Pool and the Certificates representing
certain undivided interests, as described below, in a single trust fund (the
"Trust Fund") consisting primarily of the Mortgage Loans in such Mortgage
Pool. Similarly, the term "Pass-Through Rate" will refer to the Pass-Through
Rate borne by the Certificates of one specific Series and the term "Trust
Fund" will refer to one specific Trust Fund.
13
<PAGE>
Mortgage Loans to be included in a Trust Fund will be described in the related
Prospectus Supplement and may include any of the following features or
combination thereof or other features described in the related Prospectus
Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from time
to time in relation to an index (which will be specified in the related
Prospectus Supplement), a rate that is fixed for a period of time or under
certain circumstances and is followed by an adjustable rate, a rate that
otherwise varies from time to time, or a rate that is convertible from an
adjustable rate to a fixed rate. Changes to an adjustable rate may be
subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and added
to the principal of a loan for such periods and under such circumstances as
may be specified in the related Prospectus Supplement. Mortgage Loans may
provide for the payment of interest at a rate lower than the specified
interest rate borne by such Mortgage Loan (the "Mortgage Rate") for a
period of time or for the life of the loan, and the amount of any
difference may be contributed from funds supplied by the seller of the
Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from the
interest rate on the Mortgage Loan or may not be amortized during all or a
portion of the original term. Payment of all or a substantial portion of
the principal may be due on maturity ("balloon payments"). Principal may
include interest that has been deferred and added to the principal balance
of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the life
of the loan, may increase over a specified period of time or may change
from period to period. Loans may include limits on periodic increases or
decreases in the amount of monthly payments and may include maximum or
minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the loan or may decline over time, and may be
prohibited for the life of the loan or for certain periods ("lockout
periods"). Certain loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee
in connection with any such subsequent prepayment. Other loans may permit
prepayments without payment of a fee unless the prepayment occurs during
specified time periods. The loans may include "due-on-sale" clauses which
permit the mortgagee to demand payment of the entire mortgage loan in
connection with the sale or certain transfers of the related Mortgaged
Property. Other loans may be assumable by persons meeting the then
applicable underwriting standards of the Seller.
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement and to the extent then specifically known to the
Depositor, with respect to the Mortgage Loans contained in the related Mortgage
Pool, including (i) the aggregate outstanding principal balance and the average
outstanding principal balance of the Mortgage Loans as of the applicable Cut-
off Date, (ii) the type of property securing the Mortgage Loans (e.g., one- to
four-family houses, individual units in condominium apartment buildings or in
buildings owned by cooperative housing corporations, vacation and second homes,
manufactured homes, multifamily apartments or other real property), (iii) the
original terms to maturity of the Mortgage Loans, (iv) the largest principal
balance and the smallest principal balance of any of the Mortgage Loans, (v)
the earliest origination date and latest maturity date of any of the Mortgage
Loans, (vi) the aggregate principal balance of Mortgage Loans having Loan-to-
Value Ratios at origination exceeding 80%, (vii) the Mortgage Rates or APRs or
range of Mortgage Rates or APRs borne by the Mortgage Loans, and (viii) the
geographical location of the Mortgage Loans on a state-by-state basis. If
specific information respecting the Mortgage Loans is not known to the
Depositor at the time the related Certificates are initially offered, more
general information of the nature described above will be provided in the
related Prospectus Supplement, and specific information will be set forth in
the Detailed Description.
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The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio,
expressed as a percentage, of the then outstanding principal balance of the
Mortgage Loan to the Collateral Value of the related Mortgaged Property. Unless
otherwise specified in the related Prospectus Supplement, the "Collateral
Value" of a Mortgaged Property, other than with respect to Contracts and
certain Mortgage Loans the proceeds of which were used to refinance an existing
mortgage loan (each, a "Refinance Loan"), is the lesser of (a) the appraised
value determined in an appraisal obtained by the originator at origination of
such Mortgage Loan and (b) the sales price for such property. In the case of
Refinance Loans, the "Collateral Value" of the related Mortgaged Property is
the appraised value thereof determined in an appraisal obtained at the time of
refinancing. Unless otherwise specified in the related Prospectus Supplement,
for purposes of calculating the Loan-to-Value Ratio of a Contract relating to a
new Manufactured Home, the Collateral Value is no greater than the sum of a
fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site) including
"accessories" identified in the invoice (the "Manufacturer Invoice Price"),
plus the actual cost of any accessories purchased from the dealer, a delivery
and set-up allowance, depending on the size of the unit, and the cost of state
and local taxes, filing fees and up to three years prepaid hazard insurance
premiums. Unless otherwise specified in the related Prospectus Supplement, the
Collateral Value of a used Manufactured Home is the least of the sales price,
appraised value, and National Automobile Dealers' Association book value plus
prepaid taxes and hazard insurance premiums. The appraised value of a
Manufactured Home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans, and any secondary financing on the Mortgaged
Properties, in a particular Mortgage Pool become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions and
other factors (which may or may not affect real property values) may affect the
timely payment by mortgagors of scheduled payments of principal and interest on
the Mortgage Loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses with respect to any Mortgage Pool. In the case of
Multifamily Loans, such other factors could include excessive building
resulting in an oversupply of rental housing stock or a decrease in employment
reducing the demand for rental units in an area; federal, state or local
regulations and controls affecting rents; prices of goods and energy;
environmental restrictions; increasing labor and material costs; and the
relative attractiveness to tenants of the Mortgaged Properties. To the extent
that such losses are not covered by subordination provisions or alternative
arrangements, such losses will be borne, at least in part, by the holders of
the Certificates of the related Series.
The Depositor will cause the Mortgage Loans comprising each Mortgage Pool to
be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Certificates of the related Series. The Master
Servicer named in the related Prospectus Supplement will service the Mortgage
Loans, either directly or through other mortgage servicing institutions ("Sub-
Servicers"), pursuant to a Pooling and Servicing Agreement (each, an
"Agreement") among the Depositor, the Master Servicer and the Trustee, and will
receive a fee for such services. See "Mortgage Loan Program" and "The Pooling
and Servicing Agreement". With respect to Mortgage Loans serviced by the Master
Servicer through a Sub-Servicer, the Master Servicer will remain liable for its
servicing obligations under the related Agreement as if the Master Servicer
alone were servicing such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Depositor with respect to a Series of Certificates will be
to obtain certain representations and warranties from the Sellers and to assign
to the Trustee for such Series of Certificates the Depositor's rights with
respect to such representations and warranties. See "The Pooling and Servicing
Agreement--Assignment of Mortgage
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Assets". The obligations of the Master Servicer with respect to the Mortgage
Loans will consist principally of its contractual servicing obligations under
the related Agreement (including its obligation to enforce the obligations of
the Sub-Servicers or Sellers, or both, as more fully described herein under
"Mortgage Loan Program--Representations by Sellers; Repurchases" and "The
Pooling and Servicing Agreement--Sub-Servicing by Sellers", "--Assignment of
Mortgage Assets") and its obligation to make certain cash advances in the event
of delinquencies in payments on or with respect to the Mortgage Loans in the
amounts described herein under "Description of the Certificates--Advances". The
obligations of the Master Servicer to make advances may be subject to
limitations, to the extent provided herein and in the related Prospectus
Supplement.
SINGLE FAMILY LOANS
Unless otherwise specified in the related Prospectus Supplement, Single
Family Loans will consist of mortgage loans, deeds of trust or participations
or other beneficial interests therein, secured by first liens on one- to four-
family residential properties. If so specified, the Single Family Loans may
include cooperative apartment loans ("Cooperative Loans") secured by security
interests in shares issued by private, non-profit, cooperative housing
corporations ("Cooperatives") and in the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific dwelling
units in such Cooperatives' buildings. If so specified in the related
Prospectus Supplement, the Mortgage Assets of the related Trust Fund may
include mortgage participation certificates evidencing interests in Single
Family Loans. Such loans may be conventional loans (i.e., loans that are not
insured or guaranteed by any governmental agency), insured by the FHA or
partially guaranteed by the VA, as specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
Single Family Loans will all have individual principal balances at origination
of not less than $25,000 and not more than $1,000,000, and original terms to
stated maturity of 10-40 years.
The Mortgaged Properties relating to Single Family Loans will consist of
detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units, individual
units in planned unit developments, and certain other dwelling units. Such
Mortgaged Properties may include vacation and second homes, investment
properties and leasehold interests. In the case of leasehold interests, the
term of the leasehold will exceed the scheduled maturity of the Mortgage Loan
by at least five years, unless otherwise specified in the related Prospectus
Supplement.
MULTIFAMILY LOANS
Multifamily Loans will consist of mortgage loans, deeds of trust or
participations or other beneficial interests therein, secured by first liens on
rental apartment buildings or projects containing five or more residential
units. If so specified in the related Prospectus Supplement, the Mortgage
Assets of the related Trust Fund may include mortgage participation
certificates evidencing interests in Multifamily Loans. Such loans may be
conventional loans or FHA-insured loans, as specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
Multifamily Loans will all have original terms to stated maturity of not more
than 40 years.
Mortgaged Properties which secure Multifamily Loans may include high-rise,
mid-rise and garden apartments. Certain of the Multifamily Loans may be secured
by apartment buildings owned by Cooperatives. The Cooperative owns all the
apartment units in the building and all common areas. The Cooperative is owned
by tenant-stockholders who, through ownership of stock, shares or membership
certificates in the corporation, receive proprietary leases or occupancy
agreements which confer exclusive rights to occupy specific apartments or
units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata
share of the Cooperative's payments for its mortgage loan, real property taxes,
maintenance expenses and other capital or ordinary expenses. Those payments are
in addition to any payments of principal and interest the tenant-stockholder
must make on any loans to the tenant-stockholder secured by its shares in the
Cooperative. The Cooperative will be directly
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responsible for building management and, in most cases, payment of real estate
taxes and hazard and liability insurance. A Cooperative's ability to meet debt
service obligations on a Multifamily Loan, as well as all other operating
expenses, will be dependent in large part on the receipt of maintenance
payments from the tenant-stockholders, as well as any rental income from units
or commercial areas the Cooperative might control. Unanticipated expenditures
may in some cases have to be paid by special assessments on the tenant-
stockholders.
CONTRACTS
The Contracts will consist of manufactured housing conditional sales
contracts and installment sales or loan agreements each secured by a
"Manufactured Home". Contracts may be conventional, insured by the FHA or
partially guaranteed by the VA, as specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
each Contract will be fully amortizing and will bear interest at a fixed
percentage rate ("APR"). Unless otherwise specified in the related Prospectus
Supplement, Contracts will all have individual principal balances at
origination of not less than $10,000 and not more than $1,000,000 and original
terms to stated maturity of 5-30 years.
The "Manufactured Homes" securing the Contracts will consist of manufactured
homes within the meaning of 42 U.S.C., Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
The related Prospectus Supplement will specify for the Contracts contained in
the related Trust Fund, among other things, the date of origination of the
Contracts; the APRs on the Contracts; the Contract Loan-to-Value Ratios; the
minimum and maximum outstanding principal balances as of the Cut-off Date and
the average outstanding principal balance; the outstanding principal balances
of the Contracts included in the related Trust Fund; and the original
maturities of the Contracts and the last maturity date of any Contract.
AGENCY SECURITIES
Government National Mortgage Association. GNMA is a wholly-owned corporate
instrumentality of the United States with the United States Department of
Housing and Urban Development. Section 306(g) of Title II of the National
Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
which represent an interest in a pool of mortgage loans insured by Federal
Housing Authority ("FHA") under the Housing Act, or Title V of the Housing Act
of 1949 ("FHA Loans"), or partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, or Chapter 37 of Title 38, United States
Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and credit of
the United States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection." In order to meet
its obligations under any such guarantee, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury in an unlimited amount
which is at any time sufficient to enable GNMA to perform its obligations under
its guarantee.
GNMA Certificates. Each GNMA Certificate held in a Trust Fund (which may be
issued under either the GNMA I program or the GNMA II program) will be a "fully
modified pass-through" mortgage-backed certificate issued and serviced by a
mortgage banking company or other financial concern ("GNMA Issuer")
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approved by GNMA or approved by FNMA as a seller-servicer of FHA Loans and/or
VA Loans. The mortgage loans underlying the GNMA Certificates will consist of
FHA Loans and/or VA Loans. Each such mortgage loan is secured by a one- to
four-family or multifamily residential property. GNMA will approve the issuance
of each such GNMA Certificate in accordance with a guaranty agreement (a
"Guaranty Agreement") between GNMA and the GNMA Issuer. Pursuant to its
Guaranty Agreement, a GNMA Issuer will be required to advance its own funds in
order to make timely payments of all amounts due on each such GNMA Certificate,
even if the payments received by the GNMA Issuer on the FHA Loans or VA Loans
underlying each such GNMA Certificate are less than the amounts due on each
such GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities
of substantially less than 30 years). Each such GNMA Certificate will be based
on and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential properties and will provide for the payment by or on behalf of the
GNMA Issuer to the registered holder of such GNMA Certificate scheduled monthly
payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of the monthly principal and
interest payment on each FHA Loan or VA Loan underlying such GNMA Certificate,
less the applicable servicing and guarantee fee which together equal the
difference between the interest on the FHA Loan or VA Loan and the pass-through
rate on the GNMA Certificate. In addition, each payment will include
proportionate pass-through payments of any prepayments of principal on the FHA
Loans or VA Loans underlying such GNMA Certificate and liquidation proceeds in
the event of a foreclosure or other disposition of any such FHA Loans or VA
Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such
payment. Upon notification and request, GNMA will make such payments directly
to the registered holder of such GNMA Certificate. In the event no payment is
made by a GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to
make such payment, the holder of such GNMA Certificate will have recourse only
against GNMA to obtain such payment. The Trustee or its nominee, as registered
holder of the GNMA Certificates held in a Trust Fund, will have the right to
proceed directly against GNMA under the terms of the Guaranty Agreements
relating to such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per annum
interest rates that vary from each other by up to one percentage point. The
interest rate on each GNMA II Certificate will be between one-half percentage
point and one and one-half percentage points lower than the highest interest
rate on the mortgage loans included in the pool of mortgage loans underlying
such GNMA II Certificate (except for pools of mortgage loans secured by
manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a Trust
Fund will be comprised of interest due as specified on such GNMA Certificate
plus the scheduled principal payments on the FHA Loans or VA Loans underlying
such GNMA Certificate due on the first day of the month in which the scheduled
monthly installments on such GNMA Certificate are due. Such regular monthly
installments on each such GNMA Certificate are required to be paid to the
Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments
on any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund
or any other early recovery of principal on such loan will be passed through to
the Trustee as the registered holder of such GNMA Certificate.
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GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for application to the payment of a portion of the
borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that,
during the early years of such mortgage loans, will be less than the amount of
stated interest on such mortgage loans. The interest not so paid will be added
to the principal of such graduated payment mortgage loans and, together with
interest thereon, will be paid in subsequent years. The obligations of GNMA and
of a GNMA Issuer will be the same irrespective of whether the GNMA Certificates
are backed by graduated payment mortgage loans or "buydown" mortgage loans. No
statistics comparable to the FHA's prepayment experience on level payment, non-
"buydown" mortgage loans are available in respect of graduated payment or
"buydown" mortgages. GNMA Certificates related to a Series of Certificates may
be held in book-entry form.
If specified in a Prospectus Supplement, GNMA Certificates may be backed by
multifamily mortgage loans having the characteristics specified in such
Prospectus Supplement.
Federal Home Loan Mortgage Corporation. FHLMC is a corporate instrumentality
of the United States created pursuant to Title III of the Emergency Home
Finance Act of 1970, as amended (the "FHLMC Act"). The common stock of FHLMC is
owned by the Federal Home Loan Banks and its preferred stock is owned by
stockholders of the Federal Home Loan Banks. FHLMC was established primarily
for the purpose of increasing the availability of mortgage credit for the
financing of urgently needed housing. It seeks to provide an enhanced degree of
liquidity for residential mortgage investments primarily by assisting in the
development of secondary markets for conventional mortgages. The principal
activity of FHLMC currently consists of the purchase of first lien conventional
mortgage loans or participation interests in such mortgage loans and the sale
of the mortgage loans or participations so purchased in the form of mortgage
securities, primarily FHLMC Certificates. FHLMC is confined to purchasing, so
far as practicable, mortgage loans that it deems to be of such quality, type
and class as to meet generally the purchase standards imposed by private
institutional mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided interest
in a pool of mortgage loans that may consist of first lien conventional loans,
FHA Loans or VA Loans (a "FHLMC Certificate group"). FHLMC Certificates are
sold under the terms of a Mortgage Participation Certificate Agreement. A FHLMC
Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program.
Mortgage loans underlying the FHLMC Certificates held by a Trust Fund will
consist of mortgage loans with original terms to maturity of between 10 and 40
years. Each such mortgage loan must meet the applicable standards set forth in
the FHLMC Act. A FHLMC Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another FHLMC Certificate group. Under the Guarantor
Program, any such FHLMC Certificate group may include only whole loans or
participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the timely
payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC
Certificate collection by such holder of all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent specified in
the related Prospectus Supplement for a Series of Certificates, guarantee the
timely payment of scheduled principal. Under FHLMC's Gold PC Program, FHLMC
guarantees the timely payment of principal based on the difference between the
pool factor, published in the month preceding the month of distribution and the
pool factor published in such month of distribution.
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Pursuant to its guarantees, FHLMC indemnifies holders of FHLMC Certificates
against any diminution in principal by reason of charges for property repairs,
maintenance and foreclosure. FHLMC may remit the amount due on account of its
guaranty of collection of principal at any time after default on an underlying
mortgage loan, but not later than (i) 30 days following foreclosure sale, (ii)
30 days following payment of the claim by any mortgage insurer, or (iii) 30
days following the expiration of any right of redemption, whichever occurs
later, but in any event no later than one year after demand has been made upon
the mortgagor for accelerated payment of principal. In taking actions regarding
the collection of principal after default on the mortgage loans underlying
FHLMC Certificates, including the timing of demand for acceleration, FHLMC
reserves the right to exercise its judgment with respect to the mortgage loans
in the same manner as for mortgage loans which it has purchased but not sold.
The length of time necessary for FHLMC to determine that a mortgage loan should
be accelerated varies with the particular circumstances of each mortgagor, and
FHLMC has not adopted standards which require that the demand be made within
any specified period.
FHLMC Certificates are not guaranteed by the United States or by any Federal
Home Loan Bank and do not constitute debts or obligations of the United States
or any Federal Home Loan Bank. The obligations of FHLMC under its guarantee are
obligations solely of FHLMC and are not backed by, nor entitled to, the full
faith and credit of the United States. If FHLMC were unable to satisfy such
obligations, distributions to holders of FHLMC Certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial repayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on
the underlying mortgage loans, interest at the FHLMC pass-through rate and any
other sums such as prepayment fees, within 60 days of the date on which such
payments are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, there is no limitation on the amount by which
interest rates on the mortgage loans underlying a FHLMC Certificate may exceed
the pass-through rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans from sellers at specified percentages
of their unpaid principal balances, adjusted for accrued or prepaid interest,
which when applied to the interest rate of the mortgage loans and
participations purchased, results in the yield (expressed as a percentage)
required by FHLMC. The required yield, which includes a minimum servicing fee
retained by the servicer, is calculated using the outstanding principal
balance. The range of interest rates on the mortgage loans and participations
in a FHLMC Certificate group under the Cash Program will vary since mortgage
loans and participations are purchased and assigned to a FHLMC Certificate
group based upon their yield to FHLMC rather than on the interest rate on the
underlying mortgage loans. Under FHLMC's Guarantor Program, the pass-through
rate on a FHLMC Certificate is established based upon the lowest interest rate
on the underlying mortgage loans, minus a minimum servicing fee and the amount
of FHLMC's management and guaranty income as agreed upon between the seller and
FHLMC.
FHLMC Certificates duly presented for registration of ownership on or before
the last business day of a month are registered effective as of the first day
of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day
of the second month following the month in which the purchaser became a
registered holder of the FHLMC Certificates. Thereafter, such remittance will
be distributed monthly to the registered holder so as to be received normally
by the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or
after January 2, 1985, and makes payments of principal and interest each month
to the registered holders thereof in accordance with such holders'
instructions.
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Federal National Mortgage Association. FNMA is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act, as amended (the "Charter Act"). FNMA was
originally established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately-managed corporation by legislation enacted in
1968.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps
to redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA Certificates. FNMA Certificates are Guaranteed Mortgage Pass-Through
Certificates representing fractional undivided interests in a pool of mortgage
loans formed by FNMA. Each mortgage loan must meet the applicable standards of
the FNMA purchase program. Mortgage loans comprising a pool are either provided
by FNMA from its own portfolio or purchased pursuant to the criteria of the
FNMA purchase program.
Mortgage loans underlying FNMA Certificates held by a Trust Fund will consist
of conventional mortgage loans, FHA Loans or VA Loans. Original maturities of
substantially all of the conventional, level payment mortgage loans underlying
a FNMA Certificate are expected to be between either 8 to 15 years or 20 to 40
years. The original maturities of substantially all of the fixed rate level
payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Under a
regular servicing option (pursuant to which the mortgagee or each other
servicer assumes the entire risk of foreclosure losses), the annual interest
rates on the mortgage loans underlying a FNMA Certificate will be between 50
basis points and 250 basis points greater than is its annual pass-through rate
and under a special servicing option (pursuant to which FNMA assumes the entire
risk for foreclosure losses), the annual interest rates on the mortgage loans
underlying a FNMA Certificate will generally be between 55 basis points and 255
basis points greater than the annual FNMA Certificate pass-through rate. If
specified in the related Prospectus Supplement, FNMA Certificates may be backed
by adjustable rate mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it will
distribute amounts representing such holder's proportionate share of scheduled
principal and interest payments at the applicable pass-through rate provided
for by such FNMA Certificate on the underlying mortgage loans, whether or not
received, and such holder's proportionate share of the full principal amount of
any foreclosed or other finally liquidated mortgage loan, whether or not such
principal amount is actually recovered. The obligations of FNMA under its
guarantees are obligations solely of FNMA and are not backed by, nor entitled
to, the full faith and credit of the United States. Although the Secretary of
the Treasury of the United States has discretionary authority to lend FNMA up
to $2.25 billion outstanding at any time, neither the United States nor any
agency thereof is obligated to finance FNMA's operations or to assist FNMA in
any other manner. If FNMA were unable to satisfy its obligations, distributions
to holders of FNMA Certificates would consist solely of payments and other
recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans formed on
or after May 1, 1985 (other than FNMA Certificates backed by pools containing
graduated payment mortgage loans or mortgage loans secured by multifamily
projects) are available in book-entry form only. Distributions of principal and
interest
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on each FNMA Certificate will be made by FNMA on the 25th day of each month to
the persons in whose name the FNMA Certificate is entered in the books of the
Federal Reserve Banks (or registered on the FNMA Certificate register in the
case of fully registered FNMA Certificates) as of the close of business on the
last day of the preceding month. With respect to FNMA Certificates issued in
book-entry form, distributions thereon will be made by wire, and with respect
to fully registered FNMA Certificates, distributions thereon will be made by
check.
Stripped Mortgage-Backed Securities. Agency Securities may consist of one or
more stripped mortgage-backed securities, each as described herein and in the
related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but
not the interest distributions) or the interest distributions (but not the
principal distributions), or in some specified portion of the principal and
interest distributions (but not all of such distributions) on certain FHLMC,
FNMA or GNMA Certificates. The underlying securities will be held under a trust
agreement by FHLMC, FNMA or GNMA, each as trustee, or by another trustee named
in the related Prospectus Supplement. FHLMC, FNMA or GNMA will guaranty each
stripped Agency Security to the same extent as such entity guarantees the
underlying securities backing such stripped Agency Security, unless otherwise
specified in the related Prospectus Supplement.
Other Agency Securities. If specified in the related Prospectus Supplement, a
Trust Fund may include other mortgage pass-through certificates issued or
guaranteed by GNMA, FNMA or FHLMC. The characteristics of any such mortgage
pass-through certificates will be described in such Prospectus Supplement. If
so specified, a combination of different types of Agency Securities may be held
in a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
General. Private Mortgage-Backed Securities may consist of (a) mortgage pass-
through certificates or participation certificates evidencing an undivided
interest in a pool of Mortgage Loans, or (b) collateralized mortgage
obligations secured by Mortgage Loans. Private Mortgage-Backed Securities may
include stripped mortgage-backed securities representing an undivided interest
in all or a part of either the principal distributions (but not the interest
distributions) or the interest distributions (but not the principal
distributions) or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain Mortgage Loans.
Private Mortgage-Backed Securities will have been issued pursuant to a pooling
and servicing agreement, an indenture or similar agreement (a "PMBS
Agreement"). Unless otherwise specified in the related Prospectus Supplement,
the seller/servicer of the underlying Mortgage Loans will have entered into the
PMBS Agreement with the trustee under such PMBS Agreement (the "PMBS Trustee").
The PMBS Trustee or its agent, or a custodian, will possess the Mortgage Loans
underlying such Private Mortgage-Backed Security. Mortgage Loans underlying a
Private Mortgage-Backed Security will be serviced by a servicer (the "PMBS
Servicer") directly or by one or more subservicers who may be subject to the
supervision of the PMBS Servicer. Unless otherwise specified in the related
Prospectus Supplement, the PMBS Servicer will be a FNMA or FHLMC approved
servicer and, if FHA Loans underlie the Private Mortgage-Backed Securities,
approved by HUD as an FHA mortgagee.
The issuer of the Private Mortgage-Backed Securities (the "PMBS Issuer") will
be a financial institution or other entity engaged generally in the business of
mortgage lending, a public agency or instrumentality of a state, local or
federal government, or a limited purpose corporation organized for the purpose
of, among other things, establishing trusts and acquiring and selling housing
loans to such trusts and selling beneficial interests in such trusts. If so
specified in the related Prospectus Supplement, the PMBS Issuer may be an
affiliate of the Depositor. The obligations of the PMBS Issuer will generally
be limited to certain representations and warranties with respect to the assets
conveyed by it to the related trust. Unless otherwise specified in the related
Prospectus Supplement, the PMBS Issuer will not have guaranteed any of the
assets conveyed to the related trust or any of the Private Mortgage-Backed
Securities issued under the PMBS Agreement. Additionally, although the Mortgage
Loans underlying the Private Mortgage-Backed Securities may be
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guaranteed by an agency or instrumentality of the United States, the Private
Mortgage-Backed Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private Mortgage-
Backed Securities on the dates specified in the related Prospectus Supplement.
The Private Mortgage-Backed Securities may be entitled to receive nominal or no
principal distributions or nominal or no interest distributions. Principal and
interest distributions will be made on the Private Mortgage-Backed Securities
by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS Servicer
may have the right to repurchase assets underlying the Private Mortgage-Backed
Securities after a certain date or under other circumstances specified in the
related Prospectus Supplement.
Underlying Loans. The Mortgage Loans underlying the Private Mortgage-Backed
Securities may consist of fixed rate, level payment, fully amortizing loans or
graduated payment mortgage loans, buydown loans, adjustable rate mortgage
loans, or loans having balloon or other special payment features. Such Mortgage
Loans may be secured by single family property, multifamily property,
Manufactured Homes or by an assignment of the proprietary lease or occupancy
agreement relating to a specific dwelling within a Cooperative and the related
shares issued by such Cooperative. Except as otherwise specified in the related
Prospectus Supplement, (i) no Mortgage Loan will have had a Loan-to-Value Ratio
at origination in excess of 95%, (ii) each Single Family Loan secured by a
Mortgaged Property having a Loan-to-Value Ratio in excess of 80% at origination
will be covered by a primary mortgage insurance policy, (iii) each Mortgage
Loan will have had an original term to stated maturity of not less than 5 years
and not more than 40 years, (iv) no Mortgage Loan that was more than 30 days
delinquent as to the payment of principal or interest will have been eligible
for inclusion in the assets under the related PMBS Agreement, (v) each Mortgage
Loan (other than a Cooperative Loan) will be required to be covered by a
standard hazard insurance policy (which may be a blanket policy), and (vi) each
Mortgage Loan (other than a Cooperative Loan or a Contract secured by a
Manufactured Home) will be covered by a title insurance policy.
Credit Support Relating to Private Mortgage-Backed Securities. Credit support
in the form of reserve funds, subordination of other private mortgage
certificates issued under the PMBS Agreement, letters of credit, surety bonds,
insurance policies or other types of credit support may be provided with
respect to the Mortgage Loans underlying the Private Mortgage-Backed Securities
or with respect to the Private Mortgage-Backed Securities themselves.
Additional Information. The Prospectus Supplement for a Series for which the
Trust Fund includes Private Mortgage-Backed Securities will specify (i) the
aggregate approximate principal amount and type of the Private Mortgage-Backed
Securities to be included in the Trust Fund, (ii) certain characteristics of
the Mortgage Loans which comprise the underlying assets for the Private
Mortgage-Backed Securities including (A) the payment features of such Mortgage
Loans, (B) the approximate aggregate principal balance, if known, of underlying
Mortgage Loans insured or guaranteed by a governmental entity, (C) the
servicing fee or range of servicing fees with respect to the Mortgage Loans,
and (D) the minimum and maximum stated maturities of the underlying Mortgage
Loans at origination, (iii) the maximum original term-to-stated maturity of the
Private Mortgage-Backed Securities, (iv) the weighted average term-to-stated
maturity of the Private Mortgage-Backed Securities, (v) the pass-through or
certificate rate of the Private Mortgage-Backed Securities, (vi) the weighted
average pass-through or certificate rate of the Private Mortgage-Backed
Securities, (vii) the PMBS Issuer, the PMBS Servicer (if other than the PMBS
Issuer) and the PMBS Trustee for such Private Mortgage-Backed Securities,
(viii) certain characteristics of credit support, if any, such as reserve
funds, insurance policies, surety bonds, letters of credit or guaranties
relating to the Mortgage Loans underlying the Private Mortgage-Backed
Securities or to such Private Mortgage-Backed Securities themselves, (ix) the
term on which the underlying Mortgage Loans for such Private Mortgage-Backed
Securities may, or are required to, be purchased prior to their stated maturity
or the stated maturity of the Private Mortgage-Backed Securities and (x) the
terms on which Mortgage Loans may be substituted for those originally
underlying the Private Mortgage-Backed Securities.
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USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor to the purchase of Mortgage Assets or will be used by
the Depositor for general corporate purposes. The Depositor expects to sell
Certificates in Series from time to time, but the timing and amount of
offerings of Certificates will depend on a number of factors, including the
volume of Mortgage Assets acquired by the Depositor, prevailing interest rates,
availability of funds and general market conditions.
THE DEPOSITOR
Greenwich Capital Acceptance, Inc., the Depositor, is a Delaware corporation
organized on April 23, 1987 for the limited purpose of acquiring, owning and
transferring Mortgage Assets and selling interests therein or bonds secured
thereby. It is an indirect, limited purpose finance subsidiary of The Long-Term
Credit Bank of Japan, Limited and an affiliate of Greenwich Capital Markets,
Inc. The Long-Term Credit Bank of Japan, Limited is a bank organized under the
laws of Japan conducting commercial banking, corporate finance, capital markets
and financial advisory services on a global basis. Greenwich Capital Markets,
Inc. is a registered broker-dealer engaged in the U.S. government securities
and related capital markets business. The Depositor maintains its principal
office at 600 Steamboat Road, Greenwich, Connecticut 06830. Its telephone
number is (203) 625-2700.
Neither the Depositor nor any of the Depositor's affiliates will ensure or
guarantee distributions on the Certificates of any Series.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Depositor, either directly
or through affiliates, from Sellers. Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Loans so acquired by the Depositor will
have been originated in accordance with the underwriting criteria specified
below under "Underwriting Standards".
UNDERWRITING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, each Seller
will represent and warrant that all Mortgage Loans originated and/or sold by it
to the Depositor or one of its affiliates will have been underwritten in
accordance with standards consistent with those utilized by mortgage lenders or
manufactured home lenders generally during the period of origination for
similar types of loans. As to any Mortgage Loan insured by the FHA or partially
guaranteed by the VA, the Seller will represent that it has complied with
underwriting policies of the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and
adequacy of the Mortgaged Property as collateral. In general, a prospective
borrower applying for a Single Family Loan or for financing secured by a
Manufactured Home is required to fill out a detailed application designed to
provide to the underwriting officer pertinent credit information. As part of
the description of the borrower's financial condition, the borrower generally
is required to provide a current list of assets and liabilities and a statement
of income and expenses, as well as an authorization to apply for a credit
report which summarizes the borrower's credit history with local merchants and
lenders and any record of bankruptcy. In most cases, an employment verification
is obtained from an independent source (typically the borrower's employer)
which verification reports the length of employment with that organization, the
current salary, and whether it is expected that the borrower will continue such
employment in the future. If a prospective borrower is self-employed, the
borrower may be required to submit copies of signed tax returns. The borrower
may also be required to authorize verification
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of deposits at financial institutions where the borrower has demand or savings
accounts. Underwriting standards which pertain to the creditworthiness of
borrowers seeking Multifamily Loans will be described in the related Prospectus
Supplement.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good repair and that
construction, if new, has been completed. With respect to Single Family Loans
the appraisal is based on the market value of comparable homes, the estimated
rental income (if considered applicable by the appraiser) and the cost of
replacing the home. With respect to Contracts, the appraisal is based on recent
sales of comparable Manufactured Homes and, when deemed applicable, a
replacement cost analysis based on the cost of a comparable Manufactured Home.
With respect to a Multifamily Loan, the appraisal must specify whether an
income analysis, a market analysis or a cost analysis was used. An appraisal
employing the income approach to value analyzes a multifamily project's
cashflow, expenses, capitalization and other operational information in
determining the property's value. The market approach to value focuses its
analysis on the prices paid for the purchase of similar properties in the
multifamily project's area, with adjustments made for variations between these
other properties and the multifamily project being appraised. The cost approach
calls for the appraiser to make an estimate of land value and then determine
the current cost of reproducing the building less any accrued depreciation. In
any case, the value of the property being financed, as indicated by the
appraisal, must be such that it currently supports, and is anticipated to
support in the future, the outstanding loan balance.
In the case of Single Family Loans and Contracts, once all applicable
employment, credit and property information is received, a determination
generally is made as to whether the prospective borrower has sufficient monthly
income available (i) to meet the borrower's monthly obligations on the proposed
mortgage loan (generally determined on the basis of the monthly payments due in
the year of origination) and other expenses related to the Mortgaged Property
(such as property taxes and hazard insurance) and (ii) to meet monthly housing
expenses and other financial obligations and monthly living expenses. The
underwriting standards applied by Sellers, particularly with respect to the
level of loan documentation and the mortgagor's income and credit history, may
be varied in appropriate cases where factors such as low Loan-to-Value Ratios
or other favorable credit exist.
In the case of a Single Family or Multifamily Loan secured by a leasehold
interest in real property, the title to which is held by a third party lessor,
the Seller will represent and warrant, among other things, that the remaining
term of the lease and any sublease is at least five years longer than the
remaining term on the Mortgage Note.
Certain of the types of Mortgage Loans which may be included in the Mortgage
Pools are recently developed and may involve additional uncertainties not
present in traditional types of loans. For example, certain of such Mortgage
Loans may provide for escalating or variable payments by the mortgagor or
obligor. These types of Mortgage Loans are underwritten on the basis of a
judgment that mortgagors or obligors will have the ability to make monthly
payments required initially. In some instances, however, a mortgagor's or
obligor's income may not be sufficient to permit continued loan payments as
such payments increase. These types of Mortgage Loans may also be underwritten
primarily upon the basis of Loan-to-Value Ratios or other favorable credit
factors.
QUALIFICATIONS OF SELLERS
Unless otherwise specified in the related Prospectus Supplement, each Seller
will be required to satisfy the qualifications set forth herein. Each Seller
must be an institution experienced in originating and servicing Mortgage Loans
of the type contained in the related Mortgage Pool in accordance with accepted
practices and prudent guidelines, and must maintain satisfactory facilities to
originate and service those Mortgage Loans. Each Seller must be a
seller/servicer approved by either FNMA or FHLMC. Each Seller must be a
mortgagee approved by the FHA or an institution the deposit accounts in which
are insured by the Federal
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Deposit Insurance Corporation (the "FDIC"). The Resolution Trust Corporation,
acting in its capacity as conservator or receiver of a depository institution,
may be a Seller if so specified in the related Prospectus Supplement.
REPRESENTATIONS BY SELLERS; REPURCHASES
Each Seller will have made representations and warranties in respect of the
Mortgage Loans sold by such Seller and evidenced by a Series of Certificates.
Such representations and warranties unless otherwise provided in the related
Prospectus Supplement generally include, among other things: (i) that title
insurance (or in the case of Mortgaged Properties located in areas where such
policies are generally not available, an attorney's certificate of title) in
the case of Single Family Loans and Multifamily Loans (other than a Cooperative
Loan or a contract secured by a Manufactured Home) and any required hazard
insurance policy and Primary Mortgage Insurance Policy were effective at the
origination of each Mortgage Loan other than Cooperative Loans, and that each
policy (or certificate of title as applicable) remained in effect on the date
of purchase of the Mortgage Loan from the Seller by or on behalf of the
Depositor; (ii) that the Seller had good title to each such Mortgage Loan and
such Mortgage Loan was subject to no offsets, defenses, counterclaims or rights
of rescission except to the extent that any buydown agreement described herein
may forgive certain indebtedness of a Mortgagor; (iii) that each Mortgage Loan
constituted a valid first lien on, or a first perfected security interest with
respect to, the Mortgaged Property (subject only to permissible title insurance
exceptions, if applicable, and certain other exceptions described in the
Agreement) and that the Mortgaged Property was free from damage and was in good
repair; (iv) that there were no delinquent tax or assessment liens against the
Mortgaged Property; (v) that no required payment on a Mortgage Loan was more
than thirty days delinquent; and (vi) that each Mortgage Loan was made in
compliance with, and is enforceable under, all applicable local, state and
federal laws and regulations in all material respects.
If so specified in the related Prospectus Supplement, the representations and
warranties of a Seller in respect of a Mortgage Loan will be made not as of the
Cut-off Date but as of the date on which such Seller sold the Mortgage Loan to
the Depositor or one of its affiliates. Under such circumstances, a substantial
period of time may have elapsed between such date and the date of initial
issuance of the Series of Certificates evidencing an interest in such Mortgage
Loan. Since the representations and warranties of a Seller do not address
events that may occur following the sale of a Mortgage Loan by such Seller, its
repurchase obligation described below will not arise if the relevant event that
would otherwise have given rise to such an obligation with respect to a
Mortgage Loan occurs after the date of sale of such Mortgage Loan by such
Seller to the Depositor or its affiliates. However, the Depositor will not
include any Mortgage Loan in the Trust Fund for any Series of Certificates if
anything has come to the Depositor's attention that would cause it to believe
that the representations and warranties of a Seller will not be accurate and
complete in all material respects in respect of such Mortgage Loan as of the
date of initial issuance of the related Series of Certificates. If the Master
Servicer is also a Seller of Mortgage Loans with respect to a particular
Series, such representations will be in addition to the representations and
warranties made by the Master Servicer in its capacity as a Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the Seller,
will promptly notify the relevant Seller of any breach of any representation or
warranty made by it in respect of a Mortgage Loan which materially and
adversely affects the interests of the Certificateholders in such Mortgage
Loan. Unless otherwise specified in the related Prospectus Supplement, if such
Seller cannot cure such breach within 90 days after notice from the Master
Servicer or the Trustee, as the case may be, then such Seller will be obligated
to repurchase such Mortgage Loan from the Trust Fund at a price (the "Purchase
Price") equal to 100% of the unpaid principal balance thereof as of the date of
the repurchase plus accrued interest thereon to the first day of the month
following the month of repurchase at the Mortgage Rate (less any Advances or
amount payable as related servicing compensation if the Seller is the Master
Servicer). If a REMIC election is to be made with respect to a Trust Fund,
unless otherwise provided in the related Prospectus Supplement, the Master
Servicer or a holder of the related residual certificate will be obligated to
pay any prohibited
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transaction tax which may arise in connection with any such repurchase. The
Master Servicer, unless otherwise specified in the related Prospectus
Supplement, will be entitled to reimbursement for any such payment from the
assets of the related Trust Fund or from any holder of the related residual
certificate. See "Description of the Certificates--General". Except in those
cases in which the Master Servicer is the Seller, the Master Servicer will be
required under the applicable Agreement to enforce this obligation for the
benefit of the Trustee and the holders of the Certificates, following the
practices it would employ in its good faith business judgment were it the owner
of such Mortgage Loan. This repurchase obligation will constitute the sole
remedy available to holders of Certificates or the Trustee for a breach of
representation by a Seller.
Neither the Depositor nor the Master Servicer (unless the Master Servicer is
the Seller) will be obligated to purchase a Mortgage Loan if a Seller defaults
on its obligation to do so, and no assurance can be given that Sellers will
carry out their respective repurchase obligations with respect to Mortgage
Loans. However, to the extent that a breach of a representation and warranty of
a Seller may also constitute a breach of a representation made by the Master
Servicer, the Master Servicer may have a repurchase obligation as described
below under "The Pooling and Servicing Agreement--Assignment of Mortgage
Assets".
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement, dated as
of the related Cut-off Date, among the Depositor, the Master Servicer and the
Trustee for the benefit of the holders of the Certificates of such Series. The
provisions of each Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust Fund.
A form of an Agreement is an exhibit to the Registration Statement of which
this Prospectus is a part. The following summaries describe certain provisions
which may appear in each Agreement. The Prospectus Supplement for a Series of
Certificates will describe any provision of the Agreement relating to such
Series that materially differs from the description thereof contained in this
Prospectus. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Agreement for each Series of Certificates and the applicable Prospectus
Supplement. The Depositor will provide a copy of the Agreement (without
exhibits) relating to any Series without charge upon written request of a
holder of record of a Certificate of such Series addressed to Greenwich Capital
Acceptance, Inc., 600 Steamboat Road, Greenwich, Connecticut 06830, Attention:
Asset Backed Finance Group.
GENERAL
Unless otherwise specified in the Prospectus Supplement, the Certificates of
each Series will be issued in fully registered form only, in the authorized
denominations specified in the related Prospectus Supplement, will evidence
specified beneficial ownership interests in the related Trust Fund created
pursuant to each Agreement and will not be entitled to payments in respect of
the assets included in any other Trust Fund established by the Depositor. The
Certificates will not represent obligations of the Depositor or any affiliate
of the Depositor. The Mortgage Loans will not be insured or guaranteed by any
governmental entity or other person, unless otherwise specified in the related
Prospectus Supplement. Each Trust Fund will consist of, to the extent provided
in the Agreement, (i) the Mortgage Assets, as from time to time are subject to
the related Agreement (exclusive of any amounts specified in the related
Prospectus Supplement ("Retained Interest")); (ii) such assets as from time to
time are required to be deposited in the related Certificate Account, as
defined below under "The Pooling and Servicing Agreement--Payments on Mortgage
Loans; Deposits to Certificate Account"; (iii) property which secured a
Mortgage Loan and which is acquired on behalf of the Certificateholders by
foreclosure or deed in lieu of foreclosure and (iv) any Primary Mortgage
Insurance Policies, FHA Insurance and VA Guarantees, if any, and any other
insurance policies or other forms of credit enhancement required to be
maintained pursuant to the Agreement. If so specified in the related Prospectus
Supplement, a Trust Fund may also include one or more of the following:
reinvestment income on payments received on the Mortgage Assets, a reserve
fund, a mortgage pool insurance policy, a special hazard insurance policy, a
bankruptcy bond, one or more letters of credit, a surety bond, guaranties or
similar instruments or other agreements.
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Each Series of Certificates will be issued in one or more classes. Each class
of Certificates of a Series will evidence beneficial ownership of a specified
percentage (which may be 0%) or portion of future interest payments and a
specified percentage (which may be 0%) or portion of future principal payments
on the Mortgage Assets in the related Trust Fund. A Series of Certificates may
include one or more classes that are senior in right to payment to one or more
other classes of Certificates of such Series. Certain Series or classes of
Certificates may be covered by insurance policies, surety bonds or other forms
of credit enhancement, in each case as described herein and in the related
Prospectus Supplement. One or more classes of Certificates of a Series may be
entitled to receive distributions of principal, interest or any combination
thereof. Distributions on one or more classes of a Series of Certificates may
be made prior to one or more other classes, after the occurrence of specified
events, in accordance with a schedule or formula, on the basis of collections
from designated portions of the Mortgage Assets in the related Trust Fund or on
a different basis, in each case as specified in the related Prospectus
Supplement. The timing and amounts of such distributions may vary among classes
or over time as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Certificates will be made by the Trustee
on each Distribution Date (i.e., monthly, quarterly, semi-annually or at such
other intervals and on the dates as are specified in the Prospectus Supplement)
in proportion to the percentages specified in the related Prospectus
Supplement. Distributions will be made to the persons in whose names the
Certificates are registered at the close of business on the dates specified in
the related Prospectus Supplement (each, a "Record Date"). Distributions will
be made by check or money order mailed to the persons entitled thereto at the
address appearing in the register maintained for holders of Certificates (the
"Certificate Register") or, if specified in the related Prospectus Supplement,
in the case of Certificates that are of a certain minimum denomination, upon
written request by the Certificateholder, by wire transfer or by such other
means as are described therein; provided, however, that the final distribution
in retirement of the Certificates will be made only upon presentation and
surrender of the Certificates at the office or agency of the Trustee or other
person specified in the notice to Certificateholders of such final
distribution.
The Certificates will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Certificates of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of Certificates
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of either interest or principal on the related
Mortgage Loans or a class of Certificates entitled to receive payments of
interest and principal on the Mortgage Loans only after payments to other
classes or after the occurrence of certain specified events by or on behalf of
any employee benefit plan or other retirement arrangement (including individual
retirement accounts and annuities, Keogh plans and collective investment funds
in which such plans, accounts or arrangements are invested) subject to
provisions of ERISA or the Code, may result in "prohibited transactions" within
the meaning of ERISA and the Code. See "ERlSA Considerations". Unless otherwise
specified in the related Prospectus Supplement, transfer of Certificates of
such a class will not be registered unless the transferee (i) represents that
it is not, and is not purchasing on behalf of, any such plan, account or
arrangement or (ii) provides an opinion of counsel satisfactory to the Trustee
and the Depositor that the purchase of Certificates of such a class by or on
behalf of such plan, account or arrangement is permissible under applicable law
and will not subject the Trustee, the Master Servicer or the Depositor to any
obligation or liability in addition to those undertaken in the Agreement.
As to each Series, an election may be made to treat the related Trust Fund or
designated portions thereof as a "real estate mortgage investment conduit" or
"REMIC" as defined in the Code. The related Prospectus Supplement will specify
whether a REMIC election is to be made. Alternatively, the Agreement for a
Series may provide that a REMIC election may be made at the discretion of the
Depositor or the Master Servicer
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and may only be made if certain conditions are satisfied. As to any such
Series, the terms and provisions applicable to the making of a REMIC election,
as well as any material federal income tax consequences to Certificateholders
not otherwise described herein, will be set forth in the related Prospectus
Supplement. If such an election is made with respect to a Series, one of the
classes will be designated as evidencing the sole class of "residual interests"
in the related REMIC, as defined in the Code. All other classes of Certificates
in such a Series will constitute "regular interests" in the related REMIC, as
defined in the Code. As to each Series with respect to which a REMIC election
is to be made, the Master Servicer or a holder of the related residual
certificate will be obligated to take all actions required in order to comply
with applicable laws and regulations and will be obligated to pay any
prohibited transaction taxes. The Master Servicer, unless otherwise specified
in the related Prospectus Supplement, will be entitled to reimbursement for any
such payment from the assets of the Trust Fund or from any holder of the
related residual certificate.
DISTRIBUTIONS ON CERTIFICATES
General. In general, the method of determining the amount of distributions on
a particular Series of Certificates will depend on the type of credit support,
if any, that is used with respect to such Series. See "Credit Enhancement." Set
forth below are descriptions of various methods that may be used to determine
the amount of distributions on the Certificates of a particular Series. The
Prospectus Supplement for each Series of Certificates will describe the method
to be used in determining the amount of distributions on the Certificates of
such Series.
Distributions allocable to principal and interest on the Certificates will be
made by the Trustee out of, and only to the extent of, funds in the related
Certificate Account, including any funds transferred from any reserve account
(a "Reserve Account"). As between Certificates of different classes and as
between distributions of principal (and, if applicable, between distributions
of Principal Prepayments, as defined below, and scheduled payments of
principal) and interest, distributions made on any Distribution Date will be
applied as specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, distributions to any class of
Certificates will be made pro rata to all Certificateholders of that class.
Available Funds. All distributions on the Certificates of each Series on each
Distribution Date will be made from the Available Funds described below, in
accordance with the terms described in the related Prospectus Supplement and
specified in the Agreement. Unless otherwise provided in the related Prospectus
Supplement, "Available Funds" for each Distribution Date will equal the sum of
the following amounts:
(i) the aggregate of all previously undistributed payments on account of
principal (including Principal Prepayments, if any, and prepayment
penalties, if so provided in the related Prospectus Supplement) and
interest on the Mortgage Loans in the related Trust Fund (including
Liquidation Proceeds and Insurance Proceeds and amounts drawn under letters
of credit or other credit enhancement instruments as permitted thereunder
and as specified in the related Agreement) received by the Master Servicer
after the Cut-off Date and on or prior to the day of the month of the
related Distribution Date specified in the related Prospectus Supplement
(the "Determination Date") except:
(a) all payments which were due on or before the Cut-off Date;
(b) all Liquidation Proceeds and all Insurance Proceeds, all
Principal Prepayments and all other proceeds of any Mortgage Loan
purchased by the Depositor, Master Servicer, any Sub-Servicer or any
Seller pursuant to the Agreement that were received after the
prepayment period specified in the related Prospectus Supplement and
all related payments of interest representing interest for any period
after such prepayment period;
(c) all scheduled payments of principal and interest due on a date or
dates subsequent to the first day of the month of distribution;
(d) amounts received on particular Mortgage Loans as late payments of
principal or interest or other amounts required to be paid by
Mortgagors, but only to the extent of any unreimbursed
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advance in respect thereof made by the Master Servicer (including the
related Sub-Servicers, Support Servicers or the Trustee);
(e) amounts representing reimbursement, to the extent permitted by
the Agreement and as described under "Advances" below, for advances
made by the Master Servicer, Sub-Servicers, Support Servicers or the
Trustee that were deposited into the Certificate Account, and amounts
representing reimbursement for certain other losses and expenses
incurred by the Master Servicer or the Depositor and described below;
(f) that portion of each collection of interest on a particular
Mortgage Loan in such Trust Fund which represents servicing
compensation payable to the Master Servicer or Retained Interest which
is to be retained from such collection or is permitted to be retained
from related Insurance Proceeds, Liquidation Proceeds or proceeds of
Mortgage Loans purchased pursuant to the Agreement;
(ii) the amount of any advance made by the Master Servicer, Sub-Servicer,
Support Servicer or Trustee as described under "Advances" below and
deposited by it in the Certificate Account;
(iii) if applicable, amounts withdrawn from a Reserve Account; and
(iv) if applicable, the amount of prepayment interest shortfall.
Distributions of Interest. Unless otherwise specified in the related
Prospectus Supplement, interest will accrue on the aggregate Certificate
Principal Balance (or, in the case of Certificates entitled only to
distributions allocable to interest, the aggregate notional principal balance)
of each class of Certificates entitled to interest from the date, at the Pass-
Through Rate (which may be a fixed rate or rate adjustable as specified in such
Prospectus Supplement) and for the periods specified in such Prospectus
Supplement. To the extent funds are available therefor, interest accrued during
each such specified period on each class of Certificates entitled to interest
(other than a class of Certificates that provides for interest that accrues,
but is not currently payable, referred to hereafter as "Accrual Certificates")
will be distributable on the Distribution Dates specified in the related
Prospectus Supplement until the aggregate Certificate Principal Balance of the
Certificates of such class has been distributed in full or, in the case of
Certificates entitled only to distributions allocable to interest, until the
aggregate notional principal balance of such Certificates is reduced to zero or
for the period of time designated in the related Prospectus Supplement. The
original Certificate Principal Balance of each Certificate will equal the
aggregate distributions allocable to principal to which such Certificate is
entitled. Unless otherwise specified in the related Prospectus Supplement,
distributions allocable to interest on each Certificate that is not entitled to
distributions allocable to principal will be calculated based on the notional
principal balance of such Certificate. The notional principal balance of a
Certificate will not evidence an interest in or entitlement to distributions
allocable to principal but will be used solely for convenience in expressing
the calculation of interest and for certain other purposes.
With respect to any class of Accrual Certificates, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate Certificate Principal
Balance of such class of Certificates on that Distribution Date. Unless
otherwise specified in the related Prospectus Supplement, distributions of
interest on each class of Accrual Certificates will commence only after the
occurrence of the events specified in such Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, prior to such time,
the beneficial ownership interest of such class of Accrual Certificates in the
Trust Fund, as reflected in the aggregate Certificate Principal Balance of such
class of Accrual Certificates, will increase on each Distribution Date by the
amount of interest that accrued on such class of Accrual Certificates during
the preceding interest accrual period but that was not required to be
distributed to such class on such Distribution Date. Any such class of Accrual
Certificates will thereafter accrue interest on its outstanding Certificate
Principal Balance as so adjusted.
Distributions of Principal. Unless otherwise specified in the related
Prospectus Supplement, the aggregate Certificate Principal Balance of any class
of Certificates entitled to distributions of principal will be the aggregate
original Certificate Principal Balance of such class of Certificates specified
in such Prospectus Supplement, reduced by all distributions reported to the
holders of such Certificates as allocable to principal,
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and, (i) in the case of Accrual Certificates, unless otherwise specified in the
related Prospectus Supplement, increased by all interest accrued but not then
distributable on such Accrual Certificates and (ii) in the case of adjustable
rate Certificates, unless otherwise specified in the related Prospectus
Supplement, subject to the effect of negative amortization. The related
Prospectus Supplement will specify the method by which the amount of principal
to be distributed on the Certificates on each Distribution Date will be
calculated and the manner in which such amount will be allocated among the
classes of Certificates entitled to distributions of principal.
If so provided in the related Prospectus Supplement, one or more classes of
Senior Certificates will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments
("Principal Prepayments") in the percentages and under the circumstances or for
the periods specified in such Prospectus Supplement. Any such allocation of
Principal Prepayments to such class or classes of Certificateholders will have
the effect of accelerating the amortization of such Senior Certificates while
increasing the interests evidenced by the Subordinated Certificates in the
Trust Fund. Increasing the interests 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. See "Credit
Enhancement--Subordination".
Unscheduled Distributions. If specified in the related Prospectus Supplement,
the Certificates will be subject to receipt of distributions before the next
scheduled Distribution Date under the circumstances and in the manner described
below and in such Prospectus Supplement. If applicable, the Trustee will be
required to make such unscheduled distributions on the day and in the amount
specified in the related Prospectus Supplement if, due to substantial payments
of principal (including Principal Prepayments) on the Mortgage Assets, the
Trustee or the Master Servicer determines that the funds available or
anticipated to be available from the Certificate Account and, if applicable,
any Reserve Account, may be insufficient to make required distributions on the
Certificates on such Distribution Date. Unless otherwise specified in the
related Prospectus Supplement, the amount of any such unscheduled distribution
that is allocable to principal will not exceed the amount that would otherwise
have been required to be distributed as principal on the Certificates on the
next Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, all unscheduled distributions will include interest at the
applicable Pass-Through Rate (if any) on the amount of the unscheduled
distribution allocable to principal for the period and to the date specified in
such Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Certificates would have been made on the next Distribution Date, and with
respect to Certificates of the same class, unscheduled distributions of
principal will be made on a pro rata basis. Notice of any unscheduled
distribution will be given by the Trustee prior to the date of such
distribution.
ADVANCES
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date (from
its own funds, funds advanced by Sub-Servicers or Support Servicers or funds
held in the Certificate Account for future distributions to the holders of such
Certificates), an amount equal to the aggregate of payments of principal and
interest that were delinquent on the related Determination Date and were not
advanced by any Sub-Servicer, subject to the Master Servicer's determination
that such advances will be recoverable out of late payments by Mortgagors,
Liquidation Proceeds, Insurance Proceeds or otherwise. In the case of
Cooperative Loans, the Master Servicer also will be required to advance any
unpaid maintenance fees and other charges under the related proprietary leases
as specified in the related Prospectus Supplement.
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In making Advances, the Master Servicer will endeavor to maintain a regular
flow of scheduled interest and principal payments to holders of the
Certificates, rather than to guarantee or insure against losses. If Advances
are made by the Master Servicer from cash being held for future distribution to
Certificateholders, the Master Servicer will replace such funds on or before
any future Distribution Date to the extent that funds in the applicable
Certificate Account on such Distribution Date would be less than the amount
required to be available for distributions to Certificateholders on such date.
Any Master Servicer funds advanced will be reimbursable to the Master Servicer
out of recoveries on the specific Mortgage Loans with respect to which such
Advances were made (e.g., late payments made by the related Mortgagor, any
related Insurance Proceeds, Liquidation Proceeds or proceeds of any Mortgage
Loan purchased by a Sub-Servicer or a Seller under the circumstances described
hereinabove). Advances by the Master Servicer (and any advances by a Sub-
Servicer or a Support Servicer) also will be reimbursable to the Master
Servicer (or Sub-Servicer or a Support Servicer) from cash otherwise
distributable to Certificateholders (including the holders of Senior
Certificates) to the extent that the Master Servicer determines that any such
Advances previously made are not ultimately recoverable as described above. The
Master Servicer also will be obligated to make Advances, to the extent
recoverable out of Insurance Proceeds, Liquidation Proceeds or otherwise, in
respect of certain taxes and insurance premiums not paid by Mortgagors on a
timely basis. Funds so advanced are reimbursable to the Master Servicer to the
extent permitted by the Agreement. If specified in the related Prospectus
Supplement, the obligations of the Master Servicer to make advances may be
supported by a cash advance reserve fund, a surety bond or other arrangement,
in each case as described in such Prospectus Supplement.
The Master Servicer or Sub-Servicer may enter into an agreement (a "Support
Agreement") with a Support Servicer pursuant to which the Support Servicer
agrees to provide funds on behalf of the Master Servicer or Sub-Servicer in
connection with the obligation of the Master Servicer or Sub-Servicer, as the
case may be, to make Advances. The Support Agreement will be delivered to the
Trustee and the Trustee will be authorized to accept a substitute Support
Agreement in exchange for an original Support Agreement, provided that such
substitution of the Support Agreement will not adversely affect the rating or
ratings assigned to the Certificates by such Rating Agency or Agencies.
Unless otherwise provided in the Prospectus Supplement, in the event the
Master Servicer, a Sub-Servicer or a Support Servicer fails to make an Advance,
the Trustee will be obligated to make such Advance in its capacity as successor
servicer. If the Trustee makes such an Advance, it will be entitled to be
reimbursed for such Advance to the same extent and degree as the Master
Servicer, a Sub-Servicer or a Support Servicer is entitled to be reimbursed for
Advances. See "Description of the Certificates--Distribution on Certificates"
herein.
REPORTS TO CERTIFICATEHOLDERS
Prior to or concurrently with each distribution on a Distribution Date and
except as otherwise set forth in an applicable Prospectus Supplement, the
Master Servicer or the Trustee will furnish to each Certificateholder of record
of the related Series a statement setting forth, to the extent applicable to
such Series of Certificates, among other things:
(i) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and if so
specified in the related Prospectus Supplement, prepayment penalties
included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the Subordinated
Certificateholders on such Distribution Date, and (b) withdrawn from the
Reserve Fund, if any, that is included in the amounts distributed to the
Senior Certificateholders;
(v) the outstanding principal balance or notional principal balance of
such class after giving effect to the distribution of principal on such
Distribution Date;
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(vi) the percentage of principal payments on the Mortgage Loans
(excluding prepayments), if any, which such class will be entitled to
receive on the following Distribution Date;
(vii) the percentage of Principal Prepayments on the Mortgage Loans, if
any, which such class will be entitled to receive on the following
Distribution Date;
(viii) the related amount of the servicing compensation retained or
withdrawn from the Certificate Account by the Master Servicer, and the
amount of additional servicing compensation received by the Master Servicer
attributable to penalties, fees, excess Liquidation Proceeds and other
similar charges and items;
(ix) the number and aggregate principal balances of Mortgage Loans (A)
delinquent (exclusive of Mortgage Loans in foreclosure) (1) 1 to 30 days,
(2) 31 to 60 days, (3) 61 to 90 days and (4) 91 or more days and (B) in
foreclosure and delinquent (1) 1 to 30 days, (2) 31 to 60 days, (3) 61 to
90 days and (4) 91 or more days, as of the close of business on the last
day of the calendar month preceding such Distribution Date;
(x) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure, and if such real estate secured a
Multifamily Loan, such additional information as may be specified in the
related Prospectus Supplement;
(xi) if a class is entitled only to a specified portion of payments of
interest on the Mortgage Loans in the related Mortgage Pool, the Pass-
Through Rate, if adjusted from the date of the last statement, of the
Mortgage Loans expected to be applicable to the next distribution to such
class;
(xii) if applicable, the amount remaining in any Reserve Account at the
close of business on the Distribution Date;
(xiii) the Pass-Through Rate as of the day prior to the immediately
preceding Distribution Date; and
(xiv) any amounts remaining under letters of credit, pool policies or
other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Certificate of the relevant class having the Percentage
Interest specified in the related Prospectus Supplement. The report to
Certificateholders for any Series of Certificates may include additional or
other information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Certificateholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) 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 customary information as may be deemed necessary or
desirable for Certificateholders to prepare their tax returns.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes of a
Series of Certificates or with respect to the Mortgage Assets in the related
Trust Fund. Credit enhancement may be in the form of a limited financial
guaranty policy issued by an entity named in the related Prospectus Supplement,
the subordination of one or more classes of the Certificates of such Series,
the establishment of one or more reserve accounts, the use of a cross-support
feature, use of a mortgage pool insurance policy, bankruptcy bond, special
hazard insurance policy, surety bond, letter of credit, guaranteed investment
contract or another method of credit enhancement described in the related
Prospectus Supplement, or any combination of the
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foregoing. Unless otherwise specified in the related Prospectus Supplement, any
credit enhancement will not provide protection against all risks of loss and
will not guarantee repayment of the entire principal balance of the
Certificates and interest thereon. If losses occur which exceed the amount
covered by credit enhancement or which are not covered by the credit
enhancement, Certificateholders will bear their allocable share of
deficiencies.
SUBORDINATION
If so specified in the related Prospectus Supplement, protection afforded to
holders of one or more classes of Certificates of a Series (the "Subordinated
Certificates") by means of the subordination feature will be accomplished by
the preferential right of holders of one or more other classes of such Series
(the "Senior Certificates") to distributions in respect of scheduled principal,
Principal Prepayments, interest or any combination thereof that otherwise would
have been payable to holders of Subordinated Certificates under the
circumstances and to the extent specified in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, protection may also be
afforded to the holders of Senior Certificates of a Series by: (i) reducing the
ownership interest of the related Subordinated Certificates; (ii) a combination
of the immediately preceding sentence and clause (i) above; or (iii) as
otherwise described in the related Prospectus Supplement. If specified in the
related Prospectus Supplement, delays in receipt of scheduled payments on the
Mortgage Loans and losses on defaulted Mortgage Loans will be borne first by
the various classes of Subordinated Certificates and thereafter by the various
classes of Senior Certificates, in each case under the circumstances and
subject to the limitations specified in such related Prospectus Supplement. The
aggregate distributions in respect of delinquent payments on the Mortgage Loans
over the lives of the Certificates or at any time, the aggregate losses in
respect of defaulted Mortgage Loans which must be borne by the Subordinated
Certificates by virtue of subordination and the amount of the distributions
otherwise distributable to the Subordinated Certificateholders that will be
distributable to Senior Certificateholders on any Distribution Date may be
limited as specified in the related Prospectus Supplement. If aggregate
distributions in respect of delinquent payments on the Mortgage Loans or
aggregate losses in respect of such Mortgage Loans were to exceed an amount
specified in the related Prospectus Supplement, holders of Senior Certificates
would experience losses on the Certificates.
In addition to or in lieu of the foregoing, if so specified in the related
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Distribution Date may instead be
deposited into one or more Reserve Accounts established with the Trustee. If so
specified in the related Prospectus Supplement, such deposits may be made on
each Distribution Date, for specified periods or until the balance in the
Reserve Account has reached a specified amount and, following payments from the
Reserve Account to holders of Senior Certificates or otherwise, thereafter to
the extent necessary to restore the balance in the Reserve Account to required
levels, in each case as specified in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, amounts on deposit in the
Reserve Account may be released to the holders of the class of Certificates
specified in such Prospectus Supplement at the times and under the
circumstances specified in such Prospectus Supplement.
If specified in the related Prospectus Supplement, various classes of Senior
Certificates and Subordinated Certificates may themselves be subordinate in
their right to receive certain distributions to other classes of Senior and
Subordinated Certificates, respectively, through a cross support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes
(i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the related Prospectus
Supplement. As between classes of Subordinated Certificates, payments to
holders of Senior Certificates on account of delinquencies or losses and
payments to any Reserve Account will be allocated as specified in the related
Prospectus Supplement.
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MORTGAGE POOL INSURANCE POLICIES
If specified in the related Prospectus Supplement related to a Mortgage Pool
of Single Family Loans, a separate mortgage pool insurance policy ("Mortgage
Pool Insurance Policy") will be obtained for the Mortgage Pool and issued by
the insurer (the "Pool Insurer") named in such Prospectus Supplement. Each
Mortgage Pool Insurance Policy will, subject to the limitations described
below, cover loss by reason of default in payment on Single Family Loans in the
Mortgage Pool in an amount equal to a percentage specified in such Prospectus
Supplement of the aggregate principal balance of such Mortgage Loans on the
Cut-off Date which are not covered as to their entire outstanding principal
balances by Primary Mortgage Insurance Policies. As more fully described below,
the Master Servicer will present claims thereunder to the Pool Insurer on
behalf of itself, the Trustee and the holders of the Certificates. The Mortgage
Pool Insurance Policies, however, are not blanket policies against loss, since
claims thereunder may only be made respecting particular defaulted Mortgage
Loans and only upon satisfaction of certain conditions precedent described
below. Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Pool Insurance Policies will not cover losses due to a failure to pay
or denial of a claim under a Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool Insurance Policy will provide that no claims may be validly
presented unless (i) any required Primary Mortgage Insurance Policy is in
effect for the defaulted Mortgage Loan and a claim thereunder has been
submitted and settled; (ii) hazard insurance on the related Mortgaged Property
has been kept in force and real estate taxes and other protection and
preservation expenses have been paid; (iii) if there has been physical loss or
damage to the Mortgaged Property, it has been restored to its physical
condition (reasonable wear and tear excepted) at the time of issuance of the
policy; and (iv) the insured has acquired good and merchantable title to the
Mortgaged Property free and clear of liens except certain permitted
encumbrances. Upon satisfaction of these conditions, the Pool Insurer will have
the option either (a) to purchase the property securing the defaulted Mortgage
Loan at a price equal to the principal balance thereof plus accrued and unpaid
interest at the Mortgage Rate to the date of purchase and certain expenses
incurred by the Master Servicer on behalf of the Trustee and
Certificateholders, or (b) to pay the amount by which the sum of the principal
balance of the defaulted Mortgage Loan plus accrued and unpaid interest at the
Mortgage Rate to the date of payment of the claim and the aforementioned
expenses exceeds the proceeds received from an approved sale of the Mortgaged
Property, in either case net of certain amounts paid or assumed to have been
paid under the related Primary Mortgage Insurance Policy. If any property
securing a defaulted Mortgage Loan is damaged and proceeds, if any, from the
related hazard insurance policy or the applicable Special Hazard Insurance
Policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the Mortgage Pool Insurance Policy, the
Master Servicer will not be required to expend its own funds to restore the
damaged property unless it determines that (i) such restoration will increase
the proceeds to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) such expenses
will be recoverable by it through proceeds of the sale of the property or
proceeds of the related Mortgage Pool Insurance Policy or any related Primary
Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, no Mortgage
Pool Insurance Policy will insure (and many Primary Mortgage Insurance Policies
do not insure) against loss sustained by reason of a default arising from,
among other things, (i) fraud or negligence in the origination or servicing of
a Mortgage Loan, including misrepresentation by the Mortgagor, the originator
or persons involved in the origination thereof, or (ii) failure to construct a
Mortgaged Property in accordance with plans and specifications. A failure of
coverage attributable to one of the foregoing events might result in a breach
of the related Seller's representations described above and, in such event,
might give rise to an obligation on the part of such Seller to purchase the
defaulted Mortgage Loan if the breach cannot be cured by such Seller. No
Mortgage Pool Insurance Policy will cover (and many Primary Mortgage Insurance
Policies do not cover) a claim in respect of a defaulted Mortgage Loan
occurring when the servicer of such Mortgage Loan, at the time of default or
thereafter, was not approved by the applicable insurer.
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Unless otherwise specified in the related Prospectus Supplement, the original
amount of coverage under each Mortgage Pool Insurance Policy will be reduced
over the life of the related Certificates by the aggregate dollar amount of
claims paid less the aggregate of the net amounts realized by the Pool Insurer
upon disposition of all foreclosed properties. The amount of claims paid will
include certain expenses incurred by the Master Servicer as well as accrued
interest on delinquent Mortgage Loans to the date of payment of the claim,
unless otherwise specified in the related Prospectus Supplement. Accordingly,
if aggregate net claims paid under any Mortgage Pool Insurance Policy reach the
original policy limit, coverage under that Mortgage Pool Insurance Policy will
be exhausted and any further losses will be borne by the Certificateholders.
The terms of any pool insurance policy relating to a pool of Contracts will
be described in the related Prospectus Supplement.
FHA INSURANCE; VA GUARANTEES
Single Family Loans designated in the related Prospectus Supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. Such Mortgage Loans will be insured
under various FHA programs including the standard FHA 203(b) program to finance
the acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. Single Family Loans insured
by the FHA generally require a minimum down payment of approximately 5% of the
original principal amount of the loan. No FHA-insured Single Family Loan
relating to a Series may have an interest rate or original principal amount
exceeding the applicable FHA limits at the time of origination of such loan.
The insurance premiums for Single Family Loans insured by the FHA are
collected by lenders approved by the Department of Housing and Urban
Development ("HUD") or by the Master Servicer or any Sub-Servicers and are paid
to the FHA. The regulations governing FHA single-family mortgage insurance
programs provide that insurance benefits are payable either upon foreclosure
(or other acquisition of possession) and conveyance of the mortgaged premises
to HUD or upon assignment of the defaulted Mortgage Loan to HUD. With respect
to a defaulted FHA-insured Single Family Loan, the Master Servicer or any Sub-
Servicer is limited in its ability to initiate foreclosure proceedings. When it
is determined, either by the Master Servicer or any Sub-Servicer or HUD, that
default was caused by circumstances beyond the mortgagor's control, the Master
Servicer or any Sub-Servicer is expected to make an effort to avoid foreclosure
by entering, if feasible, into one of a number of available forms of
forbearance plans with the mortgagor. Such plans may involve the reduction or
suspension of regular mortgage payments for a specified period, with such
payments to be made up on or before the maturity date of the mortgage, or the
recasting of payments due under the mortgage up to or beyond the maturity date.
In addition, when a default caused by such circumstances is accompanied by
certain other criteria, HUD may provide relief by making payments to the Master
Servicer or any Sub-Servicer in partial or full satisfaction of amounts due
under the Mortgage Loan (which payments are to be repaid by the mortgagor to
HUD) or by accepting assignment of the loan from the Master Servicer or any
Sub-Servicer. With certain exceptions, at least three full monthly installments
must be due and unpaid under the Mortgage Loan, and HUD must have rejected any
request for relief from the mortgagor before the Master Servicer or any Sub-
Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The Master Servicer of any Sub-Servicer of each FHA-
insured Single Family Loan will be obligated to purchase any such debenture
issued in satisfaction of such Mortgage Loan upon default for an amount equal
to the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer or Sub-Servicer for certain
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costs and expenses and to deduct certain amounts received or retained by the
Master Servicer or Sub-Servicer after default. When entitlement to insurance
benefits results from foreclosure (or other acquisition of possession) and
conveyance to HUD, the Master Servicer or Sub-Servicer is compensated for no
more than two-thirds of its foreclosure costs, and is compensated for interest
accrued and unpaid prior to such date but in general only to the extent it was
allowed pursuant to a forbearance plan approved by HUD. When entitlement to
insurance benefits results from assignment of the Mortgage Loan to HUD, the
insurance payment includes full compensation for interest accrued and unpaid to
the assignment date. The insurance payment itself, upon foreclosure of an FHA-
insured Single Family Loan, bears interest from a date 30 days after the
mortgagor's first uncorrected failure to perform any obligation to make any
payment due under the Mortgage and, upon assignment, from the date of
assignment to the date of payment of the claim, in each case at the same
interest rate as the applicable HUD debenture interest rate as described above.
Single Family Loans designated in the related Prospectus Supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended (a "VA Guaranty Policy"). The
Serviceman's Readjustment Act of 1944, as amended, permits a veteran (or in
certain instances the spouse of a veteran) to obtain a mortgage loan guarantee
by the VA covering mortgage financing of the purchase of a one- to four-family
dwelling unit at interest rates permitted by the VA. The program has no
mortgage loan limits, requires no down payment from the purchaser and permits
the guarantee of mortgage loans of up to 30 years' duration. However, no Single
Family Loan guaranteed by the VA will have an original principal amount greater
than five times the partial VA guarantee for such Mortgage Loan.
The maximum guarantee that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. As
of January 1, 1990, the maximum guarantee that may be issued by the VA under a
VA guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $46,000. The liability on
the guarantee is reduced or increased pro rata with any reduction or increase
in the amount of indebtedness, but in no event will the amount payable on the
guarantee exceed the amount of the original guarantee. The VA may, at its
option and without regard to the guarantee, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Single Family Loan, the Master
Servicer or Sub-Servicer is, absent exceptional circumstances, authorized to
announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guarantee is submitted after
liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the VA-
insured Single Family Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guarantee will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the Mortgaged Property. The amount payable under the guarantee
may in no event exceed the amount of the original guarantee.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special Hazard
Insurance Policy will be obtained for the Mortgage Pool and will be issued by
the insurer (the "Special Hazard Insurer") named in such Prospectus Supplement.
Each Special Hazard Insurance Policy will, subject to limitations described
below, protect holders of the related Certificates from (i) loss by reason of
damage to Mortgaged Properties caused by certain hazards (including earthquakes
and, to a limited extent, tidal waves and related water damage or as otherwise
specified in the related Prospectus Supplement) not insured against under the
standard form of hazard insurance policy for the respective states in which the
Mortgaged Properties are
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located or under a flood insurance policy if the Mortgaged Property is located
in a federally designated flood area, and (ii) loss caused by reason of the
application of the coinsurance clause contained in hazard insurance policies.
See "The Pooling and Servicing Agreement--Hazard Insurance". Each Special
Hazard Insurance Policy will not cover losses occasioned by fraud or conversion
by the Trustee or Master Servicer, war, insurrection, civil war, certain
governmental action, errors in design, faulty workmanship or materials (except
under certain circumstances), nuclear or chemical reaction, flood (if the
Mortgaged Property is located in a federally designated flood area), nuclear or
chemical contamination and certain other risks. The amount of coverage under
any Special Hazard Insurance Policy will be specified in the related Prospectus
Supplement. Each Special Hazard Insurance Policy will provide that no claim may
be paid unless hazard and, if applicable, flood insurance on the property
securing the Mortgage Loan have been kept in force and other protection and
preservation expenses have been paid.
Subject to the foregoing limitations, and unless otherwise specified in the
related Prospectus Supplement, each Special Hazard Insurance Policy will
provide that where there has been damage to property securing a foreclosed
Mortgage Loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer,
the Special Hazard Insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the property to the
Special Hazard Insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and certain
expenses incurred by the Master Servicer with respect to such property. If the
unpaid principal balance of a Mortgage Loan plus accrued interest and certain
expenses is paid by the Special Hazard Insurer, the amount of further coverage
under the related Special Hazard Insurance Policy will be reduced by such
amount less any net proceeds from the sale of the property. Any amount paid as
the cost of repair of the property will further reduce coverage by such amount.
So long as a Mortgage Pool Insurance Policy remains in effect, the payment by
the Special Hazard Insurer of the cost of repair or of the unpaid principal
balance of the related Mortgage Loan plus accrued interest and certain expenses
will not affect the total insurance proceeds paid to Certificateholders, but
will affect the relative amounts of coverage remaining under the related
Special Hazard Insurance Policy and Mortgage Pool Insurance Policy.
Since each Special Hazard Insurance Policy will be designed to permit full
recovery under the Mortgage Pool Insurance Policy in circumstances in which
such recoveries would otherwise be unavailable because property has been
damaged by a cause not insured against by a standard hazard policy and thus
would not be restored, each Agreement will provide that, if the related
Mortgage Pool Insurance Policy shall have been terminated or been exhausted
through payment of claims, unless otherwise specified in the related Prospectus
Supplement, the Master Servicer will be under no further obligation to maintain
such Special Hazard Insurance Policy.
To the extent specified in an applicable Prospectus Supplement, the Master
Servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each nationally recognized rating agency rating the
Certificates of the related Series in a special trust account to provide
protection in lieu of or in addition to that provided by a Special Hazard
Insurance Policy. The amount of any Special Hazard Insurance Policy or of the
deposit to the special trust account relating to such Certificates in lieu
thereof may be reduced so long as any such reduction will not result in a
downgrading of the rating of such Certificates by any such rating agency.
The terms of any Special Hazard Insurance Policy relating to a pool of
Contracts will be described in the related Prospectus Supplement.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a bankruptcy bond
("Bankruptcy Bond") for proceedings under the federal Bankruptcy Code will be
issued by an insurer named in such Prospectus
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Supplement. Each Bankruptcy Bond will cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of principal and interest
on a Mortgage Loan or a reduction by such court of the principal amount of a
Mortgage Loan and will cover certain unpaid interest on the amount of such a
principal reduction from the date of the filing of a bankruptcy petition. The
required amount of coverage under each Bankruptcy Bond will be set forth in the
related Prospectus Supplement. Coverage under a Bankruptcy Bond may be
cancelled or reduced by the Master Servicer if such cancellation or reduction
would not adversely affect the then current rating or ratings of the related
Certificates. See "Certain Legal Aspects of the Mortgage Loans--Anti-Deficiency
Legislation and Other Limitations on Lenders".
To the extent specified in an applicable Prospectus Supplement, the Master
Servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each nationally recognized rating agency rating the
Certificates of the related Series in a special trust account to provide
protection in lieu of or in addition to that provided by a Bankruptcy Bond. The
amount of any Bankruptcy Bond or of the deposit to the special trust account
relating to such Certificates in lieu thereof may be reduced so long as any
such reduction will not result in a downgrading of the rating of such
Certificates by any such rating agency.
The terms of any Bankruptcy Bond relating to a pool of Contracts will be
described in the related Prospectus Supplement.
FHA INSURANCE ON MULTIFAMILY LOANS
There are two primary FHA insurance programs that are available for
Multifamily Loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD
to insure mortgage loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of such mortgage loans made under
Sections 221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer.
Generally the term of such a mortgage loan may be up to 40 years and the ratio
of loan amount to property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans made
for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan-to-value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a
project.
FHA insurance is generally payable in cash or, at the option of the
mortgagee, in debentures. Such insurance does not cover 100% of the mortgage
loan but is instead subject to certain deductions and certain losses of
interest from the date of the default.
RESERVE ACCOUNTS
If so specified in the related Prospectus Supplement, credit support with
respect to a Series of Certificates may be provided by the establishment and
maintenance with the Trustee for such Series of Certificates, in trust, of one
or more Reserve Accounts for such Series. The related Prospectus Supplement
will specify whether or not such Reserve Accounts will be included in the Trust
Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit therein of
cash, U.S. Treasury securities, instruments evidencing ownership of principal
or interest payments thereon, letters of credit, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
related Prospectus Supplement, (ii) by the deposit therein from time to time of
certain amounts, as specified in the related Prospectus Supplement to which the
Subordinate Certificateholders, if any, would otherwise be entitled or (iii) in
such other manner as may be specified in the related Prospectus Supplement.
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Any amounts on deposit in the Reserve Account and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in Permitted
Investments which, unless otherwise specified in the related Prospectus
Supplement, will include obligations of the United States and certain agencies
thereof, certificates of deposit, certain commercial paper, time deposits and
bankers acceptances sold by eligible commercial banks and certain repurchase
agreements of United States government securities with eligible commercial
banks. If a letter of credit is deposited with the Trustee, such letter of
credit will be irrevocable. Unless otherwise specified in the related
Prospectus Supplement, any instrument deposited therein will name the Trustee,
in its capacity as trustee for the holders of the Certificates, as beneficiary
and will be issued by an entity acceptable to each rating agency that rates the
Certificates. Additional information with respect to such instruments deposited
in the Reserve Accounts will be set forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Account for distribution to the
holders of Certificates for the purposes, in the manner and at the times
specified in the related Prospectus Supplement.
CROSS SUPPORT
If specified in the related Prospectus Supplement, the beneficial ownership
of separate groups of assets included in a Trust Fund may be evidenced by
separate classes of the related Series of Certificates. In such case, credit
support may be provided by a cross support feature which requires that
distributions be made with respect to Certificates evidencing a beneficial
ownership interest in other asset groups within the same Trust Fund. The
related Prospectus Supplement for a Series which includes a cross support
feature will describe the manner and conditions for applying such cross support
feature.
If specified in the related Prospectus Supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
related Trust Funds. If applicable, the related Prospectus Supplement will
identify the Trust Funds to which such credit support relates and the manner of
determining the amount of the coverage provided thereby and of the application
of such coverage to the identified Trust Funds.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust Fund may also
include insurance, guaranties, surety bonds, letters of credit or similar
arrangements for the purpose of (i) maintaining timely payments or providing
additional protection against losses on the assets included in such Trust Fund,
(ii) paying administrative expenses or (iii) establishing a minimum
reinvestment rate on the payments made in respect of such assets or principal
payment rate on such assets. Such arrangements may include agreements under
which Certificateholders are entitled to receive amounts deposited in various
accounts held by the Trustee upon the terms specified in such Prospectus
Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Certificates will be
affected primarily by the amount and timing of principal payments received on
or in respect of the Mortgage Assets included in the related Trust Fund. The
original terms to maturity of the Mortgage Loans in a given Mortgage Pool will
vary depending upon the type of Mortgage Loans included therein. Each
Prospectus Supplement will contain information with respect to the type and
maturities of the Mortgage Loans in the related Mortgage Pool. Unless otherwise
specified in the related Prospectus Supplement, Single Family Loans and
Contracts may be prepaid without penalty in full or in part at any time.
Multifamily Loans may prohibit prepayment for a specified period after
origination, may prohibit partial prepayments entirely, and may require the
payment of a prepayment penalty upon prepayment in full or in part. The
prepayment experience on the Mortgage Loans in a Mortgage Pool will affect the
life of the related Series of Certificates.
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A number of factors, including homeowner mobility, economic conditions, the
presence and enforceability of due-on-sale clauses, mortgage market interest
rates and the availability of mortgage funds, may affect prepayment experience
of Single Family Loans and Contracts. Some of these factors, and other factors,
including limitations on prepayment and the relative tax benefits associated
with the ownership of income-producing real property, may affect the prepayment
of Multifamily Loans.
Unless otherwise provided in the related Prospectus Supplement, all
conventional Single Family Loans and Contracts will contain due-on-sale
provisions permitting the mortgagee or holder of the Contract to accelerate the
maturity of the loan or Contract upon sale or certain transfers by the
mortgagor or obligor of the underlying Mortgaged Property. As described in the
related Prospectus Supplement, conventional Multifamily Loans may contain due-
on-sale provisions, due-on-encumbrance provisions, or both. Mortgage Loans
insured by the FHA, and Single Family Loans and Contracts partially guaranteed
by the VA, are assumable with the consent of the FHA and the VA, respectively.
Thus, the rate of prepayments on such Mortgage Loans may be lower than that of
conventional Mortgage Loans bearing comparable interest rates. Unless otherwise
provided in the related Prospectus Supplement, the Master Servicer generally
will enforce any due-on-sale or due-on-encumbrance clause, to the extent it has
knowledge of the conveyance or further encumbrance or the proposed conveyance
or proposed further encumbrance of the Mortgaged Property and reasonably
believes that it is entitled to do so under applicable law; provided, however,
that the Master Servicer will not take any enforcement action that would impair
or threaten to impair any recovery under any related insurance policy. See "The
Pooling and Servicing Agreement--Collection Procedures" and "Certain Legal
Aspects of the Mortgage Loans" for a description of certain provisions of each
Agreement and certain legal developments that may affect the prepayment
experience on the Mortgage Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Mortgage Rates borne by the Mortgage Loans, such
Mortgage Loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above such Mortgage Rates. Conversely,
if prevailing interest rates rise appreciably above the Mortgage Rates borne by
the Mortgage Loans, such Mortgage Loans are likely to experience a lower
prepayment rate than if prevailing rates remain at or below such Mortgage
Rates. However, there can be no assurance that such will be the case. The rate
of prepayment on Multifamily Loans may also be affected by other factors,
including Mortgage Loan terms (e.g., the existence of lockout periods, due-on-
sale and due-on-encumbrance clauses and prepayment penalties), relative
economic conditions in the area where the Mortgaged Properties are located, the
quality of management of the Mortgaged Properties and possible changes in tax
laws.
When a full prepayment is made on a Single Family Loan, the Mortgagor is
charged interest on the principal amount of the Mortgage Loan so prepaid only
for the number of days in the month actually elapsed up to the date of the
prepayment rather than for a full month. Unless otherwise specified in the
related Prospectus Supplement, the effect of prepayments in full will be to
reduce the amount of interest passed through in the following month to holders
of Certificates because interest on the principal amount of any Mortgage Loan
so prepaid will be paid only to the date of prepayment. Partial prepayments in
a given month may be applied to the outstanding principal balances of the
Mortgage Loans so prepaid on the first day of the month of receipt or the month
following receipt. In the latter case, partial prepayments will not reduce the
amount of interest passed through in such month. Unless otherwise specified in
the related Prospectus Supplement, both full and partial prepayments will not
be passed through until the month following receipt. Prepayment penalties
collected with respect to Multifamily Loans will be distributed to the holders
of Certificates, or to other persons entitled thereto, as described in the
related Prospectus Supplement.
If the rate at which interest is passed through to the holders of
Certificates of a Series is calculated on a Mortgage Loan-by-Mortgage Loan
basis, disproportionate principal prepayments among Mortgage Loans with
different Mortgage Rates will affect the yield on such Certificates. In all
cases, the effective yield to Certificateholders will be slightly lower than
the yield otherwise produced by the applicable Pass-Through
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Rate and purchase price, because while interest will accrue on each Mortgage
Loan from the first day of the month (unless otherwise provided in the related
Prospectus Supplement), the distribution of such interest will not be made
earlier than the month following the month of accrual.
Under certain circumstances, the Master Servicer or the holders of the
residual interests in a REMIC may have the option to purchase the assets of a
Trust Fund thereby effecting earlier retirement of the related Series of
Certificates. See "The Pooling and Servicing Agreement--Termination; Optional
Termination".
Factors other than those identified herein and in the related Prospectus
Supplement could significantly affect principal prepayments at any time and
over the lives of the Certificates. The relative contribution of the various
factors affecting prepayment may also vary from time to time. There can be no
assurance as to the rate of payment of principal of the Mortgage Assets at any
time or over the lives of the Certificates.
The Prospectus Supplement relating to a Series of Certificates will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted
average lives and maturities of such Certificates.
In the event of the appointment of a receiver, bankruptcy trustee, debtor in
possession or similar entity (each, an "Insolvency Trustee") with respect to a
Seller due to its insolvency or if a Seller becomes a debtor under title 11 of
the United States Code (the "Bankruptcy Code") or any similar insolvency law,
such Insolvency Trustee may attempt to characterize the transfer of the related
Mortgage Loans from such Seller to the Depositor as a pledge to secure a
financing rather than as a sale. In the event that such attempt were
successful, such Insolvency Trustee might elect, among other remedies, to
accelerate payment of the related Certificates and liquidate such Mortgage
Loans, with each related Certificateholder entitled to receive its allocable
share of the principal balance thereof, together with such Certificateholder's
allocable share of interest thereon at the applicable Pass-Through Rate or
weighted average Strip Rate (as defined in the related Prospectus Supplement),
as the case may be, to the date of payment. In any such event, the related
Certificateholders might incur reinvestment losses with respect to principal
received and investment losses attendant to the liquidation of the Mortgage
Loans (and the resulting early retirement of the related Certificates). In
addition, certain delays in distributions might be experienced by such
Certificateholders in connection with any such insolvency proceedings.
THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of each Agreement which
are not described elsewhere in this Prospectus. The summary does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
the provisions of each Agreement. Where particular provisions or terms used in
the Agreements are referred to, such provisions or terms are as specified in
the Agreements.
ASSIGNMENT OF MORTGAGE ASSETS
Assignment of the Mortgage Loans. At the time of issuance of the Certificates
of a Series, the Depositor will cause the Mortgage Loans comprising the related
Trust Fund to be assigned to the Trustee, together with all principal and
interest received by or on behalf of the Depositor on or with respect to such
Mortgage Loans after the Cut-off Date, other than principal and interest due on
or before the Cut-off Date and other than any Retained Interest specified in
the related Prospectus Supplement. The Trustee will, concurrently with such
assignment, deliver the Certificates to the Depositor in exchange for the
Mortgage Loans. Each Mortgage Loan will be identified in a schedule appearing
as an exhibit to the related Agreement. Such schedule will include information
as to the outstanding principal balance of each Mortgage Loan after application
of payments due on the Cut-off Date, as well as information regarding the
Mortgage Rate or APR, the current scheduled monthly payment of principal and
interest, the maturity of the loan, the Loan-to-Value Ratio at origination and
certain other information.
In addition, the Depositor will deliver or cause to be delivered to the
Trustee (or to the custodian hereinafter referred to) as to each Mortgage Loan,
among other things, (i) the mortgage note or Contract
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endorsed without recourse in blank or to the order of the Trustee, (ii) in the
case of Single Family Loans or Multifamily Loans, the mortgage, deed of trust
or similar instrument (a "Mortgage") with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording office,
in which case the Depositor will deliver or cause to be delivered a copy of
such Mortgage together with a certificate that the original of such Mortgage
was delivered to such recording office), (iii) an assignment of the Mortgage or
Contract to the Trustee, which assignment will be in recordable form in the
case of a Mortgage assignment, and (iv) such other security documents as may be
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, (i) in the case of Single Family Loans or
Multifamily Loans, the Depositor will promptly cause the assignments of the
related loans to be recorded in the appropriate public office for real property
records, except in states in which, in the opinion of counsel acceptable to the
Trustee, such recording is not required to protect the Trustee's interest in
such loans against the claim of any subsequent transferee or any successor to
or creditor of the Depositor or the originator of such loans, and (ii) in the
case of Contracts, the Depositor will promptly make or cause to be made an
appropriate filing of a UCC-1 financing statement in the appropriate states to
give notice of the Trustee's ownership of the Contracts.
With respect to any Mortgage Loans which are Cooperative Loans, the Depositor
will cause to be delivered to the Trustee, the related original cooperative
note endorsed without recourse in blank or to the order of the Trustee, the
original security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate, related blank stock powers and any other document specified in the
related Prospectus Supplement. The Depositor will cause to be filed in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will review such
Mortgage Loan documents within the time period specified in the related
Prospectus Supplement after receipt thereof, and the Trustee will hold such
documents in trust for the benefit of the Certificateholders. Unless otherwise
specified in the related Prospectus Supplement, if any such document is found
to be missing or defective in any material respect, the Trustee (or such
custodian) will notify the Master Servicer and the Depositor, and the Master
Servicer will notify the related Seller. If the Seller cannot cure the omission
or defect within 45 days after receipt of such notice, the Seller will be
obligated to purchase the related Mortgage Loan from the Trustee at the
Purchase Price. There can be no assurance that a Seller will fulfill this
purchase obligation. Although the Master Servicer may be obligated to enforce
such obligation to the extent described above under "Mortgage Loan Program--
Representations by Sellers; Repurchases", neither the Master Servicer nor the
Depositor will be obligated to purchase such Mortgage Loan if the Seller
defaults on its purchase obligation, unless such breach also constitutes a
breach of the representations or warranties of the Master Servicer or the
Depositor, as the case may be. Unless otherwise specified in the related
Prospectus Supplement, this purchase obligation constitutes the sole remedy
available to the Certificateholders or the Trustee for omission of, or a
material defect in, a constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a custodial
agreement to maintain possession of and, if applicable, to review the documents
relating to the Mortgage Loans as agent of the Trustee.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation of
the Master Servicer which materially and adversely affects the interests of the
Certificateholders in a Mortgage Loan, the Master Servicer will be obligated
either to cure the breach in all material respects or to purchase the Mortgage
Loan at the Purchase Price. Unless otherwise specified in the related
Prospectus Supplement, this obligation to cure or purchase constitutes the sole
remedy available to the Certificateholders or the Trustee for such a breach of
representation by the Master Servicer.
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Notwithstanding the foregoing provisions, with respect to a Trust Fund for
which a REMIC election is to be made, unless the related Prospectus Supplement
otherwise provides, no purchase of a Mortgage Loan will be made if such
purchase would result in a prohibited transaction tax under the Code.
Assignment of Agency Securities. The Depositor will cause the Agency
Securities to be registered in the name of the Trustee or its nominee, and the
Trustee concurrently will execute, countersign and deliver the Certificates.
Each Agency Security will be identified in a schedule appearing as an exhibit
to the Agreement, which will specify as to each Agency Security the original
principal amount and outstanding principal balance as of the Cut-off Date, the
annual pass-through rate (if any) and the maturity date.
Assignment of Private Mortgage-Backed Securities. The Depositor will cause
Private Mortgage-Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated Private
Mortgage-Backed Securities. Unless otherwise specified in the related
Prospectus Supplement, the Trustee will not be in possession of or be assignee
of record of any underlying assets for a Private Mortgage-Backed Security. See
"The Trust Fund--Private Mortgage-Backed Securities" herein. Each Private
Mortgage-Backed Security will be identified in a schedule appearing as an
exhibit to the related Agreement which will specify the original principal
amount, outstanding principal balance as of the Cut-off Date, annual pass-
through rate or interest rate and maturity date and certain other pertinent
information for each Private Mortgage-Backed Security conveyed to the Trustee.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO CERTIFICATE ACCOUNT
Each Sub-Servicer servicing a Mortgage Loan pursuant to a Sub-Servicing
Agreement (as defined below under "--Sub-Servicing by Sellers") will establish
and maintain an account (the "Sub-Servicing Account") which meets the following
requirements and is otherwise acceptable to the Master Servicer. A Sub-
Servicing Account must be established with a Federal Home Loan Bank or with a
depository institution (including the Sub-Servicer itself) whose accounts are
insured by either the Bank Insurance Fund (the "BIF") of the FDIC or the
Savings Association Insurance Fund (as successor to the Federal Savings and
Loan Insurance Corporation ("SAIF")) of the FDIC. If a Sub-Servicing Account is
maintained at an institution that is a Federal Home Loan Bank or an FDIC-
insured institution and, in either case, the amount on deposit in the Sub-
Servicing Account exceeds the FDIC insurance coverage amount, then such excess
amount must be remitted to the Master Servicer within one business day of
receipt. In addition, the Sub-Servicer must maintain a separate account for
escrow and impound funds relating to the Mortgage Loans. Each Sub-Servicer is
required to deposit into its Sub-Servicing Account on a daily basis all amounts
described below under "--Sub-Servicing by Sellers" that are received by it in
respect of the Mortgage Loans, less its servicing or other compensation. On or
before the date specified in the Sub-Servicing Agreement, the Sub-Servicer will
remit or cause to be remitted to the Master Servicer or the Trustee all funds
held in the Sub-Servicing Account with respect to Mortgage Loans that are
required to be so remitted. The Sub-Servicer is also required to advance on the
scheduled date of remittance an amount corresponding to any monthly installment
of principal and interest, less its servicing or other compensation, on any
Mortgage Loan for which payment was not received from the mortgagor. Unless
otherwise specified in the related Prospectus Supplement, this obligation of
the Sub-Servicer to advance continues up to and including the first of the
month following the date on which the related Mortgaged Property is sold at a
foreclosure sale or is acquired on behalf of the Certificateholders by deed in
lieu of foreclosure, or until the related Mortgage Loan is liquidated.
The Master Servicer will establish and maintain or cause to be established
and maintained with respect to the related Trust Fund a separate account or
accounts for the collection of payments on the related Mortgage Assets in the
Trust Fund (the "Certificate Account"), which unless otherwise specified in the
related Prospectus Supplement, must be either (i) maintained with a depository
institution the debt obligations of which (or in the case of a depository
institution that is the principal subsidiary of a holding company, the
obligations of which) are rated in one of the two highest rating categories by
the nationally recognized statistical rating organization(s) that rated one or
more classes of the related Series of Certificates (each, a "Rating Agency"),
(ii) an account or accounts the deposits in which are fully insured by either
the
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BIF or SAIF, (iii) an account or accounts the deposits in which are insured by
the BIF or SAIF (to the limits established by the FDIC), and the uninsured
deposits in which are otherwise secured such that, as evidenced by an opinion
of counsel, the Certificateholders have a claim with respect to the funds in
the Certificate Account or a perfected first priority security interest against
any collateral securing such funds that is superior to the claims of any other
depositors or general creditors of the depository institution with which the
Certificate Account is maintained, or (iv) an account or accounts otherwise
acceptable to each Rating Agency. The collateral eligible to secure amounts in
the Certificate Account is limited to United States government securities and
other high-quality investments ("Permitted Investments"). A Certificate Account
may be maintained as an interest bearing account or the funds held therein may
be invested pending each succeeding Distribution Date in Permitted Investments.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer or its designee will be entitled to receive any such interest or other
income earned on funds in the Certificate Account as additional compensation
and will be obligated to deposit in the Certificate Account the amount of any
loss immediately as realized. The Certificate Account may be maintained with
the Master Servicer or with a depository institution that is an affiliate of
the Master Servicer, provided it meets the standards set forth above.
The Master Servicer will deposit or cause to be deposited in the Certificate
Account for each Trust Fund on a daily basis, to the extent applicable and
unless otherwise specified in the related Prospectus Supplement and provided in
the Agreement, the following payments and collections received or advances made
by or on behalf of it subsequent to the Cut-off Date (other than payments due
on or before the Cut-off Date and exclusive of any amounts representing
Retained Interest):
(i) all payments on account of principal, including Principal Prepayments
and, if specified in the related Prospectus Supplement, prepayment
penalties, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, net of
applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items ("Insured Expenses") incurred, and
unreimbursed advances made, by the related Sub-Servicer, if any) of the
hazard insurance policies and any Primary Mortgage Insurance Policies, to
the extent such proceeds are not applied to the restoration of the property
or released to the Mortgagor in accordance with the Master Servicer's
normal servicing procedures (collectively, "Insurance Proceeds") and all
other cash amounts (net of unreimbursed expenses incurred in connection
with liquidation or foreclosure ("Liquidation Expenses") and unreimbursed
advances made, by the related Sub-Servicer, if any) received and retained
in connection with the liquidation of defaulted Mortgage Loans, by
foreclosure or otherwise ("Liquidation Proceeds"), together with any net
proceeds received on a monthly basis with respect to any properties
acquired on behalf of the Certificateholders by foreclosure or deed in lieu
of foreclosure;
(iv) all proceeds of any Mortgage Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any Sub-Servicer or any
Seller as described under "Mortgage Loan Program--Representations by
Sellers; Repurchases" or "--Assignment of Mortgage Assets" above and all
proceeds of any Mortgage Loan repurchased as described under "--
Termination; Optional Termination" below;
(v) all payments required to be deposited in the Certificate Account with
respect to any deductible clause in any blanket insurance policy described
under "--Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Certificate Account; and
(vii) all other amounts required to be deposited in the Certificate
Account pursuant to the Agreement.
SUB-SERVICING BY SELLERS
Each Seller of a Mortgage Loan or any other servicing entity may act as the
Sub-Servicer for such Mortgage Loan pursuant to an agreement (each, a "Sub-
Servicing Agreement"), which will not contain any
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terms inconsistent with the related Agreement. While each Sub-Servicing
Agreement will be a contract solely between the Master Servicer and the Sub-
Servicer, the Agreement pursuant to which a Series of Certificates is issued
will provide that, if for any reason the Master Servicer for such Series of
Certificates is no longer the Master Servicer of the related Mortgage Loans,
the Trustee or any successor Master Servicer must recognize the Sub-Servicer's
rights and obligations under such Sub-Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate its
servicing obligations to third-party servicers, but such Sub-Servicer will
remain obligated under the related Sub-Servicing Agreement. Each Sub-Servicer
will be required to perform the customary functions of a servicer of mortgage
loans. Such functions generally include collecting payments from mortgagors or
obligors and remitting such collections to the Master Servicer; maintaining
hazard insurance policies as described herein and in any related Prospectus
Supplement, and filing and settling claims thereunder, subject in certain cases
to the right of the Master Servicer to approve in advance any such settlement;
maintaining escrow or impoundment accounts of mortgagors or obligors for
payment of taxes, insurance and other items required to be paid by the
mortgagor or obligor pursuant to the related Mortgage Loan; processing
assumptions or substitutions, although, unless otherwise specified in the
related Prospectus Supplement, the Master Servicer is generally required to
exercise due-on-sale clauses to the extent such exercise is permitted by law
and would not adversely affect insurance coverage; attempting to cure
delinquencies; supervising foreclosures; inspecting and managing Mortgaged
Properties under certain circumstances; maintaining accounting records relating
to the Mortgage Loans; and, to the extent specified in the related Prospectus
Supplement, maintaining additional insurance policies or credit support
instruments and filing and settling claims thereunder. A Sub-Servicer will also
be obligated to make advances in respect of delinquent installments of
principal and interest on Mortgage Loans, as described more fully above under
"--Payments on Mortgage Loans; Deposits to Certificate Account", and in respect
of certain taxes and insurance premiums not paid on a timely basis by
mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be entitled
to a monthly servicing fee (to the extent the scheduled payment on the related
Mortgage Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer is also entitled to collect and
retain, as part of its servicing compensation, any prepayment or late charges
provided in the Mortgage Note or related instruments. Each Sub-Servicer will be
reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under the
Agreement. The Master Servicer may purchase the servicing of Mortgage Loans if
the Sub-Servicer elects to release the servicing of such Mortgage Loans to the
Master Servicer. See "--Servicing and Other Compensation and Payment of
Expenses".
Each Sub-Servicer may be required to agree to indemnify the Master Servicer
for any liability or obligation sustained by the Master Servicer in connection
with any act or failure to act by the Sub-Servicer in its servicing capacity.
Each Sub-Servicer will be required to maintain a fidelity bond and an errors
and omissions policy with respect to its officers, employees and other persons
acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Mortgage Loan pursuant to
the terms of the Sub-Servicing Agreement for the entire term of such Mortgage
Loan, unless the Sub-Servicing Agreement is earlier terminated by the Master
Servicer or unless servicing is released to the Master Servicer. The Master
Servicer may terminate a Sub-Servicing Agreement without cause, upon written
notice to the Sub-Servicer in the manner specified in such Sub-Servicing
Agreement.
The Master Servicer may agree with a Sub-Servicer to amend a Sub-Servicing
Agreement or, upon termination of the Sub-Servicing Agreement, the Master
Servicer may act as servicer of the related Mortgage Loans or enter into new
Sub-Servicing Agreements with other Sub-Servicers. If the Master Servicer acts
as servicer, it will not assume liability for the representations and
warranties of the Sub-Servicer which it replaces. Each Sub-Servicer must be a
Seller or meet the standards for becoming a Seller or have such servicing
experience as to be otherwise satisfactory to the Master Servicer and the
Depositor. The Master
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Servicer will make reasonable efforts to have the new Sub-Servicer assume
liability for the representations and warranties of the terminated Sub-
Servicer, but no assurance can be given that such an assumption will occur. In
the event of such an assumption, the Master Servicer may in the exercise of its
business judgment release the terminated Sub-Servicer from liability in respect
of such representations and warranties. Any amendments to a Sub-Servicing
Agreement or new Sub-Servicing Agreements may contain provisions different from
those which are in effect in the original Sub-Servicing Agreement. However,
each Agreement will provide that any such amendment or new agreement may not be
inconsistent with or violate such Agreement.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers, will make
reasonable efforts to collect all payments called for under the Mortgage Loans
and will, consistent with each Agreement and any Mortgage Pool Insurance
Policy, Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty Policy
and Bankruptcy Bond or alternative arrangements, follow such collection
procedures as are customary with respect to mortgage loans that are comparable
to the Mortgage Loans. Consistent with the above, the Master Servicer may, in
its discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Mortgage Loan and (ii) to the extent not inconsistent with
the coverage of such Mortgage Loan by a Mortgage Pool Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guaranty or Bankruptcy Bond or
alternative arrangements, if applicable, arrange with a Mortgagor a schedule
for the liquidation of delinquencies running for no more than 125 days after
the applicable due date for each payment. Both the Sub-Servicer and the Master
Servicer remain obligated to make advances during any period of such an
arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any case
in which property securing a conventional Mortgage Loan has been, or is about
to be, conveyed by the mortgagor or obligor, the Master Servicer will, to the
extent it has knowledge of such conveyance or proposed conveyance, exercise or
cause to be exercised its rights to accelerate the maturity of such Mortgage
Loan under any due-on-sale clause applicable thereto, but only if the exercise
of such rights is permitted by applicable law and will not impair or threaten
to impair any recovery under any related Primary Mortgage Insurance Policy. If
these conditions are not met or if the Master Servicer reasonably believes it
is unable under applicable law to enforce such due-on-sale clause, or if such
Mortgage Loan is insured by the FHA or partially guaranteed by the VA the
Master Servicer will enter into or cause to be entered into an assumption and
modification agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable for
repayment of the Mortgage Loan and, to the extent permitted by applicable law,
the mortgagor remains liable thereon. Any fee collected by or on behalf of the
Master Servicer for entering into an assumption agreement will be retained by
or on behalf of the Master Servicer as additional servicing compensation. In
the case of Multifamily Loans, and unless otherwise specified in the related
Prospectus Supplement, the Master Servicer will agree to exercise any right it
may have to accelerate the maturity of a Multifamily Loan to the extent it has
knowledge of any further encumbrance of the related Mortgaged Property effected
in violation of any due-on-encumbrance clause applicable thereto. See "Certain
Legal Aspects of the Mortgage Loans--Due-on-Sale Clauses". In connection with
any such assumption, the terms of the related Mortgage Loan may not be changed.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Loans" herein. This approval is usually based on the purchaser's
income and net worth and numerous other factors. Although the Cooperative's
approval is unlikely to be unreasonably withheld or delayed, the necessity of
acquiring such approval could limit the number of potential purchasers for
those shares and otherwise limit the Trust Fund's ability to sell and realize
the value of those shares.
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In general, a "tenant-stockholder" (as defined in Code Section 216(b)(2)) of
a corporation that qualifies as a "cooperative housing corporation" within the
meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under
Code Sections 163 and 164. In order for a corporation to qualify under Code
Section 216(b)(1) for its taxable year in which such items are allowable as a
deduction to the corporation, such Section requires, among other things, that
at least 80% of the gross income of the corporation be derived from its tenant-
stockholders (as defined in Code Section 216(b)(2)). By virtue of this
requirement, the status of a corporation for purposes of Code Section 216(b)(1)
must be determined on a year-to-year basis. Consequently, there can be no
assurance that Cooperatives relating to the Cooperative Loans will qualify
under such Section for any particular year. In the event that such a
Cooperative fails to qualify for one or more years, the value of the collateral
securing any related Cooperative Loans could be significantly impaired because
no deduction would be allowable to tenant-stockholders under Code Section
216(a) with respect to those years. In view of the significance of the tax
benefits accorded tenant-stockholders of a corporation that qualifies under
Code Section 216(b)(1), the likelihood that such a failure would be permitted
to continue over a period of years appears remote.
HAZARD INSURANCE
The Master Servicer will require the mortgagor or obligor on each Single
Family Loan, Multifamily Loan or Contract to maintain a hazard insurance policy
providing for no less than the coverage of the standard form of fire insurance
policy with extended coverage customary for the type of Mortgaged Property in
the state in which such Mortgaged Property is located. Such coverage will be in
an amount not less than the replacement value of the improvements or
Manufactured Home securing such Mortgage Loan or the principal balance owing on
such Mortgage Loan, whichever is less. All amounts collected by the Master
Servicer under any hazard policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the mortgagor or
obligor in accordance with the Master Servicer's normal servicing procedures)
will be deposited in the related Certificate Account. In the event that the
Master Servicer maintains a blanket policy insuring against hazard losses on
all the Mortgage Loans comprising part of a Trust Fund, it will conclusively be
deemed to have satisfied its obligation relating to the maintenance of hazard
insurance. Such blanket policy may contain a deductible clause, in which case
the Master Servicer will be required to deposit from its own funds into the
related Certificate Account the amounts which would have been deposited therein
but for such clause. Any additional insurance coverage for Mortgaged Properties
in a Mortgage Pool of Multifamily Loans will be specified in the related
Prospectus Supplement.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements or Manufactured Home
securing a Mortgage Loan by fire, lightning, explosion, smoke, windstorm and
hail, riot, strike and civil commotion, subject to the conditions and
exclusions particularized in each policy. Although the policies relating to the
Mortgage Loans may have been underwritten by different insurers under different
state laws in accordance with different applicable forms and therefore may not
contain identical terms and conditions, the basic terms thereof are dictated by
respective state laws, and most such policies typically do not cover any
physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mud flows), nuclear reactions, wet or dry rot,
vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of
uninsured risks and is not intended to be all inclusive. If the Mortgaged
Property securing a Mortgage Loan is located in a federally designated special
flood area at the time of origination, the Master Servicer will require the
mortgagor or obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Mortgage Loans
typically contain a clause which in effect requires the insured at all times to
carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the insured property in order to recover the full amount
of any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of
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partial loss will not exceed the larger of (i) the actual cash value (generally
defined as replacement cost at the time and place of loss, less physical
depreciation) of the improvements damaged or destroyed or (ii) such proportion
of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements. Since the amount
of hazard insurance the Master Servicer may cause to be maintained on the
improvements securing the Mortgage Loans declines as the principal balances
owing thereon decrease, and since improved real estate generally has
appreciated in value over time in the past, the effect of this requirement in
the event of partial loss may be that hazard insurance proceeds will be
insufficient to restore fully the damaged property. If specified in the related
Prospectus Supplement, a special hazard insurance policy will be obtained to
insure against certain of the uninsured risks described above. See "Credit
Enhancement--Special Hazard Insurance Policies".
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged property, any damage to such borrower's cooperative
dwelling or such Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Loan to the extent not covered by
other credit support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Primary Mortgage Insurance Policies. The Master Servicer will maintain or
cause each Sub-Servicer to maintain, as the case may be, in full force and
effect, to the extent specified in the related Prospectus Supplement, a Primary
Mortgage Insurance Policy with regard to each Single Family Loan for which such
coverage is required. The Master Servicer will not cancel or refuse to renew
any such Primary Mortgage Insurance Policy in effect at the time of the initial
issuance of a Series of Certificates that is required to be kept in force under
the applicable Agreement unless the replacement Primary Mortgage Insurance
Policy for such cancelled or nonrenewed policy is maintained with an insurer
whose claims-paying ability is sufficient to maintain the current rating of the
classes of Certificates of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary, the
amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Mortgage Loan will consist of the insured percentage of the unpaid
principal amount of the covered Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the insured (other than the proceeds of
hazard insurance) that are derived from or in any way related to the Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore the Mortgaged Property and which have not been applied to the payment
of the Mortgage Loan, (iii) amounts expended but not approved by the issuer of
the related Primary Mortgage Insurance Policy (the "Primary Insurer"), (iv)
claim payments previously made by the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained by
reason of defaults in payments by borrowers. Primary Mortgage Insurance
Policies will not insure against, and exclude from coverage, a loss sustained
by reason of a default arising from or involving certain matters, including (i)
fraud or negligence in origination or servicing of the Mortgage Loans,
including misrepresentation by the originator, borrower or other persons
involved in the origination of the Mortgage Loan; (ii) failure to construct the
Mortgaged Property subject to the Mortgage Loan in accordance with specified
plans; (iii) physical damage to the Mortgaged Property; and (iv) the related
Servicer not being approved as a servicer by the Primary Insurer.
Recoveries Under a Primary Mortgage Insurance Policy. As conditions precedent
to the filing of or payment of a claim under a Primary Mortgage Insurance
Policy covering a Mortgage Loan, the insured will be required to (i) advance or
discharge (a) all hazard insurance policy premiums and (b) as necessary and
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approved in advance by the Primary Insurer, (1) real estate property taxes, (2)
all expenses required to maintain the related Mortgaged Property in at least as
good a condition as existed at the effective date of such Primary Mortgage
Insurance Policy, ordinary wear and tear excepted, (3) Mortgaged Property sales
expenses, (4) any outstanding liens (as defined in such Primary Mortgage
Insurance Policy) on the Mortgaged Property and (5) foreclosure costs,
including court costs and reasonable attorneys' fees; (ii) in the event of any
physical loss or damage to the Mortgaged Property, to have the Mortgaged
Property restored and repaired to at least as good a condition as existed at
the effective date of such Primary Mortgage Insurance Policy, ordinary wear and
tear excepted; and (iii) tender to the Primary Insurer good and merchantable
title to and possession of the Mortgaged Property.
In those cases in which a Single Family Loan is serviced by a Sub-Servicer,
the Sub-Servicer, on behalf of itself, the Trustee and Certificateholders, will
present claims to the Primary Insurer, and all collections thereunder will be
deposited in the Sub-Servicing Account. In all other cases, the Master
Servicer, on behalf of itself, the Trustee and the Certificateholders, will
present claims to the insurer under each Primary Mortgage Insurance Policy, and
will take such reasonable steps as are necessary to receive payment or to
permit recovery thereunder with respect to defaulted Mortgage Loans. As set
forth above, all collections by or on behalf of the Master Servicer under any
Primary Mortgage Insurance Policy and, when the Mortgaged Property has not been
restored, the hazard insurance policy, are to be deposited in the Certificate
Account, subject to withdrawal as heretofore described.
If the Mortgaged Property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged Mortgaged Property to a condition sufficient to permit
recovery under the related Primary Mortgage Insurance Policy, if any, the
Master Servicer is not required to expend its own funds to restore the damaged
Mortgaged Property unless it determines (i) that such restoration will increase
the proceeds to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Mortgage Loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Mortgage Loan is not covered by a Primary
Mortgage Insurance Policy, the Master Servicer will be obligated to follow or
cause to be followed such normal practices and procedures as it deems necessary
or advisable to realize upon the defaulted Mortgage Loan. If the proceeds of
any liquidation of the Mortgaged Property securing the defaulted Mortgage Loan
are less than the principal balance of such Mortgage Loan plus interest accrued
thereon that is payable to Certificateholders, the Trust Fund will realize a
loss in the amount of such difference plus the aggregate of expenses incurred
by the Master Servicer in connection with such proceedings and which are
reimbursable under the Agreement. In the unlikely event that any such
proceedings result in a total recovery which is, after reimbursement to the
Master Servicer of its expenses, in excess of the principal balance of such
Mortgage Loan plus interest accrued thereon that is payable to
Certificateholders, the Master Servicer will be entitled to withdraw or retain
from the Certificate Account amounts representing its normal servicing
compensation with respect to such Mortgage Loan and, unless otherwise specified
in the related Prospectus Supplement, amounts representing the balance of such
excess, exclusive of any amount required by law to be forwarded to the related
Mortgagor, as additional servicing compensation.
If the Master Servicer or its designee recovers Insurance Proceeds which,
when added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the Master Servicer, exceed the principal balance of
such Mortgage Loan plus interest accrued thereon that is payable to
Certificateholders, the Master Servicer will be entitled to withdraw or retain
from the Certificate Account amounts representing its normal servicing
compensation with respect to such Mortgage Loan. In the event that the Master
Servicer has expended its own funds to restore the damaged Mortgaged Property
and such funds have not been reimbursed under the related hazard insurance
policy, it will be entitled to withdraw from the Certificate Account out of
related Liquidation Proceeds or Insurance Proceeds an amount equal to such
expenses incurred by it, in which event the Trust Fund may realize a loss up to
the amount so charged. Since Insurance
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Proceeds cannot exceed deficiency claims and certain expenses incurred by the
Master Servicer, no such payment or recovery will result in a recovery to the
Trust Fund which exceeds the principal balance of the defaulted Mortgage Loan
together with accrued interest thereon. See "Credit Enhancement".
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer's primary servicing compensation with respect to a Series
of Certificates will come from the monthly payment to it, out of each interest
payment on a Mortgage Loan, of an amount equal to the percentage per annum
specified in the related Prospectus Supplement of the outstanding principal
balance thereof. Since the Master Servicer's primary compensation is a
percentage of the outstanding principal balance of each Mortgage Loan, such
amounts will decrease as the Mortgage Loans amortize. In addition to primary
compensation, the Master Servicer or the Sub-Servicers will be entitled to
retain all assumption fees and late payment charges, to the extent collected
from Mortgagors, and, if so provided in the related Prospectus Supplement, any
prepayment penalties and any interest or other income which may be earned on
funds held in the Certificate Account or any Sub-Servicing Account. Unless
otherwise specified in the related Prospectus Supplement, any Sub-Servicer will
receive a portion of the Master Servicer's primary compensation as its sub-
servicing compensation.
In addition to amounts payable to any Sub-Servicer, the Master Servicer will,
unless otherwise specified in the related Prospectus Supplement, pay from its
servicing compensation certain expenses incurred in connection with its
servicing of the Mortgage Loans, including, without limitation, payment of any
premium for any insurance policy, guaranty, surety or other form of credit
enhancement as specified in the related Prospectus Supplement, payment of the
fees and disbursements of the Trustee and independent accountants, payment of
expenses incurred in connection with distributions and reports to
Certificateholders, and payment of any other expenses described in the related
Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each year,
a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Audit Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the
servicing by or on behalf of the Master Servicer of mortgage loans, private
mortgage-backed securities or agency securities, under pooling and servicing
agreements substantially similar to each other (including the related
Agreement) was conducted in compliance with such agreements except for any
significant exceptions or errors in records that, in the opinion of the firm,
the Audit Program for Mortgages serviced for FHLMC, or the Uniform Single Audit
Program for Mortgage Bankers, requires it to report. In rendering its statement
such firm may rely, as to matters relating to the direct servicing of Mortgage
Loans, private mortgage-backed securities or agency securities, by Sub-
Servicers, upon comparable statements for examinations conducted substantially
in compliance with the Uniform Single Audit Program for Mortgage Bankers or the
Audit Program for Mortgages serviced for FHLMC (rendered within one year of
such statement) of firms of independent public accountants with respect to the
related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or before a
specified date in each year, of an annual statement signed by two officers of
the Master Servicer to the effect that the Master Servicer has fulfilled its
obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers of
the Master Servicer may be obtained by Certificateholders of the related Series
without charge upon written request to the Master Servicer at the address set
forth in the related Prospectus Supplement.
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CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under each Agreement will be named in the related
Prospectus Supplement. The entity serving as Master Servicer may have normal
business relationships with the Depositor or the Depositor's affiliates.
Each Agreement will provide that the Master Servicer may not resign from its
obligations and duties under the Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Master Servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer, the
Depositor nor any director, officer, employee, or agent of the Master Servicer
or the Depositor will be under any liability to the related Trust Fund or
Certificateholders for any action taken or for refraining from the taking of
any action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the Master Servicer, the Depositor nor any such
person will be protected against any liability which would otherwise be imposed
by reason of willful misfeasance, bad faith or negligence in the performance of
duties thereunder or by reason of reckless disregard of obligations and duties
thereunder. Each Agreement will further provide that the Master Servicer, the
Depositor and any director, officer, employee or agent of the Master Servicer
or the Depositor will be entitled to indemnification by the related Trust Fund
and will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Agreement or the Certificates,
other than any loss, liability or expense related to any specific Mortgage Loan
or Mortgage Loans (except any such loss, liability or expense otherwise
reimbursable pursuant to the Agreement) and any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, each Agreement will provide
that neither the Master Servicer nor the Depositor will be under any obligation
to appear in, prosecute or defend any legal action which is not incidental to
its respective responsibilities under the Agreement and which in its opinion
may involve it in any expense or liability. The Master Servicer or the
Depositor may, however, in its discretion undertake any such action which it
may deem necessary or desirable with respect to the 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 Fund and the Master Servicer or the Depositor, as the case may be, will
be entitled to be reimbursed therefor out of funds otherwise distributable to
Certificateholders.
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement,
provided that such person is qualified to sell mortgage loans to, and service
mortgage loans on behalf of, FNMA or FHLMC and further provided that such
merger, consolidation or succession does not adversely affect the then current
rating or ratings of the class or classes of Certificates of such Series that
have been rated.
EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement, Events of
Default under each Agreement will consist of (i) any failure by the Master
Servicer to distribute or cause to be distributed to Certificateholders of any
class any required payment (other than an Advance) which continues unremedied
for five business days after the giving of written notice of such failure to
the Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Certificates of such class
evidencing not less than 25% of the aggregate Percentage Interests evidenced by
such class; (ii) any failure by the Master Servicer to make an Advance as
required under the Agreement, unless cured as specified therein; (iii) any
failure by the Master Servicer duly to observe or perform in any material
respect any of its other covenants or agreements in the Agreement which
continues unremedied for thirty days after
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the giving of written notice of such failure to the Master Servicer by the
Trustee or the Depositor, or to the Master Servicer, the Depositor and the
Trustee by the holders of Certificates of any class evidencing not less than
25% of the aggregate Percentage Interests constituting such class; and (iv)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceeding and certain actions by or on behalf of the
Master Servicer indicating its insolvency, reorganization or inability to pay
its obligations.
If specified in the related Prospectus Supplement, the Agreement will permit
the Trustee to sell the Mortgage Assets and the other assets of the Trust Fund
in the event that payments in respect thereto are insufficient to make payments
required in the Agreement. The assets of the Trust Fund will be sold only under
the circumstances and in the manner specified in the related Prospectus
Supplement.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Certificates
of any class evidencing not less than 51% of the aggregate Percentage Interests
constituting such class and under such other circumstances as may be specified
in such Agreement, the Trustee shall, terminate all of the rights and
obligations of the Master Servicer under the Agreement relating to such Trust
Fund and in and to the Mortgage Loans, whereupon the Trustee will succeed to
all of the responsibilities, duties and liabilities of the Master Servicer
under the Agreement, including, if specified in the related Prospectus
Supplement, the obligation to make advances, and will be entitled to similar
compensation arrangements. In the event that the Trustee is unwilling or unable
so to act, it may appoint, or petition a court of competent jurisdiction for
the appointment of, a Mortgage Loan servicing institution with a net worth of
at least $10,000,000 to act as successor to the Master Servicer under the
Agreement. Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and any such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the Master Servicer under the Agreement.
No Certificateholder, solely by virtue of such holder's status as a
Certificateholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Certificates of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class 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.
AMENDMENT
Unless otherwise specified in the related Prospectus Supplement, each
Agreement may be amended by the Depositor, the Master Servicer and the Trustee,
without the consent of any of the Certificateholders, (i) to cure any
ambiguity; (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein; or (iii) to make
any other revisions with respect to matters or questions arising under the
Agreement which are not inconsistent with the provisions thereof, provided that
such action will not adversely affect in any material respect the interests of
any Certificateholder. In addition, to the extent provided in the related
Agreement, an Agreement may be amended without the consent of any of the
Certificateholders, to change the manner in which the Certificate Account is
maintained, provided that any such change does not adversely affect the then
current rating on the class or classes of Certificates of such Series that have
been rated. In addition, if a REMIC election is made with respect to a Trust
Fund, the related Agreement may be amended to modify, eliminate or add to any
of its provisions to such extent as may be necessary to maintain the
qualification of the related Trust Fund as a REMIC, provided that the Trustee
has received an opinion of counsel to the effect that such action is necessary
or helpful to maintain such qualification. Unless otherwise specified in the
related Prospectus Supplement, each Agreement may also be amended by the
Depositor, the Master Servicer and the Trustee with consent of holders of
Certificates of such Series evidencing not less than 66% of the aggregate
Percentage Interests of each class affected thereby
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for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Agreement or of modifying in any
manner the rights of the holders of the related Certificates; provided,
however, that no such amendment may (i) reduce in any manner the amount of or
delay the timing of, payments received on Mortgage Loans which are required to
be distributed on any Certificate without the consent of the holder of such
Certificate, or (ii) reduce the aforesaid percentage of Certificates of any
class of holders which are required to consent to any such amendment without
the consent of the holders of all Certificates of such class covered by such
Agreement then outstanding. If a REMIC election is made with respect to a Trust
Fund, the Trustee will not be entitled to consent to an amendment to the
related Agreement without having first received an opinion of counsel to the
effect that such amendment will not cause such Trust Fund to fail to qualify as
a REMIC.
TERMINATION; OPTIONAL TERMINATION
Unless otherwise specified in the related Agreement, the obligations created
by each Agreement for each Series of Certificates will terminate upon the
payment to the related Certificateholders of all amounts held in the
Certificate Account or by the Master Servicer and required to be paid to them
pursuant to such Agreement following the later of (i) the final payment or
other liquidation of the last of the Mortgage Assets subject thereto or the
disposition of all property acquired upon foreclosure of any such Mortgage
Assets remaining in the Trust Fund and (ii) the purchase by the Master Servicer
or, if REMIC treatment has been elected and if specified in the related
Prospectus Supplement, by the holder of the residual interest in the REMIC (see
"Certain Federal Income Tax Consequences" below), from the related Trust Fund
of all of the remaining Mortgage Assets and all property acquired in respect of
such Mortgage Assets.
Unless otherwise specified in the related Prospectus Supplement, any such
purchase of Mortgage Assets and property acquired in respect of Mortgage Assets
evidenced by a Series of Certificates will be made at the option of the Master
Servicer or, if applicable, such holder of the REMIC residual interest, at a
price, and in accordance with the procedures, specified in the related
Prospectus Supplement. The exercise of such right will effect early retirement
of the Certificates of that Series, but the right of the Master Servicer or, if
applicable, such holder of the REMIC residual interest, to so purchase is
subject to the principal balance of the related Mortgage Assets being less than
the percentage specified in the related Prospectus Supplement of the aggregate
principal balance of the Mortgage Assets at the Cut-off Date for the Series.
The foregoing is subject to the provision that if a REMIC election is made with
respect to a Trust Fund, any repurchase pursuant to clause (ii) above will be
made only in connection with a "qualified liquidation" of the REMIC within the
meaning of Section 860F(g)(4) of the Code.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable Prospectus
Supplement. The commercial bank or trust company serving as Trustee may have
normal banking relationships with the Depositor, the Master Servicer and any of
their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in nature, of
certain legal matters relating to the Mortgage Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the appropriate laws of the states in which
Mortgage Loans may be originated.
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GENERAL
Single Family Loans and Multifamily Loans. The Single Family Loans and
Multifamily Loans will be secured by deeds of trust, mortgages, security deeds
or deeds to secure debt, depending upon the prevailing practice in the state in
which the property subject to the loan is located. A mortgage creates a lien
upon the real property encumbered by the mortgage, which lien is generally not
prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the borrower and owner of the mortgaged property, and the mortgagee, who is
the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. Although a deed of trust is similar
to a mortgage, a deed of trust formally has three parties, the borrower-
property owner called the trustor (similar to a mortgagor), a lender (similar
to a mortgagee) called the beneficiary, 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 obligation. A security deed and a deed to
secure debt are special types of deeds which indicate on their face that they
are granted to secure an underlying debt. By executing a security deed or deed
to secure debt, the grantor conveys title to, as opposed to merely creating a
lien upon, the subject property to the grantee until such time as the
underlying debt is repaid. The trustee's authority under a deed of trust, the
mortgagee's authority under a mortgage and the grantee's authority under a
security deed or deed to secure debt are governed by law and, with respect to
some deeds of trust, the directions of the beneficiary.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans. The
Cooperative owns all the real property that comprises the project, including
the land, separate dwelling units and all common areas. The Cooperative is
directly responsible for project management and, in most cases, payment of real
estate taxes and hazard and liability insurance. If there is a blanket mortgage
on the Cooperative and/or underlying land, as is generally the case, the
Cooperative, as project mortgagor, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
Cooperative in connection with the construction or purchase of the
Cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that Cooperative is a party
are generally subordinate to the interest of the holder of the blanket mortgage
in that building. If the Cooperative is unable to meet the payment obligations
arising under its blanket mortgage, the mortgagee holding the blanket mortgage
could foreclose on that mortgage and terminate all subordinate proprietary
leases and occupancy agreements. In addition, the blanket mortgage on a
Cooperative may provide financing in the form of a mortgage that does not fully
amortize with a significant portion of principal being due in one lump sum at
final maturity. The inability of the Cooperative to refinance this mortgage and
its consequent inability to make such final payment could lead to foreclosure
by the mortgagee providing the financing. A foreclosure in either event by the
holder of the blanket mortgage could eliminate or significantly diminish the
value of any collateral held by the lender who financed the purchase by an
individual tenant-stockholder of Cooperative shares or, in the case of a Trust
Fund including Cooperative Loans, the collateral securing the Cooperative
Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a Cooperative must
make a monthly payment to the Cooperative representing such tenant-
stockholder's pro rata share of the Cooperative's payments for its blanket
mortgage, real property taxes, maintenance expenses and other capital or
ordinary expenses. An ownership interest in a Cooperative and accompanying
rights is financed through a Cooperative share loan evidenced by a promissory
note and secured by a security interest in the occupancy agreement or
proprietary lease and in the related Cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the Cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the tenant-
stockholder, the lender may sue for judgment on the promissory note, dispose of
the collateral at a public or private sale or otherwise proceed against the
collateral or tenant-stockholder as
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an individual as provided in the security agreement covering the assignment of
the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
Contracts. Each Contract evidences both (a) the obligation of the obligor to
repay the loan evidenced thereby, and (b) the grant of a security interest in
the Manufactured Home to secure repayment of such loan. The Contracts generally
are "chattel paper" as defined in the Uniform Commercial Code (the "UCC") in
effect in the states in which the Manufactured Homes initially were registered.
Pursuant to the UCC, the rules governing the sale of chattel paper are similar
to those governing the perfection of a security interest in chattel paper.
Under the Agreement, the Depositor will transfer or cause the transfer of
physical possession of the contracts to the Trustee or its custodian. In
addition the Depositor will make or cause to be made an appropriate filing of a
UCC-1 financing statement in the appropriate states to give notice of the
Trustee's ownership of the Contracts. Under the laws of most states,
manufactured housing constitutes personal property and is subject to the motor
vehicle registration laws of the state or other jurisdiction in which the unit
is located. In a few states, where certificates of title are not required for
Manufactured Homes, security interests are perfected by the filing of a
financing statement under Article 9 of the UCC which has been adopted by all
states except Louisiana. Such financing statements are effective for five years
and must be renewed at the end of each five years. The certificate of title
laws adopted by the majority of states provide that ownership of motor vehicles
and manufactured housing shall be evidenced by a certificate of title issued by
the motor vehicles department (or a similar entity) of such state. In the
states which have enacted certificate of title laws, a security interest in a
unit of manufactured housing, so long as it is not attached to land in so
permanent a fashion as to become a fixture, is generally perfected by the
recording of such interest on the certificate of title to the unit in the
appropriate motor vehicle registration office or by delivery of the required
documents and payment of a fee to such office, depending on state law.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will be required to effect such notation or delivery of the required
documents and fees, and to obtain possession of the certificate of title, as
appropriate under the laws of the state in which any Manufactured Home is
registered. If the Master Servicer fails, due to clerical errors or otherwise,
to effect such notation or delivery, or files the security interest under the
wrong law (for example, under a motor vehicle title statute rather than under
the UCC, in a few states), the Trustee may not have a first priority security
interest in the Manufactured Home securing a Contract. As manufactured homes
have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes may, under certain circumstances, become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate
law. In order to perfect a security interest in a manufactured home under real
estate laws, the holder of the security interest must file either a "fixture
filing" under the provisions of the UCC or a real estate mortgage under the
real estate laws of the state where the home is located. These filings must be
made in the real estate records office of the county where the home is located.
Generally, Contracts will contain provisions prohibiting the obligor from
permanently attaching the Manufactured Home to its site. So long as the obligor
does not violate this agreement, a security interest in the Manufactured Home
will be governed by the certificate of title laws or the UCC, and the notation
of the security interest on the certificate of title or the filing of a UCC
financing statement will be effective to maintain the priority of the security
interest in the Manufactured Home. If, however, a Manufactured Home is
permanently attached to its site, other parties could obtain an interest in the
Manufactured Home which is prior to the security interest originally retained
by the Seller and transferred to the Depositor.
The Depositor will assign or cause to be assigned a security interest in the
Manufactured Homes to the Trustee, on behalf of the Certificateholders. Unless
otherwise specified in the related Prospectus Supplement, neither the
Depositor, the Master Servicer nor the Trustee will amend the certificates of
title to identify the Trustee, on behalf of the Certificateholders, as the new
secured party and, accordingly, the Depositor or the Seller will continue to be
named as the secured party on the certificates of title relating to the
Manufactured Homes. In most states, such assignment is an effective conveyance
of such security interest without
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amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the Depositor's rights as the secured party. However,
in some states there exists a risk that, in the absence of an amendment to the
certificate of title, such assignment of the security interest might not be
held effective against creditors of the Depositor or Seller.
In the absence of fraud, forgery or permanent affixation of the Manufactured
Home to its site by the Manufactured Home owner, or administrative error by
state recording officials, the notation of the lien of the Trustee on the
certificate of title or delivery of the required documents and fees will be
sufficient to protect the Trustee against the rights of subsequent purchasers
of a Manufactured Home or subsequent lenders who take a security interest in
the Manufactured Home. If there are any Manufactured Homes as to which the
security interest assigned to the Depositor and the Trustee is not perfected,
such security interest would be subordinate to, among others, subsequent
purchasers for value of Manufactured Homes and holders of perfected security
interests. There also exists a risk in not identifying the Trustee, on behalf
of the Certificateholders, as the new secured party on the certificate of title
that, through fraud or negligence, the security interest of the Trustee could
be released.
If the owner of a Manufactured Home moves it to a state other than the state
in which such Manufactured Home initially is registered, under the laws of most
states the perfected security interest in the Manufactured Home would continue
for four months after such relocation and thereafter until the owner re-
registers the Manufactured Home in such state. If the owner were to relocate a
Manufactured Home to another state and re-register the Manufactured Home in
such state, and if steps are not taken to re-perfect the Trustee's security
interest in such state, the security interest in the Manufactured Home would
cease to be perfected. A majority of states generally require surrender of a
certificate of title to re-register a Manufactured Home; accordingly, the
Trustee must surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
which provide for notation of lien, the Master Servicer would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Trustee would have the opportunity to
re-perfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of
the certificate of title or it will receive notice as a result of its lien
noted thereon and accordingly will have an opportunity to require satisfaction
of the related manufactured housing conditional sales contract before release
of the lien. The Master Servicer will be obligated to take such steps, at the
Master Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a Manufactured
Home take priority even over a perfected security interest. The Depositor will
obtain the representation of the Seller that it has no knowledge of any such
liens with respect to any Manufactured Home securing a Contract. However, such
liens could arise at any time during the term of a Contract. No notice will be
given to the Trustee or Certificateholders in the event such a lien arises.
FORECLOSURE/REPOSSESSION
Single Family Loans and Multifamily Loans. Foreclosure of a deed of trust is
generally accomplished by a non-judicial sale under a specific provision in the
deed of trust which authorizes the trustee to sell the property at public
auction upon any default by the borrower under the terms of the note or deed of
trust. In some states, such as California, the trustee must record a notice of
default and send a copy to the borrower-trustor, to any person who has recorded
a request for a copy of any notice of default and notice of sale, to any
successor in interest to the borrower-trustor, to the beneficiary of any junior
deed of trust and to certain other persons. Before such non-judicial sale takes
place, typically a notice of sale must be posted in a public
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place and published during a specific period of time in one or more newspapers,
posted on the property, and sent to parties having an interest of record in the
property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having
an interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties. Judicial
foreclosure proceedings are often not contested by any of the parties. When the
mortgagee's right to 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 generally issues a judgment of foreclosure
and appoints a referee or other court officer to conduct the sale of the
property. In general, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender. After
the reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the
deed of trust is not reinstated, a notice of sale must be posted in a public
place and, in most states, published for a specific 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 in
the real property.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty
of determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burden 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 will commonly obtain the
services of a real estate broker and pay the broker's 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.
Courts have imposed general equitable principles upon foreclosure, which are
generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
Cooperative Loans. 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 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.
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The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with 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 the 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 in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale
be conducted in a "commercially reasonable" manner. Whether a foreclosure sale
has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative 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.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
Contracts. The Master Servicer, on behalf of the Trustee, to the extent
required by the related agreement, may take action to enforce the Trustee's
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender,
by "self-help" repossession that is "peaceful" (i.e., without breach of the
peace) or, in the absence of voluntary surrender and the ability to repossess
without breach of the peace, by judicial process. The holder of a Contract must
give the debtor a number of days' notice, which varies from 10 to 30 days
depending on the state, prior to commencement of any repossession. The UCC and
consumer protection laws in most states place restrictions on repossession
sales, including requiring prior notice to the debtor and commercial
reasonableness in effecting such a sale. The law in most states also requires
that the debtor be given notice of any sale prior to resale of the unit so that
the debtor may redeem at or before such resale. In the event of such
repossession and resale of a Manufactured Home, the Trustee would be entitled
to be paid out of the sale proceeds before such proceeds could be applied to
the payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
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Under the laws applicable in most states, a creditor is entitled to obtain a
deficiency judgment from a debtor for any deficiency on repossession and resale
of the Manufactured Home securing such a debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states such a lien has priority over the lien of
an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency ("EPA") may
impose a lien on property where EPA has incurred clean-up costs. However, a
CERCLA lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
lender may be held liable, as an "owner" or "operator", for costs of addressing
releases or threatened releases of hazardous substances at a Mortgaged
Property, regardless of whether or not the environmental damage or threat was
caused by a prior owner or operator. CERCLA imposes liability on any and all
"responsible parties" (which includes, inter alia, the property owner and
operator) for the cost of clean-up of releases of hazardous substances.
However, CERCLA excludes from the definition of "owner or operator" secured
creditors who hold indicia of ownership for the purpose of protecting their
security interest, but "without participating in the management of the
facility." That exclusion was substantially narrowed by a May 1990 decision of
the United States Court of Appeals for the Eleventh Circuit in United States v.
Fleet Factors Corp., which held that a lender need not have involved itself in
the day-to-day operations of the facility or participated in decisions relating
to hazardous waste management in order to be liable; rather, liability could
attach to the lender if its involvement with the management of the facility is
broad enough to support the inference that the lender could affect hazardous
waste management practices if it so chose. The court added that a lender's
capacity to influence such decisions could be inferred from the extent of its
involvement in the facility's financial management. In response to Fleet
Factors, EPA promulgated regulations designed to clarify the range of
activities a lender may engage in without losing the benefit of the statutory
exclusion. Under the regulations, which took effect in April 1992, a lender is
permitted to monitor the borrower's environmental practices in order to
determine if the facility is in compliance with applicable law, and to require
the borrower to take measures necessary to achieve or maintain compliance or
conduct necessary clean-ups. The lender may not, however, exercise control over
or assume responsibility for the borrower's environmental practices. Such
actions would be considered "participation in the management of the facility".
Also, if the lender takes title to or possession of the property, it might be
deemed to have obviated the security interest exclusion and to be liable for
clean-up costs pursuant to CERCLA. The EPA regulations allow lenders to take
certain actions with respect to foreclosure, without losing the benefit of the
statutory exclusion. Essentially, the regulations allow the lender to take
actions consistent with protecting its security interest, but not actions which
demonstrate an intent to exercise long-term ownership interest in the property.
While the EPA regulations offer some protection to lenders, it must be noted
that such protection may not be available under applicable state law.
Furthermore, the regulations are binding only on EPA with respect to EPA's
enforcement powers and cost recovery rights. It has not yet been determined
whether the federal courts will apply the regulations in cost recovery actions
brought against lenders by other responsible parties, although the regulations
may well be considered persuasive by the courts. (Two judicial challenges have
been brought against the EPA regulations in the United States Court of Appeals
for the District of Columbia Circuit. The challenges both allege that the
regulations are inconsistent with the statutory requirements of CERCLA and,
therefore, should be invalidated. The challenges were filed on July 28, 1992
and are still pending.) If a lender is or becomes liable, it can bring an
action for contribution against any other "responsible parties", including a
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previous owner or operator, who created the environmental hazard, but those
persons or entities may be bankrupt or otherwise judgment proof. The costs
associated with environmental clean-up may be substantial. It is conceivable
that such remedial costs arising from the circumstances set forth above would
become a liability of the Trust Fund and occasion a loss to Certificateholders.
Except as otherwise specified in the applicable Prospectus Supplement, at the
time the Mortgage Loans were originated, no environmental assessment or a very
limited environment assessment of the Mortgage Properties was conducted.
The Agreement will provide that the Master Servicer, acting on behalf of the
Trust Fund, may not acquire title to a multifamily residential property or
mixed residential/commercial property underlying a Mortgage Loan or take over
its operation unless the Master Servicer has previously determined, based upon
a report prepared by a person who regularly conducts environmental audits, that
the Mortgaged Property is in compliance with applicable environmental laws and
regulations or that such acquisition would not be more detrimental than
beneficial to the value of the Mortgaged Properties and the interests therein
of the Certificateholders.
RIGHTS OF REDEMPTION
Single Family Loans and Multifamily Loans. In some states, after sale
pursuant to a deed of trust or foreclosure of a mortgage, the borrower and
foreclosed junior lienors are given a statutory period in which to redeem the
property from the foreclosure sale. In some states, redemption may occur only
upon payment of the entire principal balance of the loan, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. The effect of a statutory
right of redemption would defeat the title of any purchaser from the lender
subsequent to foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to retain the
property and pay the expenses of ownership until the redemption period has run.
Contracts. While state laws do not usually require notice to be given debtors
prior to repossession, many states do require delivery of a notice of default
and of the debtor's right to cure defaults before repossession. The law in most
states also requires that the debtor be given notice of sale prior to the
resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC. Manufactured
Homes are most often resold through private sale.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states, including California, have adopted statutory prohibitions
restricting the right of the beneficiary or mortgagee to obtain a deficiency
judgment against borrowers financing the purchase of their residence or
following sale under a deed of trust or certain other foreclosure proceedings.
A deficiency judgment is a personal judgment against the borrower equal in most
cases to the difference between the amount due to the lender and the fair
market value of the real property sold at the foreclosure sale. As a result of
these prohibitions, it is anticipated that in many instances the Master
Servicer will not seek deficiency judgments against defaulting mortgagors.
Under the laws applicable in most states, a creditor is entitled to obtain a
deficiency judgment for any deficiency following possession and resale of a
Manufactured Home. However, some states impose prohibitions or limitations on
deficiency judgments in such cases.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on the
Mortgaged Property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the Mortgaged
Property is not the debtor's principal residence and the court determines that
the value of the Mortgaged Property is less than the
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principal balance of the mortgage loan, for the reduction of the secured
indebtedness to the value of the Mortgaged Property as of the date of the
commencement of the bankruptcy, rendering the lender a general unsecured
creditor for the difference, and also may reduce the monthly payments due under
such mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule. The effect of any such proceedings under the federal
Bankruptcy Code, including but not limited to any automatic stay, could result
in delays in receiving payments on the Mortgage Loans underlying a Series of
Certificates and possible reductions in the aggregate amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien of a
mortgage or secured party. Numerous federal and state consumer protection laws
impose substantive requirements upon mortgage lenders and manufactured housing
lenders in connection with the origination, servicing and enforcement of Single
Family Loans and Contracts. 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 and state laws impose specific statutory liabilities
upon lenders who fail to comply with the provisions of the law. In some cases,
this liability may affect assignees of the loans or contracts.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses which the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due
thereunder.
Most of the Contracts in a Mortgage Pool will be subject to the requirements
of the FTC Rule. Accordingly, the Trustee, as holder of the Contracts, will be
subject to any claims or defenses that the purchaser of the related
Manufactured Home may assert against the seller of the Manufactured Home,
subject to a maximum liability equal to the amounts paid by the obligor on the
Contract. If an obligor is successful in asserting any such claim or defense,
and if the Seller had or should have had knowledge of such claim or defense,
the Master Servicer will have the right to require the Seller to repurchase the
Contract because of a breach of its Seller's representation and warranty that
no claims or defenses exist which would affect the obligor's obligation to make
the required payments under the Contract.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares and
the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the mortgagor or obligor sells, transfers or conveys
the Mortgaged Property, the loan or contract may be accelerated by the
mortgagee or secured party. The Garn-St Germain Depository Institutions Act of
1982 (the "Garn-St Germain Act"), subject to certain exceptions, pre-empts
state constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As to loans secured by an owner-occupied residence (which
would include a Manufactured Home), the Garn-St Germain Act sets forth nine
specific instances in which a mortgagee covered by the Act may not exercise its
rights under a due-on-sale clause, notwithstanding the fact that a transfer of
the property may have occurred. The inability to enforce a due-on-sale clause
may result in transfer of the related Mortgaged Property to an uncreditworthy
person, which could increase the likelihood of default or may result in a
mortgage bearing an interest rate below the current market rate being assumed
by a new home buyer, which
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may affect the average life of the Mortgage Loans and the number of Mortgage
Loans which may extend to maturity.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of Single Family Loans or
Contracts with respect to prepayments on loans secured by liens encumbering
owner-occupied residential properties. Since many of the Mortgaged Properties
will be owner-occupied, it is anticipated that prepayment charges may not be
imposed with respect to many of the Single Family Loans and Contracts. The
absence of such a restraint on prepayment, particularly with respect to fixed
rate Single Family Loans or Contracts having higher Mortgage Rates or APR's,
may increase the likelihood of refinancing or other early retirement of such
loans or contracts. Legal restrictions, if any, on prepayment of Multifamily
Loans will be described in the related Prospectus Supplement.
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 Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
Title V also provides that, subject to the following conditions, state usury
limitations will not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayment, balloon payment, late charges and deferral fees and requiring a 30-
day notice period prior to instituting any action leading to repossession of or
foreclosure with respect to the related unit. Title V authorized any state to
reimpose limitations on interest rates and finance charges by adopting before
April 1, 1983 a law or constitutional provision which expressly rejects
application of the federal law. Fifteen states adopted such a law prior to the
April 1, 1983 deadline. In addition, even where Title V was not so rejected,
any state is authorized by the law to adopt a provision limiting discount
points or other charges on loans covered by Title V. In any state in which
application of Title V was expressly rejected or a provision limiting discount
points or other charges has been adopted, no Contract which imposes finance
charges or provides for discount points or charges in excess of permitted
levels will be included in any Trust Fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
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 interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of the Master
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
Unless otherwise provided in the applicable Prospectus Supplement, any
shortfall in interest collections resulting from the application of the Relief
Act could result in losses to the holders of the Certificates. In addition, the
Relief Act imposes limitations which would impair the ability of the Master
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.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Certificates is
based on the advice of Brown & Wood LLP, counsel to the Depositor. This summary
is based on laws, regulations, including the REMIC regulations promulgated by
the Treasury Department on December 23, 1992, and generally effective for
REMICs with start-up dates on or after November 12, 1991 (the "REMIC
Regulations") rulings and decisions now in effect or (with respect to
regulations) proposed, all of which are subject to change either prospectively
or retroactively. This summary does not address the federal income tax
consequences of an investment in Certificates applicable to all categories of
investors, some of which (for example, banks and insurance companies) may be
subject to special rules. Prospective investors should consult their tax
advisors regarding the federal, state, local and any other tax consequences to
them of the purchase, ownership and disposition of Certificates.
GENERAL
The federal income tax consequences to Certificateholders will vary depending
on whether an election is made to treat the Trust Fund relating to a particular
Series of Certificates as a real estate mortgage investment conduit ("REMIC")
under the Internal Revenue Code of 1986, as amended (the "Code"). The
Prospectus Supplement for each Series of Certificates will specify whether a
REMIC election will be made.
NON-REMIC CERTIFICATES
If a REMIC election is not made, Brown & Wood LLP will deliver its opinion
that the Trust Fund will not be classified as an association taxable as a
corporation, and that each such Trust Fund will be classified as a grantor
trust under subpart E, Part I of subchapter J of the Code. In this case, owners
of Certificates will be treated for federal income tax purposes as owners of a
portion of the Trust Fund's assets as described below.
SINGLE CLASS OF SENIOR CERTIFICATES
Characterization. The Trust Fund may be created with one class of Senior
Certificates and one class of Subordinated Certificates. In this case, each
Senior Certificateholder will be treated as the owner of a pro rata undivided
interest in the interest and principal portions of the Trust Fund represented
by that Senior Certificate and will be considered the equitable owner of a pro
rata undivided interest in each of the Mortgage Loans in the Pool. Any amounts
received by a Senior Certificateholder in lieu of amounts due with respect to
any Mortgage Loan because of a default or delinquency in payment will be
treated for federal income tax purposes as having the same character as the
payments they replace.
Each holder of a Senior Certificate will be required to report on its federal
income tax return its pro rata share of the entire income from the Mortgage
Loans in the Trust Fund represented by that Senior Certificate, including
interest, original issue discount, if any, prepayment fees, assumption fees,
any gain recognized upon an assumption and late payment charges received by the
Master Servicer in accordance with such Senior Certificateholder's method of
accounting. Under Code Sections 162 or 212 each Senior Certificateholder will
be entitled to deduct its pro rata share of servicing fees, prepayment fees,
assumption fees, any loss recognized upon an assumption and late payment
charges retained by the Master Servicer, provided that such amounts are
reasonable compensation for services rendered to the Trust Fund. Senior
Certificateholders that are individuals, estates or trusts will be entitled to
deduct their share of expenses only to the extent such expenses plus all other
Code Section 212 expenses exceed two percent of its adjusted gross income. A
Senior Certificateholder using the cash method of accounting must take into
account its pro rata share of income and deductions as and when collected by or
paid to the Master Servicer. A Senior Certificateholder using an accrual method
of accounting must take into account its pro rata share of income and
deductions as they become due or are paid to the Master Servicer, whichever is
earlier. If the Servicing Fees paid to the Master Servicer were deemed to
exceed reasonable servicing compensation, the amount of such excess could be
considered as a retained ownership interest by the Master Servicer (or any
person to whom the Master
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Servicer assigned for value all or a portion of the Servicing Fees) in a
portion of the interest payments on the Mortgage Loans. The Mortgage Loans may
then be subject to the "coupon stripping" rules of the Code discussed below.
Unless otherwise specified in the related Prospectus Supplement, as to each
Series of Certificates Brown & Wood LLP will have advised the Depositor that:
(i) a Senior Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) representing
principal and interest payments on Mortgage Loans will be considered to
represent "loans . . . secured by an interest in real property which
is . . . residential property" within the meaning of Code Section
7701(a)(19)(C)(v); to the extent that the Mortgage Loans represented by
that Senior Certificate are of a type described in such Code section;
(ii) a Senior Certificate owned by a financial institution described in
Code Section 593(a) representing principal and interest payments on
Mortgage Loans will be considered to represent "Qualifying real property
loans" within the meaning of Code Section 593(d) and the Treasury
regulations under Code Section 593; to the extent that the Mortgage Loans
represented by that Senior Certificate are of a type described in such Code
section;
(iii) a Senior Certificate owned by a real estate investment trust
representing an interest in Mortgage Loans will be considered to represent
"real estate assets" within the meaning of Code Section 856(c)(5)(A), and
interest income on the Mortgage Loans will be considered "interest on
obligations secured by mortgages on real property" within the meaning of
Code Section 856(c)(3)(B); to the extent that the Mortgage Loans
represented by that Senior Certificate are of a type described in such Code
section; and
(iv) a Senior Certificate owned by a REMIC will be an "obligation . . .
which is principally secured, directly or indirectly, by an interest in
real property" within the meaning of Code Section 860G(a)(3).
The assets constituting certain Trust Funds may include Buydown Mortgage
Loans. The characterization of any investment in Buydown Mortgage Loans will
depend upon the precise terms of the related Buydown Agreement, but to the
extent that such Buydown Mortgage Loans are secured in part by a bank account
or other personal property, they may not be treated in their entirety as assets
described in the foregoing sections of the Code. There are no directly
applicable precedents with respect to the federal income tax treatment or the
characterization of investments in Buydown Mortgage Loans. Accordingly, holders
of Senior Certificates should consult their own tax advisors with respect to
characterization of investments in Senior Certificates representing an interest
in a Trust Fund that includes Buydown Mortgage Loans.
Premium. The price paid for a Senior Certificate by a holder will be
allocated to such holder's undivided interest in each Mortgage Loan based on
each Mortgage Loan's relative fair market value, so that such holder's
undivided interest in each Mortgage Loan will have its own tax basis. A Senior
Certificateholder that acquires an interest in Mortgage Loans at a premium may
elect to amortize such premium under a constant interest method, provided that
such Mortgage Loan was originated after September 27, 1985. Premium allocable
to a Mortgage Loan originated on or before September 27, 1985 should be
allocated among the principal payments on the Mortgage Loan and allowed as an
ordinary deduction as principal payments are made. Amortizable bond premium
will be treated as an offset to interest income on such Senior Certificate. The
basis for such Senior Certificate will be reduced to the extent that
amortizable premium is applied to offset interest payments.
It is not clear whether a reasonable prepayment assumption should be used in
computing amortization of premium allowable under Code Section 171. A
Certificateholder that makes this election for a Certificate that is acquired
at a premium will be deemed to have made an election to amortize bond premium
with respect to all debt instruments having amortizable bond premium that such
Certificateholder acquires during the year of the election or thereafter.
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If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a Senior Certificate acquired at a premium should
recognize a loss, if a Mortgage Loan prepays in full, equal to the difference
between the portion of the prepaid principal amount of the Mortgage Loan that
is allocable to the-Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a reasonable prepayment
assumption is used to amortize such premium, it appears that such a loss would
be available, if at all, only if prepayments have occurred at a rate faster
than the reasonable assumed prepayment rate. It is not clear whether any other
adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments.
Original Issue Discount. The Internal Revenue Service (the "IRS") has stated
in published rulings that, in circumstances similar to those described herein,
the special rules of the Code relating to "original issue discount" (currently
Code Sections 1271 through 1273 and 1275) will be applicable to a Senior
Certificateholder's interest in those Mortgage Loans meeting the conditions
necessary for these sections to apply. Accordingly, the following discussion is
based in part on Treasury regulations issued on February 2, 1994 under Code
Sections 1271 through 1273 and 1275 (the "OID Regulations"). A
Certificateholder should be aware, however, that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as
the Certificates. 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 financing of points or
other charges by the originator of the mortgages in an 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. Original issue discount generally must be reported as ordinary
gross income as it accrues under a constant interest method. See "Accrual of
Original Issue Discount" under "Multiple Classes of Senior Certificates" below.
Market Discount. A Senior Certificateholder that acquires an undivided
interest in Mortgage Loans may be subject to the market discount rules of Code
Sections 1276 through 1278 to the extent an undivided interest in a Mortgage
Loan is considered to have been purchased at a "market discount." Generally,
the excess of the portion of the principal amount of such Mortgage Loan
allocable to such holder's undivided interest over such holder's tax basis in
such interest. Market discount with respect to a Senior Certificate will be
considered to be zero if the amount allocable to the Senior Certificate is less
than 0.25% of the Senior Certificate's stated redemption price at maturity
multiplied by the weighted average maturity remaining after the date of
purchase. Treasury regulations implementing the market discount rules have not
yet been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment or
a prepayment) or any gain on disposition of a market discount bond acquired by
the taxpayer after October 22, 1986 shall be treated as ordinary income to the
extent that it does not exceed the accrued market discount at the time of such
payment. The amount of accrued market discount for purposes of determining the
tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. While the
Treasury Department has not yet issued regulations, rules described in the
relevant legislative history will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. If a
Senior Certificate is issued with original issue discount, the amount of market
discount that accrues during any accrual period would be equal to the product
of (i) the total remaining market discount, and (ii) a fraction, the numerator
of which is the original issue discount accruing during the period and the
denominator of which is the total remaining original issue discount at the
beginning of the accrual period.
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For Senior Certificates issued without original issue discount, the amount of
market discount that accrues during a period is equal to the product of (i) the
total remaining market discount, and (ii) a fraction, the numerator of which is
the amount of stated interest paid during the accrual period and the
denominator of which is the total amount of stated interest remaining to be
paid at the beginning of the accrual period. For purposes of calculating market
discount under any of the above methods in the case of instruments (such as the
Senior Certificates) which provide for payments which may be accelerated by
reason of prepayments of other obligations securing such instruments, the same
prepayment assumption applicable to calculating the accrual of original issue
discount will apply. Because the regulations described above have not been
issued, it is impossible to predict what effect those regulations might have on
the tax treatment of a Senior Certificate purchased at a discount or premium in
the secondary market.
A holder who acquired a Senior Certificate at a market discount also may be
required to defer, until the maturity date of such Senior Certificate or its
earlier disposition in a taxable transaction, the deduction of a portion of the
amount of interest that the holder paid or accrued during the taxable year on
indebtedness incurred or maintained to purchase or carry the Senior Certificate
in excess of the aggregate amount of interest (including original issue
discount) includible in such holder's gross income for the taxable year with
respect to such Senior Certificate. The amount of such net interest expense
deferred in a taxable year may not exceed the amount of market discount accrued
on the Senior Certificate for the days during the taxable year on which the
holder held the Senior Certificate and, in general, would be deductible when
such market discount is includible in income. The amount of any remaining
deferred deduction is to be taken into account in the taxable year in which the
Senior Certificate matures or is disposed of in a taxable transaction. In the
case of a disposition in which gain or loss is not recognized in whole or in
part, any remaining deferred deduction will be allowed to the extent of gain
recognized on the disposition. This deferral rule does not apply if the Senior
Certificateholder elects to include such market discount in income currently as
it accrues on all market discount obligations acquired by such Senior
Certificateholder in that taxable year or thereafter.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a Certificateholder to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium
in income as interest, based on a constant yield method for Certificates
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Regular Certificate with market discount, the Certificateholder
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such Certificateholder acquires during the year of the election or thereafter.
Similarly, a Certificateholder that makes this election for a Certificate that
is acquired at a premium will be deemed to have made an election to amortize
bond premium with respect to all debt instruments having amortizable bond
premium that such Certificateholder owns or acquires. See "--Regular
Certificates-Original Issue Discount and Premium" herein. The election to
accrue interest, discount and premium on a constant yield method with respect
to a Certificate is irrevocable.
MULTIPLE CLASSES OF SENIOR CERTIFICATES
A. Stripped Bonds and Stripped Coupons
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the interest payments on an obligation from ownership of
the right to receive some or all of the principal payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of Code Sections 1271
through 1288, Code Section 1286 treats a stripped bond or a stripped coupon as
an obligation issued on the date that such stripped interest is created. If a
Trust Fund is created with two classes of Senior Certificates, one class of
Senior Certificates will represent the right to principal and interest, or
principal only, on all or a portion of the Mortgage Loans (the "Stripped Bond
Certificates"), while the second class of Senior Certificates will represent
the right to some or all of the interest on such portion (the "Stripped Coupon
Certificates").
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Servicing fees in excess of reasonable servicing fees ("excess servicing")
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e., 1% interest on the Mortgage Loan principal
balance) or the Certificates are initially sold with a de minimis discount
(assuming no prepayment assumption is required), any non-de minimis discount
arising from a subsequent transfer of the Certificates should be treated as
market discount. The IRS appears to require that reasonable servicing fees be
calculated on a Mortgage Loan by Mortgage Loan basis, which could result in
some Mortgage Loans being treated as having more than 100 basis points of
interest stripped off. See "Certain Federal Income Tax Consequences--Non-REMIC
Certificates--Multiple Classes of Senior Certificates--Stripped Bonds and
Stripped Coupons" herein.
Although not entirely clear, a Stripped Bond Certificate generally should be
treated as a single debt instrument issued on the day it is purchased for
purposes of calculating any original issue discount. Generally, if the discount
on a Stripped Bond Certificate is larger than a de minimis amount (as
calculated for purposes of the original issue discount rules) a purchaser of
such a certificate will be required to accrue the discount under the original
issue discount rules of the Code. See "Non-REMIC Certificates--Single Class of
Senior Certificates--Original Issue Discount" herein. However, a purchaser of a
Stripped Bond Certificate will be required to account for any discount on the
certificate as market discount rather than original issue discount if either
(i) the amount of original issue discount with respect to the certificate was
treated as zero under the original issue discount de minimis rule when the
certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off of the
Trust Fund's Mortgage Loans. Pursuant to Revenue Procedure 91-49, issued on
August 8, 1991, purchasers of Stripped Bond Certificates using an inconsistent
method of accounting must change their method of accounting and request the
consent of the IRS to the change in their accounting method on a statement
attached to their first timely tax return filed after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could be read literally to require that original issue
discount computations be made on a Mortgage Loan by Mortgagee Loan basis.
However, based on the recent IRS guidance, it appears that a Stripped Coupon
Certificate should be treated as a single installment obligation subject to the
original issue discount rules of the Code. As a result, all payments on a
Stripped Coupon Certificate would be included in the certificate's stated
redemption price at maturity for purposes of calculating income on such
certificate under the original issue discount rules of the Code.
It is unclear under what circumstances, if any, the prepayment of Mortgage
Loans will give rise to a loss to the holder of a Stripped Bond Certificate
purchased at a premium or a Stripped Coupon Certificate. If such Certificate is
treated as a single instrument (rather than an interest in discrete mortgage
loans) and the effect of prepayments is taken into account in computing yield
with respect to such Senior Certificate, it appears that no loss may be
available as a result of any particular prepayment unless prepayments occur at
a rate faster than the assumed prepayment rate. However, if such Certificate is
treated as an interest in discrete Mortgage Loans, or if no prepayment
assumption is used, then when a Mortgage Loan is prepaid, the holder of such
Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of such Certificate that is allocable to such Mortgage
Loan.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
urged to consult with their own tax advisors regarding the proper treatment of
these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in mortgage loans of the type that
make up the Trust Fund. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Senior Certificates,
for federal income tax purposes, will be the same as that of the underlying
Mortgage Loans. While Code Section 1286 treats a stripped obligation as a
separate obligation for purposes of the Code provisions addressing original
issue discount, it is not clear whether such characterization would apply with
regard to these other Code sections. Although the issue is not free from doubt,
based on policy considerations, each class of Senior Certificates
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should be considered to represent "qualifying real property loans" within the
meaning of Code Section 593(d), "real estate assets" within the meaning of Code
Section 856(c)(5)(A) and "loans . . . secured by, an interest in real property
which is . . . residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), and interest income attributable to Senior 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 underlying Mortgage Loans and interest on such Mortgage
Loans qualify for such treatment. Prospective purchasers to which such
characterization of an investment in Senior Certificates is material should
consult their own tax advisors regarding the characterization of the Senior
Certificates and the income therefrom. Senior Certificates will be
"obligation[s] (including any participation or certificate of beneficial
ownership therein) which [are] principally secured, directly or indirectly, by
an interest in real property" within the meaning of Code Section 860G(a)(3)."
B. Senior Certificates Representing Interests in Loans Other Than ARM Loans
The original issue discount rules of Code Sections 1271 through 1275 will be
applicable to a 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 in income are
applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated after
July 1, 1982, and mortgages of individuals originated after March 2, 1984.
Under the OID Regulations, such original issue discount could arise by the
charging of points by the originator of the mortgage in an amount greater than
the statutory de minimis exception, including a payment of points that is
currently deductible by the borrower under applicable Code provisions, or under
certain circumstances, by the presence of "teaser" rates on the Mortgage
Loans.Original issue discount on each Senior Certificate must be included in
the owner's 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 amount of original issue discount required to be included in an
owner's income in any taxable year with respect to a Senior Certificate
representing an interest in Mortgage Loans other than Mortgage Loans with
interest rates that adjust periodically ("ARM Loans") likely will be computed
as described below under "--Accrual of Original Issue Discount." The following
discussion is based in part on the OID Regulations and in part on the
provisions of the Tax Reform Act of 1986 (the "1986 Act"). The OID Regulations
generally are effective for debt instruments issued on or after April 4, 1994,
but may be relied upon as authority with respect to debt instruments, such as
the Regular Certificates, issued after December 21, 1992. Alternatively,
proposed Treasury regulations issued December 21, 1992 may be treated as
authority for debt instruments issued after December 21, 1992 and prior to
April 4, 1994, and proposed Treasury regulations issued in 1986 and 1991 may be
treated as authority for instruments issued before December 21, 1992. In
applying these dates, the issue date of the Mortgage Loans should be used, or,
in the case of Stripped Bond Certificates or Stripped Coupon Certificates, the
date such Certificates are acquired. The holder of a Certificate should be
aware, however, that neither the proposed OID Regulations nor the OID
Regulations adequately address certain issues relevant to prepayable
securities.
Under the Code, the Mortgage Loans underlying each Senior Certificate will be
treated as having been issued on the date they were originated with an amount
of original issue discount equal to the excess of such Mortgage Loan's stated
redemption price at maturity over its issue price. The issue price of a
Mortgage Loan is generally the amount lent to the mortgagee, which may be
adjusted to take into account certain loan origination fees. The stated
redemption price at maturity of a Mortgage Loan is the sum of all payments to
be made on such Mortgage Loan other than payments that are treated as qualified
stated interest payments. The accrual of this original issue discount, as
described below under "--Accrual of Original Issue Discount," will, unless
otherwise specified in the related Prospectus Supplement, utilize the original
yield to maturity of the Senior Certificate calculated based on a reasonable
assumed prepayment rate for the mortgage loans underlying the Senior
Certificates (the "Prepayment Assumption"), and will take into account events
that occur during the calculation period. The Prepayment Assumption will be
determined in the manner
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prescribed by regulations that have not yet been issued. The legislative
history of the 1986 Act (the "Legislative History") provides, however, that the
regulations will require that the Prepayment Assumption be the prepayment
assumption that is used in determining the offering price of such Certificate.
No representation is made that any Certificate will prepay at the Prepayment
Assumption or at any other rate. The prepayment assumption contained in the
Code literally only applies to debt instruments collateralized by other debt
instruments that are subject to prepayment rather than direct ownership
interests in such debt instruments, such as the Certificates represent.
However, no other legal authority provides guidance with regard to the proper
method for accruing original issue discount on obligations that are subject to
prepayment, and, until further guidance is issued, the Master Servicer intends
to calculate and report original issue discount under the method described
below.
Accrual of Original Issue Discount. Generally, the owner of a Senior
Certificate must include in gross income the sum of the "daily portions," as
defined below, of the original issue discount on such Senior Certificate for
each day on which it owns a Senior Certificate, including the date of purchase
but excluding the date of disposition. In the case of an original owner, the
daily portions of original issue discount with respect to each component
generally will be determined as follows under the Amendments. A calculation
will be made by the Master Servicer or such other entity specified in the
related Prospectus Supplement of the portion of original issue discount that
accrues during each successive monthly accrual period (or shorter period from
the date of original issue) that ends on the day in the calendar year
corresponding to each of the Distribution Dates on the Senior Certificate (or
the day prior to each such date). This will be done, in the case of each full
month accrual period, by adding (i) the present value at the end of the accrual
period (determined by using as a discount factor the original yield to maturity
of the respective component, under the Prepayment Assumption) of all remaining
payments to be received under the Prepayment Assumption on the respective
component, and (ii) any payments received during such accrual period (other
than a payment of qualified stated interest), and subtracting from that total
the "adjusted issue price" of the respective component at the beginning of such
accrual period. The "adjusted issue price" of a Senior Certificate at the
beginning of the first accrual period is its issue price; the "adjusted issue
price" of a Senior Certificate at the beginning of a subsequent accrual period
is the "adjusted issue price" at the beginning of the immediately preceding
accrual period plus the amount of, original issue discount allocable to that
accrual period reduced by the amount of any payment (other than a payment of
qualified stated interest) made at the end of or during that accrual period.
The original issue discount accruing during such accrual period 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 monthly accrual period, the daily portions
of original issue discount must be determined according to an appropriate
allocation under any reasonable method.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest as it accrues rather than when received. However, the
amount of original issue discount includible in the income of a holder of an
obligation is reduced when the obligation is acquired 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 Certificateholder are
purchased at a price equal to the then unpaid principal amount of such Mortgage
Loan, no original issue discount attributable to the difference between the
issue price and the original principal amount of such Mortgage Loan (i.e.
points) will be includible by such holder. Other original issue discount on the
Mortgage Loans (e.g., that arising from a "teaser" rate) would still need to be
accrued.
C. Senior Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such as the
Senior Certificates, which represent interests in ARM Loans. Additionally, the
IRS has not issued guidance under the Code's coupon stripping rules with
respect to such instruments. In the absence of any authority the Master
Servicer will report original issue discount on Senior Certificates
attributable to ARM Loans ("Stripped ARM
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Obligations") to holders in a manner it believes is consistent with the rules
described above under the heading "Senior Certificates Representing Interests
in Loans Other Than ARM Loans" and with the OID Regulations. In general,
application of these rules may require inclusion of income on a Stripped ARM
Obligation in advance of the receipt of cash attributable to such income.
Further, the addition of interest deferred by reason of negative amortization
("Deferred Interest") to the principal balance of an ARM Loan may require the
inclusion of such amount in the income of the Senior Certificateholder when
such amount accrues. Furthermore, the addition of Deferred Interest to the
Senior Certificate's principal balance will result in additional income
(including possibly original issue discount income) to the Senior
Certificateholder over the remaining life of such Senior Certificates.
Because the treatment of Stripped ARM Obligations is uncertain, investors are
urged to consult their tax advisors regarding how income will be includible
with respect to such Certificates.
POSSIBLE APPLICATION OF PROPOSED CONTINGENT PAYMENT RULES TO CERTAIN NON-REMIC
CERTIFICATES
The regulations under section 1275 of the Code include rules for obligations
that provide for one or more contingent payments. Rights to interest payments
on a mortgage loan might be considered to be contingent within the meaning of
the Proposed Regulations if such interest would not be paid if the borrower
exercised its right to prepay the mortgage loan. However, in the case of an
investor having a right to shares of the interest and principal payments on
such a mortgage loan when the share of interest is not substantially greater
than the share of principal, the possibility of prepayment should not be
considered to characterize otherwise noncontingent interest payments as
contingent payments; the absence of interest payments following a prepayment
would be the normal consequence of the return of such investor's capital in the
form of a principal payment. On the other hand, a right to interest on such a
mortgage loan is more likely to be regarded as contingent if held by an
investor that does not also hold a right to the related principal; such an
investor would not recover its capital through receipt of a principal payment
at the time of the prepayment of the mortgage loan.
Applying these principles to the Senior Certificates, because the Mortgage
Loans are subject to prepayment at any time, payments on a Class of Senior
Certificates representing a right to interest on the Mortgage Loans could be
considered to be contingent within the meaning of the Proposed Regulations, at
least if such Senior Certificate was issued at a premium. The likelihood that
such payments will be considered contingent increases the greater the amount of
such premium.
In the event that payments on a Senior Certificate in respect of interest on
the Mortgage Loans are considered contingent, then the holder would generally
report income or loss as described above under "Stripped Bonds and Stripped
Coupons," except that the yield that would be used in calculating interest
income would not be the actual yield but would instead equal the "applicable
Federal rate" (the "AFR", generally, an average of current yields of Treasury
securities computed and published monthly by the IRS), in effect at the time of
purchase of such Senior Certificate by such holder. In addition, once such
Holder's adjusted basis in such Senior Certificate has been reduced (by prior
distributions or losses) to an amount equal to the aggregate amount of the
remaining noncontingent payments of the Mortgage Loans that are allocable to
such Senior Certificate (or to zero if such Senior Certificate does not share
in principal payments), then such holder would recognize income in each
subsequent month equal to the full amount of interest on the Mortgage Loans
that accrues in that month and is allocable to such Senior Certificate. It is
uncertain whether, under the contingent payment rules, any other adjustments
would be made to take account of prepayments of the Mortgage Loans.
SALE OR EXCHANGE OF A SENIOR CERTIFICATE
Sale or exchange of a Senior Certificate prior to its maturity will result in
gain or loss equal to the difference, if any, between the amount received and
the owner's adjusted basis in the Senior Certificate. Such adjusted basis
generally will equal the seller's purchase price for the Senior Certificate,
increased by the
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original issue discount included in the seller's gross income with respect to
the Senior Certificate, and reduced by principal payments on the Senior
Certificate previously received by the seller. Such gain or loss will be
capital gain or loss to an owner for which a Senior Certificate is a "capital
asset" within the meaning of Code Section 1221, and will be long-term or
short-term depending on whether the Senior Certificate has been owned for the
long-term capital gain holding period (currently more than one year).
Senior Certificates will be "evidences of indebtedness" within the meaning
of Code Section 582(c)(1), so that gain or loss recognized from the sale of a
Senior Certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
NON-U.S. PERSONS
Generally, to the extent that a Senior 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 (i) an owner that is not a U.S. Person (as defined
below), or (ii) a Senior Certificateholder holding on behalf of an owner that
is not a U.S. Person, will be subject to federal income tax, collected by
withholding, at a rate of 30% or such lower rate as may be provided for
interest by an applicable tax treaty. Accrued original issue discount
recognized by the owner on the sale or exchange of such a Senior Certificate
also will be subject to federal income tax at the same rate. Generally, such
payments would not be subject to withholding to the extent that a Senior
Certificate evidences ownership in Mortgage Loans issued after July 18, 1984,
if (i) such Senior Certificateholder does not actually or constructively own
10 percent or more of the combined voting power of all classes of equity in
the issuer (which for purposes of this discussion may be defined as the Trust
Fund (the "Issuer")); (ii) such Senior Certificateholder is not a controlled
foreign corporation (within the meaning of Code Section 957) related to the
Issuer; and (iii) such Senior Certificateholder complies with certain
identification requirements (including delivery of a statement, signed by the
Senior Certificateholder under penalties of perjury, certifying that such
Senior Certificateholder is not a U.S. Person and providing the name and
address of such Senior Certificateholder).
For purposes of this discussion, a "U.S. Person" means a citizen or resident
of the United States, a corporation or a partnership organized in or under the
laws of the United States, or any political subdivision thereof or an estate
or trust, the income of which, from sources outside the United States, is
includible in gross~income for federal income tax purposes regardless of its
connection with the conduct of a trade or business within the United States.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Master Servicer will furnish or make available, within a reasonable time
after the end of each calendar year, to each Certificateholder at any time
during such year, such information as may be deemed necessary or desirable to
assist Certificateholders in preparing their federal income tax returns, or to
enable holders to make such information available to owners or other financial
intermediaries of holders that hold such Certificates as nominees. If a
holder, owner or other recipient of a payment on behalf of an owner fails to
supply a certified taxpayer identification number or if the Secretary of the
Treasury determines that such person has not reported all interest and
dividend income required to be shown on its federal income tax return, 31%
backup withholding may be required with respect to any payments. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against such recipient's federal income tax liability.
REMIC CERTIFICATES
The Trust Fund relating to a Series of Certificates may elect to be treated
as a REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is not generally subject to federal income tax
(see, however "Residual Certificates--Prohibited Transactions"), if a Trust
Fund with respect to which a REMIC election is made fails to comply with one
or more of the ongoing requirements of
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the Code for REMIC status during any taxable year, including the implementation
of restrictions on the purchase and transfer of the residual interest in a
REMIC as described below under "Residual Certificates", the Code provides that
a Trust Fund will not be treated as a REMIC for such year and thereafter. In
that event, such entity may be taxable as a separate corporation, and the
related REMIC Certificates may not be accorded the status or given the tax
treatment described below. While the Code authorizes the Treasury Department to
issue regulations providing relief in the event of an inadvertent termination
of status as a REMIC, no such regulations have been issued. Any such relief
moreover, may be accompanied by sanctions, such as the imposition of a
corporate tax on all or a portion of the REMIC's income for the period in which
the requirements for such status are not satisfied. With respect to each such
Trust Fund that elects REMIC status, Brown & Wood LLP will deliver its opinion
generally to the effect that, under then existing law and assuming compliance
with all provisions of the related Agreement, such Trust Fund will qualify as a
REMIC and the related Certificates will be considered to be regular interests
("Regular Certificates") or residual interests ("Residual Certificates") in the
REMIC. The related Prospectus Supplement for each Series of Certificates will
indicate whether the Trust Fund will make a REMIC election and whether a class
of Certificates will be treated as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a REMIC
election is made, (i) Certificates held by a thrift institution taxed as a
"mutual savings bank" or "domestic building and loan association" will
represent interests in "qualifying real property loans" within the meaning of
Code Section 593(d)(1); (ii) Certificates held by a thrift institution taxed as
a "domestic building and loan association" will constitute assets described in
Code Section 7701(a)(19)(C); (iii) Certificates held by a real estate
investment trust will constitute "real estate assets" within the meaning of
Code Section 856(c)(5)(A); and (iv) interest on Certificates held by a real
estate investment trust will be considered "interest on obligations secured by
mortgages on real property" within the meaning of Code Section 856(c)(3)(B). If
less than 95% of the REMIC's assets are assets qualifying under any of the
foregoing Code sections, the Certificates will be qualifying assets only to the
extent that the REMIC's assets are qualifying assets. In addition, payments on
Mortgage Loans held pending distribution on the REMIC Certificates will be
considered to be qualifying assets under the foregoing Code Sections.
In some instances, the Mortgage Loans may not be treated entirely as assets
described in the foregoing sections. See, in this regard, the discussion of
Buydown Mortgage Loans contained in "Non-REMIC Certificates--Single Class of
Senior Certificates" above. REMIC Certificates held by a real estate investment
trust will not constitute "Government Securities" within the meaning of Code
Section 856(c)(5)(A), and REMIC Certificates held by a regulated investment
company will not constitute "Government Securities" within the meaning of Code
Section 851(b)(4)(A)(ii). REMIC Certificates held by certain financial
institutions will constitute "evidences of indebtedness" within the meaning of
Code Section 582(c)(1).
A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally
secured by an interest in real property and that is transferred to the REMIC
within a prescribed time period in exchange for regular or residual interests
in the REMIC. The REMIC Regulations provide that manufactured housing or mobile
homes (not including recreational vehicles, campers or similar vehicles) which
are "single family residences" under Code Section 25(e)(10) will qualify as
real property without regard to state law classifications. Under Code Section
25(e)(10), a single family residence includes any manufactured home which has a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches and which is of a kind customarily used at a fixed location.
Tiered REMIC Structures. For certain Series of Certificates, two separate
elections may be made to treat designated portions of the related Trust Fund as
REMICs (respectively, the "Subsidiary REMIC" and the "Master REMIC") for
federal income tax purposes. Upon the issuance of any such Series of
Certificates, Brown & Wood LLP, counsel to the Depositor, will deliver its
opinion generally to the effect that, assuming compliance with all provisions
of the related Agreement, the Master REMIC as well as any Subsidiary REMIC will
each qualify as a REMIC and the REMIC Certificates issued by the Master REMIC
and the
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Subsidiary REMICs, respectively, will be considered to evidence ownership of
Regular Certificates or Residual Certificates in the related REMIC within the
meaning of the REMIC provisions.
Only REMIC Certificates issued by the Master REMIC will be offered hereunder.
The Subsidiary REMIC and the Master REMIC will be treated as one REMIC solely
for purposes of determining whether the REMIC Certificates will be (i)
"qualifying real property loans" under Section 593(d) of the Code; (ii) "real
estate assets" within the meaning of Section 856(c)(5)(A) of the Code; (iii)
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code; and (iv) whether the income on such Certificates is interest
described in Section 856(c)(3)(B) of the Code.
REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, Regular Certificates
will be treated for federal income tax purposes as debt instruments issued by
the REMIC and not as ownership interests in the REMIC or its assets. Moreover,
holders of Regular Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to Regular
Certificates under an accrual method.
Original Issue Discount and Premium. The Regular Certificates may be issued
with "original issue discount" within the meaning of Code Section 1273(a).
Generally, such original issue discount, if any, will equal the difference
between the "stated redemption price at maturity" of a Regular Certificate and
its "issue price." Holders of any class of Certificates issued with original
issue discount will be required to include such original issue discount in
gross income for federal income tax purposes as it accrues, in accordance with
a constant interest method based on the compounding of interest, in advance of
receipt of the cash attributable to such income. The following discussion is
based in part on the OID Regulations and in part on the provisions of the 1986
Act. Holders of Regular Certificates (the "Regular Certificateholders") should
be aware, however, that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the Regular Certificates.
Rules governing original issue discount are set forth in Code Sections 1271
through 1273 and 1275. These rules require that the amount and rate of accrual
of original issue discount be calculated based on a Prepayment Assumption and
prescribe a method for adjusting the amount and rate of accrual of such
discount where the actual prepayment rate differs from the Prepayment
Assumption. Under the Code, the Prepayment Assumption must be determined in the
manner prescribed by regulations which have not yet been issued. The
Legislative History provides, however, that Congress intended the regulations
to require that the Prepayment Assumption be the prepayment assumption that is
used in determining the initial offering price of such Regular Certificates.
The Prospectus Supplement for each Series of Regular Certificates will specify
the Prepayment Assumption to be used for the purpose of determining the amount
and rate of accrual of original issue discount. No representation is made that
the Regular Certificates will prepay at the Prepayment Assumption or at any
other rate.
In general, each Regular Certificate will be treated as a single installment
obligation issued with an amount of original issue discount equal to the excess
of its "stated redemption price at maturity" over its "issue price." The issue
price of a Regular Certificate is the first price at which a substantial amount
of Regular Certificates of that class are sold to the public (excluding bond
houses, brokers, underwriters or wholesalers). If less than a substantial
amount of a particular class of Regular Certificates is sold for cash on or
prior to the date of their initial issuance (the "Closing Date"), the issue
price for such class will be treated as the fair market value of such class on
the Closing Date. 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 includes the
original principal amount of the Regular Certificate, but generally will not
include distributions of interest if such distributions constitute "qualified
stated interest." Qualified stated interest generally means interest payable at
a single fixed rate or qualified variable rate (as described below) provided
that such interest payments are unconditionally payable at intervals of one
year or less during the entire term
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of the Regular Certificate. Interest is payable at a single fixed rate only if
the rate appropriately takes into account the length of the interval between
payments. Distributions of interest on Regular Certificates with respect to
which deferred interest will accrue will not constitute qualified stated
interest payments, in which case the stated redemption price at maturity of
such Regular Certificates includes all distributions of interest as well as
principal thereon.
Where 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 greater of any original issue discount (disregarding
the rate in the first period) and any interest foregone during the first period
is treated as the amount by which the stated redemption price at maturity of
the Certificate exceeds its issue price for purposes of the de minimis rule
described below. The OID Regulations suggest that all interest on a long first
period Regular Certificate that is issued with non-de minimis original issue
discount, as determined under the foregoing rule, will be treated as original
issue discount. Where the interval between the issue date and the first
Distribution Date on a Regular Certificate is shorter than the interval between
subsequent Distribution Dates, interest due on the first Distribution Date in
excess of the amount that accrued during the first period would be added to the
Certificates stated redemption price at maturity. Regular Certificateholders
should consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a Regular Certificate.
Under the 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.
Holders generally must report de minimis original issue discount pro rata as
principal payments are received, and such income will be capital gain if the
Regular Certificate is held as a capital asset. However, accrual method holders
may elect to accrue all de minimis original issue discount as well as market
discount under a constant interest method.
The Prospectus Supplement with respect to a Trust Fund may provide for
certain Regular Certificates to be issued at prices significantly exceeding
their principal amounts or based on notional principal balances (the "Super-
Premium Certificates"). The income tax treatment of such Regular Certificates
is not entirely certain. For information reporting purposes, the Trust Fund
intends to take the position that the stated redemption price at maturity of
such Regular Certificates is the sum of all payments to be made on such Regular
Certificates determined under the Prepayment Assumption, with the result that
such Regular Certificates would be issued with original issue discount. The
calculation of income in this manner could result in negative original issue
discount (which delays future accruals of original issue discount rather than
being immediately deductible) when prepayments on the Mortgage Loans exceed
those estimated under the Prepayment Assumption. The IRS might contend,
however, that certain contingent payment rules contained in regulations
proposed on April 8, 1986, with respect to original issue discount should apply
to such Certificates. Under those rules, a Super-Premium Certificate would not
be required to report income on the basis of a yield based on the Prepayment
Assumption, but rather would use a yield equal to the applicable Federal rate
(which is an average yield on Treasury obligations), until the initial price of
the respective Super-Premium Certificate is fully recovered. The IRS recently
proposed and then withdrew a revised set of proposed contingent payment
regulations which differed substantially from the contingent payment
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regulations proposed in 1986. If the Super Premium Certificates were treated as
contingent payment obligations, it is unclear how holders of those Certificates
would report income or recover their basis. In the alternative, the IRS could
assert that the stated redemption price at maturity of such Regular
Certificates should be limited to their principal amount (subject to the
discussion below under "--Accrued Interest Certificates"), so that such Regular
Certificates would be considered for federal income tax purposes to be issued
at a premium. If such a position were to prevail, the rules described below
under "--Taxation of Owners of Regular Certificates--Premium" would apply. It
is unclear when a loss may be claimed for any unrecovered basis for a Super-
Premium Certificate. It is possible that a holder of a Super-Premium
Certificate may only claim a loss when its remaining basis exceeds the maximum
amount of future payments, assuming no further prepayments or when the final
payment is received with respect to such Super-Premium Certificate.
Under the REMIC Regulations, if the issue price of a Regular Certificate
(other than Regular Certificate based on a notional amount) does not exceed
125% of its actual principal amount, the interest rate is not considered
disproportionately high. Accordingly, such Regular Certificate generally should
not be treated as a Super-Premium Certificate and the rules described below
under "--Regular Certificates--Premium" should apply. However, it is possible
that holders of Regular Certificates issued at a premium, even if the premium
is less than 25% of such Certificate's actual principal balance, will be
required to amortize the premium under an original issue discount method or
contingent interest method even though no election under Code Section 171 is
made to amortize such premium.
Generally, a Regular Certificateholder must include in gross income the
"daily portions," as determined below, of the original issue discount that
accrues on a Regular Certificate for each day the Regular Certificateholder
holds the Regular Certificate, including the purchase date but excluding the
disposition date. In the case of an original holder of a Regular Certificate, a
calculation will be made of the portion of the original issue discount that
accrues during each successive period ("an accrual period") that ends on the
day in the calendar year corresponding to a Distribution Date (or if
Distribution Dates are on the first day or first business day of the
immediately preceding month, interest may be treated as payable on the last day
of the immediately preceding month) and begins on the day after the end of the
immediately preceding accrual period (or on the issue date in the case of the
first accrual period). This will be done, in the case of each full accrual
period, by (i) adding (a) the present value at the end of the accrual period
(determined by using as a discount factor the original yield to maturity of the
Regular Certificates as calculated under the Prepayment Assumption) of all
remaining payments to be received on the Regular Certificate under the
Prepayment Assumption, and (b) any payments included in the stated redemption
price at maturity received during such accrual period, and (ii) subtracting
from that total the "adjusted issue price" of the Regular Certificates at the
beginning of such accrual period. The "adjusted issue price" of a Regular
Certificate at the beginning of the first accrual period is its issue price;
the "adjusted issue price" of a Regular Certificate at the beginning of a
subsequent accrual period is the "adjusted issue price" at the beginning of the
immediately preceding accrual period plus the amount of original issue discount
allocable to that accrual period and reduced by the accrual period. The
original issue discount accrued during an accrual period 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 accrual period. The calculation of original
issue discount under the method described above will cause the accrual of
original issue discount to either increase or decrease (but never below zero)
in a given accrual period to reflect the fact that prepayments are occurring
faster or slower than under the Prepayment Assumption. With respect to an
initial accrual period shorter than a full accrual period the daily portions of
original issue discount may be determined according to an appropriate
allocation under any reasonable method.
A subsequent purchaser of a Regular Certificate issued with original issue
discount who purchases the Regular Certificate at a cost less than the
remaining stated redemption price at maturity will also be required to include
in gross income the sum of the daily portions of original issue discount on
that Regular Certificate. In computing the daily portions of original issue
discount for such a purchaser (as well as an initial purchaser that purchases
at a price higher than the adjusted issue price but less than the stated
redemption price at
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maturity), however, the daily portion is reduced by the amount that would be
the daily portion for such day (computed in accordance with the rules set forth
above) multiplied by a fraction, the numerator of which is the amount, if any,
by which the price paid by such holder for that Regular Certificate exceeds the
following amount: (a) the sum of the issue price plus the aggregate amount of
original issue discount that would have been includible in the gross income of
an original Regular Certificateholder (who purchased the Regular Certificate at
its issue price), less (b) any prior payments included in the stated redemption
price at maturity, and the denominator of which is the sum of the daily
portions for that Regular Certificate for all days beginning on the date after
the purchase date and ending on the maturity date computed under the Prepayment
Assumption.
Variable Rate Regular Certificate. Regular Certificates may provide for
interest based on a variable rate. Interest based on a variable rate will
constitute qualified stated interest and not contingent interest if, generally,
(i) such interest is unconditionally payable at least annually, (ii) the issue
price of the debt instrument does not exceed the total noncontingent principal
payments and (iii) interest is based on a "qualified floating rate," an
"objective rate," a combination of a single fixed rate and one or more
"qualified floating rates," one "qualified inverse floating rate," or a
combination of "qualified floating rates " that do not operate in a manner that
significantly accelerates or defers interest payments on such Regular
Certificate.
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 and Premium" by assuming generally that the
index used for the variable rate will remain fixed throughout the term of the
Certificate. Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the Depositor intends to treat interest on a
Regular Certificate that is a weighted average of the net interest rates on
Mortgage Loans as qualified stated interest. In such case, the weighted average
rate used to compute the initial pass-through rate on the Regular Certificates
will be deemed to be the index in effect through the life of the Regular
Certificates. It is possible, however, that the IRS may treat some or all of
the interest on Regular Certificates with a weighted average rate as taxable
under the rules relating to obligations providing for contingent payments. Such
treatment may effect the timing of income accruals on such Regular
Certificates.
Market Discount. A purchaser of a Regular Certificate may be subject to the
market discount provisions of Code Sections 1276 through 1278. Under these
provisions and the OID Regulations, "market discount" equals the excess, if
any, of (i) the Regular Certificate's stated principal amount or, in the case
of a Regular Certificate with original issue discount, the adjusted issue price
(determined for this purpose as if the purchaser had purchased such Regular
Certificate from an original holder) over (ii) the price for such Regular
Certificate paid by the purchaser. A Certificateholder that purchases a Regular
Certificate at a market discount will recognize income upon receipt of each
distribution representing stated redemption price. In particular, under Section
1276 of the Code such a holder generally will be required to allocate each such
principal distribution first to accrued market discount not previously included
in income, and to recognize ordinary income to that extent. A Certificateholder
may elect to include market discount in income currently as it accrues rather
than including it on a deferred basis in accordance with the foregoing. If
made, such election will apply to all market discount bonds acquired by such
Certificateholder on or after the first day of the first taxable year to which
such election applies. In addition, the OID Regulations permit a
Certificateholder using the accrual method of accounting to elect to accrue all
interest, discount (including de minimis market or original issue discount) and
premium in income as interest, based on a constant yield method. If such an
election were made with respect to a Regular Certificate with market discount,
the Certificateholder is deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Certificateholder acquires during the year of the
election or thereafter. Similarly, a Certificateholder that makes this election
for a Certificate that is acquired at a premium is deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See
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"Taxation of Regular Certificates--Premium". The election to accrue interest,
discount and premium on a constant yield method with respect to a Certificate
is irrevocable.
Market discount with respect to a Regular Certificate will be considered to
be zero if the amount allocable to the Regular Certificate is less than 0.25%
of the Regular Certificate's stated redemption price at maturity multiplied by
the Regular Certificate's weighted average maturity remaining after the date of
purchase. If market discount on a Regular Certificate is considered to be zero
under this rule, the actual amount of market discount must be allocated to the
remaining principal payments on the Regular Certificate, and gain equal to such
allocated amount will be recognized when the corresponding principal payment is
made. Treasury regulations implementing the market discount rules have not yet
been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment or
a prepayment) or any gain on disposition of a market discount bond acquired by
the taxpayer after October 22, 1986, shall be treated as ordinary income to the
extent that it does not exceed the accrued market discount at the time of such
payment. The amount of accrued market discount for purposes of determining the
tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest rate or according to one of the following methods. For
Regular Certificates issued with original issue discount, the amount of market
discount that accrues during a period is equal to the product of (i) the total
remaining market discount, multiplied by (ii) a fraction, the numerator of
which is the original issue discount accruing during the period and the
denominator of which is the total remaining original issue discount at the
beginning of the period. For Regular Certificates issued without original issue
discount, the amount of market discount that accrues during a period is equal
to the product of (a) the total remaining market discount and (b) a fraction,
the numerator of which is the amount of stated interest paid during the accrual
period and the denominator of which is the total amount of stated interest
remaining to be paid at the beginning of the period. For purposes of
calculating market discount under any of the above methods in the case of
instruments (such as the Regular Certificates) which provide for payments which
may be accelerated by reason of prepayments of other obligations securing such
instruments, the same Prepayment Assumption applicable to calculating the
accrual of original issue discount will apply.
A holder of a Regular Certificate that acquires such Regular Certificate at a
market discount also may be required to defer until the maturity date of such
Regular Certificate or its earlier disposition in a taxable transaction, the
deduction of a portion of the amount of interest that the holder paid or
accrued during the taxable year on indebtedness incurred or maintained to
purchase or carry the Regular Certificate in excess of the aggregate amount of
interest (including original issue discount) includible in such holder's gross
income for the taxable year with respect to such Regular Certificate. The
amount of such net interest expense deferred in a taxable year may not exceed
the amount of market discount accrued on the Regular Certificate for the days
during the taxable year on which the holder held the Regular Certificate and,
in general, would be deductible when such market discount is includible in
income. The amount of any remaining deferred deduction is to be taken into
account in the taxable year in which the Regular Certificate matures or is
disposed of in a taxable transaction. In the case of a disposition in which
gain or loss is not recognized in whole or in part, any remaining deferred
deduction will be allowed to the extent of gain recognized on the disposition.
This deferral rule does not apply if the Regular Certificateholder elects to
include such market discount in income currently as it accrues on all market
discount obligations acquired by such Regular Certificateholder in that taxable
year or thereafter.
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Premium. A purchaser of a Regular Certificate that purchases the Regular
Certificate at a cost (not including accrued qualified stated interest) greater
than its remaining stated redemption price at maturity will be considered to
have purchased the Regular Certificate at a premium, and may elect to amortize
such premium under a constant yield method. A Certificateholder that makes this
election for a Certificate that is acquired at a premium will be deemed to have
made an election to amortize bond premium with respect to all debt instruments
having amortizable bond premium that such Certificateholder acquires during the
year of the election or thereafter. It is not clear whether the Prepayment
Assumption would be taken into account in determining the life of the Regular
Certificate for this purpose. However, the Legislative History states that the
same rules that apply to accrual of market discount (which rules require use of
a Prepayment Assumption in accruing market discount with respect to Regular
Certificates without regard to whether such Certificates have original issue
discount) will also apply in amortizing bond premium under Code Section 171.
The Code provides that amortizable bond premium will be allocated among the
interest payments on such Regular Certificates and will be applied as an offset
against such interest payment.
Deferred Interest. Certain classes of Regular Certificates will provide for
the accrual of interest when one or more ARM Loans are adding interest to their
principal balance by reason of negative amortization ("Deferred Interest"). Any
Deferred Interest that accrues with respect to a class of Regular Certificates
will constitute income to the holders of such Certificates prior to the time
distributions of cash with respect to such Deferred Interest are made. It is
unclear, under the OID Regulations, whether any of the interest on such
Certificates will constitute qualified stated interest or whether all or a
portion of the interest payable on the Certificates must be included in the
stated redemption price at maturity of the Certificates and accounted for as
original issue discount (which could accelerate such inclusion). Interest on
Regular Certificates must in any event be accounted for under an accrual method
by the holders of such Certificates, and therefore applying the latter analysis
may result only in a slight difference in the timing of the inclusion in income
of interest on such Regular Certificates.
Effects of Defaults and Delinquencies. Certain Series of Certificates may
contain one or more Classes of Subordinate Certificates, and in the event there
are defaults or delinquencies on the Mortgage Loans, amounts that would
otherwise be distributed on the Subordinate Certificates may instead be
distributed on the Senior Certificates. Holders of Subordinate Certificates
nevertheless will be required to report income with respect to such
Certificates under an accrual method without giving effect to delays and
reductions in distributions on such Subordinate Certificates attributable to
defaults and delinquencies on the Mortgage Loans, except to the extent that it
can be established that such amounts are uncollectible. As a result, the amount
of income reported by a holder of a Subordinate Certificate in any period could
significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Subordinate Certificate is reduced as a result of defaults
and delinquencies on the Mortgage Loans. However, the timing and character of
such losses or reductions in income are uncertain, and, accordingly, holders of
Subordinate Certificates should consult their own tax advisors on this point.
Sale, Exchange or Redemption. If a Regular Certificate is sold, exchanged,
redeemed or retired, the seller will recognize gain or loss equal to the
difference between the amount realized on the sale, exchange, redemption, or
retirement and the seller's adjusted basis in the Regular Certificate. Such
adjusted basis generally will equal the cost of the Regular Certificate to the
seller, increased by any original issue discount and market discount included
in the seller's gross income with respect to the Regular Certificate, and
reduced (but not below zero) by payments included in the stated redemption
price at maturity previously received by the seller and by any amortized
premium. Similarly, a holder who receives a payment which is part of the stated
redemption price at maturity of a Regular Certificate will recognize gain equal
to the excess, if any, of the amount of the payment over the holder's adjusted
basis in the Regular Certificate. A holder of a Regular Certificate who
receives a final payment which is less than the holder's adjusted basis in the
Regular Certificate will generally recognize a loss. Except as provided in the
following paragraph and as provided under "Market Discount" below, any such
gain or loss will be capital gain or loss, provided that the Regular
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Certificate is held as a "capital asset" (generally, property held for
investment) within the meaning of Code Section 1221.
Gain from the sale or other 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 such holder's income with respect to the Regular Certificate
had income accrued thereon at a rate equal to 110% of the AFR as defined in
Code Section 1274(d) determined as of the date of purchase of such Regular
Certificate, over (ii) the amount actually includible in such holder's income.
Regular Certificates will be "evidences of indebtedness" within the meaning
of Code Section 582(c)(1), so that gain or loss recognized from the sale of a
Regular Certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
The Regular Certificate information reports will include a statement of the
adjusted issue price of the Regular Certificate at the beginning of each
accrual period. In addition, the reports will include information necessary to
compute the accrual of any market discount that may arise upon secondary
trading of Regular Certificates. Because exact computation of the accrual of
market discount on a constant yield method would require information relating
to the holder's purchase price which the REMIC may not have, it appears that
the information reports will only require information pertaining to the
appropriate proportionate method of accruing market discount.
Accrued Interest Certificates. Certain of the Regular Certificates ("Payment
Lag Certificates") may provide for payments of interest based on a period that
corresponds to the interval between Distribution Dates but that ends prior to
each such Distribution Date. The period between the Closing Date for Payment
Lag Certificates and their first Distribution Date may or may not exceed such
interval. Purchasers of Payment Lag Certificates for which the period between
the Closing Date and the first Distribution Date does not exceed such interval
could pay upon purchase of the Regular Certificates accrued interest in excess
of the accrued interest that would be paid if the interest paid on the
Distribution Date were interest accrued from Distribution Date to Distribution
Date. If a portion of the initial purchase price of a Regular Certificate is
allocable to interest that has accrued prior to the issue date ("pre-issuance
accrued interest") and the Regular Certificate provides for a payment of stated
interest on the first payment date (and the first payment date is within one
year of the issue date), that equals or exceeds the amount of the pre-issuance
accrued interest, then the Regular Certificates' issue price may be computed by
subtracting from the issue price the amount of pre-issuance accrued interest,
rather than as an amount payable on the Regular Certificate. However, it is
unclear under this method how the Proposed OID Regulations treat interest on
Payment Lag Certificates as described above. Therefore, in the case of a
Payment Lag Certificate, the REMIC intends to include accrued interest in the
issue price and report interest payments made on the first Distribution Date as
interest only to the extent such payments represent interest for the number of
days that the Certificateholder has held such Payment Lag Certificate during
the first Accrual Period.
Investors should consult their own tax advisors concerning the treatment for
federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under temporary Treasury regulations, if
the REMIC is considered to be a "single-class REMIC," a portion of the REMIC's
servicing, administrative and other noninterest expenses will be allocated as a
separate item to those Regular Certificateholders that are "passthrough
interest holders." Generally, a single-class REMIC is defined as (i) a REMIC
that would be treated as a fixed investment trust under Treasury regulations
but for its qualification as a REMIC, or (ii) a REMIC that is substantially
similar to an investment trust but is structured with the principal purpose of
avoiding this allocation requirement imposed by the temporary regulations. Such
a pass-through interest holder would be required to add its allocable share, if
any, of such expenses to its gross income and to treat the same amount as an
item of investment expense. An individual generally would be allowed a
deduction for such expenses only, as a miscellaneous itemized deduction subject
to the limitations under Code Section
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67. That section allows such deductions only to the extent that in the
aggregate such expenses exceed two percent of the holder's adjusted gross
income. In addition, Code Section 68 provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a certain amount (the "Applicable Amount") will be reduced by the
lesser of (i) 3% of the excess of the individual's adjusted gross income over
the Applicable Amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for the taxable year. The amount of additional taxable
income recognized by Residual Certificateholders who are subject to the
limitations of either Code Section 67 or Code Section 68 may be substantial.
The REMIC is required to report to each pass-through interest holder and to the
IRS such holder's allocable share, if any, of the REMIC's non-interest
expenses. The term "pass-through interest holder" generally refers to
individuals, entities taxed as individuals and certain pass-through entities
including regulated investment companies, but does not include real estate
investment trusts. Certificateholders that are "pass-through interest holders"
should consult their own tax advisors about the impact of these rules on an
investment in the Regular Certificates.
Treatment of Realized Losses. Although not entirely clear, it appears that
holders of REMIC Regular Certificates that are corporations should in general
be allowed to deduct as an ordinary loss any loss sustained during the taxable
year on account of any such Certificates becoming wholly or partially
worthless, and that, in general, holders of Certificates that are not
corporations should be allowed to deduct as a short-term capital loss any loss
sustained during the taxable year on account of any such Certificates becoming
wholly worthless. Although the matter is not entirely clear, non-corporate
holders of Certificates may be allowed a bad debt deduction at such time that
the principal balance of any such Certificate is reduced to reflect realized
losses resulting from any liquidated Mortgage Loans. The Internal Revenue
Service, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect realized losses only after all Mortgage
Loans remaining in the related Trust Fund have been liquidated or the
Certificates of the related Series have been otherwise retired. Potential
investors and holders of the Certificates are urged to consult their own tax
advisors regarding the appropriate timing, amount and character of any loss
sustained with respect to such Certificates, including any loss resulting from
the failure to recover previously accrued interest or discount income. Special
loss rules are applicable to banks and thrift institutions, including rules
regarding reserves for bad debts. Such taxpayers are advised to consult their
tax advisors regarding the treatment of losses on Certificates.
Non-U.S. Persons. Generally, payments of interest (including any payment with
respect to accrued original issue discount) on the Regular Certificates to a
Regular Certificateholder who is a non-U.S. Person not engaged in a trade or
business within the United States, will not be subject to federal withholding
tax if (i) such Regular Certificateholder does not actually or constructively
own 10 percent or more of the combined voting power of all classes of equity in
the issuer (which for purposes of this discussion may be defined as the Trust
Fund or the beneficial owners of the related Residual Certificates (the
"Issuer")); (ii) such Regular Certificateholder is not a controlled foreign
corporation (within the meaning of Code Section 957), related to the Issuer;
and (iii) such Regular Certificateholder complies with certain identification
requirements (including delivery of a statement, signed by the Regular
Certificateholder under penalties of perjury, certifying that such Regular
Certificateholder is a foreign person and providing the name and address of
such Regular Certificateholder). If a Regular Certificateholder is not exempt
from withholding, distributions of interest, including distributions in respect
of accrued original issue discount, such holder may be subject to a 30%
withholding tax, subject to reduction under any applicable tax treaty.
Further, it appears that a REMIC Regular Certificate would not be included in
the estate of a nonresident alien individual and would not be subject to United
States estate taxes. However, Certificateholders who are non-resident alien
individuals should consult their tax advisors concerning this question.
Regular Certificateholders who are non-U.S. Persons and persons related to
such holders should not acquire any Residual Certificates, and Residual
Certificateholders and persons related to Residual
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Certificateholders should not acquire any Regular Certificates without
consulting their tax advisors as to the possible adverse tax consequences of
doing so.
Information Reporting and Backup Withholding. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each Regular Certificateholder at any time during such year,
such information as may be deemed necessary or desirable to assist Regular
Certificateholders in preparing their federal income tax returns, or to enable
holders to make such information available to owners or other financial
intermediaries of holders that hold such Regular Certificates. If a holder,
owner or other recipient of a payment on behalf of an owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, 31 % backup withholding
may be required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the Residual Certificates. The REMIC
will not be subjectto--federal income tax except with respect to income from
prohibited transactions and certain other transactions. See "Prohibited
Transactions and Other Taxes" herein. Instead, each original holder of a
Residual Certificate will report on its federal income tax return, as ordinary
income, its share of the taxable income of the REMIC for each day during the
taxable year on which such holder owns any Residual Certificates. The taxable
income of the REMIC for each day will be determined by allocating the taxable
income of the REMIC for each calendar quarter ratably to each day in the
quarter. Such a holder's share of the taxable income of the REMIC for each day
will be based on the portion of the outstanding Residual Certificates that such
holder owns on that day. The taxable income of the REMIC will be determined
under an accrual method and will be taxable to the Residual Certificateholders
without regard to the timing or amounts of cash distributions by the REMIC.
Ordinary income derived from Residual Certificates will be "portfolio income"
for purposes of the taxation of taxpayers subject to the limitations on the
deductibility of "passive losses." As residual interests, the Residual
Certificates will be subject to tax rules, described below, that differ from
those that would apply if the Residual Certificates were treated for federal
income tax purposes as direct ownership interests in the Certificates, or as
debt instruments issued by the REMIC.
A Residual Certificateholder may be required to include taxable income from
the Residual Certificate in excess of the cash distributed. For example, a
structure where principal distributions are made serially on regular interests
(that is, a fast-pay, slow-pay structure) may generate such a mismatching of
income and cash distributions (that is, "phantom income"). This mismatching may
be caused by the use of certain required tax accounting methods by the REMIC,
variations in the prepayment rate of the underlying Mortgage Loans and certain
other factors. Depending upon the structure of a particular transaction, the
aforementioned factors may significantly reduce the after-tax yield of a
Residual Certificate to a Residual Certificateholder. Investors should consult
their own tax advisors concerning the federal income tax treatment of a
Residual Certificate and the impact of such tax treatment on the after-tax
yield of a Residual Certificate.
A subsequent Residual Certificateholder also will report on its federal
income tax return amounts representing a daily share of the taxable income of
the REMIC for each day that such Residual Certificateholder owns such Residual
Certificate. Those daily amounts generally would equal the amounts that would
have been reported for the same days by an original Residual Certificateholder,
as described above. The Legislative History indicates that certain adjustments
may be appropriate to reduce (or increase) the income of a subsequent holder of
a Residual Certificate that purchased such Residual Certificate at a price
greater than (or less than) the adjusted basis such Residual Certificate would
have in the hands of an original Residual Certificateholder. See "Sales of
Residual Certificates" below. It is not clear, however, whether such
adjustments will in fact be permitted or required and, if so, how they would be
made. The REMIC Regulations do not provide for any such adjustments.
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Taxable Income of the REMIC Attributable to Residual Interests. The taxable
income of the REMIC will reflect a netting of (i) the income from the Mortgage
Loans and the REMIC's other assets and (ii) the deductions allowed to the REMIC
for interest and original issue discount on the Regular Certificates and except
as described below under "Non-Interest Expenses of the REMIC," other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the Regular and Residual Certificates (or, if a class of Certificates is not
sold initially, their fair market values). Such aggregate basis will be
allocated among the Mortgage Loans and other assets of the REMIC in proportion
to their respective fair market values. A Mortgage Loan will be deemed to have
been acquired with discount or premium to the extent that the REMIC's basis
therein is less than or greater than its principal balance, respectively. Any
such discount (whether market discount or original issue discount) will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to such income, under a method similar to the method
described above for accruing original issue discount on the Regular
Certificates. The REMIC expects to elect under Code Section 171 to amortize any
premium on the Mortgage Loans. Premium on any Mortgage Loan to which such
election applies would be amortized under a constant yield method. It is likely
that the yield of a Mortgage Loan would be calculated for this purpose taking
account of the Prepayment Assumption. However, such an election would not apply
to any Mortgage Loan originated on or before September 27, 1985. Instead,
premium on such a Mortgage Loan would be allocated among the principal payments
thereon and would be deductible by the REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and original issue
discount on the Regular Certificates. The amount and method of accrual of
original issue discount will be calculated for this purpose in the same manner
as described above with respect to Regular Certificates except that the 0.25%
per annum de minimis rule and adjustments for subsequent holders described
therein will not apply.
A Residual Certificateholder will not be permitted to amortize the cost of
the Residual Certificate as an offset to its share of the REMIC's taxable
income. However, that taxable income will not include cash received by the
REMIC that represents a recovery of the REMIC's basis in its assets, and, as
described above the issue price of the Residual Certificates will be added to
the issue price of the Regular Certificates in determining the REMIC's initial
basis in its assets. See "Sales of Residual Certificates" herein. For a
discussion of possible adjustments to income of a subsequent holder of a
Residual Certificate to reflect any difference between the actual cost of such
Residual Certificate to such holder and the adjusted basis such Residual
Certificate would have in the hands of an original Residual Certificateholder,
see "Allocation of the Income of the REMIC to the Residual Certificates" above.
Additional Taxable Income of Residual Interests. Any payment received by a
holder of a Residual Certificate in connection with the acquisition of such
Residual Certificate will be taken into account in determining the income of
such holder for federal income tax purposes. Although it appears likely that
any such payment would be includible in income immediately upon its receipt or
accrual as ordinary income, the IRS might assert that such payment should be
included in income over time according to an amortization schedule or according
to some other method. Because of the uncertainty concerning the treatment of
such payments, holders of Residual Certificates should consult their tax
advisors concerning the treatment of such payments for income tax purposes.
Net Losses of the REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. Such net loss would be
allocated among the Residual Certificateholders in the same manner as the
REMIC's taxable income. The net loss allocable to any Residual Certificate will
not be deductible by the holder to the extent that such net loss exceeds such
holder's adjusted basis in such Residual Certificate. Any net loss that is not
currently deductible by reason of this limitation may only be used by such
Residual Certificateholder to offset its share of the REMIC's taxable income in
future periods (but not otherwise). The ability of Residual Certificateholders
that are individuals or closely held corporations to deduct net losses may be
subject to additional limitations under the Code.
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Mark to Market Rules. Prospective purchasers of a REMIC Residual Certificate
should be aware that on December 28, 1993, the Internal Revenue Service
released temporary regulations (the "Temporary Mark to Market Regulations")
relating to the requirement that a securities dealer mark-to-market securities
held for sale to customers. This mark-to-market requirement applies to all
securities of a dealer, except to the extent that the dealer has specifically
identified a security as held for investment. The Temporary Mark to Market
Regulations provide that for purposes of this mark-to-market requirement, a
"negative value" REMIC residual interest is not treated as a security and thus
may not be marked to market. In addition, a dealer is not required to identify
such REMIC Residual Certificate as held for investment. In general, a REMIC
Residual Certificate has negative value if, as of the date a taxpayer acquires
the REMIC Residual Certificate, the present value of the tax liabilities
associated with holding the REMIC Residual Certificate exceeds the sum of (i)
the present value of the expected future distributions on the REMIC Residual
Certificate, and (ii) the present value of the anticipated tax savings
associated with holding the REMIC Residual Certificate as the REMIC generates
losses. The amounts and present values of the anticipated tax liabilities,
expected future distributions and anticipated tax savings are all to be
determined using (i) the prepayment and reinvestment assumptions adopted under
Section 1272(a)(6), or that would have been adopted had the REMIC's regular
interests been issued with original issue discount, (ii) any required or
permitted clean up calls, or required qualified liquidation provided for in the
REMIC's organizational documents and (iii) a discount rate equal to the
"applicable Federal rate" (as specified in Section 1274(d)(1)) that would apply
to a debt instrument issued on the date of acquisition of the REMIC Residual
Certificate. Furthermore, the Temporary Mark to Market Regulations provide the
IRS with the authority to treat any REMIC Residual Certificate having
substantially the same economic effect as a "negative value" residual interest
as a "negative value" residual interest. The IRS could issue subsequent
regulations, which could apply retroactively, providing additional or different
requirements with respect to such deemed negative value residual interests. The
Temporary Mark to Market Regulations apply to taxable years ending on or after
December 31, 1993. Prospective purchasers of a REMIC Residual Certificate
should consult their tax advisors regarding the possible application of the
Temporary Mark to Market Regulations.
Non-Interest Expenses of the REMIC. The REMIC's taxable income will be
determined in the same manner as if the REMIC were an individual. However, all
or a portion of the REMIC's servicing, administrative and other non-interest
expenses will be allocated as a separate item to Residual Certificateholders
that are "pass-through interest holders." Such a holder would be required to
add an amount equal to its allocable share, if any, of such expenses to its
gross income and to treat the same amount as an item of investment expense.
Individuals are generally allowed a deduction for such an investment expense
only as a miscellaneous itemized deduction subject to the limitations under
Code Section 67. That section allows such deduction only to the extent that, in
the aggregate, all such expenses exceed two percent of an individual's adjusted
gross income. In addition, the personal exemptions and itemized deductions of
individuals with adjusted gross incomes above particular levels are subject to
certain limitations which reduce or eliminate the benefit of such items. The
REMIC is required to report to each pass-through interest holder and to the IRS
such holder's allocable share, if any, of the REMIC's non-interest expenses.
The term "passthrough interest holder" generally refers to individuals,
entities taxed as individuals and certain pass-through entities, but does not
include real estate investment trusts. Residual Certificateholders that are
"pass-through interest holders" should consult their own tax advisors about the
impact of these rules on an investment in the Residual Certificates. See "Non-
Interest Expenses of the REMIC" under "Regular Certificates" above.
Excess Inclusions. A portion of the income on a Residual Certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter
will, with an exception discussed below for certain thrift institutions, be
subject to federal income tax in all events. Thus, for example, an excess
inclusion (i) may not, except as described below, be offset by any unrelated
losses, deductions, or loss carryovers of a Residual Certificateholder; (ii)
will be treated as "unrelated business taxable income" within the meaning of
Code Section 512 if the Residual Certificateholder is a pension fund or any
other organization that is subject to tax only on its unrelated business
taxable income (see "Tax-Exempt Investors" below); and (iii) is not eligible
for
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any reduction in the rate of withholding tax in the case of a Residual
Certificateholder that is a foreign investor. See "Non-U.S. Persons" below. The
exception for thrift institutions is available only to the institution holding
the Residual Certificate, and not to any affiliate of the institution, unless
the affiliate is a subsidiary all the stock of which, and substantially all the
indebtedness of which, is held by the institution, and which is organized and
operated exclusively in connection with the organization and operation of one
or more REMICs.
Except as discussed in the following paragraph, with respect to any Residual
Certificateholder, the excess inclusions for any calendar quarter is the
excess, if any, of (i) the income of such Residual Certificateholder for that
calendar quarter from its Residual Certificate over (ii) the sum of the "daily
accruals" (as defined below) for all days during the calendar quarter on which
the Residual Certificateholder holds such Residual Certificate. For this
purpose, the daily accruals with respect to a Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable
portion of the product of the "adjusted issue price" (as defined below) of the
Residual Certificate at the beginning of the calendar quarter and 120 percent
of the "Federal long-term rate" in effect at the time the Residual Certificate
is issued. For this purpose, the "adjusted issue price" of a Residual
Certificate at the beginning of any calendar quarter equals the issue price of
the Residual Certificate, increased by the amount of daily accruals for all
prior quarters, and decreased (but not below zero) by the aggregate amount of
payments made on the Residual Certificate before the beginning of such quarter.
The "Federal long-term rate" is an average of current yields on Treasury
securities with a remaining term of greater than nine years, computed and
published monthly by the IRS.
As an exception to the general rule described above, the Treasury Department
has authority to issue regulations that would treat the entire amount of income
accruing on a Residual Certificate as excess inclusions if the Residual
Certificates in the aggregate are considered not to have "significant value."
Under the REMIC Regulations, Residual Certificateholders that are thrift
institutions described in Code Section 593 can offset excess inclusions with
unrelated deductions, losses and loss carryovers provided the Residual
Certificates have "significant value". For purposes of applying this rule,
thrift institutions that are members of an affiliated group filing a
consolidated return, together with their subsidiaries formed to issue REMICs,
are treated as separate corporations. Residual Certificates have "significant
value" if: (i) the Residual Certificates have an aggregate issue price that is
at least equal to 2% of the aggregate issue price of all Residual Certificates
and Regular Certificates with respect to the REMIC and (ii) the anticipated
weighted average life of the Residual Certificates is at least 20% of the
anticipated weighted average life of the REMIC based on the anticipated
principal payments to be received with respect thereto (using the Prepayment
Assumption and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents), 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
portion 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 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.
In the case of any Residual Certificates held by a real estate investment
trust, the aggregate excess inclusions with respect to such Residual
Certificates, reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of Code Section 857(b)(2), excluding any net
capital gain), will be allocated among the shareholders of such trust in
proportion to the dividends received by such shareholders from such trust, and
any amount so allocated will be treated as an excess inclusion with respect to
a Residual Certificate as if held directly by such shareholder. Regulated
investment companies, common trust funds, and certain cooperatives are subject
to similar rules.
Payments. Any distribution made on a Residual Certificate to a Residual
Certificateholder will be treated as a non-taxable return of capital to the
extent it does not exceed the Residual Certificateholder's adjusted basis in
such Residual Certificate. To the extent a distribution exceeds such adjusted
basis, it will be treated as gain from the sale of the Residual Certificate.
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Pass-Through of Miscellaneous Itemized Deductions. As a general rule, all of
the fees and expenses of a REMIC will be taken into account by holders of the
Residual Interests. In the case of a "single class REMIC", however, the
expenses and a matching amount of additional income will be allocated, under
temporary Treasury regulations, among the holders of the Regular Certificates
and the holders of the Residual Interests on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
the case of individuals (or trusts, estates, or other persons who compute their
income in the same manner as individuals) who own an interest in a Regular
Certificate directly or through a pass-through entity which is required to pass
miscellaneous itemized deductions through to its owners or beneficiaries (e.g.
a partnership, an S corporation, or a grantor trust), such expenses will be
deductible only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the individual, exceed 2% of such individual's adjusted
gross income. The reduction or disallowance of this deduction coupled with the
allocation of additional income may have a significant impact on the yield of
the Regular Certificate to such a Holder. Further, holders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holders' alternative
minimum taxable income. In general terms, a single class REMIC is one that
either (i) would qualify, under existing Treasury regulations, as a grantor
trust if it were not a REMIC (treating all interests as ownership interests,
even if they would be classified as debt for federal income tax purposes) or
(ii) is similar to such a trust and is structured with the principal purpose of
avoiding the single class REMIC rules. Unless otherwise stated in the
applicable Prospectus Supplement, the expenses of the REMIC will be allocated
to holders of the related Residual Interests in their entirety and not to
holders of the related Regular Certificates.
Sale or Exchange of Residual Certificates. If a Residual Certificate is sold
or exchanged, the seller will generally recognize gain or loss equal to the
difference between the amount realized on the sale or exchange and its adjusted
basis in the Residual Certificate (except that the recognition of loss may be
limited under the "wash sale" rules described below). A holder's adjusted basis
in a Residual Certificate generally equals the cost of such Residual
Certificate to such Residual Certificateholder, increased by the taxable income
of the REMIC that was included in the income of such Residual Certificateholder
with respect to such Residual Certificate, and decreased (but not below zero)
by the net losses that have been allowed as deductions to such Residual
Certificateholder with respect to such Residual Certificate and by the
distributions received thereon by such Residual Certificateholder. In general,
any such gain or loss will be capital gain or loss provided the Residual
Certificate is held as a capital asset. However, Residual Certificates will be
"evidences of indebtedness" within the meaning of Code Section 582(c)(1), so
that gain or loss recognized from sale of a Residual Certificate by a bank or
thrift institution to which such section applies would be ordinary income or
loss.
Except as provided in Treasury regulations yet to be issued, if the seller of
a Residual Certificate reacquires such Residual Certificate, or acquires any
other Residual Certificate, any residual interest in another REMIC or similar
interest in a "taxable mortgage pool" (as defined in Code Section 7701(i))
during the period beginning six months before, and ending six months after, the
date of such sale, such sale will be subject to the "wash sale" rules of Code
Section 1091. In that event, any loss realized by the Residual
Certificateholder on the sale will not be deductible, but, instead, will
increase such Residual Certificateholder's adjusted basis in the newly acquired
asset.
PROHIBITED TRANSACTIONS AND OTHER TAXES
The REMIC is subject to a tax at a rate equal to 100 percent of the net
income derived from "prohibited transactions." In general, a prohibited
transaction means the disposition of a Mortgage Loan other than pursuant to
certain specified exceptions, the receipt of investment income from a source
other than a Mortgage Loan or certain other permitted investments or the
disposition of an asset representing a temporary investment of payments on the
Mortgage Loans pending payment on the Residual Certificates or Regular
Certificates. In addition, the assumption of a Mortgage Loan by a subsequent
purchaser could cause the REMIC to recognize gain, which would also be subject
to the 100 percent tax on prohibited transactions.
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In addition, certain contributions to a REMIC made after the Closing Date
could result in the imposition of a tax on the REMIC equal to 100% of the value
of the contributed property.
It is not anticipated that the REMIC will engage in any prohibited
transactions or receive any contributions subject to the contributions tax.
However, in the event that the REMIC is subject to any such tax, unless
otherwise disclosed in the related Prospectus Supplement, such tax would be
borne first by the Residual Certificateholders, to the extent of amounts
distributable to them and then by the Master Servicer.
LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC's final tax return a date on which such adoption is deemed to occur, and
sells all of its assets (other than cash) within a 90-day period beginning on
such date, the REMIC will not be subject to any prohibited transaction tax,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than the amounts retained to meet claims) to
holders of Regular and Residual Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the Regular
Certificates. If a Residual Certificateholder's adjusted basis in the Residual
Certificate exceeds the amount of cash distributed to such Residual
Certificateholder in final liquidation of its interest, then, it would appear
that the Residual Certificateholder would be entitled to a loss equal to the
amount of such excess. It is unclear whether such a loss, if allowed, will be a
capital loss or an ordinary loss.
ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code, the
REMIC will be treated as a partnership and the Residual Certificateholders will
be treated as the partners thereof; however, under Temporary Regulations if
there is at no time during the taxable year more than one Residual
Certificateholder, a REMIC shall not be subject to the rules of Subchapter C of
chapter 63 of the Code relating to the treatment of Partnership items for a
taxable year. Accordingly, the REMIC will file an annual tax return on Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. In
addition, certain other information will be furnished quarterly to each
Residual Certificateholder who held such Residual Certificate on any day in the
previous calendar quarter.
Each Residual Certificateholder is required to treat items on its return
consistently with their treatment on the REMIC's return, unless the Residual
Certificateholder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC. The IRS may assert a deficiency resulting from a failure to
comply with the consistency requirement without instituting an administrative
proceeding at the REMIC level. The REMIC does not intend to register as a tax
shelter pursuant to Code Section 6111 because it is not anticipated that the
REMIC will have a net loss for any of the first five taxable years of its
existence. Any person that holds a Residual Certificate as a nominee for
another person may be required to furnish the REMIC, in a manner to be provided
in Treasury regulations, with the name and address of such person. and other
information.
TAX-EXEMPT INVESTORS
Any Residual Certificateholder that is a pension fund or other entity that is
subject to federal income taxation only on its "unrelated business taxable
income" within the meaning of Code Section 512 will be subject to such tax on
that portion of the distributions received on a Residual Certificate that is
considered an "excess inclusion." See "Excess Inclusions" herein.
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NON-U.S. PERSONS
Amounts paid to Residual Certificateholders who are not U.S. persons (see
"Regular Certificates--Non-U.S. Persons") are treated as interest for purposes
of the 30% (or lower treaty rate) United States withholding tax. Amounts
distributed to Residual Holders should qualify as "portfolio interest", subject
to the conditions described in "Regular Certificates" above, but only to the
extent that the Mortgage Loans were originated after July 18, 1984.
Furthermore, the rate of withholding on any income on a Residual Certificate
that is excess inclusion income will not be subject to reduction under any
applicable tax treaties. See "Residual Certificates--Excess Inclusions". If the
portfolio interest exemption is unavailable, such amount will be subject to
United States withholding tax when paid or otherwise distributed (or when the
Residual Certificate is disposed of) under rules similar to those for
withholding upon disposition of debt instruments that have original issue
discount. The Code, however, grants the Treasury Department authority to issue
regulations requiring that those amounts be taken into account earlier than
otherwise provided where necessary to prevent avoidance of tax (for example,
where the Residual Certificates do not have significant value). See "Residual
Certificates--Excess Inclusions". If the amounts paid to Residual
Certificateholders that are not U.S. persons are effectively connected with
their conduct of a trade or business within the United States, the 30% (or
lower treaty rate) withholding will not apply. Instead, the amounts paid to
such non-U.S. Person will be subject to U. S. federal income taxation at
regular graduated rates. For special restrictions on the transfer of Residual
Certificates, see "Tax-Related Restrictions on Transfers of Residual
Certificates" and "Restrictions on Transfer of REMIC Residual Certificates"
below.
For this purpose, a "U.S. Person" includes a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
under the laws of the United States or any political subdivision thereof, or an
estate or trust whose income from sources without the United States is
includible in gross income for United States federal income tax purposes
regardless of its connection with the conduct of a trade or business in the
United States.
Regular Certificateholders and persons related to such holders should not
acquire any Residual Certificates, and Residual Certificateholders and persons
related to Residual Certificateholders should not acquire any Regular
Certificates without consulting their tax advisors as to the possible adverse
tax consequences of such acquisition.
TAX-RELATED RESTRICTIONS ON TRANSFERS OF RESIDUAL CERTIFICATES
Disqualified Organizations. An entity may not qualify as a REMIC unless there
are reasonable arrangements designed to ensure that residual interests in such
entity are not held by "disqualified organizations" (as defined below).
Further, a tax is imposed on the transfer of a residual interest in a REMIC to
a "disqualified organization." The amount of the tax equals the product of (A)
an amount (as determined under the REMIC regulations) equal to the present
value of the total anticipated "excess inclusions" with respect to such
interest for periods after the transfer and (B) the highest marginal federal
income tax rate applicable to corporations. The tax is imposed on the
transferor unless the transfer is through an agent (including a broker or other
middlemen) for a disqualified organization, in which event the tax is imposed
on the agent. The person otherwise liable for the tax shall be relieved of
liability for the tax if the transferee furnished to such person an affidavit
that the transferee is not a disqualified organization and, at the time of the
transfer, such person does not have actual knowledge that the affidavit is
false. A "disqualified organization" means (A) the United States, any State,
possession, or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of any of the
foregoing (provided that such term does not include an instrumentality if all
its activities are subject to tax and, except for FHLMC, a majority of its
board of directors is not selected by any such governmental agency), (B) any
organization (other than certain farmers' cooperatives) generally exempt from
federal income taxes unless such organization is subject to the tax on
"unrelated business taxable income" and (C) a rural electric or telephone
cooperative.
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A tax is imposed on a "pass-through entity" (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization, and (B) the highest marginal federal
income tax rate applicable to corporations. The pass-through entity otherwise
liable for the tax, for any period during which the disqualified organization
is the record holder of an interest in such entity, will be relieved of
liability for the tax if such record holder furnishes to such entity an
affidavit that such record holder is not a disqualified organization and, for
such period, the pass-through entity does not have actual knowledge that the
affidavit is false. For this purpose, a "pass-through entity" means (i) a
regulated investment company, real estate investment trust or common trust
fund, (ii) a partnership, trust or estate and (iii) certain cooperatives.
Except as may be provided in Treasury regulations not yet issued, 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 tax on
pass-through entities is generally effective for periods after March 31, 1988,
except that in the case of regulated investment companies, real estate
investment trusts, common trust funds and publicly-traded partnerships the tax
shall apply only to taxable years of such entities beginning after December 31,
1988. Under proposed legislation, large partnerships (generally with 250 or
more partners) will be taxable on excess inclusion income as if all partners
were disqualified organizations.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a Residual Certificate may be,
directly or indirectly, purchased, transferred or sold without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the Residual Certificate as a
nominee or agent for a disqualified organization, and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the Residual
Certificate.
Noneconomic Residual Certificates. The REMIC Regulations disregard, for
federal income tax purposes, any transfer of a Noneconomic Residual Certificate
to a "U.S. Person," as defined in the following section of this discussion,
unless no significant purpose of the transfer is to enable the transferor to
impede the assessment or collection of tax. A Noneconomic Residual Certificate
is any Residual Certificate (including a Residual Certificate with a positive
value at issuance) unless, at the time of transfer, taking into account the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents, (i) the
present value of the expected future distributions on the Residual Certificate
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. A significant purpose to impede the assessment or
collection of tax exists if the transferor, at the time of the transfer, either
knew or should have known that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC. A transferor is
presumed not to have such knowledge if (i) the transferor conducted a
reasonable investigation of the transferee and (ii) the transferee acknowledges
to the transferor that the residual interest may generate tax liabilities in
excess of the cash flow and the transferee represents that it intends to pay
such taxes associated with the residual interest as they become due. If a
transfer of a Noneconomic Residual Certificate is disregarded, the transferor
would continue to be treated as the owner of the Residual Certificate and would
continue to be subject to tax on its allocable portion of the net income of the
REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has a "tax avoidance potential" to a "foreign person"
will be disregarded for federal income tax purposes. This rule appears to apply
to a transferee who is not a "U.S. Person", as defined below, unless such
transferee's income in respect of the Residual Certificate is effectively
connected with the conduct of a United States trade or business. A Residual
Certificate is deemed to have a tax avoidance potential unless, at the time of
transfer,
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the transferor reasonably expects that the REMIC will distribute to the
transferee amounts that will equal at least 30 percent of each excess
inclusion, and that such amounts will be distributed at or after the time the
excess inclusion accrues and not later than the end of the calendar year
following the year of accrual. If the non-U.S. Person transfers the Residual
Certificate to a U.S. Person, the transfer will be disregarded, and the foreign
transferor will continue to be treated as the owner, if the transfer has the
effect of allowing the transferor to avoid tax on accrued excess inclusions.
The provisions in the REMIC Regulations regarding transfers of Residual
Certificates that have tax avoidance potential to foreign persons are effective
for all transfers after June 30, 1992. The Pooling and Servicing Agreement will
provide that no record or beneficial ownership interest in a Residual
Certificate may be, directly or indirectly, transferred to a non-U.S. Person
unless such person provides the Trustee with a duly completed I.R.S. Form 4224
and the Trustee consents to such transfer in writing.
For purposes of this discussion, a "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, the income of which, from sources
outside the United States, is includable in gross income for federal income tax
purposes regardless of its connection with the conduct of a trade or business
within the United States.
Any attempted transfer or pledge in violation of the transfer restrictions
shall be absolutely null and void and shall vest no rights in any purported
transferee. Investors in Residual Certificates are advised to consult their own
tax advisors with respect to transfers of the Residual Certificates and, in
addition, passthrough entities are advised to consult their own tax advisors
with respect to any tax which may be imposed on a pass-through entity.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Considerations", potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Certificates. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Certificates.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to Certificates of a Series that are not divided into
subclasses. If Certificates are divided into subclasses the related Prospectus
Supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to such Certificates.
ERISA imposes requirements on employee benefit plans (and on certain other
retirement plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts in
which such plans, accounts or arrangements are invested) (collectively,
"Plans") subject to ERISA and on persons who are fiduciaries with respect to
such Plans. Generally, ERISA applies to investments made by Plans. Among other
things, ERISA requires that the assets of Plans be held in trust and that the
trustee, or other duly authorized fiduciary, have exclusive authority and
discretion to manage and control the assets of such Plans. ERISA also imposes
certain duties on persons who are fiduciaries of Plans. Under ERISA, any person
who exercises any authority or control respecting the management or disposition
of the assets of a Plan is considered to be a fiduciary of such Plan (subject
to certain exceptions not here relevant). Certain employee benefit plans, such
as governmental plans (as defined in ERISA Section 3(32)) and, if no election
has been made under Section 410(d) of the Code, church plans
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(as defined in ERISA Section 3(33)), are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Senior Certificates
without regard to the ERISA considerations described above and below, subject
to the provisions of applicable state law. Any such plan which is qualified and
exempt from taxation under Code Sections 401(a) and 501(a), however, is subject
to the prohibited transaction rules set forth in Code Section 503.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation, the
underlying assets and properties of corporations, partnerships and certain
other entities in which a Plan makes an "equity" investment could be deemed for
purposes of ERISA to be assets of the investing Plan in certain circumstances.
However, the regulation provides that, generally, the assets of a corporation
or partnership in which a Plan invests will not be deemed for purposes of ERISA
to be assets of such Plan if the equity interest acquired by the investing Plan
is a publicly-offered security. A publicly-offered security, as defined in
Labor Reg. Section 2510.3-101, is a security that is widely held, freely
transferable and registered under the Securities Exchange Act of 1934, as
amended.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA prohibits a broad range of transactions
involving Plan assets and persons ("Parties in Interest") having certain
specified relationships to a Plan and imposes additional prohibitions where
Parties in Interest are fiduciaries with respect to such Plan. Because the
Mortgage Loans may be deemed Plan assets of each Plan that purchases
Certificates, an investment in the Certificates by a Plan might be a prohibited
transaction under ERISA Sections 406 and 407 and subject to an excise tax under
Code Section 4975 unless a statutory or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted from ERISA's prohibited
transaction rules certain transactions relating to the operation of residential
mortgage pool investment trusts and the purchase, sale and holding of "mortgage
pool pass-through certificates" in the initial issuance of such certificates.
PTE 83-1 permits, subject to certain conditions, transactions which might
otherwise be prohibited between Plans and Parties in Interest with respect to
those Plans related to the origination, maintenance and termination of mortgage
pools consisting of mortgage loans secured by first or second mortgages or
deeds of trust on single-family residential property, and the acquisition and
holding of certain mortgage pool pass-through certificates representing an
interest in such mortgage pools by Plans. If the general conditions (discussed
below) of PTE 83-1 are satisfied, investments by a Plan in Certificates that
represent interests in a Mortgage Pool consisting of Single Family Loans
("Single Family Certificates") will be exempt from the prohibitions of ERISA
Sections 406(a) and 407 (relating generally to transactions with Parties in
Interest who are not fiduciaries) if the Plan purchases the Single Family
Certificates at no more than fair market value and will be exempt from the
prohibitions of ERISA Sections 406(b)(1) and (2) (relating generally to
transactions with fiduciaries) if, in addition, the purchase is approved by an
independent fiduciary, no sales commission is paid to the pool sponsor, the
Plan does not purchase more than 25% of all Single Family Certificates, and at
least 50% of all Single Family Certificates are purchased by persons
independent of the pool sponsor or pool trustee. PTE 83-1 does not provide an
exemption for transactions involving Subordinate Certificates or for
Certificates representing an interest in a Mortgage Pool consisting of
Multifamily Loans or Contracts. Accordingly, unless otherwise provided in the
related Prospectus Supplement, no transfer of a Subordinate Certificate or a
Certificate which is not a Single Family Certificate may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only to
Single Family Certificates. The Depositor believes that, for purposes of PTE
83-1, the term "mortgage pass-through certificate" would include: (i)
Certificates issued in a Series consisting of only a single class of
Certificates; and (ii) Senior Certificates issued in a Series in which there is
only one class of Senior Certificates; provided that the Certificates in the
case of clause (i), or the Senior Certificates in the case of clause (ii),
evidence the beneficial ownership of both a specified percentage of future
interest payments (greater than 0%) and a specified
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percentage (greater than 0%) of future principal payments on the Mortgage
Loans. It is not clear whether a class of Certificates that evidences the
beneficial ownership in a Trust Fund divided into Mortgage Loan Groups,
beneficial ownership of a specified percentage of interest payments only or
principal payments only, or a notional amount of either principal or interest
payments, or a class of Certificates entitled to receive payments of interest
and principal on the Mortgage Loans only after payments to other classes or
after the occurrence of certain specified events would be a "mortgage pass-
through certificate" for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied for any
transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments in
an amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount
of the payment retained by the pool sponsor, together with other funds inuring
to its benefit, to not more than adequate consideration for selling the
mortgage loans plus reasonable compensation for services provided by the pool
sponsor to the Mortgage Pool. The Depositor believes that the first general
condition referred to above will be satisfied with respect to the Certificates
in a Series issued without a subordination feature, or the Senior Certificates
only in a Series issued with a subordination feature, provided that the
subordination and Reserve Fund, subordination by shifting of interests, the
pool insurance or other form of credit enhancement described herein (such
subordination, pool insurance or other form of credit enhancement being the
system of insurance or other protection referred to above) with respect to a
Series of Certificates is maintained in an amount not less than the greater of
one percent of the aggregate principal balance of the Mortgage Loans or the
principal balance of the largest Mortgage Loan. See "Description of the
Certificates" herein. In the absence of a ruling that the system of insurance
or other protection with respect to a Series of Certificates satisfies the
first general condition referred to above, there can be no assurance that these
features will be so viewed by the DOL. The Trustee will not be affiliated with
the Depositor.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family
Certificates must make its own determination as to whether the first and third
general conditions, and the specific conditions described briefly in the
preceding paragraph, of PTE 83-1 have been satisfied, or as to the availability
of any other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Certificates is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
On September 6, 1990 the DOL issued to Greenwich Capital Markets, Inc. an
individual exemption (Prohibited Transaction Exemption 90-59; Exemption
Application No. D-8374 55 Fed. Reg. 36724) (the "Underwriter Exemption") which
applies to certain sales and servicing of "certificates" that are obligations
of a "trust" with respect to which Greenwich Capital Markets, Inc. is the
underwriter, manager or co-manager of an underwriting syndicate. The
Underwriter Exemption provides relief which is generally similar to that
provided by PTE 83-1, but is broader in several respects.
The Underwriter Exemption contains several requirements, some of which differ
from those in PTE 83-1. The Underwriter Exemption contains an expanded
definition of "certificate" which includes an interest which entitles the
holder to pass-through payments of principal, interest and/or other payments.
The Underwriter Exemption contains an expanded definition of "trust" which
permits the trust corpus to consist of secured consumer receivables, including
obligations secured by shares issued by a cooperative housing association. The
definition of "trust," however, does not include any investment pool unless,
inter alia, (i) the investment pool consists only of assets of the type which
have been included in other investment pools, (ii) certificates evidencing
interests in such other investment pools have been purchased by investors other
than Plans for at
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least one year prior to the Plan's acquisition of certificates pursuant to the
Underwriter Exemption, and (iii) certificates in such other investment pools
have been rated in one of the three highest generic rating categories of the
four credit rating agencies noted below. Generally, the Underwriter Exemption
holds that the acquisition of the certificates by a Plan must be 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. The Underwriter Exemption requires that the rights and interests
evidenced by the certificates not be "subordinated" to the rights and interests
evidenced by other certificates of the same trust. The Underwriter Exemption
requires that certificates acquired by a Plan have received a rating at the
time of their acquisition that is in one of the three highest generic rating
categories of Standard & Poor's Corporation, Moody's Investors Service, Inc.,
Duff & Phelps Inc. or Fitch Investors Service, Inc. The Underwriter Exemption
specifies that the pool trustee must not be an affiliate of the pool sponsor,
nor an affiliate of the Underwriter, the pool servicer, any obligor with
respect to mortgage loans included in the trust constituting more than five
percent of the aggregate unamortized principal balance of the assets in the
trust, or any affiliate of such entities. Finally, the Underwriter Exemption
stipulates that any Plan investing in the certificates must be an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933.
Any Plan fiduciary which proposes to cause a Plan to purchase Certificates
should consult with their counsel concerning the impact of ERISA and the Code,
the applicability of PTE 83-1 and the Underwriter Exemption, and the potential
consequences in their specific circumstances, prior to making such investment.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment
in the Certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Certificates will specify which,
if any, of the Classes of Certificates offered thereby constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of Certificates that qualify as "mortgage
related securities" will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including depository institutions, life insurance companies and pension funds)
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 as, under
applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any such entities. Under SMMEA, if a state
enacts legislation prior to October 4, 1991 specifically limiting the legal
investment authority of any such entities with respect to "mortgage related
securities," Certificates will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Approximately
twenty-one states adopted such legislation prior to the October 4, 1991
deadline. SMMEA provides, however, that in no event will the enactment of any
such legislation affect the validity of any contractual commitment to purchase,
hold or invest in Certificates, or require the sale or other disposition of
Certificates, so long as such contractual commitment was made or such
Certificates were acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Certificates
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase Certificates for their own account without regard to the
limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal authority may prescribe. In this connection, federal credit unions
should review the National Credit Union Administration ("NCUA") Letter to
Credit Unions No. 96, as modified by Letter to Credit Unions No. 108, which
includes guidelines to assist
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federal credit unions in making investment decisions for mortgage related
securities, and the NCUA's regulation "Investment and Deposit Activities" (12
C.F.R. Part 703), which sets forth certain restrictions on investment by
federal credit unions in mortgage related securities.
All depository institutions considering an investment in the Certificates
(whether or not the Class of Certificates under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement"), setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including "mortgage related securities", which are "high-
risk mortgage securities" as defined in the Policy Statement. According to the
Policy Statement, such "high-risk mortgage securities" include securities such
as Certificates not entitled to distributions allocated to principal or
interest, or Subordinated Certificates. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a "high-risk mortgage security", and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
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 and provisions which
may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates or to
purchase Certificates representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments for such investors.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the Prospectus Supplement will be
offered in Series. The distribution of the Certificates may be effected from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices to be determined at the time
of sale or at the time of commitment therefor. If so specified in the related
Prospectus Supplement and subject to the receipt of any required approvals from
the Board of Governors of the Federal Reserve Board, the Certificates will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Greenwich Capital Markets, Inc.
("GCM") acting as underwriter with other underwriters, if any, named therein.
In such event, the related Prospectus Supplement may also specify that the
underwriters will not be obligated to pay for any Certificates agreed to be
purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of the Certificates, underwriters may
receive compensation from the Depositor or from purchasers of the Certificates
in the form of discounts, concessions or commissions. The related Prospectus
Supplement will describe any such compensation paid by the Depositor.
Alternatively, the related Prospectus Supplement may specify that the
Certificates will be distributed by GCM acting as agent or in some cases as
principal with respect to Certificates that it has previously purchased or
agreed to purchase. If GCM acts as agent in the sale of Certificates, GCM will
receive a selling commission with respect to each Series of Certificates,
depending on market conditions, expressed as a percentage of the aggregate
principal balance of the related Mortgage Assets as of the Cut-off Date. The
exact percentage for each Series of Certificates will be disclosed in the
related Prospectus Supplement. To the extent that GCM elects to purchase
Certificates as principal, GCM may realize losses or profits based upon the
difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any Series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Depositor and purchasers of
Certificates of such Series.
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The Depositor will indemnify GCM and any underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, or will
contribute to payments GCM and any underwriters may be required to make in
respect thereof.
In the ordinary course of business, GCM and the Depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing of the Depositor's mortgage loans pending the sale
of such mortgage loans or interests therein, including the Certificates.
The Depositor anticipates that the Certificates will be sold primarily to
institutional investors. 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 Securities Act of 1933 in connection
with reoffers and sales by them of Certificates. Holders of Certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
The legality of the Certificates of each Series, including certain federal
income tax consequences with respect thereto, will be passed upon for the
Depositor by Brown & Wood LLP, One World Trade Center, New York, New York
10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Certificates
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Certificates.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of the Certificates of each Series offered
hereby and by the Prospectus Supplement that they shall have been rated in one
of the four highest rating categories by the nationally recognized statistical
rating agency or agencies specified in the related Prospectus Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the credit enhancer or guarantor, if any. Ratings on
mortgage pass-through certificates do not represent any assessment of the
likelihood of principal prepayments by mortgagors or of the degree by which
such prepayments might differ from those originally anticipated. As a result,
certificateholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped pass-through certificates in extreme cases might
fail to recoup their underlying investments.
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
organization. Each security rating should be evaluated independently of any
other security rating.
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED. 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 STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION IN SUCH STATE. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
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TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Summary of Terms........................................................... S-3
The Mortgage Pool.......................................................... S-9
Servicing of the Mortgage Loans............................................ S-20
Description of the Certificates............................................ S-24
Financial Security Assurance Inc........................................... S-41
Yield, Prepayment and Maturity Considerations.............................. S-43
Use of Proceeds............................................................ S-45
Certain Federal Income Tax Consequences.................................... S-45
State Taxes................................................................ S-46
ERISA Considerations....................................................... S-46
Method of Distribution..................................................... S-48
Legal Matters.............................................................. S-48
Ratings.................................................................... S-49
Experts.................................................................... S-49
PROSPECTUS
Prospectus Supplement or Current Report on
Form 8-K.................................................................. 2
Incorporation of Certain Information by Reference.......................... 2
Available Information...................................................... 2
Summary of Terms........................................................... 3
The Trust Fund............................................................. 13
Use of Proceeds............................................................ 24
The Depositor.............................................................. 24
Mortgage Loan Program...................................................... 24
Description of the Certificates............................................ 27
Credit Enhancement......................................................... 33
Yield and Prepayment Considerations........................................ 40
The Pooling and Servicing Agreement........................................ 42
Certain Legal Aspects of the Mortgage Loans................................ 54
Certain Federal Income Tax Consequences.................................... 64
State Tax Considerations................................................... 90
ERISA Considerations....................................................... 90
Legal Investment........................................................... 93
Method of Distribution..................................................... 94
Legal Matters.............................................................. 95
Financial Information...................................................... 95
Rating..................................................................... 95
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GREENWICH CAPITAL
ACCEPTANCE, INC.
Depositor
COUNTRYWIDE HOME
LOANS, INC.
Seller and Servicer
$187,965,310 CLASS A
MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 1996-CHL1
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PROSPECTUS SUPPLEMENT
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[LOGO OF GREENWICH CAPITAL]
[LOGO OF COUNTRYWIDE SECURITIES]
JULY 25, 1996
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