PROSPECTUS SUPPLEMENT
(To Prospectus dated June 24, 1998)
$638,321,444
SEQUOIA MORTGAGE TRUST 3
MORTGAGE LOAN ASSET BACKED CERTIFICATES
SEQUOIA MORTGAGE FUNDING CORPORATION
Seller
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
Master Servicer
GREENWICH CAPITAL ACCEPTANCE, INC.
Depositor
------------------------------------------------------------
The Sequoia Mortgage Trust 3 Mortgage Loan Asset Backed Certificates will
consist of (i) the Class A-1, Class A-2, Class A-3 and Class A-4 Certificates
(collectively, the "SENIOR SEQUENTIAL CERTIFICATES"), (ii) the Class A-X1,
Class A-X2, Class A-X3, Class A-X4 and Class A-IO Certificates (collectively,
the "SENIOR IO CERTIFICATES"), (iii) the Class A-PO Certificates (the "CLASS
A-PO CERTIFICATES" and, together with the Senior Sequential Certificates and
Senior IO Certificates, the "SENIOR REGULAR CERTIFICATES"), (iv) the Class
A-RLT Certificates (to be held by one of the Redwood Parties (as defined
herein)) and the Class A-R Certificates (collectively, the "RESIDUAL
CERTIFICATES" and, together with the Senior Regular Certificates, the "SENIOR
CERTIFICATES"), (v) the Class M-1, Class M-2 and Class M-3 Certificates
(collectively, the "MEZZANINE CERTIFICATES") and (vi) the Class B-1, Class B-2
and Class B-3 Certificates (collectively, the "SUBORDINATE CERTIFICATES"). The
Senior Certificates, the Mezzanine Certificates and the Subordinate
Certificates are collectively referred to herein as the "CERTIFICATES". Only
the Senior Certificates (other than the Class A-RLT Certificates) and the
Mezzanine Certificates are offered hereby (collectively, the "OFFERED
CERTIFICATES").
<TABLE>
<CAPTION>
Weighted
Principal Balance Average
Offered of Class Notional Pass-Through Life (in Assumed Final CUSIP
Certificates Balance (1) Rate (years) (8) distribution Date (9) Number
<S> <C> <C> <C> <C> <C>
Class A-1 Certificates $225,459,000 6.37%(2) 1.01 Nov. 2017 81743NAA9
Class A-2 Certificates $ 95,000,000 6.34%(2) 2.73 May 2021 81743NAB7
Class A-3 Certificates $164,200,000 6.35%(2) 4.27 Sept. 2025 81743NAC5
Class A-4 Certificates $121,922,720 6.25%(2) 4.50 June 2028 81743NAD3
Class A-X1 Certificates $225,459,000 0.48%(3) N/A Dec. 2002 81743NAE1
Class A-X2 Certificates $ 95,000,000 0.51%(3) N/A Dec. 2002 81743NAF8
Class A-X3 Certificates $164,200,000 0.50%(3) N/A Dec. 2002 81743NAG6
Class A-X4 Certificates $121,922,720 0.60%(3) N/A Dec. 2002 81743NAH4
Class A-IO Certificates $595,721,313 0.0025%(4) N/A June 2028 81743NAP6
Class A-PO Certificates $ 3,033,074 0.00%(5) 2.94 June 2028 81743NAJ0
Class A-R Certificates $ 50 (6) N/A N/A 81743NAK7
Class M-1 Certificates $ 16,127,300 6.85%(7) 4.50 June 2028 81743NAL5
Class M-2 Certificates $ 7,741,100 6.85%(7) 4.50 June 2028 81743NAM3
Class M-3 Certificates $ 4,838,200 6.85%(7) 4.50 June 2028 81743NAN1
(1) Subject to a permitted variance of plus or minus 5%.
(2) Following the Initial Optional Call Date (as defined herein), the Class A-1, Class A-2, Class A-3 and Class A-4 Certificates
will bear interest at the variable rates specified herein.
(3) Initial Pass-Through Rates. On each Distribution Date (as defined herein) following the initial Distribution Date to
and including the Initial Optional Call Date, the Class A-X1, Class A-X2, Class A-X3 and Class A-X4 Certificates will bear
interest calculated on their respective Class Notional Balances at the variable rates specified herein. Following the
Initial Optional Call Date, the Class Notional Balances of the Class A-X1, Class A-X2, Class A-X3 and Class A-X4
Certificates will be deemed to be zero and such Classes will no longer bear interest.
(4) For each Distribution Date following the Initial Optional Call Date, the Class A-IO Certificates will be entitled to the
excess of interest accrued at the Net WAC Rate on the Pool Stated Principal Balance (as defined herein) for such date over
interest distributable on all other outstanding Classes of Certificates for such date.
(5) The Class A-PO Certificates are principal only certificates and will bear no interest for any Distribution Date to and
including the Initial Optional Call Date; following the Initial Optional Call Date, the Class A-PO Certificates will bear
interest at the variable rate specified herein.
(6) The Class A-R Certificates are principal only certificates and will not bear interest.
(7) Initial Pass-Through Rates. On each Distribution Date following the initial Distribution Date, the Class M-1, Class M-2 and
Class M-3 Certificates will bear interest at the variable rates specified herein.
(8) Determined on the basis of an assumed pricing speed of 18% CPR (as described herein), the assumption that the Optional
Call (as defined herein) is exercised on the Initial Optioned Call Date, and the other assumptions set forth herein under
"Yield, Prepayment and Maturity Considerations - Modeling Assumptions".
(9) Determined on the basis of the assumptions set forth herein under "Yield, Prepayment and Maturity Considerations - Modeling
Assumptions".
</TABLE>
FOR A DISCUSSION OF CERTAIN RISK FACTORS RELATING TO INVESTMENTS IN
THE OFFERED CERTIFICATES, SEE "RISK FACTORS" BEGINNING ON PAGE S-9 OF
THIS PROSPECTUS SUPPLEMENT.
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.
The Offered Certificates will be purchased by the Underwriters from the
Depositor and will be offered by the Underwriters from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of the sale. Proceeds to the Depositor from the sale of the Offered
Certificates are expected to be approximately 99.62% of the aggregate original
Class Principal Balances of the Offered Certificates plus accrued interest all
the interest-bearing Classes of the Offered Certificates from and including
the Cut-off Date to, but not including, the Closing Date, before deducting
issuance expenses payable by the Depositor.
GREENWICH CAPITAL BEAR, STEARNS & CO. INC. LEHMAN BROTHERS
June 25, 1998
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 June 1, 1998, among the parties
specified herein. The Trust Fund will consist primarily of a pool of
conventional mortgage loans (the "MORTGAGE LOANS") that are secured by first
liens on one- to four-family residential properties. The Mortgage Loans bear
interest at a fixed rate of interest during the first five years after
origination and thereafter are subject to annual rate adjustments based upon
changes in the One-Year CMT Index as described herein under "The Mortgage
Pool".
Distributions to Certificateholders will be made on the 25th day of
each month or, if such 25th day is not a Business Day (as defined herein), on
the first Business Day thereafter (each, a "DISTRIBUTION DATE"), commencing in
July 1998. On each Distribution Date beginning with the December 2002
Distribution Date (the "INITIAL OPTIONAL CALL DATE"), the Certificates will be
subject to redemption at the option of the Class A-RLT Certificateholder.
The Classes of Offered Certificates will have the approximate original
Class Principal Balances and Class Notional Balances (as applicable) specified
on the cover hereof. The Senior IO Certificates will have no principal
balances and will be entitled solely to distributions of interest as described
herein. The Class A-PO Certificates will not bear interest for any
Distribution Date to and including the Initial Optional Call Date. The rights
of the holders of the Mezzanine Certificates (the "MEZZANINE
CERTIFICATEHOLDERS") to receive certain distributions of interest and
principal with respect to the Mortgage Loans will be subordinate to the rights
of the holders of the Senior Certificates (the "SENIOR CERTIFICATEHOLDERS") to
receive certain distributions of interest and principal, respectively. The
rights of the holders of the Subordinate Certificates (the "SUBORDINATE
CERTIFICATEHOLDERS") to receive certain distributions of interest and
principal with respect to the Mortgage Loans will be subordinate to the rights
of the Senior Certificateholders and the Mezzanine Certificateholders to
receive certain distributions of interest and principal, respectively, in each
case to the extent described herein.
THE YIELD TO INVESTORS ON EACH CLASS OF THE OFFERED CERTIFICATES WILL
BE SENSITIVE IN VARYING DEGREES TO, AMONG OTHER THINGS, THE RATE AND TIMING OF
PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) OF THE MORTGAGE LOANS, THE EXERCISE
OF THE OPTIONAL CALL (AS DEFINED HEREIN) BY THE CLASS A-RLT CERTIFICATEHOLDER
ON OR AFTER THE INITIAL OPTIONAL CALL DATE, AND, SUBSEQUENT TO THE INITIAL
OPTIONAL CALL DATE, TO THE LEVEL OF ONE-MONTH LIBOR. THE YIELD TO MATURITY OF
A CLASS OF OFFERED CERTIFICATES MAY VARY FROM THE ANTICIPATED YIELD TO THE
EXTENT SUCH CERTIFICATES ARE PURCHASED AT A DISCOUNT OR A PREMIUM AND TO THE
EXTENT THE RATE AND TIMING OF PAYMENTS THEREON ARE SENSITIVE TO PREPAYMENTS.
PROSPECTIVE PURCHASERS SHOULD CONSIDER, IN THE CASE OF THE CLASS A-PO
CERTIFICATES AND ANY OTHER OFFERED CERTIFICATES (OTHER THAN THE SENIOR IO
CERTIFICATES) 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 THE SENIOR IO CERTIFICATES AND ANY
OTHER OFFERED CERTIFICATES 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. PROSPECTIVE PURCHASERS OF THE SENIOR IO
CERTIFICATES SHOULD CAREFULLY CONSIDER THE RISK THAT A RAPID RATE OF PRINCIPAL
PAYMENTS ON THE MORTGAGE LOANS OR, IN THE CASE OF THE CLASS A-IO CERTIFICATES,
THE EXERCISE OF THE OPTIONAL CALL BY THE CLASS A-RLT CERTIFICATEHOLDER COULD
RESULT IN THE FAILURE OF SUCH PURCHASERS TO RECOVER THEIR INITIAL INVESTMENTS.
IN ADDITION, THE YIELDS TO MATURITY OF THE CLASS M-1, CLASS M-2 AND CLASS M-3
CERTIFICATES WILL BE SENSITIVE IN VARYING DEGREES TO LOSSES DUE TO DEFAULTS ON
THE MORTGAGE LOANS.
NEITHER THE MEZZANINE CERTIFICATES NOR THE CLASS A-R CERTIFICATES
SHOULD BE ACQUIRED BY A PENSION OR OTHER BENEFIT PLAN SUBJECT TO ERISA (AS
DEFINED HEREIN) OR BY INDIVIDUAL RETIREMENT ACCOUNTS OR OTHER PLANS SUBJECT TO
SECTION 406 OF ERISA OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED.
For federal income tax purposes, the Trust Fund will include two "real
estate mortgage investment conduits" (each, a "REMIC") organized in a tiered
REMIC structure. The Offered Certificates (except the Class A-R Certificates)
together with the Subordinate Certificates will represent ownership of all the
"regular interests" in the Upper Tier REMIC (as defined herein) and the Class
A-R Certificates will represent ownership of the "residual interest" therein.
-------------------------------------------------
Greenwich Capital Markets, Inc. ("GREENWICH CAPITAL"), Bear, Stearns &
Co. Inc. ("BEAR STEARNS") and Lehman Brothers Inc. ("LEHMAN BROTHERS") and,
together with Greenwich Capital and Bear Stearns, the "UNDERWRITERS") intend
to make a secondary market in the Offered Certificates but have no obligation
to do so. There is currently no secondary market for the Offered Certificates
and there can be no assurance that such a market will develop or, if it does
develop, that it will continue.
The Offered 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 Offered Certificates (except the Class A-R Certificates) will
be made in book-entry form only through the facilities of the Depository (as
defined herein) and that delivery of the Class A-R Certificates will be made
at the offices of Greenwich Capital, Greenwich, Connecticut, on or about June
26, 1998.
-------------------------------------------------
This Prospectus Supplement does not contain complete information about
the offering of the Offered Certificates. Additional information is contained
in the Prospectus dated June 24, 1998 (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 Offered
Certificates may not be consummated unless the purchaser has received both
this Prospectus Supplement and the Prospectus.
-------------------------------------------------
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from an Underwriter or a request by such
investor's representative within the period during which there is an
obligation to deliver a Prospectus Supplement and Prospectus, the Company or
such Underwriter will promptly deliver, or cause to be delivered, without
charge, a paper copy of the Prospectus Supplement and Prospectus.
-------------------------------------------------
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Offered 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.
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 on the pages
indicated in the "Index of Defined Terms" beginning at page S-64 or, to the
extent not defined herein, have the meanings assigned to such terms in the
Prospectus.
Title of
Certificates ......................Sequoia Mortgage Trust 3 Mortgage Loan
Asset Backed Certificates (the
"CERTIFICATES"), consisting of (i) the
Class A-1, Class A-2, Class A-3 and Class
A-4 Certificates (collectively, the "SENIOR
SEQUENTIAL CERTIFICATES"), (ii) the Class
A-X1, Class A-X2, Class A-X3, Class A-X4
and Class A-IO Certificates (collectively,
the "SENIOR IO CERTIFICATES"), (iii) the
Class A-PO Certificates (the "CLASS A-PO
CERTIFICATES" and, together with the Senior
Sequential Certificates and Senior IO
Certificates, the "SENIOR REGULAR
CERTIFICATES"), (iv) the Class A-R and
Class A-RLT Certificates (collectively, the
"RESIDUAL CERTIFICATES" and, together with
the Senior Regular Certificates, the
"SENIOR CERTIFICATES"), (v) the Class M-1,
Class M-2 and Class M-3 Certificates
(collectively, the "MEZZANINE
CERTIFICATES") and (vi) the Class B-1,
Class B-2 and Class B-3 Certificates
(collectively, the "SUBORDINATE
CERTIFICATES"). Only the Senior
Certificates (other than the Class A-RLT
Certificate) and the Mezzanine Certificates
are offered hereby (collectively, the
"OFFERED CERTIFICATES").
The Depositor .....................Greenwich Capital Acceptance, Inc. (the
"DEPOSITOR"), a Delaware corporation. The
Depositor is an indirect limited purpose
finance subsidiary of National Westminster
Bank Plc and an affiliate of Greenwich
Capital Markets, Inc. ("GREENWICH
CAPITAL"). See "The Depositor" in the
Prospectus and "Method of Distribution"
herein. None of the Depositor, Greenwich
Capital or any of their affiliates or any
other person or entity will insure or
guarantee or otherwise be obligated with
respect to the Certificates.
Seller ............................Sequoia Mortgage Funding Corporation, a
Delaware corporation. The Seller is a
limited purpose finance subsidiary of
Redwood Trust, Inc., a Maryland corporation
("REDWOOD TRUST"). On or before the Closing
Date, the Mortgage Loans will be sold by
Redwood Trust and a taxable affiliate of
Redwood Trust, RWT Holdings, Inc., a
Delaware corporation ("HOLDINGS", and
together with Redwood Trust, the "REDWOOD
PARTIES"), to the Seller pursuant to two
mortgage loan purchase agreements
(collectively, the "MORTGAGE LOAN PURCHASE
AGREEMENT"), and by the Seller to the
Depositor pursuant to the Mortgage Loan
Sale Agreement (as defined herein), in
privately negotiated transactions.
Master Servicer ...................Norwest Bank Minnesota, National
Association, in its capacity as master
servicer of the Mortgage Loans (in such
capacity, the "MASTER SERVICER"). Pursuant
to the Pooling and Servicing Agreement (as
defined herein), the Master Servicer's
obligations will be limited principally to
(i) performing certain administrative
functions, (ii) supervising the performance
of each Servicer (as defined herein) to the
limited extent provided in the Pooling and
Servicing Agreement and (iii) succeeding to
the obligations of a terminated Servicer
under the related Servicing Agreement or
appointing a successor Servicer thereunder.
See "Servicing of the Mortgage Loans"
herein.
Servicers .........................Prior to the Closing Date and in connection
with their acquisition of the Mortgage
Loans, the Redwood Parties entered into
mortgage servicing agreements (each, a
"SERVICING AGREEMENT") with certain
servicers (each, a "SERVICER") pursuant to
which each Servicer has agreed to perform
certain servicing functions with respect to
the related Mortgage Loans. See "Servicing
of the Mortgage Loans" herein. On or prior
to the Closing Date, the Redwood Parties
will assign all of their respective rights,
title and interest in the Servicing
Agreements to the Seller which will in turn
assign all of its rights thereunder to the
Depositor and, in turn, the Depositor will
assign its rights thereunder to the Trust.
Trustee ...........................First Union National Bank, a national
banking association, not in its individual
capacity but solely as trustee on behalf of
the Certificateholders (the "TRUSTEE").
Cut-off Date ......................June 1, 1998.
Closing Date ......................On or about June 26, 1998.
Description of Certificates
A. General .....................The Certificates will be issued pursuant to
a Pooling and Servicing Agreement, dated as
of June 1, 1998 (the "POOLING AND SERVICING
AGREEMENT"), among the Depositor, the
Master Servicer, the Trustee and the
Seller.
The Senior Certificates, the Mezzanine
Certificates and the Subordinate
Certificates will together 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 mortgage loans (the
"MORTGAGE LOANS") secured by first liens on
one- to four-family residential properties
(the "MORTGAGED PROPERTIES"). Each Mortgage
Loan will have an initial fixed interest
rate period of five years following the
related origination date (the "FIXED RATE
PERIOD"), and thereafter will be subject to
annual interest rate adjustments based on
the One-Year CMT Index as further described
herein.
In addition to the Offered Certificates,
the following Classes of Certificates, in
the indicated original Class Principal
Balances, will be issued (but are not
offered hereby), and will bear interest at
the indicated Pass-Through Rates:
Class Original Class Pass-Through
Principal Balance (1) Rate
A-RLT (2) (2)
B-1 $2,580,400 6.85% (3)
B-2 $1,935,300 6.85% (3)
B-3 $2,257,929 6.85% (3)
1) Subject to a permitted variance of plus or minus 5%.
2) The Class A-RLT Certificate will have no Class Principal
Balance or Class Notional Balance and will not bear interest.
3) Initial Pass-Through Rates. For each Distribution Date
following the initial Distribution Date, the Pass-Through
Rate for each Class of Subordinate Certificates will be
equal to the Net WAC Rate (as defined herein) for such date.
B. Form of Certificates The Offered
Certificates (other than the Class A-R
Certificates) will be represented by book
entries on the records of The Depository
Trust Company (the "DEPOSITORY") and
participating members thereof (such
Certificates, the "BOOK-ENTRY
CERTIFICATES"). So long as such
Certificates are Book-Entry Certificates,
each such Class of Certificates will be
evidenced by one or more certificates
registered in the name of Cede & Co.
("CEDE"), as nominee of the Depository. No
person acquiring a beneficial ownership
interest in the Offered Certificates issued
in book-entry form 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. The Class
A-R Certificates will be issued in fully
registered, definitive form. See
"Description of the
Certificates--Book-Entry Certificates"
herein.
C. Distributions ...............Distributions on the Offered Certificates
will be made on the 25th day of each month
or, if such day is not a Business Day (as
defined herein), on the first Business Day
thereafter, commencing in July 1998 (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 in which such Distribution Date
occurs (each, a "RECORD DATE"), except that
the final distribution on the Certificates
will be made only upon presentment and
surrender of the Certificates at the office
or agency of the Trustee in The City of New
York. Distributions on the Mortgage Loans
will be applied to the distribution of
interest and principal on the Certificates
in accordance with the priorities described
below. The rights of the Mezzanine
Certificateholders to receive certain
distributions of interest and principal
with respect to the Mortgage Loans are
subordinate to the rights of the Senior
Certificateholders to receive certain
distributions of interest and principal,
respectively, and the rights of the
Subordinate Certificateholders to receive
certain distributions of interest and
principal with respect to the Mortgage
Loans are subordinate to the rights of the
Senior Certificateholders and the Mezzanine
Certificateholders to receive certain
distributions of interest and principal,
respectively, in each case to the extent
described herein.
1. Interest ........On each Distribution
Date, to the extent
funds are available
therefor, the holders
of each Class of
interest-bearing
Certificates will be
entitled to receive
interest in an amount
(the "INTEREST
DISTRIBUTION AMOUNT")
equal to the sum of (i)
interest accrued during
the related Interest
Accrual Period at the
Pass-Through Rate (as
described herein) on
the Class Principal
Balance or Class
Notional Balance, as
applicable, of such
Class of Certificates
and (ii) any Unpaid
Interest Shortfall (as
defined herein), less
any Net Interest
Shortfalls (as defined
herein), payable in the
following order of
priority: first, to the
Classes of Senior
Certificates, pro rata;
second, sequentially,
to the Class M-1, Class
M-2 and Class M-3
Certificates, in that
order; and third,
sequentially, to the
Class B-1, Class B-2
and Class B-3
Certificates, in that
order. With respect to
each Distribution Date,
the "INTEREST ACCRUAL
PERIOD" is the calendar
month preceding the
month in which such
Distribution Date
occurs. See
"Description of the
Certificates--Interest"
herein.
2. Principal ........Amounts distributable
in respect of principal
of the Certificates
will be allocated to
those Classes of
Certificates then
entitled to receive
distributions of
principal in the order
and priorities
described in
"Description of the
Certificates--Principal"
herein. On each
Distribution Date, to
the extent funds are
available therefor, an
amount equal to the
Principal Distribution
Amount (as defined
herein) will be
distributed as
principal of the
applicable Classes in
accordance with the
allocations and
priorities described
herein under
"Description of the
Certificates--Principal".
D. Subordination .............The rights of the Mezzanine Certificates to
receive certain payments are subordinate to
the Senior Certificates and the rights of
the Subordinate Certificates to receive
certain payments are subordinate to the
Senior Certificates and the Mezzanine
Certificates. Generally, all Realized
Losses with respect to the Non-PO
Percentage (as defined herein) of the
Mortgage Loans will be borne first by the
Subordinate Certificates (in the reverse
order of their numerical designations)
until the Class Principal Balances thereof
are reduced to zero, then by the Mezzanine
Certificates (in the reverse order of their
numerical designations) until the Class
Principal Balances thereof are reduced to
zero, and then by the Senior Sequential
Certificates, pro rata.
Mortgage Rate As described under "The
Mortgage Pool--General", the Mortgage Rate
for each Mortgage Loan will have an initial
fixed interest rate period of five years
following the related origination date for
such Mortgage Loan (the "FIXED RATE
PERIOD"), and thereafter will be subject to
annual adjustments so as to equal the sum,
generally rounded to the nearest 0.125%, of
the One-Year CMT Index and the Gross Margin
(as defined herein) for such Mortgage Loan,
subject to the effects of the applicable
Initial Adjustment Cap, Periodic Rate Cap
and Maximum Mortgage Rate (each as defined
herein). There is no lifetime minimum
interest rate specified for any Mortgage
Loan.
The "ONE-YEAR CMT INDEX" applicable to any
annual Adjustment Date (as defined herein)
for a Mortgage Loan will be the weekly
average yield on United States treasury
securities adjusted to a constant maturity
rate of one year, as made available by the
Federal Reserve Board, published in Federal
Reserve Statistical Release H.15(519) and
most recently available as of the date
generally 45 days before the applicable
Adjustment Date.
On any Distribution Date, the "NET MORTGAGE
RATE" for any Mortgage Loan will be equal
to the Mortgage Rate of such Mortgage Loan
on the first day of the month preceding the
month in which such Distribution Date
occurs, minus the servicing fee rate (the
"SERVICING FEE RATE") payable to the
applicable Servicer as described herein
under "Servicing of the Mortgage
Loans--Servicing Compensation and Payment
of Expenses". See "The Mortgage
Pool--General" herein.
On any Distribut ion Date beginning with
the Distribution Date in December 2002 (the
"INITIAL OPTIONAL CALL DATE"), the Class
A-RLT Certificateholder will have the
option (the "OPTIONAL CALL") to purchase,
in whole but not in part, either (a) all
the Mortgage Loans and the REO Property, if
any, remaining in the Trust Fund and
thereby effect the early retirement of all
Certificates or (b) all outstanding
Certificates, in either case by depositing
an amount not less than the aggregate of
the Class Principal Balances of the
outstanding Classes of Certificates plus
accrued and unpaid interest with respect to
the outstanding Classes of interest-bearing
Certificates at the respective Pass-Through
Rates in effect for such Distribution Date
to but not including such Distribution
Date. Notice of the exercise of the
Optional Call will be given to
Certificateholders at least 15 days prior
to such exercise. See "Description of the
Certificates--Optional Call by the Class
A-RLT Certificateholder" herein.
Federal Income Tax
Considerations ....................For federal income tax purposes, the Trust
Fund will include two segregated asset
pools with respect to which elections will
be made to treat each as a separate "real
estate mortgage investment conduit"
("REMIC"). The Certificates (other than the
Residual Certificates) will constitute the
"regular interests" in the Upper Tier REMIC
(as defined herein). The Class A-R
Certificates will represent the beneficial
ownership of the sole class of "residual
interest" in the Upper Tier REMIC and the
Class A-RLT Certificate will represent the
beneficial ownership of the sole class of
"residual interest" in the Lower Tier REMIC
(as defined herein).
The Class A-PO Certificates and the Senior
IO Certificates will, and certain other
Classes of the Offered Certificates may, be
issued with original issue discount for
federal income tax purposes. See "Certain
Federal Income Tax Consequences" herein.
The holders of the Class A-R Certificates
will be subject to special federal income
tax rules that may significantly reduce the
after-tax yield of such Certificates. See
"Certain Federal Income Tax Consequences"
herein.
ERISA Considerations ............The acquisition of a Senior 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 Section 4975 of the Code.
Certain exemptions from the prohibited
transaction rules of ERISA could be
applicable to the acquisition of Senior
Certificates (other than the Residual
Certificates).
The purchase and holding of a Mezzanine
Certificate or a Class A-R Certificate
(collectively, the "ERISA RESTRICTED
CERTIFICATES") by or on behalf of any Plan,
or by any person using the assets of any
Plan (including any insurance company using
assets in its general or separate account
that may constitute assets of any Plan) may
not meet the requirements of any exemption
issued under ERISA and may result in the
assets of the Trust Fund being deemed "plan
assets" under ERISA. This may cause the
Trustee, the Master Servicer, the Depositor
and certain other entities to become
fiduciaries of such Plan under ERISA and
may result in one or more "prohibited
transactions" within the meaning of ERISA
and the Code and the imposition of excise
taxes and/or other civil penalties. As a
result, the ERISA Restricted Certificates
should not be acquired by a Plan.
Accordingly, no ERISA Restricted
Certificate will be registered for transfer
unless the Trustee shall have received
either: (i) a representation to the Trustee
from the transferee of such Certificate
that such transferee neither is, nor is
acting on behalf of, a Plan subject to
Section 406 of ERISA or Section 4975 of the
Code (or comparable provisions of any
subsequent enactments) and is not using the
assets of any such Plan to acquire such
Certificate or (ii) if the transferee is a
Plan, or is acting on behalf of a Plan or
using the assets of any such Plan to
acquire such Certificate, an opinion of
counsel satisfactory to the Trustee (a) if
the purchaser is an insurance company, that
the purchaser is an insurance company which
is purchasing such Certificate with funds
contained in an "insurance company general
account" (as such term is defined in
Section V(e) of Prohibited Transaction
Class Exemption 95-60 ("PTCE 95-60")) and
that the purchase and holding of such
Certificate are covered under Sections I
and III of PTCE 95-60, or (b) in any other
case, that such transfer does not
constitute a prohibited transaction within
the meaning of Section 406 of ERISA or
Section 4975 of the Code, will not result
in the assets of the Trust Fund being
deemed "plan assets" subject to the
prohibited transaction provisions of ERISA
and the Code, and will not subject either
the Trustee or the Master Servicer to any
obligation in addition to those expressly
assumed by it in the Pooling and Servicing
Agreement. The representation in clause (i)
above shall be deemed to have been made to
the Trustee by the transferee's acceptance
of an ERISA Restricted Certificate (unless
the Trustee shall have received from the
transferee an alternative representation
acceptable in form and substance to the
Master Servicer and the Depositor). Any
purported transfer of an ERISA Restricted
Certificate to or on behalf of a Plan
(including individual retirement accounts
or other plans or arrangements subject to
Section 406 of ERISA or Section 4975 of the
Code) without the delivery of an opinion of
counsel referred to in clause (ii) above
shall be void and of no effect.
Any Plan fiduciary considering whether to
purchase any Offered 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 Senior Certificates and the Class M-1
Certificates will constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act
of 1984, as amended ("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, will be legal
investments for certain entities to the
extent provided for in SMMEA. The Class M-2
and Class M-3 Certificates will not
constitute "mortgage related securities"
for the purposes of 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 any
Class of Offered 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
Senior Certificates (other than the Class
A-RLT Certificate) that they be rated "AAA"
by Fitch IBCA, Inc. ("FITCH") and "Aaa" by
Moody's Investors Service, Inc. ("MOODY'S"
and, together with Fitch, the "RATING
Agencies"). It is a condition of the
issuance of the Class M-1, Class M-2 and
Class M-3 Certificates that they be rated
"AA", "A" and "BBB", respectively, by
Fitch. The security ratings of the Offered
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.
The Depositor has not requested ratings of
the Offered Certificates by any rating
agency other than the Rating Agencies.
However, there can be no assurance as to
whether any other rating agency will rate
the Offered 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 Offered
Certificates could be lower than the
respective ratings assigned thereto by the
Rating Agencies.
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Offered Certificates.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
Yield Generally. The yields to maturity of the Offered Certificates may
vary from the anticipated yields to the extent such Certificates are purchased
at a discount or a premium and to the extent the rate and timing of payments
thereon are sensitive to the rate and timing of principal payments (including
prepayments) on the Mortgage Loans. Certificateholders should consider, in the
case of the Class A-PO Certificates and any other Offered Certificates (other
than the Senior IO Certificates) 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 the Senior
IO Certificates and any other Offered Certificates 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. In particular, if
the Class A-RLT Certificateholder exercises the Optional Call on or after the
Initial Optional Call Date, the effect will be the same as a prepayment in
full of the Mortgage Loans. In addition, the timing of changes in the rate of
principal prepayments on the Mortgage Loans (including for this purpose,
prepayments resulting from (i) refinancing, (ii) liquidations of the Mortgage
Loans due to defaults, casualties and condemnations, (iii) purchases by the
Seller or the applicable Servicer of any Defective Mortgage Loans or Defaulted
Mortgage Loans and (iv) any exercise of the Optional Call by the Class A-RLT
Certificateholder) may significantly affect an investor's actual yield to
maturity, even if the average rate of principal prepayments is consistent with
such investor's expectation. In general, the earlier a principal prepayment on
a Mortgage Loan occurs, the greater the effect of such principal prepayment on
an investor's yield to maturity. The effect on an investor's yield of
principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the
issuance of the Offered Certificates may not be offset by a subsequent like
decrease (or increase) in the rate of principal prepayments.
Prepayment Considerations and Risks. The rates of distributions on the
Offered Certificates, the aggregate amounts of distributions thereon and the
yields to maturity of the Offered 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 and by the rate of
principal prepayments thereon. The Mortgage Loans may be prepaid by the
mortgagors (each, a "MORTGAGOR") at any time; however, with respect to certain
Mortgage Loans, a prepayment charge will generally apply to full and partial
prepayments by Mortgagors during certain periods. Any such prepayment charge
will be retained by the related Servicer as additional servicing compensation.
The Mortgage Loans are subject to the "due-on-sale" provisions included
therein (insofar as such provisions are enforceable under applicable state
law). Prepayments, liquidations and purchases of the Mortgage Loans (including
any exercise of the Optional Call by the Class A-RLT Certificateholder) will,
subject to certain conditions, result in distributions to holders of the
Offered Certificates then entitled to receive principal distributions of
amounts that would otherwise have been distributed over the remaining terms of
the Mortgage Loans. See "Description of the Certificates" herein. 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.
The weighted average life of a pool of loans is the average amount of
time that will elapse from the date such pool is formed until each dollar of
principal is scheduled to be repaid to the investors in such pool. Because it
is expected that there may be principal prepayments and defaults on the
Mortgage Loans, the actual weighted average life of the Mortgage Loans may
vary substantially from the weighted average remaining term to stated maturity
of the Mortgage Loans as set forth herein under "The Mortgage Pool".
Defaults and Delinquent Payments. The yields to maturity of the Offered
Certificates will be sensitive to defaults and delinquent payments on the
Mortgage Loans. The related Servicer will not be required to advance amounts
in respect of delinquent payments of principal and interest of a Mortgage Loan
unless such amounts are deemed by it to be recoverable from future collections
or payments in respect of such Mortgage Loan. If a purchaser of an Offered
Certificate calculates its anticipated yield based on an assumed rate of
default and amount of losses that are lower than the default rate and amount
of losses actually incurred and not borne by a Class of Certificates
subordinate to such Offered Certificate, its actual yield to maturity may be
lower than the yield to maturity so calculated and could, in the event of
substantial losses, be negative. The timing of Realized Losses (as defined
herein) that are not borne by a Class of Certificates that is subordinate to
such Offered Certificate will also affect an investor's actual yield to
maturity even if the rate of defaults and severity of such losses are
consistent with such 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.
Payment Delay. Under the Pooling and Servicing Agreement, Scheduled
Payments of principal and interest on the Mortgage Loans in respect of any Due
Date generally will not be passed through to the holders of the Certificates
until the Distribution Date in the following calendar month. As a result, the
monthly distributions to the holders of the Certificates generally will
reflect Scheduled Payments during the prior calendar month. Each Distribution
Date will be on the 25th day of each month (or the next succeeding Business
Day), commencing in July 1998. Thus, the effective yield to the holders of the
Certificates will be below that otherwise produced by the related Pass-Through
Rate and the price paid for the Certificates by such holders because
distributions on such Certificates in respect of any given month will not be
made until on or about the 25th day of the following month and will not bear
interest during such delay.
GEOGRAPHIC CONCENTRATION
Mortgage Loans representing approximately 44.97% of the Cut-off Date
Pool Balance (as defined herein) are secured by Mortgaged Properties located
in California. If residential real estate markets in California should
experience an overall decline in property values after the dates of
origination of the related Mortgage Loans, the rates of delinquencies,
foreclosures, bankruptcies and losses on the Mortgage Loans may increase
substantially. Changes in the values of Mortgaged Properties may have an
effect on the delinquency, foreclosure, bankruptcy and loss experience of the
Mortgage Loans. No assurance can be given that the values of the Mortgaged
Properties have remained or will remain at the levels in effect on the dates
of origination of the related Mortgage Loans.
The hazard insurance policies which the Mortgagors are required to
maintain typically do not cover physical damage resulting from earth movement
(including earthquakes, landslides and mudflows). A significant portion of the
Mortgaged Properties may be located in areas that have been affected in the
past by such non-covered natural disasters. Under the Pooling and Servicing
Agreement, the Seller will represent that, as of the Cut-off Date, each
Mortgaged Property was undamaged by any casualty that was not fully insured
against and was, to the Seller's knowledge, in good repair.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "CIVIL RELIEF ACT"), mortgagors who enter
military service after the origination of their mortgage loans (including
mortgagors who are members of the National Guard or are in reserve status at
the time of the origination of their mortgage loans and are later called to
active duty) may not be charged interest (including fees and charges) above an
annual rate of 6% during the period of their active duty status, unless a
court orders otherwise upon application of the related lender. It is possible
that the application of the Civil Relief Act could have an effect, for an
indeterminate period of time, on the ability of the related Servicer to
collect full amounts of interest on certain of the Mortgage Loans. Any such
interest shortfalls could result in losses to the holders of the Offered
Certificates. In addition, the Civil Relief Act imposes limitations which
would impair the ability of the related Servicer to foreclose on an affected
Mortgage Loan during the Mortgagor'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 related Mortgaged
Property in a timely fashion. See "Description of the Certificates--Allocation
of Available Funds--Interest" herein and "Certain Legal Aspects of the
Loans--Soldiers' and Sailors' Civil Relief Act" in the Prospectus.
PURCHASED MORTGAGE LOANS
Substantially all of the Mortgage Loans will have been purchased by the
Redwood Parties in accordance with their respective loan purchase programs. In
the Mortgage Loan Purchase Agreement, each Redwood Party will make certain
representations and warranties to the Seller regarding the Mortgage Loans and
substantially similar representations and warranties will be made by the
Seller to the Depositor in the Mortgage Loan Sale Agreement and assigned by
the Depositor to the Trustee. In the event of a breach of any such
representation or warranty that materially and adversely affects the
Certificateholders, the Seller and/or such Redwood Party will be required
either to cure such breach or to repurchase the related Mortgage Loan or
Loans.
LEGAL CONSIDERATIONS
The transfer of the Mortgage Loans by the Redwood Parties to the Seller
will be characterized in the Mortgage Loan Purchase Agreement as sale
transactions. Nevertheless, in the event of a bankruptcy of a Redwood Party,
the trustee in bankruptcy could attempt to recharacterize the sale of the
related Mortgage Loans to the Seller as a borrowing secured by a pledge of
such Mortgage Loans.
If such an attempt to recharacterize the transfer of the Mortgage Loans
were successful, a trustee in bankruptcy could elect to accelerate payment of
the Certificates and liquidate the Mortgage Loans, with the holders of the
Certificates entitled to no more than the outstanding Class Principal
Balances, if any, of the Classes of Certificates, together with interest on
the outstanding Classes of interest-bearing Certificates at the applicable
Pass-Through Rates to the date of payment. In the event of an acceleration of
the Certificates, the holders of the Certificates would lose the right to
future payments of interest, might suffer reinvestment losses in a lower
interest rate environment and may fail to recover their initial investment.
Whether or not an acceleration takes place, delays in payments on the
Certificates and possible reductions in the amount of such payments could
occur. The Seller will warrant in the Mortgage Loan Sale Agreement that the
transfer of the Mortgage Loans to the Depositor is a valid transfer of all of
the Seller's right, title and interest in the Mortgage Loans to the Depositor,
and the Depositor will warrant in the Pooling and Servicing Agreement that the
transfer of the Mortgage Loans to the Trust Fund is a valid transfer of all of
the Depositor's right, title and interest in the Mortgage Loans to the Trust
Fund.
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING THE MORTGAGE LOANS
Applicable federal and state laws regulate interest rates and other
charges with respect to mortgage loans and require certain disclosures. In
addition, other laws, public policy and general principles of equity relating
to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
the Mortgage Loans. Depending on the provisions of the applicable law and the
specific facts and circumstances involved, violations of these laws, policies
and principles may limit the ability to collect all or part of the principal
of or interest on the Mortgage Loans, may entitle the related Mortgagor to a
refund of amounts previously paid and, in addition, could subject the owner of
the Mortgage Loans to damages and administrative enforcement. See "Risk
Factors--Certain Other Legal Considerations Regarding the Loans" in the
Prospectus.
BOOK-ENTRY REGISTRATION
The Offered Certificates (except the Class A-R Certificates) initially
will be represented by one or more certificates registered in the name of Cede
& Co. ("CEDE"), as nominee of the Depository, and will not be registered in
the names of the Certificate Owners (as defined herein) or their nominees.
Because of this, unless and until Definitive Certificates are issued, the
related Certificate Owners will not be recognized by the Trustee as
"Certificateholders" (as such term is used herein and in the Pooling and
Servicing Agreement) and will be able to exercise the rights of the holders of
the Offered Certificates only indirectly through the Depository and its
participating organizations. See "Description of the Certificates--Book-Entry
Certificates" herein.
THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with unpaid principal
balances as of the Cut-off Date (each such balance, a "CUT-OFF DATE PRINCIPAL
BALANCE") expected to total approximately $645,095,073.46 (such total, the
"CUT-OFF DATE POOL BALANCE"). All percentages described herein are approximate
percentages (except as otherwise stated) by Cut-off Date Pool Balance. The
Mortgage Loans to be included in the Mortgage Pool were purchased by the
Redwood Parties in the ordinary course of their respective businesses and were
acquired substantially in accordance with the underwriting criteria described
below under "--Underwriting Standards". The Mortgage Loans provide for the
amortization of the amount financed over a series of monthly payments;
provided, however, that with respect to the Mortgage Loans that are serviced
by MLCC (see "Servicing of the Mortgage Loans--Servicing Agreements" herein),
representing approximately 22.54% of the Mortgage Loans (the "INTEREST ONLY
LOANS"), only interest is payable thereon during the first five years after
origination and thereafter the Interest Only Loans become fully amortizing
during their sixth through 30th years. All the Mortgage Loans had a stated
term to maturity of 30 years at origination. All the Mortgage Loans provide
for payments due as of the first day of each month. Scheduled monthly payments
made by the Mortgagors on the Mortgage Loans (each, a "SCHEDULED PAYMENT")
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 15-day grace
period for Scheduled Payments. Any Mortgage Loan may be prepaid in full or in
part at any time; however, approximately 2.4% of the Mortgage Loans provide
for the payment by the Mortgagor of a prepayment charge in limited
circumstances on certain full or partial prepayments.
Certain Interest Only Loans representing approximately 8.5% of the
Mortgage Loans (the "ADDITIONAL COLLATERAL LOANS"), in addition to being
secured by the related Mortgaged Properties, are secured by a security
interest in a limited amount of additional collateral or are supported by a
third-party guarantee (the "ADDITIONAL COLLATERAL"). The requirement to
maintain Additional Collateral generally terminates when the Loan-to-Value
Ratio for an Additional Collateral Loan is reduced below 80% by virtue of a
reduction in the principal balance of such Mortgage Loan or an increase in the
appraised value of the related Mortgaged Property as determined by MLCC.
Although the pledge agreement or guarantee agreement, as applicable, and the
security interest in such Additional Collateral will not be assigned to the
Trustee, MLCC has entered into a pledged asset servicing agreement that has
been assigned to the Trustee, pursuant to which MLCC is obligated to realize
upon the Additional Collateral. In addition, a limited purpose surety bond
will guarantee receipt by the Trustee of certain shortfalls in the net
proceeds realized from the liquidation of any required Additional Collateral
to the extent that such shortfall results in a loss of principal upon the
liquidation of the related Additional Collateral Loan.
Each Mortgage Loan has a Mortgage Rate subject to adjustment on the Due
Date of the 60th Scheduled Payment under the related Mortgage Note (the
"INITIAL ADJUSTMENT DATE") and thereafter on each anniversary of such date
(each such anniversary, a "SUBSEQUENT ADJUSTMENT DATE"), to equal the sum,
generally rounded to the nearest 0.125%, of (i) the applicable One-Year CMT
Index value and (ii) a fixed percentage amount specified in such Mortgage Note
(the "GROSS MARGIN"); provided, however, that with respect to approximately
17.6%, 59.6% and 22.8% of the Mortgage Loans, the Mortgage Rate will not
increase or decrease by more than 2.0%, 5.0% and 6.0%, respectively, on the
Initial Adjustment Date (the "INITIAL ADJUSTMENT CAP"); and provided, further,
that no Mortgage Rate will increase or decrease by more than 2.0% on any
Subsequent Adjustment Date (the "PERIODIC RATE CAP"). 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 a fixed percentage (such
rate, the "MAXIMUM MORTGAGE RATE"). Effective beginning with the first
Scheduled Payment due on a Mortgage Loan after each related Adjustment Date,
the Scheduled Payment will be adjusted to an amount which will fully amortize
the outstanding principal balance of such Mortgage Loan over its remaining
term. If the One-Year CMT Index ceases to be published or is otherwise
unavailable, the Master Servicer will select an alternative index for mortgage
loans on single-family residential properties, based upon the terms of the
Mortgage Note.
Substantially all of the Mortgage Loans were originated with Mortgage
Rates less than the sum of the then applicable One-Year CMT Index values and
the related Gross Margins, rounded as described herein.
As of the Closing Date, all Scheduled Payments due prior to the Cut-off
Date will have been made. None of the Mortgage Loans will have been 60 or more
days Delinquent (as defined herein) more than once since the origination of
such Mortgage Loan.
Each Mortgage Loan was originated on or after February 9, 1996, and has
an Initial Adjustment Date on or after March 1, 2001.
None of the Mortgage Loans will have a first Due Date prior to April 1,
1996. The latest maturity date of any of the Mortgage Loans will be in May
2028.
Approximately 43.47% of the Mortgage Loans will be "purchase money"
mortgage loans the proceeds of which were used to purchase the related
Mortgaged Properties. With respect to not more than approximately 45.18% of
the Mortgage Loans, the proceeds thereof were used to refinance existing
mortgage loans.
Approximately 44.97% of the Mortgage Loans will be secured by Mortgaged
Properties located in the State of California. No more than approximately
1.36% of the Mortgage Loans will be secured by Mortgaged Properties located in
any one five-digit ZIP code area.
Approximately 75.41% of the Mortgage Loans will be secured by
one-family detached residences and approximately 16.33% of the Mortgage Loans
will be secured by dwelling units in planned unit developments. No more than
approximately 7.70% of the Mortgage Loans will be secured by units in
condominium projects. No more than approximately 0.39% of the Mortgage Loans
will be secured by two- to four-family residences. On the basis of
representations made by the Mortgagors in their loan applications, no more
than approximately 0.78% of the Mortgage Loans will be secured by Mortgaged
Properties that are investor-owned.
None of the Mortgage Loans will be subject to any buydown agreement.
At least 11.58% of the Mortgage Loans will be insured by primary
mortgage insurance policies.
The Mortgage Loans are expected to have the characteristics listed
below.
ORIGINAL LOAN-TO-VALUE RATIOS
The weighted average original Loan-to-Value Ratio (as defined below) of
the Mortgage Loans as of the Cut-off Date is expected to be approximately
71.77%. In connection with the Additional Collateral Loans, Constructive
Loan-to-Value Ratios (as defined below) are calculated and included in the
following table. The original 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):
RANGE OF ORIGINAL
LOAN-TO-VALUE OR
CONSTRUCTIVE NUMBER OF AGGREGATE % OF
LOAN-TO-VALUE MORTGAGE CUT-OFF DATE CUT-OFF DATE
RATIOS LOANS PRINCIPAL BALANCE POOL BALANCE
5.00% - 10.00% 5 $ 129,739.61 0.02%
10.01% - 15.00% 6 558,305.12 0.09
15.01% - 20.00% 10 1,178,264.71 0.18
20.01% - 25.00% 14 1,428,385.35 0.22
25.01% - 30.00% 18 2,566,586.95 0.40
30.01% - 35.00% 11 1,107,138.94 0.17
35.01% - 40.00% 35 10,118,066.78 1.57
40.01% - 45.00% 39 11,414,849.27 1.77
45.01% - 50.00% 76 25,047,103.62 3.88
50.01% - 55.00% 65 20,165,460.22 3.13
55.01% - 60.00% 96 30,871,116.06 4.79
60.01% - 65.00% 126 43,217,528.62 6.70
65.01% - 70.00% 402 123,350,232.86 19.12
70.01% - 75.00% 247 79,786,064.43 12.37
75.01% - 80.00% 694 218,515,858.90 33.87
80.01% - 85.00% 35 9,548,526.51 1.48
85.01% - 90.00% 163 46,029,422.41 7.14
90.01% - 95.00% 87 20,062,423.10 3.11
------- ---------------- ---------
TOTAL 2,129 $645,095,073.46 100.00%
The "LOAN-TO-VALUE RATIO" of a Mortgage Loan is equal to (i) the
original principal balance of such Mortgage Loan 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 the Originator of the related Mortgage Loan by an
independent fee appraiser at the time of the origination of such 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. The "CONSTRUCTIVE LOAN-TO-VALUE RATIO" of an Additional
Collateral Loan is equal to (i) the original principal balance of such
Mortgage Loan less the required amount of Additional Collateral, divided by
(ii) the lesser of the appraised value of the Mortgage Loan at origination
and, if the Mortgage Loan is a purchase money loan, the sales price of the
Mortgaged Property. See "-- General" above for a description of the Additional
Collateral Loans. 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
values of the related Mortgaged Properties, actual losses on the Mortgage
Loans could be higher than losses now generally experienced in the mortgage
lending industry
INITIAL MORTGAGE RATES
As of the Cut-off Date, the weighted average Mortgage Rate borne by the
Mortgage Loans is expected to be approximately 7.079% per annum. The Mortgage
Rates borne by 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):
AGGREGATE
NUMBER OF CUT-OFF DATE % OF
RANGE OF MORTGAGE MORTGAGE PRINCIPAL CUT-OFF DATE
RATES LOANS BALANCE POOL BALANCE
5.625% - 5.749% 1 $ 408,180.50 0.06%
5.750% - 5.999% 20 6,035,571.95 0.94
6.000% - 6.249% 38 12,503,532.28 1.94
6.250% - 6.499% 53 17,081,805.61 2.65
6.500% - 6.749% 116 35,928,416.45 5.57
6.750% - 6.999% 464 136,121,170.08 21.10
7.000% - 7.249% 497 168,533,276.02 26.13
7.250% - 7.499% 542 171,218,518.54 26.54
7.500% - 7.749% 350 84,563,268.30 13.11
7.750% - 7.999% 33 8,502,105.63 1.32
8.000% - 8.249% 7 2,410,039.54 0.37
8.250% - 8.499% 6 1,302,212.70 0.20
8.500% - 8.500% 2 486,975.86 0.08
------ -------------- ------
TOTAL 2,129 $645,095,073.46 100.00%
INITIAL ADJUSTMENT DATES
The Initial Adjustment Dates 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):
INITAL NUMBER OF
ADJUSTMENT MORTGAGE AGGREGATE CUT-OFF % OF CUT-OFF DATE
DATE LOANS DATE PRINCIPAL POOL BALANCE
March 1, 2001 2 $ 852,327.39 0.13%
February 1, 2002 1 173,765.84 0.03
April 1, 2002 1 165,848.65 0.03
June 1, 2002 1 123,898.92 0.02
August 1, 2002 8 2,053,788.56 0.32
September 1, 2002 17 5,174,132.75 0.80
October 1, 2002 55 19,399,233.05 3.01
November 1, 2002 80 28,306,954.96 4.39
December 1, 2002 89 27,973,105.27 4.34
January 1, 2003 207 70,821,312.33 10.98
February 1, 2003 530 147,107,211.89 22.80
March 1, 2003 597 164,759,400.54 25.54
April 1, 2003 508 166,372,444.62 25.79
May 1, 2003 33 11,811,648.69 1.83
----- --------------- ------
TOTAL 2,129 $645,095,073.46 100.00%
GROSS MARGINS* As of the Cut-off Date, the weighted average Gross
Margin is expected to be approximately 2.763%. 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):
GROSS MARGINS*
NUMBER OF AGGREGATE
RANGE OF GROSS MORTGAGE CUT-OFF DATE CUT-OFF DATE
MARGINS LOANS PRINCIPAL BALANCE POOL BALANCE
2.125% - 2.249% 1 $ 311,733.54 0.05%
2.750% - 2.999% 2,090 634,011,451.09 98.28
3.000% - 3.249% 11 3,377,261.88 0.52
3.250% - 3.499% 19 5,409,111.64 0.84
3.500% - 3.749% 2 498,128.44 0.08
3.750% - 3.750% 6 1,487,386.87 0.23
--------- --------------- --------
TOTAL 2,129 $645,095,073.46 100.00%
- ---------------------
* To be used to calculate the Mortgae Rate for the related Mortgage Loan
beginning with its Initial Adjustment Date (subject to the related Initial
Ajdustment Cap for the Initial Adjustment Date and the related periodic
Rate cap for each Subsequent Adjustment Date).
MAXIMUM MORTGAGE RATES
As of the Cut-off Date, the weighted average Maximum Mortgage Rate with
respect to the Mortgage Loans is expected to be approximately 12.311% 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):
RANGE OF MAXIMUM NUMBER OF AGGREGATE % OF CUT-OFF
MORTGAGE RATES MORTGAGE CUT-OFF DATE DATE POOL
LOANS PRINCIPAL BALANCE BALANCE
10.625% - 10.749% 1 $ 408,180.50 0.06%
10.750% - 10.999% 16 4,987,782.95 0.77
11.000% - 11.249% 33 11,484,632.28 1.78
11.250% - 11.499% 50 16,391,935.60 2.54
11.500% - 11.749% 97 31,039,637.69 4.81
11.750% - 11.999% 253 87,604,284.38 13.58
12.000% - 12.249% 426 149,812,069.15 23.22
12.250% - 12.499% 418 140,461,491.84 21.77
12.500% - 12.749% 161 51,130,186.35 7.93
12.750% - 12.999% 238 56,595,880.82 8.77
13.000% - 13.249% 81 21,169,380.57 3.28
13.250% - 13.499% 131 32,374,906.71 5.02
13.500% - 13.749% 211 39,123,229.26 6.06
13.750% - 13.999% 10 1,470,899.51 0.23
14.000% - 14.249% 2 980,765.84 0.15
14.250% 1 59,810.01 0.01
------ --------------- --------
TOTAL 2,129 $645,095,073.46 100.00%
REMAINING TERMS TO MATURITY (IN MONTHS)
As of the Cut-off Date, the weighted average remaining term to maturity
of the Mortgage Loans is expected to be approximately 356.19 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):
REMAINING TEMS OF MATURITY (IN MONTHS)
REMAINING TERM NUMBER OF AGGREGATE % OF
TO MATURITY MORTGAGE CUT-OFF DATE CUT-OFF DATE
(IN MONTHS) LOANS PRINCIPAL BALANCE POOL BALANCE
235 1 $ 348,598.91 0.05%
238 1 300,837.15 0.05
333 1 104,869.51 0.02
344 1 173,765.84 0.03
346 1 165,848.65 0.03
348 1 123,898.92 0.02
350 8 2,053,788.56 0.32
351 16 4,672,469.40 0.72
352 55 19,399,233.05 3.01
353 80 28,306,954.96 4.39
354 90 28,474,768.62 4.41
355 205 69,960,213.42 10.84
356 533 148,626,823.50 23.04
357 595 164,469,746.81 25.50
358 508 166,101,607.47 25.75
359 33 11,811,648.69 1.83
-------- --------------- --------
TOTAL 2,129 $645,095,073.46 100.00%
CUT-OFF DATE PRINCIPAL BALANCES
As of the Cut-off Date, the average of the Cut-off Date Principal
Balances of the Mortgage Loans is expected to be approximately $303,004. 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):
NUMBER OF AGGREGATE % OF
RANGE OF CUT-OFF DATE MORTGAGE CUT-OFF DATE CUT-OFF DATE
PRINCIPAL BALANCES LOANS PRINCIPAL BALANCE POOL BALANCE
$ 9,568.75 - $ 10,000.00 1 $ 9,568.75 0.00%
$ 10,000.01 - $ 20,000.00 6 102,962.70 0.02
$ 20,000.01 - $ 30,000.00 6 154,741.65 0.02
$ 30,000.01 - $ 40,000.00 8 281,587.25 0.04
$ 40,000.01 - $ 50,000.00 27 1,278,476.33 0.20
$ 50,000.01 - $ 60,000.00 18 1,008,080.84 0.16
$ 60,000.01 - $ 70,000.00 23 1,513,936.03 0.23
$ 70,000.01 - $ 80,000.00 28 2,140,159.00 0.33
$ 80,000.01 - $ 90,000.00 27 2,318,930.48 0.36
$ 90,000.01 - $ 100,000.00 41 3,974,119.14 0.62
$ 100,000.01 - $ 110,000.00 23 2,452,785.94 0.38
$ 110,000.01 - $ 120,000.00 25 2,914,598.55 0.45
$ 120,000.01 - $ 130,000.00 26 3,261,206.70 0.51
$ 130,000.01 - $ 140,000.00 25 3,405,939.55 0.53
$ 140,000.01 - $ 150,000.00 24 3,524,409.44 0.55
$ 150,000.01 - $ 160,000.00 17 2,658,467.97 0.41
$ 160,000.01 - $ 170,000.00 21 3,474,609.70 0.54
$ 170,000.01 - $ 180,000.00 22 3,852,415.13 0.60
$ 180,000.01 - $ 190,000.00 21 3,883,950.14 0.60
$ 190,000.01 - $ 200,000.00 30 5,910,543.79 0.92
$ 200,000.01 - $ 250,000.00 305 71,871,631.94 11.14
$ 250,000.01 - $ 300,000.00 537 147,366,279.99 22.84
$ 300,000.01 - $ 350,000.00 288 93,696,992.33 14.52
$ 350,000.01 - $ 400,000.00 194 73,124,570.14 11.34
$ 400,000.01 - $ 450,000.00 120 51,172,109.85 7.93
$ 450,000.01 - $ 500,000.00 87 41,793,904.12 6.48
$ 500,000.01 - $ 550,000.00 50 26,374,244.82 4.09
$ 550,000.01 - $ 600,000.00 45 26,234,395.91 4.07
$ 600,000.01 - $ 650,000.00 33 21,012,213.36 3.26
$ 650,000.01 - $ 700,000.00 10 6,791,726.24 1.05
$ 700,000.01 - $ 750,000.00 7 5,133,613.87 0.80
$ 750,000.01 - $ 800,000.00 3 2,344,159.15 0.36
$ 800,000.01 - $ 850,000.00 4 3,333,998.88 0.52
$ 850,000.01 - $ 900,000.00 5 4,294,124.10 0.67
$ 900,000.01 - $ 950,000.00 1 909,254.07 0.14
$ 950,000.01 - $1,000,000.00 18 17,894,365.61 2.77
$1,100,000.01 - $1,150,000.00 1 1,126,000.00 0.17
$1,150,000.01 - $1,200,000.00 1 1,200,000.00 0.19
$1,250,000.01 - $1,300,000.00 1 1,300,000.00 0.20
----- --------------- ------
TOTAL 2,129 $645,095,073.46 100.00%
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
As of the Cut-off Date, the geographic distribution of the Mortgage Loans
was expected to be as follows (the sum of the percentages in the following
table may not equal the total due to rounding):
% OF
NUMBER OF AGGREGATE CUT-OFF CUT-OFF
MORTGAGE DATE PRINCIPAL DATE POOL
STATE LOANS BALANCE BALANCE
California 845 $290,127,204.07 44.97%
Colorado 92 30,594,905.69 4.74
Illinois 98 27,772,286.15 4.31
New Jersey 84 25,143,674.68 3.90
Florida 108 23,710,975.88 3.68
Michigan 90 21,233,956.55 3.29
Texas 60 16,801,083.67 2.60
Washington 53 16,501,111.52 2.56
Minnesota 48 16,425,333.13 2.55
Massachusetts 47 15,529,312.72 2.41
Georgia 51 14,696,386.33 2.28
Arizona 39 11,418,265.30 1.77
Utah 37 10,961,937.72 1.70
Pennsylvania 35 10,703,832.05 1.66
New York 42 10,138,905.18 1.57
Maryland 33 10,098,395.19 1.57
Connecticut 34 9,819,804.69 1.52
Virginia 34 9,783,133.70 1.52
North Carolina 32 9,181,361.46 1.42
Ohio 37 9,080,192.28 1.41
Nevada 19 6,423,514.87 1.00
Oregon 20 5,656,810.35 0.88
Missouri 22 4,242,761.70 0.66
Wisconsin 11 3,200,560.46 0.50
Indiana 12 3,061,632.83 0.47
Kentucky 13 2,888,937.82 0.45
District of Columbia 8 2,698,936.38 0.42
Tennessee 12 2,465,485.00 0.38
Kansas 9 2,043,815.76 0.32
South Carolina 10 2,016,093.05 0.31
Iowa 6 1,933,805.93 0.30
Idaho 7 1,874,058.07 0.29
New Mexico 9 1,871,880.01 0.29
Alabama 9 1,870,606.21 0.29
Louisiana 9 1,862,295.16 0.29
Nebraska 10 1,759,835.14 0.27
Wyoming 4 1,745,025.56 0.27
Maine 5 1,472,776.65 0.23
Montana 6 1,395,419.35 0.22
Arkansas 9 999,376.64 0.15
Mississippi 4 788,334.23 0.12
Oklahoma 4 746,831.69 0.12
Rhode Island 3 736,300.00 0.11
New Hampshire 3 593,635.22 0.09
North Dakota 2 445,547.42 0.07
Hawaii 2 383,740.00 0.06
West Virginia 1 165,000.00 0.03
Delaware 1 30,000.00 0.00
------ ------------------ -------
TOTAL 2,129 $645,095,073.46 100.00%
ASSIGNMENT OF THE MORTGAGE LOANS
The Depositor will purchase the Mortgage Loans from the Seller pursuant
to a Mortgage Loan Sale Agreement (the "MORTGAGE LOAN SALE AGREEMENT") dated
as of the Cut-off Date between the Seller and the Depositor. Under the
Mortgage Loan Sale Agreement, the Seller will make certain representations,
warranties and covenants to the Depositor relating to, among other things,
certain characteristics of the Mortgage Loans and, subject to the limitations
described below, will be obligated to purchase, or substitute a similar
mortgage loan for, any Mortgage Loan as to which there exists deficient
documentation or as to which there has been an uncured breach of any
representation or warranty relating to the characteristics of the Mortgage
Loans that materially and adversely affects the value of such Mortgage Loan or
the interests of the Certificateholders in such Mortgage Loan (each, a
"DEFECTIVE MORTGAGE LOAN")
Pursuant to the Pooling and Servicing Agreement, on the Closing Date
the Depositor will sell, transfer, assign, set over and otherwise convey
without recourse to the Trustee, in trust for the benefit of the holders of
the Certificates, all right, title and interest of the Depositor in and to (i)
each Mortgage Loan, (ii) the Mortgage Loan Sale Agreement and (iii) other
assets included in the Trust Fund, including all principal and interest
received by the Master Servicer and each Servicer with respect to the Mortgage
Loans after the Cut-off Date (to the extent not applied in computing the
Cut-off Date Pool Balance). Under the Pooling and Servicing Agreement, the
Depositor will assign all its right, title and interest in and to the
representations, warranties and covenants made by the Seller in the Mortgage
Loan Sale Agreement (including the Seller's repurchase obligations) to the
Trustee for the benefit of the Certificateholders. The Depositor will make no
representations or warranties with respect to the Mortgage Loans and will have
no obligation to repurchase or substitute for Defective Mortgage Loans. The
Seller is selling the Mortgage Loans without recourse and will have no
obligation with respect to the Certificates other than the purchase or
substitution obligations described above.
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 the Seller, the last
endorsee or by 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 the Seller;
(ii) the original recorded mortgage, deed of trust or other
security instrument (each, a "MORTGAGE");
(iii) a duly executed assignment of the Mortgage to "First Union
National Bank, as Trustee under the Pooling and Servicing Agreement, dated as
of June 1, 1998, for Sequoia Mortgage Trust 3, without recourse", in
recordable form (to be recorded promptly following the Closing Date),
(iv) the original recorded prior 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, with evidence of
recording thereon if permissible under applicable law; 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 insurer, with the original policy of title
insurance to be delivered within one year from the Closing Date.
The assignments of the Mortgages to the Trustee will be recorded in the
appropriate public offices for real property records promptly following the
Closing Date.
The Trustee will review, or cause to be reviewed, each Trustee's
Mortgage File on or prior to the Closing Date and will hold such documents in
trust for the benefit of the Certificateholders. 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 Master Servicer and the Seller in writing.
If the Seller cannot or does not cure such omission or defect within 90 days
after its receipt of notice from the Trustee, the Seller is required to
purchase such Defective Mortgage Loan from the Trust Fund at a price (the
"PURCHASE PRICE") equal to 100% of the Stated Principal Balance thereof plus
accrued interest thereon, at a rate equal to the difference between the
Mortgage Rate and the Servicing Fee Rate (the "NET MORTGAGE RATE") to the
first day of the month in which the Purchase Price is to be distributed.
Rather than purchase the Defective Mortgage Loan as provided above, the Seller
may remove such Mortgage Loan (a "DELETED MORTGAGE LOAN") from the Trust Fund
and substitute in its place one or more Mortgage Loans of like kind (such loan
or loans, collectively, a "REPLACEMENT MORTGAGE LOAN"); provided, however,
that such substitution is permitted only 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 Lower Tier REMIC 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 an outstanding 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 90% of the Stated Principal Balance of the
Deleted Mortgage Loan (the amount of any shortfall to be deposited by the
Seller in the Certificate Account not later than the succeeding Determination
Date (as defined herein) and held for distribution to the holders of the
Certificates on the related Distribution Date), (ii) have a Maximum Mortgage
Rate not less than (and not more than two percentage points greater than) the
Maximum Mortgage Rate of the Deleted Mortgage Loan, (iii) have the same
Periodic Rate Cap as the Deleted Mortgage Loan and a Gross Margin not less
than that of the Deleted Mortgage Loan and, if Mortgage Loans equal to 1% or
more of the Cut-off Date Pool Balance have become Deleted Mortgage Loans, not
more than two percentage points more than that of the Deleted Mortgage Loan,
(iv) be accruing interest at a rate not lower than, and not more than 1% per
annum higher than, that of the Deleted Mortgage Loan, (v) have a Loan-to-Value
Ratio or Constructive Loan-to-Value Ratio not higher than that of the Deleted
Mortgage Loan, (vi) have a remaining term to maturity not 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 permanent fixed Mortgage
Rate, (viii) meet the underwriting standards being applied by the Redwood
Parties (as described below), (ix) have an Initial Adjustment Date no earlier
than four months before, and no later than four months after, the Initial
Adjustment Date for the Deleted Mortgage Loan, (x) have the same interest-only
period, if applicable, and (xi) comply with all of the representations and
warranties set forth in the Pooling and Servicing Agreement as of the date of
substitution. This cure, purchase or substitution obligation constitutes the
sole remedy available to the Certificateholders or the Trustee for omission
of, or a material defect in, a Mortgage Loan document or for breach of a
representation or warranty.
UNDERWRITING STANDARDS
All of the Mortgage Loans have been purchased in the secondary market
by the Redwood Parties in the ordinary course of their respective businesses
from banks, savings and loan associations, mortgage bankers and other mortgage
loan originators (each, an "ORIGINATOR"). Each Redwood Party approves
individual institutions as eligible Originators after an evaluation of certain
criteria, including the Originator's mortgage origination experience and
financial stability and, if applicable, servicing experience. Each Originator
and/or the entity from which the Redwood Parties purchased the Mortgage Loans
will have represented and warranted that each of the Mortgage Loans originated
and/or sold by such Originator or other entity was underwritten in accordance
with standards consistent with those utilized by mortgage lenders generally
during the period of origination.
Underwriting standards are applied by or on behalf of a lender to
evaluate a borrower's credit standing and repayment ability, and the value and
adequacy of the related mortgaged property as collateral. In general, a
prospective borrower applying for a loan 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 expense, 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, among other things, 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 of deposits at financial institutions where the
borrower has demand or savings accounts. See "Mortgage Loan
Program--Underwriting Standards" in the Prospectus.
When a Redwood Party acquires a mortgage loan, the borrower's credit
report is reviewed. Generally, each credit report provides a credit score for
the borrower. The credit score is based upon the credit evaluation methodology
developed by Fair, Isaac and Company ("FICO"), a consulting firm specializing
in creating default predictive models through a high number of variables
components. FICO scores generally range from 350 to 850 and are available from
three major credit bureaus: Experian (formerly TRW), Equifax and Trans Union.
These scores estimate, on a relative basis, which loans are most likely to
default in the future. Lower scores imply higher default risk relative to a
higher score. FICO scores are empirically derived from historical credit
bureau data and represent a numerical weighing of a borrower's credit
characteristics over a two-year period. A FICO score is generated through the
statistical analysis of a number of credit-related characteristics or
variables. Common characteristics include number of credit lines (trade
lines), payment history, past delinquencies, severity of delinquencies,
current levels of indebtedness, types of credit and length of credit history.
Attributes are the specific values of each characteristic. A scorecard (the
model) is created with weights or points assigned to each attribute. An
individual loan applicant's credit score is derived by adding together the
attribute weights for the applicant. With respect to the Mortgage Loans,
90.68% (by Cut-off Date Pool Balance) have credit scores for the borrowers and
their weighted average FICO score was 722 at the time of scoring.
SERVICING OF THE MORTGAGE LOANS
THE MASTER SERVICER
Norwest Bank Minnesota, National Association, with its principal
servicing offices at 11000 Broken Land Parkway, Columbia, Maryland 21044, will
perform the duties of Master Servicer in accordance with the terms set forth
in the Pooling and Servicing Agreement. Such duties will be limited
principally to (i) performing certain administrative functions, (ii)
supervising the performance of each Servicer to the limited extent provided in
the Pooling and Servicing Agreement and (iii) succeeding to the obligations of
a terminated Servicer under the related Servicing Agreement or appointing a
successor Servicer thereunder.
SERVICING AGREEMENTS
The Mortgage Pool is comprised of 12 separate pools of Mortgage Loans.
Three pools are being serviced by Norwest Mortgage, Inc. ("NORWEST MORTGAGE"),
an affiliate of the Master Servicer, pursuant to three substantially similar
Servicing Agreements (the "NORWEST SERVICING AGREEMENTS"); two pools are being
serviced by Merrill Lynch Credit Corporation ("MLCC") pursuant to two
substantially similar Servicing Agreements (the "MLCC SERVICING AGREEMENTS");
two pools are being serviced by Cendant Mortgage Corporation ("CENDANT")
pursuant to two substantially similar Servicing Agreements (the "CENDANT
SERVICING AGREEMENTS"); three such pools are being serviced by Countrywide
Home Loans Inc. ("COUNTRYWIDE") pursuant to two substantially similar
Servicing Agreements (the "COUNTRYWIDE SERVICING AGREEMENTS"); and two pools
are being serviced by other Servicers.
NORWEST SERVICING AGREEMENTS. The aggregate principal balance as of the
Cut-off Date of Mortgage Loans covered by the Norwest Servicing Agreements was
$302,071,516. Norwest remits collections on the Mortgage Loans due to the
owner thereof on the 18th day of each month or, if not a business day, on the
first business day thereafter. Norwest may assign its servicing rights under
the Norwest Servicing Agreements with the prior consent of the owner of the
Mortgage Loans, such consent not to be unreasonably withheld.
MLCC SERVICING AGREEMENTS. The aggregate principal balance as of the
Cut-off Date of Mortgage Loans covered by the MLCC Servicing Agreements was
$145,433,585. MLCC remits collections on the Mortgage Loans due to the owner
thereof on the 18th day of each month or, if not a business day, on the first
business day thereafter. MLCC may assign its servicing rights under the MLCC
Servicing Agreements to a successor servicer meeting the eligibility criteria
therein set forth.
CENDANT SERVICING AGREEMENTS. The aggregate principal balance as of the
Cut-off Date of Mortgage Loans covered by the Cendant Servicing Agreements was
$94,454,582. Cendant remits collections on the Mortgage Loans due to the owner
thereof on the 18th day of each month or, if not a business day, on the first
business day thereafter. Cendant may assign its servicing rights under the
Cendant Servicing Agreements with the prior consent of the owner of the
Mortgage Loans, which consent may be granted or withheld at the sole
discretion of the owner of the Mortgage Loans.
COUNTRYWIDE SERVICING AGREEMENTS. The aggregate principal balance as of
the Cut-off Date of Mortgage Loans covered by the Countrywide Servicing
Agreements was $84,811,652. Countrywide remits collections on the Mortgage
Loans due to the owner thereof on the 18th day of each month or, if not a
business day, on the first business day thereafter. Countrywide may assign its
servicing rights under the Countrywide Servicing Agreements with the prior
consent of the owner of the Mortgage Loans, such consent not to be
unreasonably withheld.
SERVICING AND COLLECTION PROCEDURES
Servicing functions to be performed by the Servicers under the
Servicing Agreements include collection and remittance of principal and
interest payments, administration of mortgage escrow accounts, collection of
certain insurance claims and, if necessary, foreclosure and liquidation of REO
property. A Servicer may contract with subservicers to perform some or all of
the Servicer's servicing duties, but the Servicer will not thereby be released
from its obligations under its Servicing Agreement. When used herein with
respect to servicing obligations, the term Servicer includes any such
subservicer. The Master Servicer will perform certain supervisory functions
with respect to the servicing of the Mortgage Loans by the Servicers.
Under each Servicing Agreement, the Servicers deposit collections on
the Mortgage Loans into custodial accounts established by them. Such accounts
are required to be kept segregated from operating accounts of the related
Servicer and to meet the eligibility criteria set forth in the applicable
Servicing Agreement. Under certain Servicing Agreements, amounts on deposit in
the custodial account may be invested in permitted investments as therein
defined. Any losses resulting from such investments are required to be
reimbursed to the custodial account by the applicable Servicer out of its own
funds.
On or before the Closing Date, the Master Servicer will establish the
Certificate Account (as defined herein) into which each Servicer will remit
collections on the Mortgage Loans serviced by it (net of such Servicer's
related servicing compensation) on the 18th day of each month or, if not a
Business Day, on the first Business Day thereafter). Under the Pooling and
Servicing Agreement, amounts on deposit in the Certificate Account may be
invested in Permitted Investments (as defined therein). The Master Servicer is
entitled to receive the investment income thereon and any losses resulting
from such investments are required to be reimbursed to the Certificate Account
by the Master Servicer out of its own funds.
In the event of a default by a Servicer under the related Servicing
Agreement, the Master Servicer will have the right to remove the Servicer and
will exercise that right if it considers such removal to be in the best
interest of the Certificateholders. In the event that the Master Servicer
removes a Servicer, the Master Servicer will act as successor Servicer under
the related Servicing Agreement or will appoint a successor Servicer.
FORECLOSURE AND DELINQUENCY EXPERIENCE
The following table summarizes the delinquency and foreclosure
experience, as of March 31, 1998, of mortgage loans which were owned by
Redwood Trust on such date. The table includes information on mortgage loans
which are not included in the Mortgage Pool and no assurances can be given
that the foreclosure and delinquency experience presented in the table below
will be indicative of such experience on the Mortgage Loans in the future.
Holdings commenced its acquisition of mortgage loans in 1998, and accordingly
does not have foreclosure and delinquency experience information that would be
meaningful to include herein. Holdings has, however, acquired its mortgage
loans using underwriting standards comparable to those applied by Redwood
Trust.
The delinquency and foreclosure percentages may be affected by the size
and relative lack of seasoning of the portfolio. 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 and delinquency experience presented in the
table will be indicative of such experience on the Mortgage Loans in the
future.
Delinquencies with respect to mortgage loans owned by Redwood Trust as
of March 31, 1998 are as follows:
Delinquencies and Foreclosures
at March 31, 1998
(unaudited)
--------------------------------------------------------
By No. By Dollar Percent by Percent by
of Loans Amount No. of Loans Dollar Amount
Total Portfolio Owned 5,939 $1,837,517,535 100% 100%
Period of Delinquency:
31 to 60 days 103 $ 27,527,988 1.73% 1.50%
61 to 90 days 11 4,902,269 0.19 0.27
91 or more days* 13 3,053,341 0.22 0.17
Loans in Foreclosure 3 810,189 0.05 0.04
REO** 3 497,124 0.05 0.03
Total of Delinquent
Loans, Loans in
Foreclosure and REO
133 $ 36,709,911 2.24% 2.00%
- ------------------
* Does not include loans counted in "Loans in Foreclosure".
** Dollar amount of REO is equal to the unpaid principal balances of the
mortgage loans represented by such REO, plus the unamortized balance of
the purchase premiums paid for such mortgage loans as were purchased at a
premium.
There can be no assurance that factors beyond the Servicers' control,
such as national or local economic conditions or downturns in the real estate
markets of its lending areas, will not result in increased rates of
delinquencies and foreclosure losses in the future.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES; MASTER SERVICING COMPENSATION
The Servicing Fee Rate payable to each Servicer will vary from Mortgage
Loan to Mortgage Loan and will range from 0.25% to 0.375%. The Servicing Fee
with respect to each Mortgage Loan is payable out of the interest payments on
such Mortgage Loan. For certain Mortgage Loans, a rate reflecting lender paid
primary mortgage insurance, ranging from 0.125% to 0.875% per annum, is added
to the Servicing Fee Rate. Under all of the Servicing Agreements, the amount
of the Servicing Fee is subject to adjustment with respect to prepaid Mortgage
Loans, as described below under "--Adjustment to Certain Servicing Fees in
Connection with Certain Prepaid Mortgage Loans". The Servicers will also be
entitled to receive any prepayment penalties, late payment fees, assumption
fees and other similar charges.
The Master Servicer will be compensated for the performance of its
duties under the Pooling and Servicing Agreement by receiving earnings on and
the investment income with respect to amounts on deposit in the Certificate
Account and the Distribution Account from which monies the Master Servicer
will pay the Trustee its fee.
ADJUSTMENT TO CERTAIN SERVICING FEES IN CONNECTION WITH CERTAIN PREPAID
MORTGAGES LOANS
When a Mortgagor prepays a Mortgage Loan between Due Dates, such
Mortgagor is required to pay interest on the amount prepaid only to the date
of prepayment and not thereafter. Principal prepayments by Mortgagors received
during a calendar month will be distributed to Certificateholders on the
Distribution Date in the month following the month of receipt. Thus less than
one month's interest may have been collected on Mortgage Loans that have
prepaid with respect to any Distribution Date. A "PREPAYMENT INTEREST
SHORTFALL" is the amount by which interest paid by a Mortgagor in connection
with a prepayment of principal on a Mortgage Loan is less than one month's
interest at the related Mortgage Rate on the outstanding principal balance of
such Mortgage Loan before application of such prepayment. Pursuant to each of
the Servicing Agreements, the related aggregate Servicing Fee of a Servicer
for any month may be reduced, but not below zero, by the amount of Prepayment
Interest Shortfalls occurring during such month with respect to the Mortgage
Loans serviced pursuant to such Servicing Agreement. With respect to each
Servicing Agreement, if Prepayment Interest Shortfalls in any month occurring
with respect to such Mortgage Loans exceed the amount of the applicable
Servicing Fee for such month that is eligible for reduction as described
above, the amount of funds available from collections to be paid to
Certificateholders in respect of interest on the Mortgage Loans on the related
Distribution Date will be reduced by the amount of such excess (such excess,
the "NET PREPAYMENT INTEREST SHORTFALL").
ADVANCES
Each Servicer will be required to advance, prior to each remittance
date under the applicable Servicing Agreement, an amount equal to the
aggregate of the Scheduled Payments of principal and interest on the Mortgage
Loans (adjusted to the applicable Net Mortgage Rate) serviced under such
Servicing Agreement that were due on the related due date and that were
delinquent on the related determination date under such Servicing Agreement
(any such advance, an "ADVANCE").
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. A Servicer is not obligated to make Advances to the extent
that such Advances are, in its reasonable judgment, non-recoverable from
future payments and collections or insurance payments or proceeds of
liquidation of the related Mortgage Loans. Any failure by a Servicer to make
an Advance as required under the related Servicing Agreement will constitute a
default thereunder, in which case the Master Servicer will be required to make
an Advance in accordance with the terms of the Pooling and Servicing
Agreement; provided, however, that in no event will the Master Servicer be
required to make an Advance that is not, in its reasonable judgment,
recoverable from future payments and collections or insurance payments or
proceeds of liquidation of the related Mortgage Loans. If a Servicer or the
Master Servicer determines to make an Advance, such Advance will be included
in the Available Funds for the related Distribution Date. Any failure by the
Master Servicer to make an Advance as required under the Pooling and Servicing
Agreement will constitute a Master Servicer Default thereunder, in which case
the Trustee or the successor master servicer will be obligated to make such
Advance.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Offered Certificates will be issued pursuant to a Pooling and
Servicing Agreement, dated as of June 1, 1998 (the "POOLING AND SERVICING
AGREEMENT"), among the Depositor, the Seller, the Master Servicer and the
Trustee. Set forth below are summaries of certain of the specific terms and
provisions pursuant to which the Offered Certificates will be issued. The
following summaries do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, the provisions of the Pooling and
Servicing Agreement. When particular provisions or terms used in the Pooling
and Servicing Agreement are referred to, the actual provisions (including
definitions of terms) are incorporated herein by reference.
The Sequoia Mortgage Trust 3 Mortgage Loan Asset Backed Certificates
will consist of (i) the Class A-1, Class A-2, Class A-3 and Class A-4
Certificates (collectively, the "SENIOR SEQUENTIAL CERTIFICATES"), (ii) the
Class A-X1, Class A-X2, Class A-X3, Class A-X4 and Class A-IO Certificates
(collectively, the "SENIOR IO CERTIFICATES"), (iii) the Class A-PO
Certificates (the "CLASS A-PO CERTIFICATES" and, together with the Senior
Sequential Certificates and the Senior IO Certificates, the "SENIOR REGULAR
CERTIFICATES"), (iv) the Class A-R Certificates and the Class A-RLT
Certificate (collectively, the "RESIDUAL CERTIFICATES" and, together with the
Senior Regular Certificates, the "SENIOR CERTIFICATES", (v) the Class M-1,
Class M-2 and Class M-3 Certificates (collectively, the "MEZZANINE
CERTIFICATES") and (vi) the Class B-1, Class B-2 and Class B-3 Certificates
(collectively, the "SUBORDINATE CERTIFICATES"). Only the Senior Certificates
(other than the Class A-RLT Certificate) and the Mezzanine Certificates are
offered hereby (collectively, the "OFFERED CERTIFICATES").
The Class A-1, Class A-2, Class A-3 and Class A-4 Certificates will
have the approximate original Class Principal Balances specified on the cover
hereof and will evidence in the aggregate original beneficial ownership
interests of approximately 34.95%, 14.73%, 25.45% and 18.90%, respectively, in
the Trust Fund. The Class A-X1, Class A-X2, Class A-X3, Class A-X4 and Class
A-IO Certificates will have the approximate original Class Notional Balances
described on the cover hereof, will have no principal balances and will be
entitled solely to distributions of interest as set forth herein. The Class
A-PO Certificates will have the approximate original Class Principal Balance
specified on the cover hereof and will evidence in the aggregate an initial
beneficial ownership interest of approximately 0.47% in the Trust Fund. The
Class A-R Certificates will have the original Class Principal Balance
specified on the cover hereof. The Class M-1, Class M-2 and Class M-3
Certificates will have the approximate original Class Principal Balances
specified on the cover hereof and will evidence in the aggregate initial
beneficial ownership interests of approximately 2.50%, 1.20% and 0.75%,
respectively, in the Trust Fund. The remaining beneficial ownership interest
in the Trust Fund will be evidenced by the Subordinate Certificates, which
will have original Class Principal Balances totaling approximately $6,773,629
(representing an aggregate original beneficial ownership interest of
approximately 1.05% in the Trust Fund).
The "Class Principal Balance" of any Class of the Certificates (except
the Senior IO Certificates and the Class A-RLT Certificate) as of any
Distribution Date is the original Class Principal Balance thereof reduced by
the sum of all amounts previously distributed to the holders of Certificates
of such Class as payments of principal and the amount of Realized Losses
allocated to such Class. See "-- Allocation of Losses" below.
The Offered Certificates (other than the Class A-R Certificates) will
be issued in book-entry form as described below. The Senior Sequential
Certificates will be issued in minimum dollar denominations of $25,000 and
multiples of $1,000 in excess thereof. The Class A-X1, Class A-X2, Class A-X3
and Class A-X4 will be issued in minimum notional denominations of $500,000
and multiples of $1,000 in excess thereof. The Class A-PO Certificates will be
issued in minimum denominations of $100,000 and multiples of $1,000 in excess
thereof. The Mezzanine Certificates will be issued in minimum denominations of
$50,000 and multiples of $1,000 in excess thereof. The Class A-R Certificates
will be issued in registered, certificated form in a single denomination.
The assumed final distribution dates of the Classes of Offered
Certificates are the applicable Distribution Dates occurring in the months
specified in the table below:
Class Assumed Final Distribution Dates
Class A-1......................... November 2017
Class A-2......................... May 2021
Class A-3......................... September 2025
Class A-4......................... June 2028
Class A-X1........................ December 2002
Class A-X2........................ December 2002
Class A-X3........................ December 2002
Class A-X4........................ December 2002
Class A-IO........................ June 2028
Class A-PO........................ June 2028
Class M-1......................... June 2028
Class M-2......................... June 2028
Class M-3......................... June 2028
BOOK-ENTRY CERTIFICATES
The Offered Certificates (except the Class A-R Certificates) will be
book-entry certificates (the "BOOK-ENTRY CERTIFICATES"). The Book-Entry
Certificates will be issued in one or more certificates, the initial aggregate
principal balances or notional balances of which will equal the original Class
Principal Balance or Class Notional Balance, as applicable, of each Class of
Certificates 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 Book-Entry 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 Book-Entry Certificates. Except as
described below, no person acquiring a Book-Entry Certificate (each, a
"CERTIFICATE OWNER") will be entitled to receive a physical certificate
representing such Certificate (a "DEFINITIVE CERTIFICATE").
A Certificate 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
such Certificate 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 Certificate Owner's Financial Intermediary
is not a Depository participant). Therefore, each Certificate Owner must rely
on the foregoing procedures to evidence its beneficial ownership of a
Book-Entry Certificate. Beneficial ownership of a Book-Entry Certificate may
be transferred only by 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 Book-Entry Certificates, whether held for its own account
or as a nominee for another person. In general, beneficial ownership of
Book-Entry Certificates will be subject to the rules, regulations and
procedures governing the Depository and Depository participants as in effect
from time to time.
Distributions on the Book-Entry 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 Certificate Owners of the Book-Entry 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
Certificate Owners of the Book-Entry Certificates that it represents.
Under a book-entry format, Certificate Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since
such payments will be forwarded by the Trustee to Cede. None of the Depositor,
the Seller, the Master Servicer or the Trustee shall be responsible or liable
for such delays in the application of such payments to the Certificate Owners.
Because the Depository can only act on behalf of Financial Intermediaries, the
ability of a Certificate Owner to pledge Book-Entry Certificates to persons or
entities that do not participate in the Depository system, or otherwise take
actions in respect of such Book-Entry Certificates, may be limited due to the
absence of physical certificates for such Book-Entry Certificates. In
addition, issuance of the Book-Entry 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 Book-Entry Certificates will be Cede,
as nominee of the Depository. Certificate Owners of the Book-Entry
Certificates will not be "Certificateholders", as that term is used in the
Pooling and Servicing Agreement. Certificate 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
Certificate 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 Book-Entry Certificates of
such Certificate 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 Book-Entry Certificates
under the Pooling and Servicing Agreement only at the direction of one or more
Financial Intermediaries to whose Depository accounts the Book-Entry
Certificates are credited, to the extent that such actions are taken on behalf
of Financial Intermediaries whose holdings include such Book-Entry
Certificates.
Definitive Certificates will be issued to Certificate Owners of the
Book-Entry 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 Book-Entry
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) after
the occurrence of an Event of Default, Certificate Owners of the Book-Entry
Certificates having not less than 51% of the Voting Rights evidenced by the
Book-Entry 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 Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Certificate
Owners of such Book-Entry 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 Book-Entry 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.
TIERED REMIC STRUCTURE
For federal income tax purposes, the Trust Fund will include two
segregated asset pools, each of which will be treated as a separate REMIC. The
assets of the lower tier REMIC (the "LOWER TIER REMIC") will principally
consist of the Mortgage Loans. The assets of the upper tier REMIC (the "UPPER
TIER REMIC") will consist of uncertificated regular interests issued by the
Lower Tier REMIC which in the aggregate will correspond to the Certificates
(other than the Class A-RLT Certificate).
DISTRIBUTIONS
Distributions on the Offered 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 July 27, 1998 (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 in which such Distribution Date occurs (the "RECORD
DATE").
On each Distribution Date distributions with respect to the Book-Entry
Certificates will be made by wire transfer of immediately available funds to
the Depository and distributions with respect to Definitive Certificates will
be made by check mailed to the address of the person entitled thereto as it
appears on the Certificate Register; provided, however, that in the case of
any Certificateholder that holds Certificates of any Class evidencing an
aggregate Certificate Balance of $1,000,000 or more and has so notified the
Trustee in writing in accordance with the Pooling and Servicing Agreement,
distributions will be made 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; and provided,
further, that the final distribution in retirement of any of the Certificates
will be made only upon presentment and surrender of such Certificates at the
Corporate Trust Office of the Trustee. On each Distribution Date, a holder of
a Certificate will receive such holder's Percentage Interest of the amounts
required to be distributed with respect to the Class of Certificates to which
such Certificate belongs. The "PERCENTAGE INTEREST" evidenced by a Certificate
will equal the percentage derived by dividing the denomination of such
Certificate by the aggregate denominations of all Certificates of the Class to
which such Certificate belongs.
DEPOSITS TO THE CERTIFICATE ACCOUNT
The Master Servicer shall establish and maintain an account (the
"CERTIFICATE ACCOUNT"), on behalf of the Certificateholders. The Master
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 Pool
Balance):
(i) all payments on account of principal, including principal
prepayments, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans,
net of the related Servicing Fee;
(iii) all payments received under the limited purpose surety
bond referred to under "The Mortgage Pool -- General" herein;
(iv) all proceeds of any insurance policies (to the extent such
proceeds are not applied to the restoration of the related Mortgaged Property
or released to the related Mortgagor in accordance with the applicable
Servicer's normal servicing procedures) other than proceeds that represent
reimbursement of such Servicer's costs and expenses incurred in connection
with presenting claims under the related insurance policies ("INSURANCE
PROCEEDS"), and all other cash amounts received through foreclosure, eminent
domain, condemnation or otherwise, in connection with the liquidation of
defaulted Mortgage Loans (including Additional Collateral Loans), together
with the net proceeds on a monthly basis from any properties acquired by such
Servicer by foreclosure, deed in lieu of foreclosure or otherwise (other than
such net proceeds representing any profit realized by such Servicer in
connection with the disposition of any such properties) (together with
Insurance Proceeds, "LIQUIDATION PROCEEDS");
(v) all payments in respect of Prepayment Interest Shortfalls
made by the related Servicer;
(vi) any amount required to be deposited by the Master Servicer
in connection with any losses on investment of funds in the Certificate
Account;
(vii) any amounts required to be deposited by the applicable
Servicer with respect to any deductible clause in any blanket hazard insurance
policy maintained by such Servicer in lieu of requiring each Mortgagor to
maintain a hazard insurance policy covering the related Mortgaged Property;
(viii) all proceeds of any Defective Mortgage Loans or property
in respect of Defective Mortgage Loans purchased by the Seller or the
applicable Servicer and all amounts required to be deposited in connection
with shortfalls in the principal amount of Replacement Mortgage Loans; and
(ix) all proceeds of any Defaulted Mortgage Loans purchased by
the Seller or the applicable Servicer.
WITHDRAWALS FROM THE CERTIFICATE ACCOUNT
The Master Servicer may from time to time withdraw funds from the
Certificate Account for the following purposes:
(i) to pay to the Master Servicer earnings on or investment
income with respect to funds in or credited to the Certificate Account (from
which amount the Master Servicer will pay the Trustee its fee);
(ii) to reimburse the applicable Servicer or the Master
Servicer, as the case may be, for Advances, such right of reimbursement with
respect to any Mortgage Loan being limited to amounts received that represent
late recoveries of payments of principal and/or interest on such Mortgage Loan
(or Insurance Proceeds or Liquidation Proceeds with respect thereto) with
respect to which such Advance was made;
(iii) to reimburse the applicable Servicer or the Master
Servicer, as the case may be, for any Advances previously made that such
Servicer or the Master Servicer, as applicable, has determined to be
nonrecoverable;
(iv) to reimburse the applicable Servicer from Insurance
Proceeds for expenses incurred by such Servicer and covered by the related
insurance policies;
(v) to pay the applicable Servicer any unpaid Servicing Fees and
to reimburse it to the extent provided in the related Servicing Agreement for
any reasonable unreimbursed out-of-pocket costs and expenses incurred by such
Servicer in the performance of its servicing obligations thereunder, such
right of reimbursement being limited to amounts received representing late
recoveries of the payments of such costs and expenses;
(vi) to pay to the Seller or the applicable Servicer, as the
case may be, with respect to each Mortgage Loan or property acquired in
respect thereof that has been purchased by the Seller pursuant to the Pooling
and Servicing Agreement or by the applicable Servicer pursuant to the related
Servicing Agreement, all amounts received thereon and not taken into account
in determining the related Stated Principal Balance of such purchased Mortgage
Loan;
(vii) to reimburse the Master 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.
In addition, on or prior to 1:00 p.m. Central time on the Business Day
immediately preceding each Distribution Date, the Master Servicer shall
withdraw from the Certificate Account the amount of Available Funds, to the
extent on deposit, and remit such amount to the Trustee for deposit in the
Distribution Account, as described below.
DEPOSITS TO THE DISTRIBUTION ACCOUNT
The Trustee shall maintain a distribution account (the "DISTRIBUTION
ACCOUNT") on behalf of the Certificateholders. The Trustee shall, promptly
upon receipt, deposit in the Distribution Account and retain therein the
following:
(i) the aggregate amount remitted by the Master Servicer from
the Certificate Account;
(ii) all Advances; and
(iii) any amount required to be deposited by the Master Servicer
in connection with any losses on investment of funds in the Distribution
Account.
WITHDRAWALS FROM THE DISTRIBUTION ACCOUNT
The Trustee shall withdraw funds from the Distribution Account for
distribution to 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 Master Servicer as master servicing
compensation earnings on or investment income with respect to funds in or
credited to the Distribution Account (from which amount the Master Servicer
will pay the Trustee any unpaid portion of its fee);
(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
GENERAL. Distributions to Certificateholders will be made on each
Distribution Date in an amount equal to the amount of Available Funds.
"AVAILABLE FUNDS", as of any Distribution Date, is the sum of the following
amounts:
(a) the aggregate amount on deposit in the Certificate Account as of
the close of business on the immediately preceding Determination Date; and
(b) Advances with respect to such Distribution Date and any amounts
deposited by the Servicers in the Certificate Account in respect of Prepayment
Interest Shortfalls during the related prepayment period;
less the sum of:
(x) the portion thereof representing (i) principal prepayments,
Insurance Proceeds and Liquidation Proceeds received after the last day of the
related prepayment period and (ii) all Scheduled Payments or portions thereof
received in respect of scheduled principal and interest on the Mortgage Loans
due after the immediately preceding Due Date; and
(y) amounts permitted to be withdrawn from the Certificate Account
pursuant to clauses (i) through (viii), inclusive, under "--Withdrawals from
the Certificate Account" above.
INTEREST. On each Distribution Date, to the extent of the Available
Funds, each Class of interest-bearing Certificates will be entitled to receive
an amount allocable to interest (as to each such Class, the "INTEREST
DISTRIBUTION AMOUNT") with respect to the related Interest Accrual Period. The
Interest Distribution Amount for any Class of interest-bearing Certificates
will be equal to the sum of (i) interest at the applicable Pass-Through Rate
on the Class Principal Balance or Class Notional Balance, as applicable, of
such Class as of the first day of the related Interest Accrual Period and (ii)
the sum of the amounts, if any, by which the Interest Distribution Amount for
such Class on each prior Distribution Date exceeded the amount actually
distributed as interest on such prior Distribution Dates and not subsequently
distributed (the "UNPAID INTEREST SHORTFALL"). Interest will be calculated and
payable on the basis of a 360-day year divided into twelve 30-day months.
The interest entitlement described above for each Class of
interest-bearing Certificates will be reduced by the amount of Net Interest
Shortfalls for such Distribution Date. With respect to any Distribution Date,
the "NET INTEREST SHORTFALL" is equal to the sum of (i) the amount of interest
which would otherwise have been received with respect to any Mortgage Loan
that was the subject of (x) a Relief Act Reduction (as defined below) or (y) a
Special Hazard Loss, Fraud Loss or Bankruptcy Loss (each as defined herein),
after the exhaustion of the respective amounts of coverage provided by the
Subordinate Certificates and the Mezzanine Certificates for such types of
losses and (ii) any Net Prepayment Interest Shortfalls. Net Interest
Shortfalls on any Distribution Date will be allocated, pro rata, among all
Classes of Certificates entitled to receive distributions of interest on such
Distribution Date, based on the amount of interest each such Class of
Certificates would otherwise be entitled to receive on such Distribution Date
before taking into account any reduction in such amounts resulting from such
Net Interest Shortfalls. A "RELIEF ACT REDUCTION" is a reduction in the amount
of monthly interest payment on a Mortgage Loan pursuant to the Civil Relief
Act. See "Certain Legal Aspects of the Loans--Soldiers' and Sailors' Civil
Relief Act" in the Prospectus.
With respect to each Distribution Date, the "INTEREST ACCRUAL PERIOD"
for each Class of Certificates will be the calendar month preceding the month
in which such Distribution Date occurs.
On each Distribution Date, interest will be payable on each Class of
interest-bearing Certificates with respect to the related Interest Accrual
Period to the extent of Available Funds in the following order of priority:
first, to the Classes of interest-bearing Senior Certificates, pro
rata, the Interest Distribution Amount with respect to each such Class;
second, sequentially, to the Class M-1, Class M-2 and Class M-3
Certificates, in that order, the Interest Distribution Amount with respect to
each such Class; and
third, sequentially, to the Class B-1, Class B-2 and Class B-3
Certificates, in that order, the Interest Distribution Amount with respect to
each such Class.
The Pass-Through Rate for each Class of interest-bearing Certificates
with respect to the Interest Accrual Period related to each Distribution Date
is determined as set forth below.
1. Senior Sequential Certificates .........For each Distribution Date
to and including the Initial
Optional Call Date, the
Pass-Through Rates for the
Class A-1, Class A-2, Class
A-3 and Class A-4
Certificates will be 6.37%,
6.34%, 6.35% and 6.25% per
annum, respectively. For
each Distribution Date
following the Initial
Optional Call Date, the
Pass-Through Rate for the
Class A-1, Class A-2, Class
A-3 and Class A-4
Certificates will be equal
to the least of (i) the sum
of One-Month LIBOR (as
defined herein) for such
date plus 0.55%, (ii) the
Net WAC Rate (as defined
herein) for such date and
(iii) 11.0% per annum.
2. Senior IO Certificates. ..........For each Distribution Date
following the initial
Distribution Date to and
including the Initial
Optional Call Date, the
Pass-Through Rates for the
Class A-X1, Class A-X2,
Class A-X3 and Class A-X4
Certificates will be equal
to the excess, if any, of
(x) the Net WAC Rate for
such date over (y) the
Pass-Through Rates for such
date of the Class A-1, Class
A-2, Class A-3 and Class A-4
Certificates, respectively.
For each Distribution Date
after the Initial Optional
Call Date, the Class
Notional Balances of the
Class A-X1, Class A-X2,
Class A-X3 and Class A-X4
Certificates will be deemed
to be zero and such Classes
will no longer bear
interest.
For each Distribution Date
to and including the Initial
Optional Call Date, the
Pass-Through Rate for the
Class A-IO Certificates will
be equal to 0.0025% per
annum. For each Distribution
Date thereafter, the Class
A-IO Certificates will be
entitled to receive interest
in an amount equal to the
excess of interest accrued
at the Net WAC Rate on the
Pool Stated Principal
Balance for such date over
interest accrued on all
other outstanding Classes of
Certificates for such date.
3. Class A-PO Certificates ..........For each Distribution Date
to and including the Initial
Optional Call Date, the
Class A-PO Certificates will
not bear interest. For each
Distribution Date following
the Initial Optional Call
Date, the Class A-PO
Certificates will bear
interest at the Pass-Through
Rate equal to the least of
(i) One-Month LIBOR for such
date, (ii) the weighted
average Net Mortgage Rate of
the Discount Mortgage Loans
for such date, (iii) the Net
WAC Rate for such date and
(iv) 11.0% per annum.
4. Mezzanine Certificates ...........For each Distribution Date
to and including the Initial
Optional Call Date, the
Pass-Through Rate for each
Class of Mezzanine
Certificates will be equal
to the Net WAC Rate for such
date. On each Distribution
Date following the Initial
Optional Call Date, the
Pass-Through Rate for each
Class of Mezzanine
Certificates will be equal
to the least of (i) the sum
of One-Month LIBOR for such
date and the Applicable
Spread, (ii) the Net WAC
Rate for such date and (iii)
11.0% per annum. The
Applicable Spread for the
Class M-1, Class M-2 and
Class M-3 Certificates will
be 1.00%, 1.25% and 1.50%,
respectively.
5. Subordinate Certificates. ........For each Distribution Date,
the Pass-Through Rate for
each Class of Subordinate
Certificates will be equal
to the Net WAC Rate for such
date.
Determination of One-Month LIBOR
Beginning in December 2002, on the second LIBOR Business Day (as
defined below) prior to the commencement of each Interest Accrual Period
(each, a "LIBOR RATE DETERMINATION DATE"), the Master Servicer will determine
One-Month LIBOR for each LIBOR Rate Determination Date, the Master Servicer or
its agent will determine "ONE-MONTH LIBOR" on the basis of the Interest
Settlement Rate (the "INTEREST SETTLEMENT RATE") of the British Bankers'
Association (the "BBA") for one-month deposits in U.S. dollars as found on
Telerate page 3750 as of 11:00 a.m. London time on each LIBOR Rate
Determination Date. Interest Settlement Rates currently are based on rates
quoted by 16 BBA designated banks as being, in the view of such banks, the
offered rate at which deposits are being quoted to prime banks in the London
interbank market. Such Interest Settlement Rates are calculated by eliminating
the four highest rates and the four lowest rates, averaging the eight
remaining rates, carrying the result (expressed as a percentage) out to six
decimal places, and rounding to five decimal places.
"LIBOR BUSINESS DAY" means a day on which banks are open for dealing in
foreign currency and exchange in London, England and The City of New York.
The Master Servicer's establishment of One-Month LIBOR (or an
alternative index) and the Master Servicer's subsequent calculation of the
Pass-Through Rates for any Interest Accrual Period, in the absence of willful
misconduct, bad faith or manifest error, will be final and binding. The
Pass-Through Rates for the related Classes of Certificates for any applicable
Interest Accrual Period may be obtained by telephoning the Master Servicer at
(410) 884-2000.
PRINCIPAL. The "PRINCIPAL DISTRIBUTION AMOUNT" for any Payment Date
will be equal to the sum of:
(i) the principal portion of all scheduled monthly payments on
the Mortgage Loans received or Advanced (as defined herein) on the Mortgage
Loans with respect to the related Due Date;
(ii) the principal portion of all proceeds received with respect
to such Payment Date of (x) the purchase of a Defective Mortgage Loan (or, in
the case of a substitution, certain amounts representing a principal
adjustment) by the Seller or the applicable Servicer or the purchase of a
Defaulted Mortgage Loan (as defined herein) by the Seller or the applicable
Servicer; and
(iii) the principal portion of all other unscheduled collections
(such amounts together with the amounts included in clause (ii) above,
"PRINCIPAL PREPAYMENT DISTRIBUTION AMOUNTS"), received during the preceding
calendar month or deemed to be received during such month, including, without
limitation, full and partial principal prepayments made by the respective
Mortgagors, Liquidation Proceeds and Insurance Proceeds, to the extent not
distributed in the preceding month.
On each Distribution Date, the Principal Distribution Amount will be
allocated among the Senior Certificates, the Mezzanine Certificates and the
Subordinate Certificates as described below.
Class A-PO Principal Distribution Amount
On each Distribution Date, an amount equal to the PO Percentage
(defined below) of the portion of the Principal Distribution Amount
attributable to the Discount Mortgage Loans (defined below) will be
distributed as principal of the Class A-PO Certificates, until the Class
Principal Balance thereof is reduced to zero.
Remaining Principal Distribution Amount
I. On each Distribution Date to and including the Distribution Date in
June 2001, the Principal Distribution Amount remaining after giving effect to
the distribution specified in the immediately preceding paragraph (the
"REMAINING PRINCIPAL DISTRIBUTION AMOUNT") will be distributed as principal of
the Classes of Certificates specified below in the following order of
priority:
(i) to the Class A-R Certificates, until the Class Principal
Balance thereof is reduced to zero;
(ii) sequentially, to the Classes of Senior Sequential
Certificates, in the order of their numerical designation, until the Class
Principal Balances thereof are reduced to zero; and
(iii) to the Mezzanine Certificates and Subordinate
Certificates, pro rata, until the Class Principal Balances thereof are reduced
to zero.
II. On each Distribution Date beginning in July 2001 to and including
the Distribution Date in June 2003, the Remaining Principal Distribution
Amount will be distributed as principal of the Classes of Certificates
specified below as follows:
(A) if the Senior Credit Enhancement Percentage (as defined
herein) is equal to or greater than 11.0% and a Trigger
Event (as defined below) is not in effect, in the
following order of priority:
(i) to the Subordinate Certificates, pro rata, until the
Mezzanine Credit Enhancement Percentage (as defined
herein) is reduced to 2.1% (after giving effect to
such distribution); and
(ii) to the applicable Classes of Certificates specified
in Section I above in the amounts and priorities
specified therein, the Remaining Principal
Distribution Amount after giving effect to the
distribution in clause (i) above;
(B) if the Senior Credit Enhancement Percentage is less than
11.0% or a Trigger Event is in effect, to the applicable
Classes of Certificates specified in Section I above in
the amounts and priorities specified therein.
III. On each Distribution Date beginning in July 2003, the Remaining
Principal Distribution Amount will be distributed as principal of the Classes
of Certificates specified below as follows:
(A) if the Senior Credit Enhancement Percentage is equal to or
greater than 11% and a Trigger Event is not in effect, in
the following order of priority:
(i) to the Classes of Subordinate Certificates, pro rata,
until the Mezzanine Credit Enhancement Percentage is
reduced to 2.1% (after giving effect to such
distribution); and
(ii) to the Classes of Senior Sequential Certificates and
the Mezzanine Certificates, pro rata, the Remaining
Principal Distribution Amount after giving effect to
the distribution in clause (i) above, until the Class
Principal Balances thereof are reduced to zero; and
(B) if the Senior Credit Enhancement Percentage is less than
11.0% or a Trigger Event is in effect:
(i) to the Classes of Senior Sequential Certificates, the
Mezzanine Certificates and the Subordinate
Certificates, pro rata, the Remaining Principal
Distribution Amount less the Principal Prepayment
Distribution Amount allocable to the Non-PO
Percentage of the Mortgage Loans, until the Class
Principal Balances thereof are reduced to zero; and
(ii) to the Classes of Certificates specified below in the
following order of priority, the Principal Prepayment
Distribution Amount:
(a) to the Classes of Senior Sequential
Certificates, pro rata, the Specified Percentage
(as defined below) of the Principal Prepayment
Distribution Amount allocable to the Non-PO
Percentage of the Mortgage Loans, until the
Senior Credit Enhancement Percentage is equal to
11.0% and a Trigger Event is not in effect; and
(b) to the Classes of Mezzanine Certificates and
Subordinate Certificates, pro rata, the
remaining Principal Prepayment Distribution
Amount, until the Class Principal Balances
thereof are reduced to zero.
Notwithstanding the foregoing, if the Class Principal Balances of the
Senior Sequential Certificates have been reduced to zero, the Remaining
Principal Distribution Amount will be distributed to the Classes of Mezzanine
Certificates and Subordinate Certificates, pro rata, except in the event that
a Credit Enhancement Lockout Event (as defined herein) is in effect. If a
Credit Enhancement Lockout Event is in effect with respect to one or more
Classes of Mezzanine Certificates or Subordinate Certificates, the Remaining
Principal Distribution Amount will be distributed, pro rata, only to such
Classes of Mezzanine Certificates and Subordinate Certificates as to which a
Credit Enhancement Lockout Event is not in effect.
ADDITIONAL DEFINITIONS
The "AGGREGATE MEZZANINE PRINCIPAL BALANCE" and "AGGREGATE SUBORDINATE
PRINCIPAL BALANCE" for any Distribution Date are equal to the aggregate of the
Class Principal Balances of the Mezzanine Certificates and of the Subordinate
Certificates, respectively, for such date.
"BUSINESS DAY" means a day that is not a Saturday, Sunday, legal
holiday or a day on which banking institutions are authorized or obligated by
law, regulation or executive order to be closed in The City of New York,
Maryland, Minnesota or the city in which the corporate trust office of the
Trustee is located.
The "CLASS CREDIT ENHANCEMENT PERCENTAGE" for any Distribution Date and
any Class of the Senior Sequential Certificates, the Mezzanine Certificates
and the Subordinate Certificates is calculated by dividing the Class Principal
Balances of all Classes of such Certificates that are subordinate to such
Class by the Pool Principal Balance for such date. For purposes of determining
whether a Class of the Mezzanine Certificates or the Subordinate Certificates
is subordinate to any other Class of such Certificates, any Class of
Certificates which appears after any other Class or Classes in the following
list shall be deemed subordinate to such other Class or Classes: Class M-1,
Class M-2, Class M-3, Class B-1, Class B-2, Class B-3.
The "CLASS NOTIONAL BALANCE" with respect to (a) the Class A-X1, Class
A-X2, Class A-X3 and Class A-X4 Certificates for any Distribution Date to and
including the Initial Optional Call Date will be equal to the Class Principal
Balances of the Class A-1, Class A-2, Class A-3 and Class A-4 Certificates,
respectively, for such date, and thereafter will be equal to zero, and (b)
with respect to the Class A-IO Certificates for any Distribution Date to and
including the Initial Optional Call Date will be equal to the aggregate of the
principal balances of the Non-Discount Mortgage Loans for such date, and for
any Distribution Date thereafter will be equal to zero.
The "CLASS PRINCIPAL BALANCE" with respect to any Class of Certificates
(other than the Senior IO Certificates and the Class A-RLT Certificate) for
any Distribution Date will be equal to the original Class Principal Balance
thereof reduced by the sum of (i) all amounts distributed in respect of
principal of such Class on all prior Distribution Dates and (ii) all Realized
Losses allocated to such Class on all prior Distribution Dates.
A "CREDIT ENHANCEMENT LOCKOUT EVENT" is in effect with respect to any
Class of the Mezzanine Certificates and the Subordinate Certificates on any
Distribution Date following the Distribution Date on which the Class Principal
Balances of the Senior Sequential Certificates have been reduced to zero, if
the Rolling Six-Month Delinquency Rate for such Distribution Date is equal to
or greater than one-half of the Class Credit Enhancement Percentage for such
Class for such date.
A "DISCOUNT MORTGAGE LOAN" is a Mortgage Loan with a Net Mortgage Rate
of less than 6.37%.
The "DISCOUNT MORTGAGE POOL" for any Distribution Date is comprised of
all of the Discount Mortgage Loans in the Mortgage Pool.
The "DETERMINATION DATE" with respect to any Distribution Date is the
15th of the month in which such Distribution Date occurs.
The "DUE DATE" with respect to any Distribution Date is the first day
of the month in which such Distribution Date occurs.
The "MEZZANINE CREDIT ENHANCEMENT PERCENTAGE" for any Distribution Date
is the quotient, expressed as a percentage, obtained by dividing (i) the
Aggregate Subordinate Principal Balance by (ii) the Pool Principal Balance,
each for such date.
The "NET MORTGAGE INTEREST RATE" with respect to any Distribution Date
and any Mortgage Loan is equal to the Mortgage Rate of such Mortgage Loan on
the first day of the month preceding the month in which such Distribution Date
occurs, minus the applicable servicing fee rate (the "SERVICING FEE RATE")
with respect to such Mortgage Loan as described herein under "Servicing of the
Mortgage Loans--Servicing Compensation and Payment of Expenses".
The "NET WAC RATE" for any Distribution Date to and including the
Initial Optional Call Date is equal to a fraction, expressed as a percentage,
the numerator of which is (i) the product of (a) the weighted average of the
Net Mortgage Rates of the Mortgage Loans for such date and (b) the aggregate
of the principal balances of the Mortgage Loans for such date, minus (ii) the
Interest Distribution Amount for the Class A-IO Certificates for such date,
and the denominator of which is the aggregate Non-PO Balance of the Mortgage
Loans for such date; and for any Distribution Date thereafter is equal to the
weighted average of the Net Mortgage Rates of the Mortgage Loans for such
date.
A "NON-DISCOUNT MORTGAGE LOAN" is any Mortgage Loan other than a
Discount Mortgage Loan.
The "NON-PO BALANCE" (a) with respect to any Discount Mortgage Loan and
any date is equal to the Non-PO Percentage of the Stated Principal Balance
thereof as of such date and (b) with respect to any Non-Discount Mortgage
Loan, is equal to the Stated Principal Balance thereof as of such date.
The "NON-PO PERCENTAGE" (a) with respect to any Discount Mortgage Loan
and any date will be equal to 100% minus the related PO Percentage for such
date and (b) with respect to any Non-Discount Mortgage Loan, will be equal to
100%.
The "POOL STATED PRINCIPAL BALANCE" means, with respect to any
Distribution Date, the aggregate of the Stated Principal Balances of the
Mortgage Loans that were outstanding on the Due Date occurring in the month
preceding the month in which such Distribution Date occurs.
The "PO PERCENTAGE" with respect to any Discount Mortgage Loan will be
the fraction, expressed as a percentage, equal to (6.37% minus the related Net
Mortgage Rate) divided by 6.37%.
A "REALIZED LOSS" with respect to any defaulted Mortgage Loan that is
finally liquidated (each, a "LIQUIDATED LOAN"), is the amount of loss realized
equal to the portion of the principal balance remaining after application of
all amounts recovered (net of amounts reimbursable to the related Servicer or
the Master Servicer for related Advances, expenses, and Servicing Fees)
towards interest and principal owing on such Mortgage Loan.
The "ROLLING SIX-MONTH DELINQUENCY RATE" means, with respect to any
Distribution Date, the average of 60-plus day delinquency percentages
(including loans in foreclosure or relating to REO properties) for the six
most recent months.
The "SENIOR CREDIT ENHANCEMENT PERCENTAGE" for any Distribution Date
is the quotient, expressed as a percentage, obtained by dividing (i) the sum
of (a) the Aggregate Mezzanine Principal Balance and (b) the Aggregate
Subordinate Principal Balance by (ii) the Pool Principal Balance, each for
such date.
The "SPECIFIED PERCENTAGE" for any Distribution Date occurring in the
periods listed in the table below will be as follows:
Distribution Date Percentage
July 2003-June 2004 70%
July 2004-June 2005 60%
July 2005-June 2006 40%
July 2006-June 2007 20%
July 2007 and thereafter 0%
Any scheduled reduction in the Specified Percentage set forth above
shall not be made as of the related Distribution Date unless either:
A. (i)(X) the aggregate of the principal balances of the
Mortgage Loans delinquent 60-plus days, averaged over the six most
recent months, is less than 50% of the sum of the Aggregate Mezzanine
Principal Balance and the Aggregate Subordinate Principal Balance for
such date or (Y) the Rolling Six-Month Delinquency Rate for such
Distribution Date does not exceed 2%, AND
(ii) with respect to the periods indicated in the table set
forth under the definition of "Specified Percentage" above, the amount
of Realized Losses on the Mortgage Loans to and including such
Distribution Date is less than 30%, 35%, 40%, 45% or 50%,
respectively, of the sum of the original Class Principal Balances of
the Mezzanine Certificates and the Subordinate Certificates;
OR
--
B. (i) the Rolling Six-Month Delinquency Rate for such
Distribution Date does not exceed 4%, AND
(ii) the amount of Realized Losses on the Mortgage Loans to and
including such Distribution Date is less than 10% of the sum of the
original Class Principal Balance of the Mezzanine Certificates and the
Subordinate Certificates (each of A and B, a "STEPDOWN LOCKOUT
EVENT").
Notwithstanding the foregoing, upon reduction of the Class Principal Balances
of the Senior Sequential Certificates to zero, the Specified Percentage will
equal 0%.
The "STATED PRINCIPAL BALANCE" with respect to any Mortgage Loan and
any date is the Cut-off Date Principal Balance of such Mortgage Loan less the
sum of (i) the principal portion of the Scheduled Payments due thereon that
were received in the month prior to the most recent Distribution Date or as to
which an Advance was made, (ii) all principal prepayments, Insurance Proceeds
and Liquidation Proceeds with respect to such Mortgage Loan to the extent
distributed on any previous Distribution Date and (iii) any Realized Loss with
respect to such Mortgage Loan for any previous Distribution Date.
A "TRIGGER EVENT" is in effect with respect to any Distribution Date
if the Rolling Six-Month Delinquency Rate for such date is equal to or greater
than one-half of the Senior Credit Enhancement Percentage for such date.
ALLOCATION OF LOSSES
On each Distribution Date, the applicable PO Percentage of any
Realized Loss, including any Excess Loss, with respect to a Discount Mortgage
Loan will be allocated to the Class A-PO Certificates until the Class
Principal Balance thereof is reduced to zero. The amount of any such Realized
Loss, other than an Excess Loss, allocated on or prior to the date on which
the Class Principal Balances of all Classes of the Subordinate Certificates
and the Mezzanine Certificates have been reduced to zero will be treated as a
"CLASS A-PO DEFERRED AMOUNT". To the extent funds are allocable on such
Distribution Date or on any future Distribution Date from the Principal
Distribution Amount to any Mezzanine and Subordinate Certificates, Class A-PO
Deferred Amounts will be paid to the Class A-PO Certificates prior to
distributions of principal on the Mezzanine and Subordinate Certificates. Any
distribution of Available Funds in respect of unpaid Class A-PO Deferred
Amounts will not further reduce the Class Principal Balance of the Class A-PO
Certificates. The Class A-PO Deferred Amounts will not bear interest. The
Class Principal Balance of the Class of Subordinate Certificates then
outstanding with the highest numerical Class designation or, if the Class
Principal Balances of the Subordinate Certificates have been reduced to zero,
then the Class Certificate Balance of the Class of Mezzanine Certificates then
outstanding with the highest numerical Class designation will be reduced by
the amount of any payments in respect of Class A-PO Deferred Amounts. After
the date on which the Class Principal Balances of the Subordinate Certificates
and the Mezzanine Certificates have been reduced to zero, no new Class A-PO
Deferred Amounts will be created.
On each Distribution Date, the applicable Non-PO Percentage of any
Realized Losses, other than any Excess Losses, will be allocated first to the
Subordinate Certificates and then to the Mezzanine Certificates, in each case
in the reverse order of their numerical Class designations (beginning with the
Class of Subordinate Certificates then outstanding with the highest numerical
Class designation), in each case until the Class Principal Balances of such
respective Classes has been reduced to zero, and then to the Senior Sequential
Certificates, pro rata, based upon their respective Class Principal Balances.
On each Distribution Date, the applicable Non-PO Percentage of any
Excess Losses will be allocated, pro rata, among the Classes of Senior
Sequential Certificates, Mezzanine Certificates and Subordinate Certificates
based upon their respective Class Principal Balances.
Because principal distributions are paid to certain Classes of Senior
Certificates (other than the Certificates with Class Notional Balances) before
other Classes of Senior Certificates, holders of such Senior Certificates that
are entitled to receive principal later bear a greater risk of having Realized
Losses on the Mortgage Loans allocated to their Certificates than holders of
Classes that are entitled to receive principal earlier.
SUBORDINATION OF THE MEZZANINE AND SUBORDINATE CERTIFICATES
The rights of the holders of the Mezzanine Certificates and the
Subordinate Certificates to receive distributions with respect to the Mortgage
Loans will be subordinate to such rights of the holders of the Senior
Certificates to the extent described herein. This subordination is intended to
enhance the likelihood of regular receipt by the holders of the Senior
Certificates of the full amount of the monthly distributions due them, and to
afford such holders protection against Realized Losses. The protection
afforded to the holders of Senior Certificates by means of the subordination
feature will be accomplished by the preferential right of such holders to
receive, prior to any distribution being made on a Distribution Date in
respect of the Mezzanine Certificates and the Subordinate Certificates, the
amounts due them in respect of interest and principal, respectively, on each
Distribution Date out of Available Funds on deposit on such date in the
Certificate Account and, if necessary, by the right of such holders to receive
future distributions with respect to the Mortgage Loans that would otherwise
have been payable to the holders of the Mezzanine and Subordinate
Certificates. See "--Allocation of Available Funds" above.
Unless reduced by cash flow deficiencies due to delinquencies or
liquidation losses, the entitlement of the Senior Sequential Certificates to a
disproportionate percentage of the Remaining Principal Distribution Amount
will have the effect of accelerating the amortization of such Classes from
what it would have been if such amount had been distributed pro rata on the
basis of the Class Principal Balances of such Classes together with the
Mezzanine Certificates and the Subordinate Certificates. Any such acceleration
will increase the relative interests of the Mezzanine Certificates and
Subordinate Certificates in the Trust Fund and the protection afforded to the
Class A-1, Class A-2, Class A-3 and Class A-4 Certificates thereby. If,
however, as a result of losses on the Mortgage Loans, the Pool Stated Balance
becomes less than the aggregate of the Class Principal Balances of the Class
A-1, Class A-2, Class A-3 and Class A-4 Certificates the protection afforded
by the subordination feature will be exhausted and the Class A-1, Class A-2,
Class A-3 and Class A-4 Certificateholders will thereafter bear all losses and
delinquencies in respect of the Mortgage Loans on a pro rata basis.
"BANKRUPTCY LOSSES" on any Distribution Date are the aggregate of all
Realized Losses for the preceding Prepayment Period on account of (i)
Deficient Valuations, or (ii) Debt Service Reductions with respect to the
Mortgage Loans. A "DEFICIENT VALUATION with respect to any Mortgage Loan is a
valuation by a court of competent jurisdiction of the Mortgaged Property in an
amount less than the then outstanding indebtedness under the Mortgage Loan, or
any reduction in the amount of principal to be paid in connection with any
Scheduled Payment that results in a permanent forgiveness of principal, which
valuation or reduction results from a final non-appealable order of such court
under the U.S. Bankruptcy Code. A "DEBT SERVICE REDUCTION" with respect to any
Mortgage Loan is a reduction by a court of competent jurisdiction in the
Scheduled Payment for such Mortgage Loan, except a reduction resulting from a
Deficient Valuation.
"EXCESS LOSSES" are (i) Special Hazard Losses in excess of the Special
Hazard Loss Coverage Amount, (ii) Bankruptcy Losses in excess of the
Bankruptcy Loss Coverage Amount and (iii) Fraud Losses in excess of the Fraud
Loss Coverage Amount.
"FRAUD LOSSES" on any Distribution Date are the aggregate of all
Realized Losses for the preceding Prepayment Period on account of fraud,
dishonesty or misrepresentation in connection with the origination of the
related Mortgage Loan.
"SPECIAL HAZARD LOSSES" are Realized Losses in respect of Special
Hazard Loans. A "SPECIAL HAZARD LOAN" is a Liquidated Loan as to which the
applicable Servicer's ability to recover the full amount due thereunder was
substantially impaired by a hazard not insured against under a standard hazard
insurance policy.
The Mezzanine Certificates and the Subordinate Certificates will
provide protection to the Classes of Certificates of higher relative priority
against (i) Special Hazard Losses in an initial amount of $8,773,293 (the
"SPECIAL HAZARD LOSS COVERAGE AMOUNT"), (ii) Bankruptcy Losses in an initial
amount of $300,000 (the "BANKRUPTCY LOSS COVERAGE AMOUNT") and (iii) Fraud
Losses in an initial amount of $12,901,901 (the "FRAUD LOSS COVERAGE AMOUNT").
The Bankruptcy Loss Coverage Amount will be reduced, from time to
time, by the amount of Bankruptcy Losses allocated to the Certificates.
The Fraud Loss Coverage Amount will be reduced, from time to time, by
the amount of Fraud Losses allocated to the Certificates. In addition, on each
anniversary of the Cut-off Date, the Fraud Loss Coverage Amount will be
reduced as follows: (a) on the first, second, third and fourth anniversaries
of the Cut-off Date, to an amount equal to the lesser of (i) 1% of the then
current Pool Stated Principal Balance and (ii) the excess of the Fraud Loss
Coverage Amount as of the preceding anniversary of the Cut-off Date over the
cumulative amount of Fraud Losses allocated to the Certificates since such
preceding anniversary and (b) on the fifth anniversary of the Cut-off Date, to
zero.
The Special Hazard Loss Coverage Amount will be reduced, from time to
time, to an amount equal on any Distribution Date to the lesser of (a) the
greatest of (i) 1% of the aggregate of the Stated Principal Balances of the
Mortgage Loans, (ii) twice the Stated Principal Balance of the largest
Mortgage Loan and (iii) the aggregate Stated Principal Balances of the
Mortgage Loans secured by Mortgaged Properties located in the single
California five-digit Zip code area having the highest aggregate Stated
Principal Balance of any such Zip code area and (b) the Special Hazard Loss
Coverage Amount as of the Closing Date less the amount, if any, of losses
attributable to Special Hazard Mortgage Loans incurred since the Closing Date.
All Stated Principal Balances for the purpose of this definition will be
calculated as of the first day of the month preceding such Distribution Date
after giving effect to Scheduled Payments of principal and interest on the
Mortgage Loans then due, whether or not paid.
The amount of coverage provided by the Mezzanine Certificates and the
Subordinate Certificates for Special Hazard Losses, Bankruptcy Losses and
Fraud Losses may be cancelled or reduced from time to time for each of the
risks covered, provided that the then current ratings of the Certificates
assigned by the Ratings Agencies are not adversely affected thereby. In
addition, a reserve fund or other form of credit enhancement may be
substituted for the protection provided by the Mezzanine Certificates and the
Subordinate Certificates for Special Hazard Losses, Bankruptcy Losses and
Fraud Losses.
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:
June 1, 1998......................... Cut-off Date.
June 1-June 30, 1998................. (A) Prepayment period. The Servicers
receive Principal Prepayments and
interest thereon to the date of such
prepayment. For each Distribution
Date, the Prepayment Period will
commence on the first of the
preceding calendar month and end on
the last day of such month.
June 30.............................. (B) Record Date (the last Business Day of
the month preceding the month in
which the related Distribution Date
occurs).
July 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.
June 1 - July 15..................... (D) Each Servicer receives Scheduled
Payments due on July 1 during this
period.
July 15.............................. (E) Determination Date.
July 27.............................. (F) Distribution Date.
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 July 27, 1998 (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. With respect to Prepayment Interest Shortfalls
resulting from principal prepayments received during the related prepayment
period, the applicable Servicer will reduce its Servicing Fee for such month
and make a corresponding payment to 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 July 27, 1998 will be made to
Certificateholders of record as of the close of business on the Record Date.
(C) Scheduled Payments are due on this date and, when received, will be passed
through on the related Distribution Date, with the interest adjusted to the
applicable Net Mortgage Rate.
(D) All required amounts from the Servicers will be deposited by the Master
Servicer in the Certificate Account within one Business Day 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.
(E) As of July 15, 1998 the Trustee will determine the amount of principal and
interest (including the amount, if any, of Advances to be made by the
applicable Servicer or the Master 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 July 1, 1998 which have been
received on or before July 20, 1998 (or which were the subject of an Advance),
as well as all Principal Prepayments received on Mortgage Loans during the
related Prepayment Period (the Cut-off Date through June 30, 1998, in the case
of the initial Distribution Date). In the event a Prepayment Interest
Shortfall occurs during such Prepayment Period, the Servicing Fee otherwise
payable to the applicable Servicer for such month shall, to the extent of such
Prepayment Interest Shortfall, be deposited by such Servicer in the
Certificate Account for distribution to Certificateholders on July 27, 1998.
(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 Depositor and Redwood Trust a statement (based on
information received from Master Servicer in its possession from the related
Servicer) generally setting forth:
(i) the amount of the related distribution to holders of each Class of
Certificates allocable to principal, separately identifying the aggregate
amount of any Principal Prepayments included therein;
(ii) the amount of such distribution to holders of each Class of
Certificates allocable to interest, any Unpaid Interest Shortfall included in
such distribution and any remaining Unpaid Interest Shortfall after giving
effect to such distribution;
(iii) if the distribution to the holders of each Class of Certificates
is less than the full amount that would be distributable to such holders if
there were sufficient funds available therefor, the amount of the shortfall
and the allocation thereof as between principal and interest;
(iv) the Class Principal Balance or Class Notional Balance, as
applicable, of each Class of Certificates after giving effect to the
distribution of principal on such Distribution Date;
(v) the Pool Stated Principal Balance for the following Distribution
Date;
(vi) the related amount of the Servicing Fee paid to or retained by
the Servicer;
(vii) the Pass-Through Rate for each Class of Certificates with
respect to such Distribution Date;
(viii) the aggregate Stated Principal Balances of the Discount
Mortgage Loans and, for any Distribution Date after the Initial Optional Call
Date, the related Net WAC Rate;
(ix) the amount of Advances included in the distribution on such
Distribution Date;
(x) 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 as
of the close of business on the last day of the calendar month preceding such
Distribution Date;
(xi) the Rolling Six-Month Delinquency Rate for such Distribution
Date;
(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 Senior Credit Enhancement Percentage, the Mezzanine Credit
Enhancement Percentage and each Class Credit Enhancement Percentage separately
stated, before and after giving effect to distributions on such Distribution
Date;
(xv) the aggregate amount of Realized Losses incurred during the
preceding calendar month and the portion thereof attributable to Special
Hazard Losses, Bankruptcy Losses and Fraud Losses;
(xvi) whether a Trigger Event is in effect for such Distribution Date;
(xvii) whether a Credit Enhancement Lockout Event is in effect for
such Distribution Date;
(xviii) whether a Stepdown Lockout Event is in effect for such
Distribution Date, specifying such Stepdown Lockout Event; and
(xix) the aggregate amount of Realized Losses allocated to each Class
of Certificates.
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 Master Servicer, the Trustee and the Seller, without the consent of
Certificateholders, 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 Master Servicer,
the Trustee and the Seller, with the consent of the holders of a Majority in
Interest of each Class of Senior, Mezzanine and Subordinate 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 CALL BY CLASS A-RLT CERTIFICATEHOLDER
On any Distribution Date beginning with the Distribution Date in
December 2002 (the "INITIAL OPTIONAL CALL DATE"), the Class A-RLT
Certificateholder will have the option (the "OPTIONAL CALL") to purchase, in
whole but not in part, either (a) all the Mortgage Loans and the REO Property,
if any, remaining in the Trust Fund and thereby effect the early retirement of
all Certificates or (b) all outstanding Certificates, in either case by
depositing an amount not less than the aggregate of the Class Principal
Balances of the outstanding Classes of Certificates plus accrued and unpaid
interest on the outstanding classes of interest-bearing Certificates at the
respective Pass-Through Rates in effect for such Distribution Date to but not
including such Distribution Date. Notice of the exercise of the Optional Call
will be given to Certificateholders at least 15 days prior to such exercise.
OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any Mortgage Loan which is delinquent in payment by 91 days or
more, the Seller (or the applicable Servicer) may, at its option, purchase
such Mortgage Loan (each, a "DEFAULTED 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
Events of Default will consist of: (i) any failure by the Master
Servicer to deposit in the Certificate Account the required amounts or remit
to the Trustee any payment (other than an Advance required to be made under
the terms of the Pooling and Servicing Agreement) 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
and the Trustee by the holders of Certificates having not less than 25% of the
Voting Rights evidenced by the Certificates; (ii) any failure by the Master
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 Master Servicer by the Trustee or the Depositor, or to the
Master Servicer and the Trustee by the holders of Certificates evidencing not
less than 25% of the Voting Rights evidenced by the Certificates; (iii)
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings, and certain actions by or on behalf of the Master
Servicer indicating its insolvency or inability to pay its obligations or (iv)
any failure of the Master Servicer to make any Advance which continues
unremedied for the period of one Business Day after the date on which
telecopied notice of such failure, requiring the same to be remedied, shall
have been given to the Master Servicer by the Trustee. As of any date of
determination, (a) 1% of all Voting Rights shall be allocated to each Class of
Senior IO Certificates, if any, with a Class Notional Balance greater than
zero, and (b) the remaining Voting Rights (or 100% of the Voting Rights if
there is no Class of Senior IO Certificates with a Class Notional Balance
greater than zero) shall be allocated among holders of the remaining Classes
of Certificates in proportion to the Class Principal Balances thereof on such
date.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under the Pooling and Servicing
Agreement (other than an Event of Default described in clause (iv) in the
preceding paragraph) remains unremedied, the Trustee may, and upon the receipt
of instructions from holders of Certificates having not less than 25% of the
Voting Rights evidenced by the Certificates, the Trustee shall, terminate all
of the rights and obligations of the Master 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 Master Servicer
under the Pooling and Servicing Agreement, including the obligation to make
Advances. If an Event of Default arises from the Master Servicer's failure to
make an Advance as described in clause (iv) in the preceding paragraph [and
the Trustee receives instructions from holders of Certificates having not less
than 51% of the Voting Rights evidenced by the Certificates], the Trustee
shall terminate all of the rights and obligations of the Master Servicer under
the Pooling and Servicing Agreement and in and to the Mortgage Loans as
described in the preceding sentence.
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 default and 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, and the Trustee for 60 days has
neglected or refused to institute any such proceeding.
THE TRUSTEE
First Union National Bank, a national banking association will be the
Trustee under the Pooling and Servicing Agreement. The Depositor and Greenwich
may maintain other banking relationships in the ordinary course of business
with the Trustee. Offered Certificates may be surrendered at the Corporate
Trust Office of the Trustee located at 230 South Tryon Street, Charlotte,
North Carolina 28288, Attention: Sequoia Mortgage Trust 3 or at such other
addresses as the Trustee may designate from time to time.
RESTRICTIONS ON TRANSFER OF THE CLASS A-R CERTIFICATES AND THE MEZZANINE
CERTIFICATES
The Pooling and Servicing Agreement provides that the Class A-R
Certificates and the Mezzanine Certificates (in addition to certain other
Classes of Certificates) may not be acquired by a Plan except under the
limited circumstances set forth therein. See "ERISA Considerations" herein. In
addition, the Class A-R Certificates will be subject to the restrictions on
transfer described in the Prospectus under "Certain Federal Income Tax
Consequences - REMIC Certificates - Tax-Related Restrictions on Transfer of
Residual Certificates - Noneconomic Residual Certificates".
Each Class A-R Certificate and each Mezzanine Certificate will contain
a legend describing the foregoing restrictions which are applicable to it.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
DELAY IN DISTRIBUTIONS; INTEREST LAG; NET INTEREST SHORTFALLS
The effective yield to the holders of each Class of Offered
Certificates will be lower than the yield otherwise produced by the applicable
rate at which interest is passed through to such holders and the purchase
price of such Certificates because monthly distributions will not be payable
to such holders until the 25th day (or, if such day is not a Business Day, the
first Business Day thereafter) of the month following the month in which
interest accrues on the Mortgage Loans (without any additional distribution of
interest or earnings thereon in respect of such delay). In addition, the
Mortgage Rate applicable for any Adjustment Date will be based on the One-Year
CMT Index most recently announced as of a date generally 45 days prior to each
Adjustment Date. Thus, if the One-Year CMT Index increases with respect to a
Mortgage Loan that is no longer in its Fixed Rate Period, the lag in time
before the corresponding Mortgage Rate increases will, all other things being
equal, slow the upward adjustment of the Pass-Through Rates that are based on
the Net WAC Rate. See "The Mortgage Pool" herein.
Net Interest Shortfalls will also adversely affect the yields on the
Offered Certificates.
DEFAULTS AND DELINQUENT PAYMENTS
Delinquencies on the Mortgage Loans which are not advanced by the
applicable Servicer or the Master Servicer (because such amounts, if advanced,
would be non-recoverable) will adversely affect the yield on the Certificates.
The yields to maturity of the Mezzanine Certificates will be sensitive
to defaults and delinquent payments on the Mortgage Loans because any Realized
Losses resulting therefrom will be allocated first to the Subordinate
Certificates and second to the Mezzanine Certificates (in the reverse order of
their numerical designations) before allocation to the Senior Sequential
Certificates. If a purchaser of Mezzanine Certificates 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,
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
will also affect an investor's actual yield to maturity even if the rate of
defaults and severity of 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.
The yields to maturity of the Senior Sequential Certificates may also
be sensitive to such defaults and delinquent payments. If the Class Principal
Balances of the Subordinate Certificates and the Mezzanine Certificates have
been reduced to zero due to the allocation of Realized Losses to such Classes,
any additional Realized Losses will be allocated to the remaining Senior
Sequential Certificates on a pro rata basis. See "Description of the
Certificates - Allocation of Losses" herein.
PREPAYMENT CONSIDERATIONS AND RISKS
The rates of principal payments on Certificates, the aggregate amount
of distributions on the Certificates and the yields to maturity of the
Certificates will be related to the rate and timing of payments of principal
on the Mortgage Loans and any exercise by the Class A-RLT Certificateholder of
the Optional Call on or after the Initial Optional Call Date. 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 the Seller. The Mortgage
Loans may be prepaid by the Mortgagors at any time; however, with respect to
approximately 2.4% of the Mortgage Loans (by Cut-off Date Balance), a
prepayment charge may apply to full and partial prepayments by borrowers under
the limited circumstances described above under "The Mortgage Pool--General".
Increases in the Scheduled Payments on the Mortgage Loans in excess of those
assumed in underwriting such Mortgage Loans following the initial Adjustment
Dates may result in a default rate higher than that which would be experienced
had the Mortgage Loans borne fixed interest rates until maturity. 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 the Seller of a Defaulted Mortgage Loan) or any exercise
by the Class A-RLT Certificateholder of the Optional Call will, subject to
certain conditions, result in distributions to Certificateholders of principal
amounts that would otherwise be distributed over the remaining terms of the
Mortgage Loans. Since the rate of payment of any 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. The extent to
which the yield to maturity of any Certificate may vary from the anticipated
yield will depend upon the degree to which it is purchased at a discount or
premium, and the degree to which the timing of payments thereon is sensitive
to prepayments, liquidations and purchases of the Mortgage Loans.
Further, in the case of the Class A-PO Certificates and any other
Certificate purchased at a discount, an investor should consider the risk that
a slower than anticipated rate of principal payments on the Mortgage Loans
could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of any Senior IO Certificate and any
Offered Certificate purchased at a premium, the risk that a faster than
anticipated rate of principal payments, liquidations and purchases could
result in an actual yield to such investor that is lower than the anticipated
yield. An investor in the Senior IO Certificates should carefully consider the
risk that a rapid rate of principal payments on the Mortgage Loans could
result in the failure of such investor to recover its initial investment. In
addition, any exercise of the Optional Call by the Class A-RLT
Certificateholder could have a materially adverse effect on the yield of the
Class A-IO Certificateholders and could result in the failure of such holders
to recover their initial investments.
The Pass-Through Rates of the Class A-X1, Class A-X2, Class A-X3 and
Class A-X4 Certificates for each Distribution Date to and including the
Initial Optional Call Date will be equal to the excess, if any, of the Net WAC
Rate of the Non-Discount Mortgage Loans for the preceding calendar month over
the Pass-Through Rates for such date of the Class A-1, Class A-2, Class A-3
and Class A-4 Certificates, respectively. Following the Initial Optional Call
Date, such Classes will no longer bear interest. Disproportionate principal
payments (whether resulting from full or partial prepayments) on Non-Discount
Mortgage Loans having Net Mortgage Rates higher or lower than the then current
Pass-Through Rates of the related Classes of the Class A-X1, Class A-X2, Class
A-X3 and Class A-X4 Certificates will therefore affect the yields on such
Certificates. The yields to maturity of the Class A-X1, Class A-X2, Class A-X3
and Class A-X4 Certificates will be lower than those otherwise produced if
disproportionate principal payments (including prepayments) are made on the
Non-Discount Mortgage Loans having Net Mortgage Rates that exceed the
Pass-Through Rates of the related Classes of such Certificates.
The Pass-Through Rate for the Class A-IO Certificates for each
Distribution Date to and including the Initial Optional Call Date will be
equal to 0.0025% per annum calculated on the Class Notional Balance of such
Class (i.e., the Non-PO Percentage of the aggregate Stated Principal Balances
of the Mortgage Loans) for such date. For each Distribution Date thereafter,
the Class A-IO Certificates will be entitled to distributions of interest on
each Distribution Date equal to the excess of interest accrued for such date
at the Net WAC Rate on the Non-PO Percentage of the Pool Stated Principal
Balance over interest accrued for such date on all outstanding Classes of
interest-bearing Certificates. Accordingly, disproportionate principal
payments (whether resulting from full or partial prepayments) of the Non-PO
Balances of the Mortgage Loans will cause the yield to maturity of such
Certificates to be lower than that otherwise produced if disproportionate
principal payments (including prepayments) are made on the Non-PO Balances of
the Mortgage Loans. In addition, as stated above, any exercise of the Optional
Call by the Class A-RLT Certificateholder could have a materially adverse
effect on the yield of the Class A-IO Certificateholders and could result in
the failure of such holders to recover their initial investments.
The Pass-Through Rate on the Mezzanine Certificates for each
Distribution Date to and including the Initial Optional Call Date will be
equal to the Net WAC Rate on the Mortgage Loans for 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 then current Pass-Through Rate will therefore affect the yields
on the Mezzanine Certificates. The yields to maturity of the Mezzanine
Certificates will be lower than those otherwise produced if disproportionate
principal payments (including prepayments) are made on Mortgage Loans having
Net Mortgage Rates that exceed the Pass-Through Rate of the Mezzanine
Certificates.
The yields to maturity on the Offered Certificates may be affected by
the resetting of the Mortgage Rates on the Mortgage Loans on the related
Adjustment Dates. In addition, because the Mortgage Rate for each Mortgage
Loan is based on the One-Year CMT Index plus the related Gross Margin, such
rate could be higher than prevailing market interest rates, and this may
result in an increase in the rate of prepayments on the Mortgage Loans after
such adjustment. Finally, because the Mortgage Rates on the Mortgage Loans are
based on the One-Year CMT Index while the Pass-Through Rates on the Offered
Certificates may, following the Initial Optional Call Date, be based on
One-Month LIBOR, the yields to maturity on the Offered Certificates could be
adversely affected. Similarly, the yields to maturity of the Offered
Certificates after the Initial Optional Call Date will be lower than that
otherwise produced if disproportionate principal payments (including
prepayments) are made on Mortgage Loans having Net Mortgage Rates (or Gross
Margins) that exceed the weighted average of the Net Mortgage Rates (or
weighted average Gross Margin).
All of the Mortgage Loans are mortgage loans whose interest rates are
fixed for a period of five years following their origination dates; following
such five-year periods, the rates will be subject to annual adjustments based
on the One-Year CMT Index. The rate of principal prepayments with respect to
adjustable rate mortgages ("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 a pool 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 the 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 will bear interest at an
adjustable Mortgage Rate following the Fixed Rate Period, the first adjustment
of the Mortgage Rate of any Mortgage Loan occurring on its related Initial
Adjustment Date will be limited by the applicable Initial Adjustment Cap and
the annual adjustment of the Mortgage Rate for any Mortgage Loan on each
Subsequent Adjustment Date will not exceed the Periodic Rate Cap. In no event
will the Mortgage Rate of any Mortgage Loan 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 One-Year CMT Index and the Gross
Margin. Each adjustment of the Mortgage Loan Rates will be subject to rounding
to the nearest 0.125%.
MODELING ASSUMPTIONS
The following assumptions (the "MODELING ASSUMPTIONS") have been used
in preparing the principal decrement tables on the following pages (the "DEC
TABLES"). It has been assumed: (i) the Adjustable Rate Loans consist of six
assumed mortgage loans (the "ASSUMED LOANS") with the characteristics set
forth in the following tables:
<TABLE>
<CAPTION>
ASSUMED LOANS:
Remaining Original
Term to Term to Initial
Net Initial Maximum Stated Stated Mortgage Adjustment
Principal Mortgage Servicing Mortgage Gross Adjustment Periodic Mortgage Maturity Maturity Loan Age Date
Pool Balance Rate Fee Rate Rate Margin Cap Rate Cap Rate (in months)(in months)(in months)(in months)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 4,183,784.01 6.2063% 0.2500% 5.9563% 2.7500% 6.0000% 2.000% 12.2063% 357 360 3 57
2 $141,249,801.21 7.1716% 0.2500% 6.9216% 2.7500% 6.0000% 2.000% 13.1716% 357 360 3 57
3 $ 2,171,047.09 6.4459% 0.2500% 6.1959% 2.6603% 5.0000% 2.000% 11.4459% 355 360 5 55
4 $ 82,640,604.99 7.2400% 0.2500% 6.9900% 2.7857% 4.7431% 2.000% 12.2651% 354 360 6 54
5 $ 43,018,928.87 6.2323% 0.2624% 5.9698% 2.7622% 3.7176% 2.000% 11.2323% 357 360 3 57
6 $371,830,907.29 7.1201% 0.2642% 6.8560% 2.7632% 4.2946% 2.000% 12.1251% 356 359 3 57
</TABLE>
It has been further assumed that:
(i) the Distributions are made on the 25th day of each month beginning in
July 1998, (ii) there are no prepayment penalties with respect to any of the
Mortgage Loans, (iii) the Cut-off Date Pool Balance of the Mortgage Loans is
$645,095,073.46, (iv) no defaults or delinquencies will occur in the payment by
Mortgagors of principal or interest on the Mortgage Loans, (v) the closing date
of the sale of the Offered Certificates is June 25, 1998, (vi) One-Month LIBOR
is and remains equal to 6.23%, (vii) the One-Year CMT Index is and remains equal
to 5.55%, (viii) Scheduled Payments on the Mortgage Loans are computed prior to
giving effect to prepayments, (ix) Pools 1, 3 and 5 represent the Discount
Mortgage Loans, (x) Pools 2, 4 and 6 represent the Non-Discount Mortgage Loans,
(xi) Pools 3 and 4 have Servicing Fee Rates equal to 0.34% after the related
Initial Adjustment Dates, and (xii) Pools 1 and 2 are Interest Only Loans until
their Initial Adjustment Dates. After the Initial Adjustment Date, the Scheduled
Payments on each Mortgage Loan included in Pools 1 and 2 will be adjusted to
fully amortize the outstanding principal balance over the remaining term.
PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE*
CLASS A-1 CERTIFICATES AT THE FOLLOWING PERCENTAGES OF CPR
----------------------------------------------------------
Distribution Date 0% 12% 18% 25% 30% 50%
- ----------------- ---- ----- ----- ----- ----- -----
Initial Percent 100% 100% 100% 100% 100% 100%
June 1999 98 64 47 27 13 0
June 2000 95 32 4 0 0 0
June 2001 93 4 0 0 0 0
June 2002 90 0 0 0 0 0
June 2003 87 0 0 0 0 0
June 2004 84 0 0 0 0 0
June 2005 80 0 0 0 0 0
June 2006 76 0 0 0 0 0
June 2007 72 0 0 0 0 0
June 2008 67 0 0 0 0 0
June 2009 62 0 0 0 0 0
June 2010 57 0 0 0 0 0
June 2011 51 0 0 0 0 0
June 2012 45 0 0 0 0 0
June 2013 38 0 0 0 0 0
June 2014 30 0 0 0 0 0
June 2015 22 0 0 0 0 0
June 2016 13 0 0 0 0 0
June 2017 3 0 0 0 0 0
June 2018 0 0 0 0 0 0
June 2019 0 0 0 0 0 0
June 2020 0 0 0 0 0 0
June 2021 0 0 0 0 0 0
June 2022 0 0 0 0 0 0
June 2023 0 0 0 0 0 0
June 2024 0 0 0 0 0 0
June 2025 0 0 0 0 0 0
June 2026 0 0 0 0 0 0
June 2027 0 0 0 0 0 0
June 2028 0 0 0 0 0 0
Weighted Average
Life (1):
Without
Redemption (2) 12.16 1.52 1.01 0.72 0.59 0.33
With
Redemption (3) 4.26 1.52 1.01 0.72 0.59 0.33
- -----------------------------------------------------------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Class
Principal Balance of such Class of Certificates on each Distribution
Date by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the
assumed net reductions in such Class of Certificates.
(2) In years, assuming no exercise of the Optional Call.
(3) In years, assuming the Optional Call is exercised on the Initial
Optional Call Date and an early termination of the Certificates is
effected.
PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE*
CLASS A-2 CERTIFICATES AT THE FOLLOWING PERCENTAGES OF CPR
----------------------------------------------------------
Distribution Date 0% 12% 18% 25% 30% 50%
- ----------------- -- --- --- --- --- ---
Initial Percent 100 100% 100% 100% 100% 100%
June 1999 100 100 100 100 100 0
June 2000 100 100 100 35 0 0
June 2001 100 100 25 0 0 0
June 2002 100 52 0 0 0 0
June 2003 100 2 0 0 0 0
June 2004 100 0 0 0 0 0
June 2005 100 0 0 0 0 0
June 2006 100 0 0 0 0 0
June 2007 100 0 0 0 0 0
June 2008 100 0 0 0 0 0
June 2009 100 0 0 0 0 0
June 2010 100 0 0 0 0 0
June 2011 100 0 0 0 0 0
June 2012 100 0 0 0 0 0
June 2013 100 0 0 0 0 0
June 2014 100 0 0 0 0 0
June 2015 100 0 0 0 0 0
June 2016 100 0 0 0 0 0
June 2017 100 0 0 0 0 0
June 2018 83 0 0 0 0 0
June 2019 56 0 0 0 0 0
June 2020 27 0 0 0 0 0
June 2021 0 0 0 0 0 0
June 2022 0 0 0 0 0 0
June 2023 0 0 0 0 0 0
June 2024 0 0 0 0 0 0
June 2025 0 0 0 0 0 0
June 2026 0 0 0 0 0 0
June 2027 0 0 0 0 0 0
June 2028 0 0 0 0 0 0
Weighted Average Life
(1):
Without Redemption (2) 21.22 4.10 2.73 1.92 1.57 0.83
With Redemption (3) 4.50 4.02 2.73 1.92 1.57 0.83
- ------------------------------------------------------------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Class
Principal Balance of such Class of Certificates on each Distribution
Date by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the
assumed net reductions in such Class of Certificates.
(2) In years, assuming no exercise of the Optional Call.
(3) In years, assuming the Optional Call is exercised on the Initial
Optional Call Date and an early termination of the Certificates is
effected.
PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE*
CLASS A-3 CERTIFICATES AT THE FOLLOWING PERCENTAGES OF CPR
----------------------------------------------------------
Distribution Date 0% 12% 18% 25% 30% 50%
- ----------------- --- --- --- --- --- ---
Initial Percent 100% 100% 100% 100% 100% 100%
June 1999 100 100 100 100 100% 98
June 2000 100 100 100 100 93 0
June 2001 100 100 100 65 35 0
June 2002 100 100 75 25 0 0
June 2003 100 100 44 0 0 0
June 2004 100 78 21 0 0 0
June 2005 100 58 3 0 0 0
June 2006 100 40 0 0 0 0
June 2007 100 25 0 0 0 0
June 2008 100 11 0 0 0 0
June 2009 100 0 0 0 0 0
June 2010 100 0 0 0 0 0
June 2011 100 0 0 0 0 0
June 2012 100 0 0 0 0 0
June 2013 100 0 0 0 0 0
June 2014 100 0 0 0 0 0
June 2015 100 0 0 0 0 0
June 2016 100 0 0 0 0 0
June 2017 100 0 0 0 0 0
June 2018 100 0 0 0 0 0
June 2019 100 0 0 0 0 0
June 2020 100 0 0 0 0 0
June 2021 97 0 0 0 0 0
June 2022 77 0 0 0 0 0
June 2023 55 0 0 0 0 0
June 2024 32 0 0 0 0 0
June 2025 6 0 0 0 0 0
June 2026 0 0 0 0 0 0
June 2027 0 0 0 0 0 0
June 2028 0 0 0 0 0 0
Weighted Average
Life (1):
Without
Redemption (2) 25.20 7.64 4.99 3.46 2.81 1.48
With Redemption (3) 4.50 4.50 4.27 3.44 2.81 1.48
- -----------------------------------------------------------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Class
Principal Balance of such Class of Certificates on each Distribution
Date by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the
assumed net reductions in such Class of Certificates.
(2) In years, assuming no exercise of the Optional Call.
(3) In years, assuming the Optional Call is exercised on the Initial
Optional Call Date and an early termination of the Certificates is
effected.
PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE*
CLASS A-4 CERTIFICATES AT THE FOLLOWING PERCENTAGES OF CPR
----------------------------------------------------------
Distribution Date 0% 12% 18% 25% 30% 50%
- ----------------- --- --- --- --- --- ---
Initial Percent 100% 100% 100% 100% 100% 100%
June 1999 100 100 100 100 100 100
June 2000 100 100 100 100 100 100
June 2001 100 100 100 100 100 35
June 2002 100 100 100 100 96 8
June 2003 100 100 100 93 59 0
June 2004 100 100 100 69 41 0
June 2005 100 100 100 51 28 0
June 2006 100 100 84 38 19 0
June 2007 100 100 68 28 13 0
June 2008 100 100 54 20 9 0
June 2009 100 99 44 15 6 0
June 2010 100 85 35 11 4 0
June 2011 100 73 28 8 3 0
June 2012 100 62 22 6 2 0
June 2013 100 53 18 4 1 0
June 2014 100 45 14 3 1 0
June 2015 100 38 11 2 1 0
June 2016 100 32 9 2 0 0
June 2017 100 27 7 1 0 0
June 2018 100 22 5 1 0 0
June 2019 100 18 4 1 0 0
June 2020 100 14 3 0 0 0
June 2021 100 12 2 0 0 0
June 2022 100 9 2 0 0 0
June 2023 100 7 1 0 0 0
June 2024 100 5 1 0 0 0
June 2025 100 3 0 0 0 0
June 2026 70 2 0 0 0 0
June 2027 29 1 0 0 0 0
June 2028 0 0 0 0 0 0
Weighted Average
Life (1):
Without
Redemption (2) 28.53 16.59 11.64 8.08 6.38 2.91
With
Redemption (3) 4.50 4.50 4.50 4.50 4.44 2.91
- -----------------------------------------------------------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Class Principal
Balance of such Class of Certificates on each Distribution Date by the
number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in such
Class of Certificates.
(2) In years, assuming no exercise of the Optional Call.
(3) In years, assuming the Optional Call is exercised on the Initial Optional
Call Date and an early termination of the Certificates is effected.
PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE*
CLASS A-PO CERTIFICATES AT THE FOLLOWING PERCENTAGES OF CPR
----------------------------------------------------------
Distribution Date 0% 12% 18% 25% 30% 50%
- ----------------- --- --- --- --- --- ---
Initial Percent 100% 100% 100% 100% 100% 100%
June 1999 99 87 81 74 69 49
June 2000 98 76 66 55 48 24
June 2001 97 66 53 41 33 12
June 2002 95 57 43 30 23 6
June 2003 94 50 35 22 16 3
June 2004 93 43 28 16 11 1
June 2005 91 37 23 12 8 1
June 2006 90 32 18 9 5 0
June 2007 88 28 15 7 4 0
June 2008 87 24 12 5 2 0
June 2009 85 21 10 4 2 0
June 2010 83 18 8 3 1 0
June 2011 81 15 6 2 1 0
June 2012 79 13 5 1 1 0
June 2013 76 11 4 1 0 0
June 2014 73 9 3 1 0 0
June 2015 70 8 2 1 0 0
June 2016 67 7 2 0 0 0
June 2017 64 6 1 0 0 0
June 2018 60 5 1 0 0 0
June 2019 56 4 1 0 0 0
June 2020 51 3 1 0 0 0
June 2021 46 2 0 0 0 0
June 2022 41 2 0 0 0 0
June 2023 35 1 0 0 0 0
June 2024 29 1 0 0 0 0
June 2025 22 1 0 0 0 0
June 2026 15 0 0 0 0 0
June 2027 6 0 0 0 0 0
June 2028 0 0 0 0 0 0
Weighted Average
Life (1):
Without
Redemption (2) 20.23 6.81 4.71 3.36 2.75 1.46
With
Redemption (3) 4.38 3.36 2.94 2.50 2.23 1.40
- ----------------------------------------------------------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Class
Principal Balance of such Class of Certificates on each Distribution
Date by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the
assumed net reductions in such Class of Certificates.
(2) In years, assuming no exercise of the Optional Call.
(3) In years, assuming the Optional Call is exercised on the Initial
Optional Call Date and an early termination of the Certificates is
effected.
PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE*
CLASS M-1, CLASS M-2 AND CLASS M-3 CERTIFICATES AT
THE FOLLOWING PERCENTAGES OF CPR
-----------------------------------------------------------
Distribution Date 0% 12% 18% 25% 30% 50%
- ----------------- --- --- --- --- --- ---
Initial Percent 100% 100% 100% 100% 100% 100%
June 1999 100 100 100 100 100 100
June 2000 100 100 100 100 100 100
June 2001 100 100 100 100 100 100
June 2002 100 100 100 100 100 100
June 2003 100 100 100 100 100 65
June 2004 99 88 81 74 69 32
June 2005 97 76 65 55 48 16
June 2006 96 66 53 40 33 8
June 2007 94 57 43 30 23 4
June 2008 92 49 34 22 16 2
June 2009 90 42 27 16 11 1
June 2010 88 36 22 12 7 0
June 2011 86 31 18 9 5 0
June 2012 84 27 14 6 3 0
June 2013 81 23 11 5 2 0
June 2014 78 19 9 3 2 0
June 2015 75 16 7 2 1 0
June 2016 71 14 5 2 1 0
June 2017 67 11 4 1 0 0
June 2018 63 9 3 1 0 0
June 2019 59 8 2 1 0 0
June 2020 54 6 2 0 0 0
June 2021 49 5 1 0 0 0
June 2022 43 4 1 0 0 0
June 2023 37 3 1 0 0 0
June 2024 30 2 0 0 0 0
June 2025 23 1 0 0 0 0
June 2026 15 1 0 0 0 0
June 2027 6 0 0 0 0 0
June 2028 0 0 0 0 0 0
Weighted Average
Life (1):
Without
Redemption (2) 21.31 11.47 9.57 8.31 7.72 5.85
With
Redemption (3) 4.50 4.50 4.50 4.50 4.50 4.50
- ------------------------------------------------------------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Class
Principal Balance of such Class of Certificates on each Distribution
Date by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the aggregate amount of the
assumed net reductions in such Class of Certificates.
(2) In years, assuming no exercise of the Optional Call.
(3) In years, assuming the Optional Call is exercised on the Initial
Optional Call Date and an early termination of the Certificates is
effected.
The preceding tables have been prepared based on the Modeling
Assumptions (including the assumptions regarding the characteristics and
performance of the Mortgage Loans which may differ from the actual
characteristics and performance thereof) and should be read in conjunction
therewith.
SENSITIVITY OF THE SENIOR IO CERTIFICATES AND CLASS A-PO CERTIFICATES
The yields to maturity of the Senior IO Certificates and Class A-PO
Certificates will be highly sensitive to the prepayment, repurchase and
default experience of the Mortgage Loans included in the Trust Fund. Investors
should carefully consider the associated risks, including the risk that a
rapid rate of principal prepayments on the Mortgage Loans or purchases of
Mortgage Loans could result in the failure of investors in the Senior IO
Certificates to recover their initial investment. Distributions to holders of
the Class A-X1, Class A-X2, Class A-X3 and Class A-X4 Certificates will cease
after the Initial Optional Call Date.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement
("CPR") represents an assumed constant rate of prepayment each month relative
to the then outstanding principal balance of a pool of mortgage loans
expressed as an annualized percentage. CPR does not purport to be either an
historical description of the prepayment experience of any pool of mortgage
loans or a prediction of the anticipated rate of prepayment of any mortgage
loans, including the Mortgage Loans included in the Trust Fund.
The following table (the "YIELD TABLE") demonstrates the sensitivity of
the pre-tax yields on the Senior IO Certificates and the Class A-PO
Certificates to various constant rates of prepayment by projecting the
aggregate payments of interest on the Senior IO Certificates and the
corresponding pre-tax yields on a corporate bond equivalent ("CBE") basis,
assuming distributions on the Mortgage Loans are made as set forth in the
Pooling and Servicing Agreement. In calculating distributions on the Mortgage
Loans for the Yield Table, it has been assumed that: (i) the Mortgage Loans
prepay at the specified percentages of CPR, (ii) no defaults or delinquencies
on the Mortgage Loans are experienced, (iii) no Mortgage Loans are purchased
or substituted for pursuant to the Pooling and Servicing Agreement or the
applicable Servicing Agreement, (iv) Scheduled Payments for all Mortgage Loans
are received on the first day of each month (commencing in the calendar month
following the Closing Date) and the principal portion of such payments is
computed prior to giving effect to prepayments received in the prior month,
(v) all Mortgage Loans prepay at the same rate and all such payments are
treated as prepayments in full of individual Mortgage Loans, with no
shortfalls in collection of interest, (vi) such prepayments are received on
the last day of each month commencing in the month of the Closing Date, (vii)
distributions on the Certificates are received on the 25th day of each month,
commencing in the calendar month following the Closing Date and (viii) the
Senior IO Certificates and Class A-PO Certificates are purchased on the
Closing Date at the Assumed Purchase Prices (computed as a percentage of the
applicable Class Notional Balance or Class Principal Balance thereof)
presented in the following table (which include accrued interest).
PRE-TAX YIELDS ON THE SENIOR IO CERTIFICATES AND CLASS A-PO CERTIFICATES
CLASSES PRICE CERTIFICATES PERCENTAGES OF CPR
------- ----- ---------------------------------------------------------
0% 12% 18% 35% 50%
-- --- --- --- ---
A-X1 0.439386% 132.243% 61.901% 15.000% (103.381)% (163.984)%
A-X2 1.140751 38.201 34.378 15.000 (59.162) (121.674)
A-X3 1.581688 17.112 17.112 15.000 (21.578) (68.637)
A-X4 1.974633 15.000 15.000 15.000 11.829 (7.499)
A-IO 0.671682 37.970 22.922 15.000 (10.280) (37.903)
A-PO 62.516539 7.859 11.852 15.000 27.965 44.770
The pre-tax yields set forth in the preceding table were calculated by
determining the monthly discount rates which, when applied to the assumed
streams of cash flows to be paid on Senior IO Certificates and the Class A-PO
Certificates, would cause the discounted present value of such assumed stream
of cash flows to the Closing Date to equal the assumed purchase prices (which
includes accrued interest), and converting such monthly rates to CBE rates.
Such calculation does not take into account the interest rates at which funds
received by Certificateholders as distributions on the Senior IO Certificates
and the Class A-PO Certificates may be reinvested and consequently does not
purport to reflect the return on any investment in such Certificates when such
reinvestment rates are considered.
It is highly unlikely that the Mortgage Loans will prepay at the same
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate or time or that prepayments will be spread evenly among Mortgage Loans
with differing Gross Margins. As a result of these factors, the pre-tax yields
on the Senior IO Certificates and the Class A-PO Certificates are likely to
differ from those shown in such table, even if all of the Mortgage Loans
prepay at the indicated percentages of CPR. No representation is made as to
the actual rate of principal payments on the Mortgage Loans (or the Mortgage
Rates thereon) for any period or over the lives of the Senior IO Certificates
and the Class A-PO Certificates or as to the yields on such Certificates.
Investors must make their own decisions as to the appropriate prepayment
assumptions to be used in deciding whether to purchase such Certificates.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Pooling and Servicing Agreement provides that the Trust Fund will
be comprised of a Lower Tier REMIC and an Upper Tier REMIC. The Lower Tier
REMIC will consist of all of the assets constituting the Trust Fund (except
the Additional Collateral and the related limited purpose surety bond) and
will issue uncertificated regular interests which will be held entirely by the
Upper Tier REMIC. Each of the Lower Tier REMIC and the Upper Tier REMIC will
designate a single class of interests as the residual interest in that REMIC.
The Class A-R Certificates will represent ownership of the residual interest
in the Upper Tier REMIC and the Class A-RLT Certificate will represent
ownership of the residual interest in the Lower Tier REMIC. An election will
be made to treat each of the Lower Tier REMIC and the Upper Tier REMIC as a
REMIC for federal income tax purposes.
The Upper Tier REMIC will issue 17 classes of regular interests. Each
Class of Offered Certificates (except the Class A-RLT Certificate) and the
Subordinate Certificates will represent the beneficial ownership of regular
interests issued by the Upper Tier REMIC.
Upon the issuance of the Offered Certificates, Brown & Wood LLP ("TAX
COUNSEL") will deliver its opinion concluding, assuming compliance with the
Pooling and Servicing Agreement, that for federal income tax purposes each of
the Lower Tier REMIC and the Upper Tier REMIC will qualify as a REMIC within
the meaning of Section 860D of the Internal Revenue Code of 1986, as amended
(the "CODE"), and the Offered Certificates (except for the Class A-R
Certificates) represent regular interests in a REMIC.
The Certificates (other than the Residual Certificates) generally will
be treated as debt instruments issued by the Upper Tier REMIC for federal
income tax purposes. Income on the Certificates must be reported under an
accrual method of accounting.
Although the tax treatment is not entirely certain, the Class A-PO
Certificates and the Senior IO Certificates will be treated as having been
issued with original issue discount ("OID") for federal income tax purposes
equal to the excess of all expected payments of interests on such Certificates
over their issue price. Although unclear, a holder of a Class A-PO Certificate
or a Senior IO Certificate may be entitled to deduct a loss to the extent that
its remaining basis exceeds the maximum amount of future payments to which
such Certificateholder would been entitled if there were no further
prepayments of the Mortgage Loans. The Senior IO Certificates and the Class
A-PO Certificates and, depending on their respective issue prices (as
described in the Prospectus under "Certain Federal Income Tax Consequences"),
the remaining classes of the Offered Certificates (other than the Class A-R
Certificates) may be treated as having been issued with OID for federal income
tax purposes. For purposes of determining the amount and rate of accrual of
OID and market discount, the Trust Fund intends to assume that there will be
prepayments on the Mortgage Loans at a rate equal to 18% CPR. No
representation is made as to whether the Mortgage Loans will prepay at the
foregoing rate or any other rate. See "Yield, Prepayment and Maturity
Considerations" herein and "Certain Federal Income Tax Consequences" in the
Prospectus. Computing accruals of OID in the manner described in the
Prospectus may (depending on the actual rate of prepayments during the accrual
period) result in the accrual of negative amounts of OID on the Certificates
issued with OID in an accrual period. Holders will be entitled to offset
negative accruals of OID only against future OID accrual on such Certificates.
If the holders of any of the Offered Certificates (other than the Class
A-R Certificates) are treated as holding such Certificates at a premium, such
holders should consult their tax advisors regarding the election to amortize
bond premium and the method to be employed.
As is described more fully under "Certain Federal Income Tax
Consequences" in the Prospectus, the Offered Certificates (other than the
Class A-R Certificates) will represent qualifying assets under Sections
856(c)(5)(A) and 7701(a)(19)(C) of the Code, and net interest income
attributable to such 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 Offered Certificates (other than the Class A-R Certificates)
will represent qualifying assets under Section 860G(a)(3) if acquired by a
REMIC within the time period prescribed by the Code.
Holders of certain Classes of Certificates may be treated as having
written a call option on such Certificates and as having received a call
premium, increasing the price deemed paid for such Certificates for purposes
of determining the Upper Tier REMIC's issue price of the Certificates. The
Trust intends to take the position that any such call premiums are de minimis.
The holders of the Class A-R Certificates must include the taxable
income of the Upper Tier REMIC in their federal taxable income. The resulting
tax liability of such holders may exceed cash distributions to such holders
during certain periods. All or a portion of the taxable income from a Class
A-R Certificate recognized by a holder may be treated as "excess inclusion"
income, which, with limited exceptions, is subject to U.S. federal income tax.
The Small Business Job Protection Act of 1996 has eliminated the
special rule permitting Section 593 institutions ("thrift institutions") to
use net operating losses and other allowable deductions to offset their excess
inclusion income from REMIC residual certificates that have "significant
value" within the meaning of the REMIC Regulations, effective for taxable
years beginning after December 31, 1995, except with respect to residual
certificates continuously held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the alternative
minimum taxable income of a REMIC residual certificateholder. First,
alternative minimum taxable income for such residual holder is determined
without regard to the special rule that taxable income cannot be less than
excess inclusions. Second, a residual holder's alternative minimum taxable
income for a tax year cannot be less than the excess inclusions for the year.
Third, the amount of any alternative minimum tax net operating loss deductions
must be computed without regard to any excess inclusions. These rules are
effective for tax years beginning after December 31, 1986, unless a residual
holder elects to have such rules apply only to tax years beginning after
August 20, 1996.
Furthermore, the Small Business Job Protection Act of 1996, as part of
the repeal of the bad debt reserve method for thrift institutions, repealed
the application of Section 593(d) of the Code to any taxable year beginning
after December 31, 1995.
Also, purchasers of Class A-R Certificates should consider carefully
the tax consequences of an investment in Residual Certificates discussed in
the Prospectus and should consult their own tax advisors with respect to those
consequences. See "Certain Federal Income Tax Consequences--REMIC
Certificates--b. Residual Certificates" in the Prospectus. Specifically,
prospective holders of Class A-R Certificates should consult their tax
advisors regarding whether, at the time of acquisition, a Class A-R
Certificate will be treated as a "non-economic" residual interest, a
"non-significant value" residual interest and a "tax avoidance potential"
residential interest. See "Certain Federal Income Tax Consequences--REMIC
Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates--Noneconomic Residual Certificates" in the Prospectus.
Additionally, for information regarding prohibited transactions and treatment
of Realized Losses, see "Certain Federal Income Tax Consequences--REMIC
Certificates--Prohibited Transactions and Other Taxes" and "--REMIC
Certificates-- Regular Certificates--Treatment of Realized Losses" in the
Prospectus.
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 Offered 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
Offered 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 Offered Certificates that are Senior
Certificates (other than the Class A-R 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.
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 Offered Certificates that are Senior
Certificates (other than the Class A-R 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 an individual administrative
exemption to (i) Greenwich Capital Markets, Inc. (Prohibited Transaction
Exemption 90-59; Exemption Application No. D-8374) (the "GREENWICH CAPITAL
EXEMPTION"), (ii) Bear, Stearns & Co. Inc. (Prohibited Transaction Exemption
90-30, Exemption Application No. D-8207, 55 Fed. Reg. 21461 (1990) (the "BEAR
STEARNS EXEMPTION")), (iii) Lehman Brothers Inc. (Prohibited Transaction
Exemption 91-14, Exemption Application No. D-7958, 56 Fed. Reg. 7413 (1991)
(the "LEHMAN BROTHERS EXEMPTION", and collectively with the Greenwich Capital
Exemption and the Bear Stearns Exemption, 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,
Inc. ("S&P"), Moody's Investors Service, Inc. ("MOODY'S"), Duff & Phelps
Credit Rating Co. ("D&P") or Fitch IBCA, Inc. ("FITCH");
(4) the trustee must not be an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the 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, as amended.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of a
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 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 any 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 the seller, the
depositor, the underwriters, 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").
The Underwriters believe that the Exemption will apply to the
acquisition and holding of the Offered Certificates that are Senior
Certificates (other than the Class A-R 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.
THE PURCHASE AND HOLDING OF A MEZZANINE CERTIFICATE OR A CLASS A-R
CERTIFICATE (COLLECTIVELY, THE "ERISA RESTRICTED CERTIFICATES") BY OR ON
BEHALF OF ANY PLAN, OR BY ANY PERSON USING THE ASSETS OF A PLAN (INCLUDING ANY
INSURANCE COMPANY USING ASSETS IN ITS GENERAL OR SEPARATE ACCOUNTS THAT MAY
CONSTITUTE ASSETS OF A PLAN), MAY NOT MEET THE REQUIREMENTS OF ANY ISSUED
EXEMPTION UNDER ERISA AND MAY RESULT IN THE ASSETS OF THE TRUST FUND BEING
DEEMED "PLAN ASSETS" UNDER ERISA. THIS MAY CAUSE THE TRUSTEE, THE MASTER
SERVICER, THE DEPOSITOR AND CERTAIN OTHER ENTITIES TO BECOME FIDUCIARIES OF
SUCH PLAN UNDER ERISA AND MAY RESULT IN ONE OR MORE "PROHIBITED TRANSACTIONS"
WITHIN THE MEANING OF ERISA AND THE CODE AND THE IMPOSITION OF EXCISE TAXES
AND/OR OTHER CIVIL PENALTIES. AS A RESULT, THE ERISA RESTRICTED CERTIFICATES
SHOULD NOT BE ACQUIRED BY A PLAN. ACCORDINGLY, NO ERISA RESTRICTED CERTIFICATE
WILL BE REGISTERED FOR TRANSFER UNLESS THE TRUSTEE SHALL HAVE RECEIVED EITHER:
(I) A REPRESENTATION FROM THE TRANSFEREE OF SUCH CERTIFICATE TO THE TRUSTEE TO
THE EFFECT THAT SUCH TRANSFEREE NEITHER IS NOR IS ACTING ON BEHALF OF A PLAN
SUBJECT TO ERISA OR SECTION 4975 OF THE CODE (OR COMPARABLE PROVISIONS OF ANY
SUBSEQUENT ENACTMENTS) AND IS NOT USING THE ASSETS OF ANY SUCH PLAN TO ACQUIRE
SUCH CERTIFICATES OR (II) IF THE TRANSFEREE IS A PLAN, OR IS ACTING ON BEHALF
OF A PLAN OR USING A PLAN'S ASSETS TO ACQUIRE SUCH CERTIFICATES, AN OPINION OF
COUNSEL SATISFACTORY TO THE TRUSTEE (A) IF THE PURCHASER IS AN INSURANCE
COMPANY, THAT THE PURCHASER IS AN INSURANCE COMPANY WHICH IS PURCHASING SUCH
CERTIFICATES WITH FUNDS CONTAINED IN AN "INSURANCE COMPANY GENERAL ACCOUNT"
(AS SUCH TERM IS DEFINED IN SECTION V(E) OF PROHIBITED TRANSACTION CLASS
EXEMPTION 95-60 ("PTCE 95-60")) AND THAT THE PURCHASE AND HOLDING OF SUCH
CERTIFICATES ARE COVERED UNDER SECTIONS I AND III OF PTCE 95-60, OR (B) IN ANY
OTHER CASE, SUCH TRANSFER DOES NOT CONSTITUTE OR GIVE RISE TO A PROHIBITED
TRANSACTION WITHIN THE MEANING OF SECTION 406 OF ERISA OR SECTION 4975 OF THE
CODE (INCLUDING ANY PROHIBITED TRANSACTION THAT MIGHT ARISE IN CONNECTION WITH
THE EXERCISE OF THE CALL OPTION BY THE HOLDER OF THE CLASS A-RLT CERTIFICATE)
AND WILL NOT RESULT IN THE ASSETS OF THE TRUST FUND BEING DEEMED "PLAN ASSETS"
AND SUBJECT TO THE PROHIBITED TRANSACTION PROVISIONS OF ERISA AND THE CODE AND
WILL NOT SUBJECT EITHER THE TRUSTEE OR THE MASTER SERVICER TO ANY OBLIGATION
IN ADDITION TO THOSE EXPRESSLY ASSUMED BY IT IN THE POOLING AND SERVICING
AGREEMENT. THE REPRESENTATION IN CLAUSE (I) SHALL BE DEEMED TO HAVE BEEN MADE
TO THE TRUSTEE BY THE TRANSFEREE'S ACCEPTANCE OF AN ERISA RESTRICTED
CERTIFICATE (UNLESS THE TRUSTEE SHALL HAVE RECEIVED FROM THE TRANSFEREE AN
ALTERNATIVE REPRESENTATION ACCEPTABLE IN FORM AND SUBSTANCE TO THE MASTER
SERVICER AND THE DEPOSITOR). ANY PURPORTED TRANSFER OF AN ERISA RESTRICTED
CERTIFICATE TO OR ON BEHALF OF A PLAN (INCLUDING INDIVIDUAL RETIREMENT
ACCOUNTS OR OTHER PLANS OR ARRANGEMENTS SUBJECT TO SECTION 406 OF ERISA OR
SECTION 4975 OF THE CODE) WITHOUT THE DELIVERY OF AN OPINION OF COUNSEL
REFERRED TO IN CLAUSE (II) ABOVE SHALL BE VOID AND OF NO EFFECT.
Because the holder of the Class A-RLT Certificate could be a party in
interest with respect to a Plan investor, any Plan investor (including an
insurance company general account investing the assets of Plans) that is
considering acquiring Certificates should consult with its legal advisors
concerning whether the direct acquisition by the holder of the Class A-RLT
Certificate of an option to purchase the Certificates held by such Plan, or
the exercise by the holder of the Class A-RLT Certificate of such an option,
could constitute a prohibited transaction, and whether such transaction would
be covered by the Exemption or another statutory, regulatory or administrative
exemption.
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 Offered
Certificates that are Senior Certificates (other than the Class A-R
Certificates). Moreover, each Plan fiduciary should determine whether under
the general fiduciary standards of investment prudence and diversification, an
investment in the Offered 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 dated as of the date hereof (the "UNDERWRITING AGREEMENT") among
Greenwich Capital (an affiliate of the Depositor), Bear Stearns and Lehman
Brothers (collectively, the "UNDERWRITERS") and the Depositor, the Depositor
has agreed to sell to the Underwriters, and the Underwriters have severally
agreed to purchase from the Depositor, the Offered Certificates set forth
below:
Greenwich Capital Bear, Stearns Lehman
Class Markets, Inc. and Co. Inc. Brothers Inc.
- ----- ------------- ------------ -------------
Class A-1 Certificates $169,094,250 $28,182,375 $28,182,375
Class A-2 Certificates $71,250,000 $11,875,000 $11,875,000
Class A-3 Certificates $123,150,000 $20,525,000 $20,525,000
Class A-4 Certificates $91,442,040 $15,240,340 $15,240,340
Class A-X1 Certificates $225,459,000* $0 $0
Class A-X2 Certificates $95,000,000* $0 $0
Class A-X3 Certificates $164,200,000* $0 $0
Class A-X4 Certificates $121,922,720* $0 $0
Class A-IO Certificates $595,721,313* $0 $0
Class A-PO Certificates $3,033,074 $0 $0
Class A-R Certificates $50 $0 $0
Class M-1 Certificates $16,127,300 $0 $0
Class M-2 Certificates $7,741,100 $0 $0
Class M-3 Certificates $4,838,200 $0 $0
- -----------------------------------------------------------------------------
Distribution of the Offered Certificates will be made by the
Underwriters from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. The Underwriters may
effect such transactions by selling Offered Certificates to or through
dealers, and such dealers may receive from the Underwriters, for which they
act as agent, compensation in the form of underwriting discounts, concessions
or commissions. The Underwriters and any dealers that participate with the
Underwriters in the distribution of such Offered Certificates may be deemed to
be underwriters, and any discounts, commissions or concessions received by
them, and any profit on the resale of the Certificates purchased by them, may
be deemed to be underwriting discounts and commissions under the Securities
Act of 1933, as amended (the "ACT").
The Depositor has been advised by the Underwriters that each intends to
make a market in the Offered Certificates but has no obligation to do so.
There can be no assurance that a secondary market for the Offered Certificates
will develop or, if it does develop, that it will continue.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriters against, or make contributions to the Underwriters with
respect to, certain civil liabilities, including liabilities under the Act.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor and for the
Underwriters by Brown & Wood LLP, New York, New York. Certain matters will be
passed upon for the Seller by Tobin & Tobin, a professional corporation, San
Francisco, California. Certain tax matters will be passed upon by for the
Seller by Giancarlo and Gnazzo, a professional corporation, San Francisco,
California.
RATINGS
It is a condition of the issuance of the Offered Certificates that the
Senior Certificates be rated "AAA" by Fitch and "Aaa" by Moody's and that
Class M-1, Class M-2 and Class M-3 Certificates be rated "AA", "A" and "BBB",
respectively, by Fitch.
The security ratings assigned to the Offered 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 the Rating Agencies to mortgage pass-through
certificates address the likelihood of the receipt by the related
certificateholders of all distributions to which they are entitled under the
agreements pursuant to which such certificates are issued. The ratings take
into consideration the credit quality of the related mortgage pool, 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. Ratings do not, however, constitute a statement
regarding frequency of prepayments on the related mortgage loans.
The Depositor has not requested ratings of the Offered Certificates by
any rating agency other than the Rating Agencies. However, there can be no
assurance as to whether any other rating agency will rate the Offered
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 Offered
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
INDEX OF DEFINED TERMS
Page No.
Act...................................................................... S-62
Additional Collateral.....................................................S-11
Additional Collateral Loans...............................................S-11
Advance...................................................................S-26
Aggregate Cut-off Date Principal Balance..................................S-11
Aggregate Mezzanine Principal Balance.....................................S-36
Aggregate Subordinate Principal Balance...................................S-36
ARMs......................................................................S-47
Assumed Loans.............................................................S-47
Available Funds...........................................................S-32
Bankruptcy Loss Coverage Amount...........................................S-40
BBA.......................................................................S-34
Bear Stearns...............................................................iii
Bear Stearns Exemption....................................................S-59
Book-Entry Certificates..............................................S-3, S-28
Business Day..............................................................S-36
CBE...................................................................... S-56
Cede...........................................................S-3, S-10, S-28
Cendant...................................................................S-23
Cendant Servicing Agreements..............................................S-23
Certificate Account.......................................................S-30
Certificate Owner.........................................................S-28
Certificates.............................................................Cover
Civil Relief Act...........................................................S-9
Class A-PO Certificates............................................Cover, S-26
Class A-PO Deferred Amount................................................S-39
Class Credit Enhancement Percentage.......................................S-36
Class Notional Balance....................................................S-36
Class Principal Balance...................................................S-36
Code..................................................................... S-57
Collateral Value......................................................... S-13
Constructive Loan-to-Value Ratio..........................................S-13
Countrywide...............................................................S-23
Countrywide Servicing Agreement...........................................S-23
CPR.......................................................................S-56
Credit Enhancement Lockout Event..........................................S-37
Cut-off Date Principal Balance............................................S-11
D&P..................................................................S-7, S-59
Debt Service Reduction....................................................S-40
DEC Tables................................................................S-47
Defaulted Mortgage Loan...................................................S-43
Deficient Valuation.......................................................S-40
Definitive Certificate....................................................S-28
Deleted Mortgage Loan.....................................................S-22
Depositor..................................................................S-1
Depository...........................................................S-3, S-28
Determination Date........................................................S-37
Discount Mortgage Loan....................................................S-37
Discount Mortgage Pool....................................................S-37
Distribution Account......................................................S-31
Distribution Date................................................ii, S-3, S-29
Due Date..................................................................S-37
ERISA................................................................S-6, S-59
ERISA Restricted Certificates........................................S-6, S-60
Excess Losses.............................................................S-40
Exemption.................................................................S-59
FICO......................................................................S-23
Financial Intermediary....................................................S-28
Fitch................................................................S-7, S-59
Fixed Rate Period............................................ ........S-2, S-5
Fraud Loss Coverage Amount................................................S-40
Fraud Losses..............................................................S-40
Greenwich Capital..........................................................S-1
Greenwich Capital Exemption...............................................S-59
Gross Margin..............................................................S-11
Holdings...................................................................S-1
Initial Adjustment Cap....................................................S-11
Initial Adjustment Date...................................................S-11
Initial Optional Call.....................................................S-43
Initial Optional Call Date.......................................ii, S-5, S-43
Insurance Proceeds........................................................S-30
Interest Accrual Period..............................................S-4, S-32
Interest Distribution Amount.........................................S-4, S-32
Interest Only Loans.......................................................S-11
Interest Settlement Rate..................................................S-34
Lehman Brothers............................................................iii
Lehman Brothers Exemption.................................................S-59
LIBOR Rate Determination Date.............................................S-34
Liquidated Loan...........................................................S-37
Liquidation Proceeds......................................................S-30
Loan-to-Value Ratio.......................................................S-13
Lower Tier REMIC..........................................................S-29
Master Servicer............................................................S-1
Maximum Mortgage Rate.....................................................S-11
Mezzanine Certificateholders................................................ii
Mezzanine Certificates...............................................S-1, S-27
Mezzanine Credit Enhancement Percentage...................................S-37
MLCC..................................................................... S-23
MLCC Servicing Agreements.................................................S-23
Modeling Assumptions......................................................S-47
Moody's..............................................................S-7, S-59
Mortgage..................................................................S-21
Mortgage Loan Purchase Agreement...........................................S-1
Mortgage Loan Sale Agreement..............................................S-21
Mortgage Loans..............................................................ii
Mortgage Pool..............................................................S-2
Mortgaged Properties.......................................................S-2
Mortgagor..................................................................S-8
Net Interest Shortfall....................................................S-32
Net Mortgage Interest Rate................................................S-37
Net Mortgage Rate....................................................S-5, S-22
Net Prepayment Interest Shortfall.........................................S-26
Net WAC Rate..............................................................S-37
Non-Discount Mortgage Loan................................................S-37
Non-PO Balance............................................................S-37
Non-PO Percentage.........................................................S-37
Norwest Mortgage..........................................................S-23
Norwest Servicing Agreements..............................................S-23
Offered Certificates.................................................S-1, S-27
OID.......................................................................S-57
One-Month LIBOR...........................................................S-34
One-Year CMT Index.........................................................S-5
Optional Call..............................................................S-5
Originator................................................................S-22
Percentage Interest.......................................................S-29
Periodic Rate Cap.........................................................S-11
Plan ................................................................S-6, S-59
PO Percentage.............................................................S-37
Pool Principal Balance....................................................S-37
Pooling and Servicing Agreement......................................S-2, S-26
Prepayment Interest Shortfall.............................................S-26
Principal Distribution Amount.............................................S-34
Prospectus.................................................................iii
PTCE 95-60...........................................................S-6, S-61
Purchase Price............................................................S-22
Rating Agencies............................................................S-7
Realized Loss.............................................................S-37
Record Date..........................................................S-3, S-29
Redwood Parties............................................................S-1
Redwood Trust..............................................................S-1
Relief Act Reduction......................................................S-32
Remaining Principal Distribution Amount...................................S-35
REMIC..................................................................ii, S-5
Replacement Mortgage Loan.................................................S-22
Residual Certificates................................................S-1, S-27
Restricted Group..........................................................S-60
Rolling Six-Month Delinquency Rate........................................S-38
S&P................................................................ S-7, S-59
Scheduled Payment.........................................................S-11
Senior...................................................................Cover
Senior Certificateholders...................................................ii
Senior Certificates............................................S-1, S-26, S-27
Senior Credit Enhancement Percentage......................................S-38
Senior IO Certificates.................................................i, S-26
Senior Regular Certificates..........................................S-1, S-27
Senior Sequential Certificates...............................................i
Servicer...................................................................S-2
Servicing Agreement........................................................S-2
Servicing Fee Rate...................................................S-5, S-37
SMMEA......................................................................S-7
Special Hazard Loan.......................................................S-40
Special Hazard Loss Coverage Amount.......................................S-40
Special Hazard Losses.....................................................S-40
Specified Percentage......................................................S-38
Stated Principal Balance..................................................S-38
Stepdown Lockout Event....................................................S-38
Subordinate Certificateholders..............................................ii
Subordinate Certificates.............................................S-1, S-27
Subsequent Adjustment Date................................................S-11
Tax Counsel...............................................................S-57
Trigger Event.............................................................S-39
Trust Fund..................................................................ii
Trustee....................................................................S-2
Trustee's Mortgage File...................................................S-21
Underwriters.........................................................iii, S-61
Underwriting Agreement....................................................S-61
Unpaid Interest Shortfall.................................................S-32
Upper Tier REMIC..........................................................S-29
Yield Table...............................................................S-56
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.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
Summary of Terms........................................... S-1
Risk Factors............................................... S-8
The Mortgage Pool.......................................... S-11
Servicing of the Mortgage Loans............................ S-23
Description of the Certificates............................ S-26
Yield, Prepayment and Maturity Considerations.............. S-45
Use of Proceeds............................................ S-57
Certain Federal Income Tax Consequences.................... S-57
ERISA Considerations....................................... S-59
Method of Distribution..................................... S-61
Legal Matters.............................................. S-62
Ratings.................................................... S-62
Index of Defined Terms..................................... S-64
PROSPECTUS
Prospectus Supplement or Current Report on
Form 8-K............................................... ii
Incorporation of Certain Information by Reference.......... ii
Available Information...................................... ii
Summary of Terms........................................... 1
The Trust Fund............................................. 12
Use of Proceeds............................................ 23
The Depositor.............................................. 23
Mortgage Loan Program...................................... 23
Description of the Certificates............................ 26
Credit Enhancement......................................... 33
Yield and Prepayment Considerations........................ 40
The Pooling and Servicing Agreement........................ 42
Certain Legal Aspects of the Mortgage Loans................ 55
Certain Federal Income Tax Consequences.................... 65
State Tax Considerations................................... 93
ERISA Considerations....................................... 93
Legal Investment........................................... 96
Method of Distribution..................................... 97
Legal Matters.............................................. 98
Financial Information...................................... 98
Rating..................................................... 98
Index of Defined Terms..................................... 99
$638,321,444
SEQUOIA MORTGAGE TRUST 3
MORTGAGE LOAN ASSET BACKED CERTIFICATES
SEQUOIA MORTGAGE FUNDING CORPORATION
Seller
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
Master Servicer
GREENWICH CAPITAL ACCEPTANCE, INC.
Depositor
-----------
PROSPECTUS SUPPLEMENT
-----------
GREENWICH CAPITAL
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS
June 25, 1998
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
SECURITIES 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 be 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:
June 24, 1998 GREENWICH CAPITAL
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, if so, the 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
Securities Exchange Act of 1934, as amended, 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: Paul D.
Stevelman, 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: Midwest Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and New York Regional
Office, 7 World Trade Center, New York, New York 10048. In addition, the
Securities and Exchange Commission (the "Commission") maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Depositor, that file
electronically with the Commission.
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.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K.........................ii
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE...........................ii
AVAILABLE INFORMATION.......................................................ii
SUMMARY OF TERMS............................................................ 1
THE TRUST FUND..............................................................12
The Mortgage Loans--General........................................12
Single Family Loans................................................15
Multifamily Loans..................................................15
Contracts..........................................................16
Agency Securities..................................................16
Private Mortgage-Backed Securities.................................21
USE OF PROCEEDS.............................................................23
THE DEPOSITOR...............................................................23
MORTGAGE LOAN PROGRAM.......................................................23
Underwriting Standards.............................................23
Qualifications of Sellers..........................................25
Representations by Sellers; Repurchases............................25
DESCRIPTION OF THE CERTIFICATES.............................................26
General ..........................................................26
Distributions on Certificates......................................28
Advances ..........................................................31
Reports to Certificateholders......................................32
CREDIT ENHANCEMENT..........................................................33
General ..........................................................33
Subordination......................................................33
Mortgage Pool Insurance Policies...................................34
FHA Insurance; VA Guarantees.......................................35
Special Hazard Insurance Policies..................................37
Bankruptcy Bonds...................................................38
FHA Insurance on Multifamily Loans.................................39
Reserve Accounts...................................................39
Cross Support......................................................40
Other Insurance, Surety Bonds, Guaranties, Letters of Credit
and Similar Instruments or Agreements............................40
YIELD AND PREPAYMENT CONSIDERATIONS.........................................40
THE POOLING AND SERVICING AGREEMENT.........................................42
Assignment of Mortgage Assets......................................42
Payments on Mortgage Loans; Deposits to Certificate Account........44
Sub-Servicing by Sellers...........................................46
Collection Procedures..............................................47
Hazard Insurance...................................................48
Realization upon Defaulted Mortgage Loans..........................49
Servicing and Other Compensation and Payment of Expenses...........51
Evidence as to Compliance..........................................51
Certain Matters Regarding the Master Servicer and the Depositor....52
Events of Default..................................................53
Rights upon Event of Default.......................................53
Amendment..........................................................54
Termination; Optional Termination..................................54
The Trustee........................................................55
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS.................................55
General ..........................................................55
Foreclosure/Repossession...........................................58
Environmental Risks................................................60
Rights of Redemption...............................................62
Anti-Deficiency Legislation and Other Limitations on Lenders.......62
Due-on-Sale Clauses................................................63
Prepayment Charges.................................................64
Applicability of Usury Laws........................................64
Soldiers' and Sailors' Civil Relief Act............................64
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....................................65
General ..........................................................65
NON-REMIC CERTIFICATES.............................................65
Single Class of Senior Certificates................................65
Multiple Classes of Senior Certificates............................69
Possible Application of Contingent Payment Regulations to
Certain Non-REMIC Certificates...................................72
Sale or Exchange of a Senior Certificate...........................73
Non-U.S. Persons...................................................74
Information Reporting and Backup Withholding.......................74
New Withholding Regulations........................................75
Tiered REMIC Structures............................................76
Regular Certificates...............................................76
Residual Certificates..............................................85
Prohibited Transactions and Other Taxes............................89
Liquidation and Termination........................................89
Administrative Matters.............................................90
Tax-Exempt Investors...............................................90
Non-U.S. Persons...................................................90
Tax-Related Restrictions on Transfers of Residual Certificates.....91
STATE TAX CONSIDERATIONS....................................................93
ERISA CONSIDERATIONS........................................................93
LEGAL INVESTMENT............................................................96
METHOD OF DISTRIBUTION......................................................97
LEGAL MATTERS...............................................................98
FINANCIAL INFORMATION.......................................................98
RATINGS.....................................................................98
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.
Certain capitalized terms used and not defined in this Summary of Terms are
defined elsewhere herein on the pages indicated in the "Index of Define Terms"
which begins on p. 97 hereof.
Title of Securities...................... Mortgage Pass-Through Certificates
(issuable in Series) (the
"CERTIFICATES").
Depositor................................ Greenwich Capital Acceptance,
Inc., a Delaware corporation and
an indirect limited purpose
finance subsidiary of National
Westminster Bank Plc and an
affiliate of Greenwich Capital
Markets, Inc. SEE "The Depositor".
Trustee.................................. The trustee (the "TRUSTEE") for
each Series of Certificates will
be specified in the related
Prospectus Supplement. SEE "The
Pooling and Servicing Agreement"
herein for a description of the
Trustee'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 Depositor.
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
"MORTGAGE 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 specified in the related
Prospectus Supplement. For
purposes hereof, "MORTGAGE LOANS"
consist of "Single Family Loans",
"Multifamily Loans" and
"Contracts".
A. Single Family Loans................... Unless otherwise specified in the
related Prospectus Supplement,
Single Family Loans will be
secured by first mortgage 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, nonprofit,
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 Single Family
Loans may be conventional loans
(I.E., loans that are not insured
or guaranteed by any governmental
agency), insured by the Federal
Housing Authority ("FHA") or
partially guaranteed by the
Veterans' Administration ("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 from ten to 40
years.
B. Multifamily Loans..................... Unless otherwise specified in the
related Prospectus Supplement,
Multifamily Loans will be secured
by first mortgage liens on rental
apartment buildings or projects
containing five or more
residential units, including
apartment buildings owned by
Cooperatives. 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 insured
by the FHA, as specified in the
related Prospectus 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 original terms to
stated maturity of not more than
40 years.
C. Contracts............................. Contracts will consist of
conditional sales and installment
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 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 from five to
30 years.
D. General Attributes of
Mortgage Loans..................... The payment terms of the 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 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 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 related
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 repayment of a
Mortgage Loan 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. Unless
otherwise specified in the
related Prospectus Supplement,
all of the Mortgage Loans will
be covered by standard hazard
insurance policies insuring
against losses due to fire and
various other causes. The
Mortgage 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.
E. Agency Securities..................... The Agency Securities evidenced by
a Series of Certificates will
consist of (i) mortgage
participation certificates issued
and guaranteed as to timely
payment of interest and, unless
otherwise specified in the related
Prospectus Supplement, ultimate
payment of principal by FHLMC
("FHLMC CERTIFICATES"), (ii)
Guaranteed Mortgage Pass-Through
Certificates issued and guaranteed
as to timely payment of principal
and interest by FNMA ("FNMA
CERTIFICATES"), (iii) fully
modified pass-through
mortgage-backed certificates
guaranteed as to timely payment of
principal and interest by GNMA
("GNMA CERTIFICATES"), (iv)
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 FHLMC,
FNMA or GNMA Certificates and,
unless otherwise specified in the
related Prospectus Supplement,
guaranteed to the same extent as
the underlying securities, (v)
another type of pass- through
certificate issued or guaranteed
by FHLMC, FNMA or GNMA and
described 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 indirectly,
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 Supplement.
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 Securities may
include stripped mortgage-backed
securities representing an
undivided interest in all or a
part of 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. Although individual
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
Mortgage-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 distributed
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
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
amount, if known, of the
underlying Mortgage Loans which
are 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 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 for the Private
Mortgage-Backed Securities or the
ranges thereof; (vi) the weighted
average pass-through or
certificate rate of the Private
Mortgage-Backed Securities; (vii)
the issuer of the Private
Mortgage-Backed Securities (the
"PMBS ISSUER"), the servicer of
the Private Mortgage-Backed
Securities (the "PMBS SERVICER")
and the trustee of the Private
Mortgage-Backed Securities (the
"PMBS TRUSTEE"); (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
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 ownership interest in a
Trust Fund created by the
Depositor pursuant to an Agreement
among the Depositor, the Master
Servicer and the Trustee for the
related Series. The Certificates
of any Series may be issued in one
or more classes as specified in
the related Prospectus Supplement.
A Series of Certificates may
include one or more classes of
senior Certificates (collectively,
the "SENIOR CERTIFICATES") and one
or more classes of subordinate
Certificates (collectively, the
"SUBORDINATED CERTIFICATES").
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 allocable only to
principal, only to interest or to
any combination thereof; (ii) may
be entitled to receive
distributions 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 classes of Certificates of
such Series throughout the lives
of the Certificates or during
specified periods; (iv) may be
entitled to receive such
distributions 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 collections from
designated portions of the assets
in the related Trust Fund; (vi) as
to Certificates entitled 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 distributions allocable to
interest, may be entitled to
distributions allocable to
interest only after the occurrence
of events specified in the related
Prospectus 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 classes 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
"DISTRIBUTION 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 Prospectus Supplement. The
amount allocable to payments 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
distributions will be made PRO
RATA to Certificateholders of the
class entitled thereto.
Unless otherwise specified in the
related Prospectus Supplement, the
aggregate original principal
balance of the Certificates will
equal the aggregate distributions
allocable to principal that such
Certificates will be entitled to
receive. If specified in the
related Prospectus Supplement, the
Certificates 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 (the "MORTGAGE RATE") equal
to the interest rates borne by the
underlying Mortgage Loans, Agency
Securities or Private
Mortgage-Backed Securities, net of
the aggregate servicing fees and
any other amounts specified in the
related Prospectus Supplement (the
"PASS-THROUGH RATE"). If specified
in the related Prospectus
Supplement, the aggregate original
principal balance of the
Certificates and interest rates on
the classes of Certificates will
be determined based on the cash
flow on the Mortgage Assets.
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 subject 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 related
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 enhancement as
described in the related
Prospectus Supplement. The
protection against losses afforded
by any such credit support may be
limited. The type, characteristics
and amount of credit enhancement
will be determined based on the
characteristics of the Mortgage
Loans underlying or comprising the
Mortgage Assets and other factors
and will be established 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
Subordinated Certificates of a
Series to receive distributions
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
Prospectus 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 holders
of Senior Certificates of a Series
by means of the subordination
feature will be accomplished by
(i) the preferential right of such
holders to receive, prior to any
distribution being made in respect
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
Certificate Account and, to the
extent described in the related
Prospectus Supplement, by the
right of such holders to receive
future distributions on the assets
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
Prospectus 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 and
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.
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 distributions 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 Contracts,
which shall be limited in scope,
covering defaults on the related
Single Family Loans, Multifamily
Loans or Contracts in an initial
amount equal to a specified
percentage of the aggregate
principal balance of all Single
Family Loans, Multifamily 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 Hazard Insurance
Policy or Policies. Each Special
Hazard Insurance Policy will be
limited in scope and will cover
losses pursuant to the provisions
of each such Special Hazard
Insurance Policy as described in
the related Prospectus Supplement.
E. Bankruptcy Bond....................... A 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 Mortgage Pool may be
insured by FHA insurance ("FHA
INSURANCE") and all or a portion
of the Single Family Loans or
Contracts in a Mortgage Pool may
be partially guaranteed by the VA
("VA INSURANCE").
G. 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
beneficial ownership of one or
more asset groups prior to
distributions to Subordinated
Certificates evidencing a
beneficial ownership interest in
other asset groups within the same
Trust Fund.
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
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.
H. Other Arrangements.................... Other arrangements as described in
the related Prospectus Supplement
including, but not limited to, one
or more letters of credit, surety
bonds, other insurance, reserve
accounts or third-party
guaranties, may be used to provide
coverage for certain risks of
defaults or various types of
losses.
Advances................................. Unless otherwise specified in the
related Prospectus Supplement, the
Master Servicer and, if
applicable, each mortgage
servicing institution that
services a Mortgage Loan in a
Mortgage Pool on behalf of the
Master Servicer (each, a
"SUB-SERVICER") will be obligated
to advance amounts (each, an
"ADVANCE") corresponding to
delinquent principal and interest
payments on such Mortgage Loan
(including, in the case of
Cooperative Loans, unpaid
maintenance fees or other charges
under the related proprietary
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
related Mortgage Loan is otherwise
liquidated. Any obligation to make
Advances may be subject to
limitations as specified in the
related Prospectus Supplement.
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 (each, a "SUPPORT
SERVICER") guaranteeing the
payment of such Advances by the
Master Servicer or Sub-Servicer,
as the case may be, as specified
in the related Prospectus
Supplement.
Unless otherwise specified in the
related Prospectus 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 advanced by the
Master Servicer, Support Servicer
or Sub-Servicer. SEE "Description
of the Certificates--Advances"
herein.
Optional Termination..................... The Master Servicer or, if
specified in the related
Prospectus Supplement, the holder
of the residual 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; Optional
Termination" herein and in the
related Prospectus Supplement.
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, as
amended ("SMMEA"). Classes of
Certificates that qualify as
"mortgage related securities" will
be legal investments for certain
types of institutional investors
to the extent provided in SMMEA,
subject, in any case, to any other
regulations which may govern
investments by such institutional
investors. Institutions whose
investment activities are subject
to review by federal or state
authorities should consult with
their counsel or the applicable
authorities to determine whether
an investment in a particular
Class of Certificates (whether or
not such Class constitutes a
"mortgage related security")
complies with applicable
guidelines, policy statements or
restrictions. SEE "Legal
Investment" herein and in the
related Prospectus Supplement.
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 estate
mortgage investment conduit"
("REMIC") under the provisions of
the Internal Revenue Code of 1986,
as amended (the "CODE"). The
Prospectus Supplement for each
Series of Certificates will
specify whether such an election
will be made. SEE "Certain Federal
Income Tax Consequences" herein
and in the related Prospectus
Supplement.
ERISA Considerations..................... A fiduciary of any employee
benefit plan or other retirement
plan or arrangement subject to the
Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), or the Code should
carefully review 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
Considerations". 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. SEE "Description of
the Certificates--General" and
"ERISA Considerations".
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 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:
- -----------------
*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 (a
"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.
(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 Mortgage 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 Mortgage 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.
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 each Mortgage Loan
(E.G., one- to four-family houses, individual units in condominium projects 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 related Mortgaged Properties 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.
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 ("REFINANCE LOANS"), 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 (each, a "SUB-SERVICER"), 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 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" and "--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 in the related Prospectus
Supplement, 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), loans
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 from ten to 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. A Cooperative
owns all the apartment units in its building and all common areas and 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 the Cooperative's 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
his shares in the Cooperative. The Cooperative will be directly 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 from five to 30 years.
"MANUFACTURED HOMES" securing the Contracts will consist of manufactured
homes within the meaning of 42 U.S.C. ss. 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 dates of
origination of the Contracts; the APRs on the Contracts; the Loan-to-Value
Ratios of the Contracts; 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")
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
(each, 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.
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 loans.
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 its Guarantor Program.
Mortgage loans underlying the FHLMC Certificates held by a Trust Fund
will consist of mortgage loans with original terms to maturity of from ten to
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.
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, or
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 becomes 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.
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 from eight to 15 years
or from 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 one another. 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, or 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 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 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 FHLMC, FNMA or GNMA. 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 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 which
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 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.
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
National Westminster Bank Plc and an affiliate of Greenwich Capital Markets,
Inc. 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 the 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 a prospective 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 borrower's length of
employment with that organization, his 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 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. In connection with a Single Family
Loan, 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 subject home. In connection with a Contract, 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. In connection with 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 of 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 generally underwritten
on the basis of a judgment that mortgagors or obligors will have the ability
to make the monthly payments required initially; in some instances, however,
their incomes 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 Deposit Insurance Corporation (the
"FDIC").
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 related
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 delinquent more
than 30 days; 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 the related 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 such Seller 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 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 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 such 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. To the extent provided in the Agreement, each Trust
Fund will consist of (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 (the "RETAINED INTEREST")); (ii) such assets as from
time to time are required to be deposited in the related Certificate Account
as defined under "The Pooling and Servicing Agreement--Payments on Mortgage
Loans; Deposits to the 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) 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.
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 portion or percentage (which may be 0%) of future interest payments
and a specified portion or percentage (which may be 0%) 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 being made on 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, in the case of a class of Certificates entitled only
to a specified percentage of payments of 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, the purchase and holding of such a
class of Certificates 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" ( a "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 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, the "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, the 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 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, any
Sub-Servicer, Support Servicer or the 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 principal balance
of each class of Certificates (with respect to each class, the "CERTIFICATE
PRINCIPAL BALANCE") (or, in the case of Certificates entitled only to
distributions allocable to interest, the aggregate notional principal balance)
entitled to interest from the date, at the Pass-Through Rate (which may be a
fixed rate or an adjustable 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 any Distribution Date will be added to the aggregate Certificate Principal
Balance of such class of Certificates on such 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 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 Certificates 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, from 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.
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 Support Servicer, as applicable) 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 "--Distribution on Certificates" above.
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 Certificate Principal Balance or notional principal
balance of such class after giving effect to the distribution of principal on
such Distribution Date;
(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) from one to 30
days, (2) from 31 to 60 days, (3) from 61 to 90 days and (4) 91 days or more
and (B) in foreclosure, 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) above 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
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 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 one or more other classes of Certificates (the
"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 the
Senior Certificates of a Series by: (i) reducing the ownership interest of the
holders 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 the Senior
Certificates would experience losses on such 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 the 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 the 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 or classes 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 among classes of Senior Certificates and as among 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 among classes of Subordinated Certificates, payments to holders
of the related Senior Certificates on account of delinquencies or losses and
payments to any Reserve Account will be allocated as specified in the related
Prospectus Supplement.
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 (a
"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 related Mortgage Pool in an amount equal to a
percentage (specified in such Prospectus Supplement) of the aggregate
principal balances 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, no Mortgage Pool Insurance
Policy will 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, the
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 any 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 such 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.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under the 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 by the Master Servicer or any applicable
Sub-Servicer or HUD that the default was caused by circumstances beyond the
mortgagor's control, the Master Servicer or such 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 such 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 such 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 such Sub-Servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures' interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will 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 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 generally only to the extent allowed pursuant to the
related 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 the date which is 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 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"),
which permits a veteran (or in certain instances the spouse of a veteran) to
obtain a mortgage loan guaranteed 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 (a "SPECIAL HAZARD INSURANCE POLICY") will be obtained
for the Mortgage Pool and will be issued by the insurer (a "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 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". No
Special Hazard Insurance Policy will 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 insurance and, if applicable,
flood insurance on the related Mortgaged Property 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 repairing such property 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 such 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 Bankruptcy Code will be issued
by an insurer named in such Prospectus 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 a 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 the related 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 would not result in a downgrading of the then current
rating or ratings 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 of one or more Reserve Accounts for such Series, in trust, with
the Trustee for such Series of Certificates. 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.
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 Account 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 types of Mortgage Loans included therein.
Each Prospectus Supplement will contain information with respect to the types
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.
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 the
prepayment experience of Single Family Loans and Contracts. Some of these
factors, as well as 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 of 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 of the Mortgage Loans.
The rate of prepayments of 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 of 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 prepayment in full is made with respect to a Single Family Loan,
the mortgagor is charged interest on the principal amount of the 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 of 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,
neither prepayments in full nor partial prepayments will 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 with respect to Mortgage Loans
bearing 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 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 that a receiver, bankruptcy trustee, debtor in possession or
similar entity (each, an "INSOLVENCY TRUSTEE") is appointed with respect to a
Seller due to its insolvency or 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 being 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. This summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of such 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 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 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 (each, 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 stating 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 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 the
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.
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, the 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". 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, the outstanding principal balance as of the Cut-off Date, the annual
pass-through rate or interest rate, the 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 under "--Sub-Servicing by Sellers" below) 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 ("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 after 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 the 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 (collectively, with respect to such Trust Fund, the
"CERTIFICATE ACCOUNT") which, unless otherwise specified in the related
Prospectus Supplement, must be (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 BIF or
SAIF, (iii) an account or accounts the deposits in which are insured by 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 that the
Master Servicer or such affiliate, as applicable, 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 property or released to
mortgagors in accordance with the Master Servicer's normal servicing
procedures (collectively, "INSURANCE PROCEEDS") and all other cash amounts
(net of unreimbursed expenses in connection with liquidation or foreclosure
("LIQUIDATION EXPENSES") incurred, 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
below under "--Hazard Insurance";
(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 terms inconsistent with
the related Agreement. While each Sub-Servicing Agreement will be a contract
solely between the Master Servicer and the related 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" below.
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 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.
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of
the Code) of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of Section 216(b)(1) of the Code is allowed a
deduction for amounts paid or accrued within his taxable year to the
corporation representing his proportionate share of certain interest expenses
and certain real estate taxes allowable as a deduction under Section 216(a) of
the Code to the corporation under Sections 163 and 164 of the Code. In order
for a corporation to qualify under Section 216(b)(1) of the Code for the
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 Section 216(b)(2) of the Code). By virtue of this requirement,
the status of a corporation for purposes of Section 216(b)(1) of the Code must
be determined on a year-to-year basis. Consequently, there can be no assurance
that Cooperatives relating to the Cooperative Loans will qualify under 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 Section 216(a) of the Code
with respect to those years. In view of the significance of the tax benefits
accorded tenant-stockholders of a corporation that qualifies under Section
216(b)(1) of the Code, the likelihood that 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 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 Loan,
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) lack
of approval by the Primary Insurer of the related Servicer as a servicer.
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 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 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 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 Sub-Servicers.
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.
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 none of the Master Servicer, the
Depositor or any director, officer, employee or agent of the Master Servicer
or of the Depositor will be under any liability to the related Trust Fund or
the 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 none of the Master Servicer, the Depositor
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 of 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 the 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 (each, an "EVENT 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 30 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 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 (i) such holder previously
has given to the Trustee written notice of default, (ii) 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
(iii) 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,
HOWEVER, 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, HOWEVER, 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, HOWEVER, 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 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 the holders of 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 from the related
Trust Fund 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"), 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 aggregate principal balance of the related Mortgage Assets as
of such date being less than the percentage specified in the related
Prospectus Supplement of the aggregate principal balances of the Mortgage
Assets as of the Cut-off Date for the Series; PROVIDED, HOWEVER, 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 or to reflect the
laws of any particular state or to encompass the laws of all states in which
security for the Mortgage Loans may be situated. The summaries are qualified
in their entirety by reference to the appropriate laws of the states in which
Mortgage Loans may be originated.
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 to the
grantee title to, as opposed to merely creating a lien upon, the subject
property 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 related 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, as is
generally the case, there is a blanket mortgage on the Cooperative and/or
underlying land, 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 the 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.
A 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 the
accompanying rights are 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 against the tenant-stockholder as
an individual as provided in the security agreement covering the assignment of
the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
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 UCC-1 financing statements 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 to effect such notation or
delivery, due to clerical errors or otherwise, 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 the affected
Contract. As Manufactured Homes have become larger and have often 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 Manufactured Home is located. These filings must be made in the real
estate records office of the county where the Manufactured 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 to the Trustee, on
behalf of the Certificateholders, a security interest in the Manufactured
Homes. Unless otherwise specified in the related Prospectus Supplement, none
of the Depositor, the Master Servicer or 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
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. In the case of any Manufactured
Home 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 Home and holders
of perfected security interests therein. There also exists a risk that, in not
identifying the Trustee, on behalf of the Certificateholders, as the new
secured party on the certificate of title, the security interest of the
Trustee could be released through fraud or negligence.
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 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
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 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 attorneys' 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 plus 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 articles of incorporation and
by-laws, as well as in the proprietary lease or occupancy agreement, and may
be cancelled by the Cooperative if the tenant-stockholder fails to pay rent or
other obligations or charges owed, including mechanics' liens against the
cooperative apartment building incurred by such tenant-stockholder. The
proprietary lease or occupancy agreement generally permits the Cooperative to
terminate such lease or agreement in the event an obligor fails to make
payments or defaults in the performance of covenants required thereunder.
Typically, the lender and the Cooperative enter into a recognition agreement
which establishes the rights and obligations of both parties in the event of a
default by the tenant-stockholder on its obligations under the proprietary
lease or occupancy agreement. A default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default
under the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided 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, lenders are
not limited in any rights they may have to dispossess 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 a Manufactured Home has not become subject to the real estate law, a
creditor can repossess the 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 ten
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.
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, there is a possibility
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
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the
facility. The Solid Waste Disposal Act ("SWDA") provides similar protection to
secured creditors in connection with liability for releases of petroleum from
certain underground storage tanks. However, if a lender "participates in the
management" of the facility in question or is found not to have held its
interest primarily to protect a security interest, the lender may forfeit its
secured creditor exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency
("EPA") in April 1992 attempted to clarify the activities in which lenders
could engage both prior to and subsequent to foreclosure of a security
interest without forfeiting the secured creditor exemption under CERCLA. The
rule was struck down in 1994 by the United States Court of Appeals for the
District of Columbia Circuit in KELLEY EX REL STATE OF MICHIGAN V.
ENVIRONMENTAL PROTECTION AGENCY, 15 F.3d 1100 (D.C Cir. 1994), REH'G DENIED,
25 F.3d 1088, CERT. DENIED SUB NOM. AM. BANKERS ASS'N V. KELLEY, 115 S.Ct. 900
(1995). Another EPA regulation promulgated in 1995 clarifies the activities in
which lenders may engage without forfeiting the secured creditor exemption
under the underground storage tank provisions of the SWDA. That regulation has
not been struck down.
On September 30, 1996, Congress amended both CERCLA and the SWDA to
provide additional clarification regarding the scope of the lender liability
exemptions under the two statutes. Among other things, the 1996 amendments
specify the circumstances under which a lender will be protected by the CERCLA
and SWDA exemptions, both while the borrower is still in possession of the
secured property and following foreclosure on the secured property.
Generally, the amendments state that a lender who holds indicia of
ownership primarily to protect a security interest in a facility encumbered by
the security interest, the lender (i) exercises decision-making control over
environmental compliance related to the facility such that the lender has
undertaken responsibility for hazardous substance handling or disposal
practices related to the facility or (ii) exercises control at a level
comparable to that of a manager of the facility encompassing daily-decision
making with respect to environmental compliance or (y) overall or
substantially all of the operational functions (as distinguished from
financial or administrative functions) of the facility other than the function
of environmental compliance. The amendments also specify certain activities
that are not considered to be "participation in management", including
monitoring or enforcing the terms of the extension of credit or security
interest, inspecting the facility, and requiring a lawful means of addressing
the release or threatened release of a hazardous substance.
The 1996 amendments also specify that a lender who did not participate in
management of a facility prior to foreclosure will not be considered an "owner
or operator", even if the lender forecloses on the facility and after
foreclosure sells or liquidates the facility, maintains business activities,
winds up operations, undertakes an appropriate response action, or takes any
other measure to preserve, protect, or prepare the facility prior to sale or
disposition, if the lender seeks to sell or otherwise divest the facility at
the earliest practicable, commercially reasonable time, on commercially
reasonable terms, taking into account market conditions and legal and
regulatory requirements.
The CERCLA and SWDA lender liability amendments specifically address the
potential liability of lenders who hold mortgages or similar conventional
security interests in real property, such as the Trust Fund does in connection
with the Mortgage Loans. The amendments do not clearly address the potential
liability of lenders who retain legal title to a property and enter into an
agreement with the purchaser for the payment of the purchase price and
interest over the term of the contract, such as the Trust Fund does in
connection with the Mortgage Loans.
If a lender becomes liable under CERCLA, it may be authorized to bring a
statutory action for contribution against any other "responsible parties",
including a previous owner or operator. However, such persons or entities may
be bankrupt or otherwise judgment proof, and the costs associated with
environmental cleanup and related actions may be substantial. Moreover, some
state laws imposing liability for addressing hazardous substances do not
contain exemptions from liability for lenders. Whether the costs of addressing
a release or threatened release at a property pledged as collateral for one of
the Loans (or at a property subject to an Installment Contract), would be
imposed on the Trust Fund, and thus occasion a loss to the Securityholders,
therefore depends on the specific factual and legal circumstances at issue.
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 plus 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 a Manufacture 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 Bankruptcy Code, 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 Bankruptcy Code, a lender may not foreclose on the
Mortgaged Property without the permission of the bankruptcy court. If the
Mortgaged Property is not the debtor's principal residence and the bankruptcy
court determines that the value of the Mortgaged Property is less than the
principal balance of the mortgage loan, the rehabilitation plan proposed by
the debtor may reduce 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), 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 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 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. With respect 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 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 with respect to prepayments
on loans secured by liens encumbering owner-occupied residential properties
may not be imposed after a certain period of time following the origination of
Single Family Loans or Contracts. 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 APRs,
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 ("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 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 to adopt a
provision limiting discount points or other charges on loans covered by Title
V. No Contract secured by a Manufactured Home located in any state in which
application of Title V was expressly rejected or a provision limiting discount
points or other charges has been adopted will be included in any Trust File if
such Contract imposes finance charges or provides for discount points or
charges in excess of permitted levels.
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 governing, among other things, 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.
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 affected Mortgage
Loans. Unless otherwise provided in the related 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 lender's inability to realize upon the mortgaged property in a timely
fashion.
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. In the discussion that follows, all references
to a "Section" or "Sections" shall be understood to refer, unless otherwise
specifically indicated, to a Section or Sections of the Code.
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 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. A Senior Certificateholder that is an individual, estate or trust
will be entitled to deduct its share of expenses only to the extent such
expenses, plus all other Section 212 expenses, exceed 2% of such Senior
Certificateholder's 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
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
might then be subject to the "coupon stripping" rules of the Code discussed
below.
Unless otherwise specified in the related Prospectus Supplement, Brown &
Wood LLP will have advised the Depositor with respect to each Series of
Certificates that:
(i) a Senior Certificate owned by a "domestic building and loan
association" within the meaning of 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 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 Section;
(ii) 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 Section 856(c)(4)(A) and interest
income on the Mortgage Loans will be considered "interest on obligations
secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) to the extent that the Mortgage Loans represented by that Senior
Certificate are of a type described in such Section; and
(iii) a Senior Certificate owned by a REMIC will be an "obligation . . .
which is principally secured by an interest in real property" within the
meaning of Section 860G(a)(3)(A) of the Code.
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application
of Section 593(d) to any taxable year beginning after December 31, 1995.
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 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.
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 Senior Certificate and the portion of the adjusted basis
of the Senior 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.
On December 30, 1997, the Internal Revenue Service (the "IRS") issued
final regulations (the "Amortizable Bond Premium Regulations") dealing with
amortizable bond premium. These regulations, which generally are effective for
bonds issued or acquired on or after March 2, 1998 (or, for holders making an
election for the taxable year that included March 2, 1998 or any subsequent
taxable year, shall apply to bonds held on or after the first day of the
taxable year of the election). The Amortizable Bond Premium Regulations
specifically do not apply to prepayable debt instruments or any pool of debt
instruments, such as the Trust Fund, the yield on which may be affected by
prepayments which are subject to Section 1272(a)(6). Absent further guidance
from the IRS and unless otherwise specified in the related Prospectus
Supplement, the Trustee will account for amortizable bond premium in the
manner described above. Prospective purchasers should consult their tax
advisors regarding amortizable bond premium and the Amortizable Bond Premium
Regulations.
Original Issue Discount. 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 Sections 1271 through 1273
and Section 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 Sections 1271 through 1273 and
Section 1275 (the "OID Regulations"). Certificateholders 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 provisions of the Code 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
"--Multiple Classes of Senior Certificates--B. Senior Certificates
Representing Interests in Loans Other than ARM Loans--Accrual of Original
Issue Discount" below.
Market Discount. A Senior Certificateholder that acquires an undivided
interest in Mortgage Loans may be subject to the market discount rules of
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 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 to the Department of the Treasury (the "Treasury")
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. Although the Treasury 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
is 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. 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 acquires 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 is made with respect
to a Mortgage Loan with market discount, the Certificateholder will 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" below. The election to
accrue interest, discount and premium on a constant yield method with respect
to a Certificate is irrevocable.
Anti-abuse Rule. The IRS is permitted apply or depart from the rules
contained in the OID Regulations as necessary or appropriate to achieve a
reasonable result where a principal purpose in structuring a Mortgage Asset,
Mortgage Loan or Senior Certificate, or the effect of applying the otherwise
applicable rules, is to achieve a result that is unreasonable in light of the
purposes of the applicable statutes (which generally are intended to achieve
the clear reflection of income for both issuers and holders of debt
instruments).
Multiple Classes of Senior Certificates
A. Stripped Bonds and Stripped Coupons
Pursuant to 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 Sections 1271
through 1288, 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").
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.
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 "--Single Class of Senior
Certificates--Original Issue Discount" above. 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) are stripped off 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 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 Sections of the Code provide
beneficial treatment to certain taxpayers that invest in mortgage loans of the
type that make up the Trust Fund. With respect to these 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 Section 1286 treats a stripped obligation as
a separate obligation for purposes of the provisions of the Code addressing
original issue discount, it is not clear whether such characterization would
apply with regard to these other Sections. Although the issue is not free from
doubt, based on policy considerations, each class of Senior Certificates
should be considered to represent "real estate assets" within the meaning of
Section 856(c)(4)(A) and "loans . . . secured by, an interest in real property
which is . . . residential real property" within the meaning of 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 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
"obligations (including any participation or certificate of beneficial
ownership therein) which are principally secured by an interest in real
property" within the meaning of Section 860G(a)(3)(A).
B. Senior Certificates Representing Interests in Loans Other Than ARM Loans
The original issue discount rules of Sections 1271 through 1275 will be
applicable to a Senior 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 provisions of the Code,
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 under "--Accrual of Original Issue Discount" below. The following
discussion is based in part on the OID Regulations and in part on the
provisions of the Tax Reform Act of 1986, as amended (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 Senior 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 Senior
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 under "--Accrual of Original Issue Discount" below,
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 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 (if the related Trust Fund includes ARM Loans), which
represent interests in ARM Loans. Additionally, the IRS has not issued
guidance under the coupon stripping rules of the Code 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 Obligations") to holders in a manner it believes to be
consistent with the rules described under the heading "--B. Senior
Certificates Representing Interests in Loans Other than ARM Loans" above 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 Contingent Payment Regulations to Certain
Non-REMIC Certificates
Final regulations issued on June 11, 1996 with respect to original issue
discount under Section 1275 include rules for obligations that provide for one
or more contingent payments (the "Contingent Payment Regulations"). Rights to
interest payments on a mortgage loan might be considered to be contingent
within the meaning of the Contingent Payment 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 Contingent
Payment 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 the heading
"--A.Stripped Bonds and Stripped Coupons"; provided, however, 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 regulations, 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 seller'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 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 a seller for which a Senior
Certificate is a "capital asset" within the meaning of 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).
The Taxpayer Relief Act of 1997 (the "1997 Tax Act") reduces the maximum
rates on long-term capital gains recognized on capital assets held by
individuals taxpayers for more than 18 months as of the date of disposition
(and would further reduce the maximum rates on such gains in the year 2001 and
thereafter for certain individual taxpayers who meet specified conditions).
The capital gains rate for capital assets held by individual taxpayers for
more than 12 months but less than 18 months was not changed by the 1997 Tax
Act. The 1997 Tax Act does not change the capital gain rates for corporations.
Prospective investors should consult their own tax advisors concerning these
tax law changes.
It is possible that capital gain realized by holders of the Senior
Certificates could be considered gain realized upon the disposition of
property that was part of a "conversion transaction". A sale of a Senior
Certificate will be part of a conversion transaction if substantially all of
the holder's expected return is attributable to the time value of the holder's
net investment, and (i) the holder entered the contract to sell the Senior
Certificate substantially contemporaneously with acquiring the Senior
Certificate, (ii) the Senior Certificate is part of a straddle, (iii) the
Senior Certificate is marketed or sold as producing capital gain or (iv) other
transactions to be specified in Treasury regulations that have not yet been
issued. If the sale or other disposition of a Senior Certificate is part of a
conversion transaction, all or any portion of the gain realized upon the sale
or other disposition would be treated as ordinary income instead of capital
gain.
Senior Certificates will be "evidences of indebtedness" within the
meaning of 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
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% 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 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 (including an
entity treated as a corporation or partnership for U.S. federal income tax
purposes) organized in or under the laws of the United States, or any State
thereof or the District of Columbia (unless in the case of a partnership
Treasury regulations are adopted that provide otherwise) or an estate whose
income 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, or a trust if a court within
the United States is able to exercise primary supervision of the
administration of the trust and one or more U.S. Persons have the authority to
control all substantial decisions of the trust. In addition, certain trusts
that would not qualify as U.S. Persons under the foregoing definition but that
are eligible to and make an election to be treated as U.S. Persons will also
be treated as U.S. Persons.
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.
New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations" which make certain modifications to the backup withholding
and information reporting rules described above. The New Regulations attempt
to unify certification requirements and modify reliance standards. The New
Regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
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, "--Prohibited Transactions and Other Taxes") below,
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 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 under
"--Residual Certificates" below), 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 to issue regulations providing relief
in the event of an inadvertent termination of status as a REMIC, no such
regulations have been issued. Moreover, any such relief 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
"domestic building and loan association" will constitute assets described in
Section 7701(a)(19)(C); (ii) Certificates held by a real estate investment
trust will constitute "real estate assets" within the meaning of Section
856(c)(4)(A); and (iii) 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 Section 856(c)(3)(B). If
less than 95% of the REMIC's assets are assets qualifying under any of the
foregoing 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 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 Section 856(c)(5)(A) and REMIC Certificates
held by a regulated investment company will not constitute "Government
Securities" within the meaning of Section 851(b)(4)(A)(ii). REMIC Certificates
held by certain financial institutions will constitute "evidences of
indebtedness" within the meaning of 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 Section 25(e)(10) will
qualify as real property without regard to state law classifications. Under
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 Subsidiary
REMIC, 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 (a) whether the REMIC Certificates
will be (i) "real estate assets" within the meaning of Section 856(c)(4)(A) or
(ii) "loans secured by an interest in real property" under Section
7701(a)(19)(C); and (b) whether the income on such Certificates is interest
described in Section 856(c)(3)(B).
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 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 Sections 1271
through 1273 and Section 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 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 the Contingent Payment Regulations should apply
to such Certificates.
Although the Contingent Payment Regulations are not applicable to
instruments governed by Section 1272(a)(6), they represent the only guidance
regarding the current view of the IRS with respect to contingent payment
instruments. 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 under "--Accrued Interest
Certificates" below), so that such Regular Certificates would be considered
for U.S. federal income tax purposes to be issued at a premium. If such
position were to prevail, the rules described under "--Premium" below 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 "--Premium" below 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 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 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. A holder
who pays an acquisition premium instead may elect to accrue original issue
discount by treating the purchase as original issue.
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 under "--Original Issue Discount and Premium" above 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 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 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 is made with respect to a Regular Certificate with market
discount, the Certificateholder will 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 "--Original Issues Discount and Premium" above. 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 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.
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 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.
On June 27, 1996, the IRS published in the Federal Register proposed
regulations on the amortization of bond premium. The foregoing discussion is
based in part on such proposed regulations. On December 30, 1997, the IRS
issued the Amortizable Bond Premium Regulations which generally are effective
for bonds acquired on or after March 2, 1998 or, for holders making an
election to amortize bond premium as described above, the taxable year that
includes March 2, 1998 or any subsequent taxable year, will apply to bonds
held on or after the first day of taxable year in which such election is made.
Neither the proposed regulations nor the final regulations, by their express
terms, apply to prepayable securities described in Section 1272(a)(6) such as
the Regular Certificates. Holders of Regular Certificates should consult their
tax advisors regarding the possibility of making an election to amortize any
such bond premium.
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.
Applying the latter analysis therefore 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.
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 that 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" above, any such gain or loss will be capital gain or loss, provided
that the Regular Certificate is held as a "capital asset" (generally, property
held for investment) within the meaning of 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 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.
Gain from the sale or other disposition of a Regular Certificate that
might otherwise be capital gain will be treated as ordinary income, (i) if the
Regular Certificate is held as part of a "conversion transaction" as defined
in Section 1258(c), up to the amount of interest that would have accrued at
the applicable federal rate under Section 1274(d) in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was
held as part of such transaction, or (ii) if the Regular Certificate is held
as part of a straddle. Potential investors should consult their tax advisors
with respect to the tax consequences of ownership and disposition of an
investment in Regular Certificates in their particular circumstances.
Regular Certificates will be "evidences of indebtedness" within the
meaning of 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
Certificate's 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
"pass-through 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 Section 67.
That Section allows such deductions only to the extent that in the aggregate
such expenses exceed 2% of the holder's adjusted gross income. In addition,
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 Section 67 or
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 IRS, 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. Prospective investors in 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% 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 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 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.
New Withholding Regulations. On October 6, 1997, the Treasury Department
issued the New Regulations which make certain modifications to the backup
withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1999, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
Residual Certificates
Allocation of the Income of the REMIC to the Residual Certificates. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. See "--Prohibited
Transactions and Other Taxes" below. 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 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 (i.e., a fast-pay, slow-pay structure) may generate such a
mismatching of income and cash distributions (i.e., "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 "--Sale or Exchange 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.
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 under "--Non-Interest Expenses of the REMIC" below,
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 or greater, respectively than its principal balance. 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 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, such 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 "--Sale or Exchange of Residual Certificates" below.
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.
Mark-to-Market Regulations. Prospective purchasers of a Residual
Certificate should be aware that the IRS finalized regulations (the
"Mark-to-Market Regulations") which provide that a Residual Certificate
acquired after January 3, 1995 cannot be marked to market. The Mark-to-Market
Regulations replaced the temporary regulations which allowed a Residual
Certificate to be marked to market provided that it was not a "negative value"
residual interest.
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
Section 67 which allows such deduction only to the extent that, in the
aggregate, all such expenses exceed 2% 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 "pass-through 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 "--Regular Certificates--Non-Interest Expenses of
the REMIC" 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
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 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% 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.
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 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.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from REMIC residual certificates that have "significant
value" within the meaning of the REMIC Regulations, effective for taxable
years beginning after December 31, 1995 except with respect to residual
certificates continuously held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect of excess inclusions on the alternative
minimum taxable income of a Residual Certificateholder. First, the alternative
minimum taxable income for such Residual Certificateholder is determined
without regard to the special rule that taxable income cannot be less than
excess inclusion. Second, the amount of any alternative minimum tax net
operating loss deductions must be computed without regard to any excess
inclusions. Third, the Residual Certificateholder's alternative minimum
taxable income for a tax year cannot be less than excess inclusions for the
year. The effect of this last statutory amendment is to prevent the use of
nonrefundable tax credits to reduce a taxpayer's income tax below its
tentative minimum tax computed only on excess inclusions. These rules are
effective for tax years beginning after December 31, 1996, unless a residual
holder elects to have such rules apply only to tax years beginning after
August 20, 1996.
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.
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 Certificates 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 Certificates 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 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 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 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.
The 1997 Tax Act reduces the maximum rates on long-term capital gains
recognized on capital assets held by individuals taxpayers for more than 18
months as of the date of disposition (and would further reduce the maximum
rates on such gains in the year 2001 and thereafter for certain individual
taxpayers who meet specified conditions). The capital gains rate for capital
assets held by individual taxpayers for more than 12 months but less than 18
months was not changed by the 1997 Tax Act. The 1997 Tax Act does not change
the capital gain rates for corporations. Prospective investors should consult
their own tax advisors concerning these tax law changes.
Prohibited Transactions and Other Taxes
The REMIC is subject to a tax at a rate equal to 100% 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% tax
on prohibited transactions.
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
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, 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. Under Temporary Regulations, however, 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 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 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 "--Residual Certificates--Excess
Inclusions" above.
Non-U.S. Persons
Amounts paid to Residual Certificateholders who are not U.S. Persons (see
"--Regular Certificates--Non- U.S. Persons" above) are treated as interest for
purposes of the 30% (or lower treaty rate) United States withholding tax.
Amounts distributed to Residual Certificateholders 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" above. 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 authority to issue regulations requiring that those amounts be taken
into account earlier than otherwise provided where necessary to prevent
avoidance of tax (e.g., where the Residual Certificates do not have
significant value). See "--Residual Certificates--Excess Inclusions" above. 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 tax 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" 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, an
estate 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, or a
trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust.
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.
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.
Non-economic Residual Certificates. The REMIC Regulations disregard, for
federal income tax purposes, any transfer of a Non-economic 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 "Non-economic
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 Non-economic 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, the transferor reasonably expects that the REMIC will distribute to
the transferee amounts that will equal at least 30% 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 to foreign persons of
Residual Certificates that have tax avoidance potential are effective for all
transfers after June 30, 1992. The 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 IRS 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 (including an entity
treated as a corporation or partnership for U.S. federal income tax purposes)
or other entity created or organized in or under the laws of the United
States, or any State thereof, or the District of Columbia (unless in the case
of a partnership Treasury regulations are adopted that provide otherwise) an
estate whose income 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, or a trust if a
court within the United States is able to exercise primary supervision of the
administration of the trust and one or more U.S. Persons have the authority to
control all substantial decisions of the trust. In addition, certain trusts
that would not qualify as U.S. Persons under the foregoing definition but that
are eligible to and make an election to be treated as U.S. Persons will also
be treated as U.S. Persons.
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 and the Code impose requirements on certain 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") 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 (as defined in ERISA Section 3(33)), are not subject to
ERISA requirements. Accordingly, assets of such plans may be invested in
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 Sections 401(a) and 501(a) of the
Code, however, is subject to the prohibited transaction rules set forth in
Section 503 of the Code.
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 Exchange Act.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA and the Code prohibit 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 Section 4975 of the Code unless a statutory, regulatory
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
containing Multifamily Loans or Contracts or Cooperative Loans. Accordingly,
unless the related Prospectus Supplement indicates that an exemption other
than PTE 83-1 is available, 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 (greater than
0%) of future interest payments and a specified 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". 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, as amended;
Exemption Application No. D-8374, 55 Fed. Reg. 36724 (1990)) (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 a 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 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
Ratings Services, Moody's Investors Service, Inc., Duff & Phelps Inc. or Fitch
IBCA, 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, as amended.
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, as amended ("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 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 System, 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.
The Depositor will indemnify GCM and any underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, as
amended, 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 as amended, in
connection with reoffers and sales of Certificates by them. 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.
RATINGS
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 certain 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.
INDEX OF DEFINED TERMS
Page
1986 Act...................................................................71
1997 Tax Act...............................................................73
Accrual Certificates.......................................................29
Advance.....................................................................9
AFR........................................................................73
Agency Securities...........................................................1
Agreement...............................................................1, 14
Amortizable Bond Premium Regulations.......................................67
Applicable Amount..........................................................83
APR.....................................................................2, 16
ARM Loans..................................................................70
Available Funds............................................................28
Bankruptcy Bond............................................................38
Bankruptcy Code............................................................42
BIF........................................................................44
CERCLA.....................................................................60
Certificate Account........................................................44
Certificate Principal Balance..............................................29
Certificate Register.......................................................27
Certificates................................................................1
Charter Act................................................................20
Closing Date...............................................................77
Code...................................................................11, 65
Collateral Value ......................................................
Collateral Value...........................................................14
Commission.................................................................ii
Contingent Payment Regulations.............................................72
Contracts...................................................................1
Cooperative Loans.......................................................1, 15
Cooperatives............................................................1, 15
Cut-off Date................................................................8
Deferred Interest......................................................72, 81
Detailed Description.......................................................12
Determination Date.........................................................29
Distribution Date...........................................................6
DOL........................................................................93
EPA........................................................................60
ERISA......................................................................11
Events of Default..........................................................53
FDIC.......................................................................25
FHA.....................................................................2, 16
FHA Insurance...............................................................9
FHA Loans..................................................................16
FHLMC.......................................................................1
FHLMC Act..................................................................18
FHLMC Certificate group....................................................18
FHLMC Certificates..........................................................4
FNMA........................................................................1
FNMA Certificates...........................................................4
FTC Rule...................................................................63
Garn-St Germain Act........................................................63
GCA........................................................................ii
GCM........................................................................97
GNMA........................................................................1
GNMA Certificates...........................................................4
GNMA Issuer................................................................17
Guaranty Agreement.........................................................17
Housing Act................................................................16
HUD........................................................................36
Insolvency Trustee.........................................................42
Insurance Proceeds.........................................................45
Insured Expenses...........................................................45
Legislative History........................................................71
Liquidation Expenses.......................................................45
Liquidation Proceeds.......................................................45
Loan-to-Value Ratio........................................................14
Manufactured Homes.........................................................16
Manufacturer Invoice Price.................................................14
Mark-to-Market Regulations.................................................86
Master REMIC...............................................................76
Master Servicer.............................................................1
Mortgage...................................................................43
Mortgage Assets.........................................................1, 12
Mortgage Loans..........................................................1, 12
Mortgage Pool..............................................................12
Mortgage Pool Insurance Policy.............................................34
Mortgage Rate...........................................................7, 13
Mortgaged Properties.......................................................12
Multifamily Loans...........................................................1
NCUA.......................................................................96
New Regulations............................................................75
Non-economic Residual Certificate..........................................92
OID Regulations............................................................67
Parties in Interest........................................................94
Pass-Through Rate...........................................................7
Payment Lag Certificates...................................................82
Permitted Investments......................................................45
Plans......................................................................93
PMBS Agreement.............................................................21
PMBS Issuer.............................................................5, 22
PMBS Servicer...........................................................5, 21
PMBS Trustee............................................................5, 21
Policy Statement...........................................................96
Pool Insurer...............................................................34
Prepayment Assumption..................................................71, 77
Primary Insurer............................................................49
Primary Mortgage Insurance Policy..........................................12
Principal Prepayments......................................................30
PTE 83-1...................................................................94
Purchase Price.............................................................26
Rating Agency..............................................................45
Record Date................................................................27
Refinance Loans............................................................14
Regular Certificateholders.................................................76
Regular Certificates.......................................................75
Relief Act.................................................................64
REMIC...........................................................1, 11, 28, 65
REMIC Regulations..........................................................65
Reserve Account............................................................28
Residual Certificates......................................................75
Retained Interest..........................................................26
SAIF.......................................................................44
Seller......................................................................1
Sellers....................................................................12
Senior Certificates.....................................................6, 33
Series......................................................................1
Single Family Certificates.................................................94
Single Family Loans.........................................................1
SMMEA..................................................................10, 96
Special Hazard Insurance Policy............................................37
Special Hazard Insurer.....................................................37
Stripped ARM Obligations...................................................72
Stripped Bond Certificates.................................................69
Stripped Coupon Certificates...............................................69
Sub-Servicer............................................................9, 14
Sub-Servicing Account......................................................44
Sub-Servicing Agreement....................................................46
Subordinated Certificates...............................................6, 33
Subsidiary REMIC...........................................................76
Super-Premium Certificates.................................................78
Support Agreement..........................................................31
Support Servicer...........................................................10
Title V....................................................................64
Trust Fund..............................................................1, 12
Trustee.....................................................................1
UCC........................................................................56
Underwriter Exemption......................................................95
VA..........................................................................2
VA Guaranty Policy.........................................................36
VA Insurance................................................................9
VA Loans...................................................................16
