PROSPECTUS SUPPLEMENT
(To Prospectus dated December 10, 1999)
$624,143,300 (Approximate)
Mortgage Loan Pass-Through Certificates, Series 1999-1
$253,248,700 Class A-1 Weighted Average Pass-Through Rate
$370,894,600 Class A-2 Weighted Average Pass-Through Rate
GREENWICH CAPITAL ACCEPTANCE, INC.
Depositor
CERTAIN AFFILIATES OF FIFTH THIRD BANK
Sellers
FIFTH THIRD BANK
Master Servicer
Consider carefully the risk factors beginning on page S-8 in this prospectus
supplement and on page 14 in the prospectus.
The certificates represent obligations of the trust only and do not represent
an interest in or obligation of the depositor, the sellers, the master
servicer, the trustee or any of their affiliates.
This prospectus supplement may be used to offer and sell the offered
certificates only if accompanied by the prospectus. The Certificates
o The certificates represent ownership interests in a trust consisting
primarily of certain fixed-rate first-lien residential mortgage loans. The
mortgage loans will be segregated into two loan groups as described in
this prospectus supplement.
o Only the Class A-1 and Class A-2 Certificates are being offered by this
prospectus supplement and the accompanying prospectus. The Class A-1 and
Class A-2 Certificates will be senior certificates.
o The Class B-1 and Class B-2 Certificates, which are not being offered by
this prospectus supplement and the accompanying prospectus, will be
subordinate certificates.
o Each class of offered certificates will bear interest at a weighted
average rate as described in this prospectus supplement.
Credit Enhancement
o Subordination - The Class B-1 Certificates will be subordinate in right of
certain payments to the Class A-1 Certificates. The Class B-2 Certificates
will be subordinate in right of certain payments to the Class A-2
Certificates.
o Allocation of Losses - Losses on the mortgage loans in a loan group
generally will be allocated to the related class of subordinate
certificates until the principal balance of that class is reduced to zero.
Thereafter, losses will be allocated to the related class of senior
certificates.
Neither the SEC nor any state securities commission has approved these
securities or determined that this prospectus supplement or the prospectus is
accurate or complete. Any representation to the contrary is a criminal
offense.
The Class A-1 and Class A-2 Certificates will be acquired upon their initial
issuance by the sellers from the depositor in a negotiated transaction. This
acquisition will be concurrent with the transfer of the mortgage loans from
the sellers to the depositor as described in this prospectus supplement. The
sellers may offer the Class A-1 and Class A-2 Certificates from time to time
to the public directly or through dealers, in negotiated transactions or
otherwise, at varying prices to be determined at the time of sale.
Delivery of the offered certificates will be made in book-entry form through
the facilities of The Depository Trust Company on or about December 29, 1999.
December 29, 1999
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
Summary of Terms..................................S-4
Risk Factors......................................S-9
The Mortgage Loan Groups.........................S-15
The Sellers......................................S-33
The Master Servicer..............................S-34
The Pooling and Servicing Agreement..............S-37
Description of the Certificates..................S-45
Yield, Prepayment and Maturity Considerations....S-59
State Taxes......................................S-69
ERISA Considerations.............................S-69
Legal Investment Considerations..................S-71
Method of Distribution...........................S-72
Legal Matters....................................S-72
Ratings..........................................S-72
Index of Defined Terms.............................74
PROSPECTUS
Page
----
Important Notice About
Information in This Prospectus
and Each Accompanying
Prospectus Supplement.......................4
Risk Factors...................................5
The Trust Fund.................................12
Use of Proceeds................................22
The Depositor..................................22
Mortgage Loan Program..........................23
Description of the
Certificates ...............................25
Credit Enhancement.............................31
Yield and Prepayment
Considerations..............................38
The Pooling and Servicing
Agreement...................................39
Certain Legal Aspects
of the Mortgage Loans.......................50
Certain Federal Income
Tax Consequences............................59
REMIC Certificates.............................68
State Tax Considerations.......................84
ERISA Considerations...........................84
Legal Investment...............................87
Method of Distribution.........................88
Legal Matters..................................88
Financial Information..........................89
Available Information..........................89
Ratings........................................89
Index of Defined Terms.........................90
<PAGE>
Summary of Terms
o This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the offering
of the Class A-1 and Class A-2 Certificates, read carefully this entire
document and the accompanying prospectus.
o This summary provides an overview of certain calculations, cash flow
priorities and other information to aid your understanding and is
qualified by the full description of these calculations, cash flow
priorities and other information in this prospectus supplement and the
accompanying prospectus. Some of the information consists of
forward-looking statements relating to future economic performance or
projections and other financial items. Forward-looking statements are
subject to a variety of risks and uncertainties that could cause actual
results to differ from the projected results. Those risks and
uncertainties include, among others, general economic and business
conditions, regulatory initiatives and compliance with governmental
regulations, and various other matters, all of which are beyond our
control. Accordingly, what actually happens may be very different from
what we predict in our forward-looking statements.
Offered Certificates
On the Closing Date, Fifth Third Mortgage Loan Trust 1999-1 will issue five
classes of certificates. Only the Class A-1 and Class A-2 Certificates are
being offered by this prospectus supplement and the accompanying prospectus.
The assets of the trust that will support the certificates will consist
primarily of a pool of fixed-rate, first-lien, residential mortgage loans
having the characteristics described in this prospectus supplement.
The offered certificates will be book-entry securities clearing through The
Depository Trust Company in minimum denominations of $25,000.
Additional Certificates
In addition to the two classes of offered certificates, the trust will issue
three other classes of certificates. These certificates will be designated the
Class B-1, Class B-2 and Class R Certificates and are not being offered by
this prospectus supplement and the prospectus. The Class B-1 and Class B-2
Certificates will have original aggregate principal balances of approximately
$8,507,126 and $18,496,117, respectively. The Class R Certificates will not
have a principal balance.
See "Description of the Certificates-- General" and "--Book-Entry
Certificates" in this prospectus supplement; and "The Mortgage Loan Groups" in
this prospectus supplement and "The Trust Fund--The Mortgage Loans--General"
in the prospectus for additional information.
<PAGE>
Cut-off Date
December 1, 1999.
Closing Date
On or about December 29, 1999.
Sellers
Fifth Third Mortgage Company
Fifth Third Bank, Central Ohio
Fifth Third Bank, Florida
Fifth Third Bank, Indiana
Fifth Third Bank, Kentucky, Inc.
Fifth Third Bank, Northern Kentucky, Inc.
Fifth Third Bank, Northwestern, Ohio, N.A.
Fifth Third Bank, Ohio Valley
Fifth Third Bank, Southwest, F.S.B.
See "The Sellers" in this prospectus supplement for additional information.
Master Servicer
Fifth Third Bank.
See "The Master Servicer" in this prospectus supplement for additional
information.
The Depositor
Greenwich Capital Acceptance, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
(203) 625-2700.
Trustee
Bank One, National Association.
See "The Pooling and Servicing Agreement--The Trustee" in this prospectus
supplement for additional information.
Designations
Each class of certificates will have different characteristics, some of which
are reflected in the following general designations.
o Offered Certificates or Senior Certificates
Class A-1 and Class A-2 Certificates.
o Subordinate Certificates
Class B-1 and Class B-2 Certificates.
o Group I Certificates Class A-1 and Class B-1 Certificates.
o Group II Certificates Class A-2 and Class B-2 Certificates.
o Book-Entry Certificates
Senior Certificates.
o Residual Certificates
Class R Certificates.
Loan Groups
o Loan Group I or Group I Mortgage Loans
A group of fixed-rate, fully amortizing mortgage loans with original
terms to maturity of not more than 15 years.
o Loan Group II or Group II Mortgage Loans
A group of fixed-rate, fully amortizing mortgage loans with original
terms to maturity of not less than 20 and not more than 30 years.
Distribution Date
Beginning in January 2000, the trustee will make distributions on the
certificates on the 25th day of each calendar month to the holders of record
of the certificates as of the business day preceding the distribution date. If
the 25th day of a month is not a business day, then the distribution will be
made on the next business day.
Payments on the Certificates
Interest Payments
Interest on the Class A-1 and Class A-2 Certificates will be calculated based
upon the weighted average of the interest rates of the mortgage loans in Loan
Group I and Loan Group II, respectively, as described under "Description of
the Certificates -- Pass-Through Rates" in this prospectus supplement.
Interest will accrue on the basis of an assumed 360-day year divided into
twelve 30-day months. The interest accrual period for each distribution date
will be the calendar month immediately preceding the month in which the
distribution date occurs.
Principal Payments
Principal will be paid to holders of the offered certificates on each
distribution date in the amounts described in this prospectus supplement under
"Description of the Certificates -Principal".
Payment Priorities
Group I Certificates
In general, on each distribution date, funds available for distribution from
payments and other amounts received on the mortgage loans in Loan Group I will
be paid in the following order of priority:
first, as interest on the Class A-1 Certificates (less certain net interest
shortfalls);
second, as interest on the Class B-1 Certificates (less certain net
interest shortfalls);
third, as principal of the Class A-1 and Class B-1 Certificates, in that
order and in the amounts calculated as described in this prospectus supplement
under "Description of the Certificates-Principal"; and
fourth, any remaining amounts to the Class R Certificates.
Group II Certificates
In general, on any distribution date, funds available for distribution from
payments and other amounts received on the mortgage loans in Loan Group II
will be paid in the following order of priority:
first, as interest on the Class A-2 Certificates (less certain net interest
shortfalls);
second, as interest on the Class B-2 Certificates (less certain net
interest shortfalls);
third, as principal of the Class A-2 and Class B-2 Certificates, in that
order and in the amounts calculated as described in this prospectus
supplement under "Description of the Certificates-Principal"; and
fourth, any remaining amounts to the Class R Certificates.
See "Description of the Certificates" in this prospectus supplement for
additional information.
Advances
The master servicer is required to make cash advances to cover delinquent
payments of principal and interest unless it reasonably believes that the cash
advances are not recoverable from future payments on the related mortgage
loans. Advances are intended to maintain a regular flow of scheduled interest
and principal payments on the certificates and are not intended to guarantee
or insure against losses. The master servicer is also required to make certain
servicing related advances.
See "The Pooling and Servicing Agreement--Advances" in this prospectus
supplement for additional information.
Optional Termination
The master servicer may purchase all of the remaining assets relating to a
loan group and retire the related certificates after the current principal
balance of the related mortgage loans and any real estate declines below 10%
of the aggregate principal balance of the mortgage loans included in that loan
group as of the cut-off date.
See "The Pooling and Servicing Agreement --Termination" in this prospectus
supplement for additional information.
Credit Enhancement
The credit enhancements for the offered certificates include
o application of available funds for each loan group to cover interest and
principal on the related class of offered certificates before application
to cover the interest and principal, respectively, on the related class of
subordinate certificates, and
o allocation of losses on the mortgage loans generally to the related class
of subordinate certificates until the principal amount of that class is
reduced to zero.
These credit enhancements are designed to increase the likelihood that holders
of the offered certificates will receive regular payments of interest and
principal.
The senior percentage and the subordinated percentage for Certificate Group I
will initially be approximately 96.75% and 3.25%, respectively. The senior
percentage and the subordinated percentage for Certificate Group II will
initially be approximately 95.25% and 4.75%, respectively.
See "Description of the Certificates" in this prospectus supplement.
Ratings
It is a condition of the issuance of the offered certificates that they be
rated "Aaa" by Moody's Investors Service, Inc. and "AAA" by Fitch IBCA, Inc.
A rating is not a recommendation to buy, sell or hold securities and it may be
lowered or withdrawn at any time by the rating agencies.
See "Ratings" in this prospectus supplement for additional information.
Tax Status
In the opinion of Brown & Wood LLP, for federal income tax purposes the trust
will be characterized as two separate "real estate mortgage investment
conduits" or REMICs. The Class A-1 and Class B-1 Certificates will constitute
"regular interests" in one REMIC and the Class A-2 and Class B-2 Certificates
will constitute "regular interest" in the other REMIC. The Class R
Certificates will represent the sole class of "residual interests" in both
REMICs.
The offered certificates generally will be treated as newly originated debt
instruments for federal income tax purposes. Beneficial owners of the offered
certificates will be required to report income on the offered certificates in
accordance with the accrual method of accounting.
See "Certain Material Federal Income Tax Consequences" in this prospectus
supplement and "Certain Federal Income Tax Consequences" in the prospectus for
additional information.
ERISA Considerations
The offered certificates may be purchased by a pension or other employee
benefit plan subject to the Employee Retirement Income Security Act of 1974 or
Section 4975 of the Internal Revenue Code of 1986, as amended, so long as
certain conditions are met. A fiduciary of an employee benefit plan must
determine that the purchase of a certificate is consistent with its fiduciary
duties under applicable law and does not result in a nonexempt prohibited
transaction.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus.
Legal Investment
The offered certificates will be "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 as long as they are
rated in one of the two highest rating categories by at least one nationally
recognized statistical rating organization.
See "Legal Investment Considerations" in this prospectus supplement and "Legal
Investment" in the prospectus.
<PAGE>
Risk Factors
The following information, which you should carefully consider,
identifies certain significant sources of risk associated with an investment
in the certificates. You should also carefully consider the information set
forth under "Risk Factors" in the prospectus.
Unpredictability of
Prepayments and
Effect on Yields.............Borrowers may prepay their mortgage loans in whole
or in part at any time. We cannot predict the
rate at which borrowers will repay their mortgage
loans. A prepayment of a mortgage loan generally
will result in a prepayment on the related
offered certificates.
o If you purchase your certificates at a
discount and principal is repaid slower than
you anticipate, then your yield may be lower
than you anticipate.
o If you purchase your certificates at a
premium and principal is repaid faster than
you anticipate, then your yield may be lower
than you anticipate.
o The rate of prepayments on the mortgage loans
will be sensitive to prevailing interest
rates. Generally, if prevailing interest
rates decline significantly below the
interest rates on the mortgage loans, those
mortgage loans are more likely to prepay than
if prevailing rates remain above the interest
rates on the mortgage loans. Conversely, if
prevailing interest rates rise significantly,
prepayments on the mortgage loans are likely
to decrease.
o Each seller is required to purchase from the
trust any mortgage loan sold by it in the
event certain breaches of representations and
warranties occur and are not cured. In
addition, the master servicer has the option
to purchase mortgage loans that become 90
days or more delinquent, subject to certain
limitations and conditions described in this
prospectus supplement. These purchases will
have the same effect on the holders of the
offered certificates as a prepayment of the
mortgage loans.
o If the rate of default and the amount of
losses on the mortgage loans is higher than
you expect, then your yield may be lower than
you expect.
o The priorities governing payments of
principal will have the effect of
accelerating the rate of principal payments
to holders of the classes of offered
certificates relative to the classes of
subordinate certificates.
See "Yield, Prepayment and Maturity
Considerations" in this prospectus supplement for
a description of factors that may influence the
rate and timing of prepayments on the mortgage
loans.
Potential Inadequacy of
Credit Enhancement for
the Offered Certificates.....Credit enhancement is provided for each class of
offered certificates first by the right of the
holders of that class to receive payments of
interest prior to the holders of the related
class of subordinate certificates and second by
the right of the holders of that class of offered
certificates to receive payments of principal
prior to the holders of the related class of
subordinate certificates. As a result,
collections on the mortgage loans in a loan group
that would otherwise be allocable to the holders
of the related subordinate certificates will be
used to pay amounts due on the related senior
certificates.
Credit enhancement also is provided to each class
of offered certificates by the allocation of
realized losses on the mortgage loans in a loan
group generally to the related class of
subordinate certificates until the principal
amount of that class is reduced to zero. However,
if the principal amount of a class of subordinate
certificates were to be reduced to zero,
delinquencies and defaults on the mortgage loans
would reduce the amount of funds available for
monthly payments to holders of the related
offered certificates.
Further, the subordinate certificates will
provide only limited protection against certain
categories of losses such as special hazard
losses, bankruptcy losses and fraud losses in
excess of the amounts specified in this
prospectus supplement. Any losses on the mortgage
loans in a loan group in excess of those amounts
will be allocated pro rata to all the
certificates in the related certificate group,
even if the principal amount of the related
subordinate certificates has not been reduced to
zero.
See "Description of the Certificates" in this
prospectus supplement and "Credit Enhancement --
Subordination" in the prospectus for additional
information.
Interest Payments May
Be Insufficient..............When a mortgage loan is prepaid in full, the
borrower is charged interest only up to the date
on which payment is made, rather than for an
entire month. This may result in a shortfall in
interest collections available for payment on the
next distribution date. The master servicer is
required to cover the shortfall in interest
collections that are attributable to prepayments
in full, but only up to the amount of one-half of
the master servicer's servicing fee for the
related accrual period. In addition, certain
shortfalls in interest collections arising from
the application of the Soldiers' and Sailors'
Civil Relief Act of 1940 will not be covered by
the master servicer.
Any uncovered interest shortfall may adversely
affect the yield on your investment.
Delay in Receipt of
Liquidation Proceeds;
Liquidation Proceeds
May Be Less than
Mortgage Loan Balance........Substantial delays could be encountered in
connection with the liquidation of delinquent
mortgage loans. Further, liquidation expenses
such as legal fees, real estate taxes and
maintenance and preservation expenses may reduce
the portion of liquidation proceeds payable to
you. If a mortgaged property fails to provide
adequate security for the related mortgage loan,
you will incur a loss on your investment if the
credit enhancement is insufficient to cover that
loss.
High Loan-to-Value
Ratios Increase Risk
of Loss......................Mortgage loans with higher loan-to-value ratios
may present a greater risk of loss than mortgage
loans with loan-to-value ratios of 80% or below.
Approximately 2.70% of the mortgage loans in Loan
Group I and 8.79% of the mortgage loans in Loan
Group II (in each case based on the aggregate
principal balance as of the cut-off date) had
loan-to-value ratios in excess of 80%, but no
more than 95%, at origination.
<PAGE>
Certificates May Not Be
Appropriate for Some
Investors....................The offered certificates may not be an appropriate
investment for investors who do not have
sufficient resources or expertise to evaluate the
particular characteristics of the offered
certificates. This may be the case due to the
reasons specified below.
o The yield to maturity of offered certificates
purchased at a price other than par will be
sensitive to the uncertain rate and timing of
principal prepayments on the mortgage loans.
o The rate of principal distributions on and
the weighted average lives of the offered
certificates will be sensitive to the
uncertain rate and timing of principal
prepayments on the mortgage loans and the
priority of principal distributions among the
classes of certificates. Accordingly, the
offered certificates may be an inappropriate
investment if you require a distribution of a
particular amount of principal on a specific
date or an otherwise predictable stream of
distributions.
o You may not be able to reinvest distributions
on an offered certificate (which, in general,
are expected to be greater during periods of
relatively low interest rates) at a rate at
least as high as the pass-through rate
applicable to your certificate.
o A secondary market for the offered
certificates may not develop or provide you
with liquidity of investment.
Geographic Concentration
of the Mortgage Loans........The following chart lists the states and related
percentage with concentrations of mortgage loans
in excess of 5% of the aggregate principal
balance of the mortgage loans in each loan group
as of the cut-off date.
Loan Group I Loan Group II
--------------------------------------------------
Ohio 63.63% Ohio 60.59%
Kentucky 15.45% Kentucky 12.17%
Florida 7.40% Indiana 10.27%
Indiana 5.58% Arizona 7.92%
In addition, the conditions below will have a
disproportionate impact on the mortgage loans in
general:
o Economic conditions in states listed above
which may or may not affect real property
values may affect the ability of borrowers to
repay their loans on time.
o Declines in the residential real estate
markets in the states listed above may reduce
the values of properties located in those
states, which would result in an increase in
the loan-to-value ratios.
o Any increase in the market value of
properties located in the states listed above
would reduce the loan-to-value ratios and
could, therefore, make alternative sources of
financing available to the borrowers at lower
interest rates, which could result in an
increased rate of prepayment of the mortgage
loans.
Lack of Liquidity............There is currently no secondary market for the
offered certificates and there can be no
assurance that a secondary market for the offered
certificates will develop. Consequently, you may
not be able to sell your certificates readily or
at prices that will enable you to realize your
desired yield. The market values of the
certificates are likely to fluctuate. Any of
these fluctuations may be significant and could
result in significant losses to you.
The secondary markets for asset-backed securities
have experienced periods of illiquidity and can
be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices
of securities that are especially sensitive to
prepayment, credit, or interest rate risk, or
that have been structured to meet the investment
requirements of limited categories of investors.
Master Servicer
Alternatives to
Foreclosure................. The master servicer may foreclose on any delinquent
mortgage loan or, subject to certain limitations
set forth in the pooling and servicing agreement,
work out an agreement with the related borrower,
which may involve waiving or modifying any term
of the mortgage loan. The master servicer may
also sell any mortgage loan that is at least 90
days delinquent.
<PAGE>
Year 2000 Systems Risk
Could Affect the Ability
of the Master Servicer
to Perform Its Duties........As described in this prospectus supplement under
the heading "The Master Servicer", the master
servicer has taken steps to reduce the impact of
the year 2000 on the ability of its computerized
information systems to accurately process
information that may be date-sensitive. However,
there can be no assurance that partial or total
systems interruptions will not have a material
adverse effect on the master servicer's
performance of its obligations under the pooling
and servicing agreement.
<PAGE>
THE MORTGAGE LOAN GROUPS
The information set forth in the following paragraphs has been provided
by the Master Servicer and the Sellers. None of the Depositor, the Trustee or
any of their respective affiliates has made or will make any representation as
to the accuracy or completeness of the information that appears under this
heading.
General
The assets held by Fifth Third Mortgage Loan Trust 1999-1 (the "Trust")
will consist principally of two groups of closed-end, fixed-rate, fully
amortizing mortgage loans (each, a "Loan Group"), the first group generally
having original terms to maturity of not more than 15 years (the "Group I
Mortgage Loans") and the second group having original terms to maturity of not
less than 20 and not more than 30 years (the "Group II Mortgage Loans" and,
together with the Group I Mortgage Loans, the "Mortgage Loans"). Loan Group I
consists of 705 Mortgage Loans having an aggregate Principal Balance as of the
Cut-off Date of approximately $261,755,826 (the "Group I Loan Balance") and
Loan Group II consists of 1,054 Mortgage Loans having an aggregate Principal
Balance as of the Cut-off Date of approximately $389,390,717 (the "Group II
Loan Balance"), in each case after application of payments of principal due on
or before the Cut-off Date whether or not received and also in each case
subject to a permitted variance of plus or minus 5%. All weighted averages
specified in this prospectus supplement are based on the Principal Balances of
the Mortgage Loans in the related Loan Group as of the Cut-off Date. The
"Principal Balance" of a Mortgage Loan as of any date is equal to the
principal balance of that Mortgage Loan at its origination, less the sum of
scheduled and unscheduled payments in respect of principal made on that
Mortgage Loan since its origination. References in this prospectus supplement
to percentages of the Mortgage Loans mean percentages based on the aggregate
of the Principal Balances of the Mortgage Loans in the related Loan Group as
of the Cut-off Date, unless otherwise specified.
Pursuant to the Pooling and Servicing Agreement, the Depositor will
purchase the Mortgage Loans from the Sellers and the Depositor will cause the
Mortgage Loans to be assigned to the Trustee for the benefit of the
Certificateholders. See "The Pooling and Servicing Agreement" in this
prospectus supplement.
Each of the Mortgage Loans was selected from a Seller's portfolio of
mortgage loans. All of the Mortgage Loans were originated by the Sellers in
the ordinary course of business and underwritten by the Sellers in accordance
with the underwriting standards described in this prospectus supplement under
the heading "The Sellers-Underwriting Standards".
Under the Pooling and Servicing Agreement, each of the Sellers will make
certain representations and warranties to the Trustee relating to, among other
things, the due execution and enforceability of the Pooling and Servicing
Agreement and certain characteristics of the Mortgage Loans sold by it and,
subject to certain limitations, will be obligated to repurchase or substitute
a similar mortgage loan for any such Mortgage Loan as to which there exists
deficient documentation or an uncured breach of any such representation or
warranty, if the breach of the representation or warranty materially and
adversely affects the Certificateholders' interests in the Mortgage Loan. The
Depositor will make no representations or warranties with respect to the
Mortgage Loans and will have no obligation to repurchase or substitute
Mortgage Loans with deficient documentation or that are otherwise defective.
The Sellers are selling the Mortgage Loans without recourse and will have no
obligation with respect to the Certificates in their capacities as Sellers
other than the repurchase or substitution obligations described above.
Group I Mortgage Loan Statistics
The Group I Mortgage Loans have original terms to maturity generally of
15 years. The following statistical information, unless otherwise specified,
is based upon the Group I Loan Balance as of the Cut-off Date.
The Group I Mortgage Loans are secured by mortgages or deeds of trust or
other similar security instruments (each, a "Mortgage") creating first liens
on one- to four-family residential properties consisting of detached or
semi-detached one- to four-family dwelling units and individual condominium
units (each, a "Mortgaged Property"). Approximately 2.70% of the Group I
Mortgage Loans had Loan-to-Value Ratios at origination in excess of 80.00%.
Approximately 0.21% of the Group I Mortgage Loans had Loan-to-Value Ratios at
origination greater than 90.00% but not more than 95.00%. There can be no
assurance that the Loan-to-Value Ratio of any Group I Mortgage Loan determined
at any time after origination is less than or equal to its original
Loan-to-Value Ratio. All of the Group I Mortgage Loans have scheduled monthly
payments due on the first day of the month (with respect to each Mortgage
Loan, a "Due Date").
Each Group I Mortgage Loan accrues interest at a rate (each, a "Loan
Rate") of not less than 5.750% per year and not more than 8.125% per year and
as of the Cut-off Date the weighted average Loan Rate of the Group I Mortgage
Loans was approximately 6.885% per year.
The weighted average remaining term to maturity of the Group I Mortgage
Loans was approximately 159 months as of the Cut-off Date. None of the Group I
Mortgage Loans had a first Due Date prior to January 1994 or after November
1999 or had a remaining term to maturity of less than 73 months or greater
than 178 months as of the Cut-off Date. The latest maturity date of any Group
I Mortgage Loan is October 2014.
The average Principal Balance of the Group I Mortgage Loans at
origination was approximately $403,714. The average Principal Balance of the
Group I Mortgage Loans as of the Cut-off Date was approximately $371,285.
No Group I Mortgage Loan had a Principal Balance of greater than
approximately $1,431,368 or less than approximately $78,725 as of the Cut-off
Date. The Group I Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal
the total indicated due to rounding):
<PAGE>
<TABLE>
<CAPTION>
Principal Balances of the Group I Mortgage Loans as of the Cut-off Date
Number of Principal Balance % of Aggregate Principal
Mortgage Outstanding as of Balance Outstanding as of
Principal Balance ($) Loans the Cut-off Date the Cut-off Date
---------------------------- ---------- ----------------- -------------------------
<S> <C> <C> <C>
78,725 - 100,000 2 $ 175,491.55 0.07%
100,001 - 150,000 3 375,203.14 0.14
150,001 - 200,000 6 1,044,264.55 0.40
200,001 - 250,000 109 25,460,298.81 9.73
250,001 - 300,000 178 49,119,368.56 18.77
300,001 - 350,000 143 46,112,680.97 17.62
350,001 - 400,000 69 25,868,700.27 9.88
400,001 - 450,000 49 20,696,439.92 7.91
450,001 - 500,000 34 16,054,201.02 6.13
500,001 - 550,000 19 10,000,143.14 3.82
550,001 - 600,000 26 14,952,449.18 5.71
600,001 - 650,000 11 6,804,582.01 2.60
650,001 - 750,000 25 17,402,703.18 6.65
750,001 - 1,000,000 30 26,257,931.24 10.03
1,000,001 - 1,500,000 1 1,431,368.08 0.55
---------- ----------------- -------------------------
Total................................ 705 $261,755,825.62 100.00%
========== ================= =========================
The average Principal Balance of the Group I Mortgage Loans as of the Cut-off Date was approximately $371,285.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Original Terms to Maturity of the Group I Mortgage Loans
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Original Term (months) of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------- ------------------- ------------------------ -------------------------
<S> <C> <C> <C>
96-96 2 $429,285.95 0.16%
97-108 1 236,938.06 0.09
109-120 20 7,090,553.17 2.71
121-132 2 556,143.83 0.21
133-144 5 1,317,625.09 0.50
145-156 9 3,259,726.97 1.25
157-168 2 1,250,310.17 0.48
169-180 664 247,615,242.38 94.60
------------------- ------------------------ -------------------------
Total..................... 705 $261,755,825.62 100.00%
=================== ======================== =========================
The weighted average original term to maturity of the Group I Mortgage Loans as of the Cut-off Date was approximately 178 months.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Remaining Terms to Maturity of the Group I Mortgage Loans
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Remaining Term (months) of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------- ------------------- ------------------------ -------------------------
<S> <C> <C> <C>
73 - 84.................. 5 $ 1,227,233.80 0.47%
85 - 96.................. 2 498,943.06 0.19
97 - 108................... 15 4,299,168.43 1.64
109 - 120................... 8 3,654,776.38 1.40
121 - 132................... 13 4,014,394.23 1.53
133 - 144................... 69 22,872,621.22 8.74
145 - 156................... 62 22,376,678.64 8.55
157 - 168................... 380 138,907,741.56 53.07
169 - 178................... 151 63,904,268.30 24.41
------------------- ------------------------ -------------------------
Total..................... 705 $261,755,825.62 100.00%
=================== ======================== =========================
The weighted average remaining term to maturity of the Group I Mortgage Loans as of the Cut-off Date was approximately 159 months.
</TABLE>
<TABLE>
<CAPTION>
Property Types of the Group I Mortgage Loans
% of Aggregate
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Property Type Loans the Cut-off Date the Cut-off Date
- ------------------------------- ------------------- ------------------------ -------------------------
<S> <C> <C> <C>
Single Family................ 684 $254,829,670.66 97.35%
Condominium................. 21 6,926,154.96 2.65
------------------- ------------------------ -------------------------
Total..................... 705 $261,755,825.62 100.00%
=================== ======================== =========================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Stated Occupancy Status of the Group I Mortgage Loans
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Stated Occupancy Status(1) of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------- ------------------- ------------------------ -------------------------
<S> <C> <C> <C>
Owner occupied as primary
residence.................... 705 $261,755,825.62 100.00%
------------------- ------------------------ -------------------------
Total..................... 705 $261,755,825.62 100.00%
=================== ======================== =========================
------------------------------------
(1) Occupancy as represented by the borrower at the time of origination.
</TABLE>
<TABLE>
<CAPTION>
Purposes of the Group I Mortgage Loans
% of Aggregate
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Purpose Loans the Cut-off Date the Cut-off Date
- ------------------------------- ------------------- ------------------------ -------------------------
<S> <C> <C> <C>
Rate/Term Refinance.......... 322 $120,028,670.02 45.86%
Cash Out Refinance........... 242 91,245,829.06 34.86
Purchase..................... 141 50,481,326.54 19.29
------------------- ------------------------ -------------------------
Total..................... 705 $261,755,825.62 100.00%
=================== ======================== =========================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Loan Rates of the Group I Mortgage Loans
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Loan Rate (%) of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------- ------------------- ------------------------ -------------------------
<S> <C> <C> <C>
5.750-5.999 2 $ 519,914.59 0.20%
6.000-6.249 2 748,440.23 0.29
6.250-6.499 20 7,265,362.98 2.78
6.500-6.749 89 36,051,161.67 13.77
6.750-6.999 321 120,838,457.84 46.16
7.000-7.249 182 66,432,754.61 25.38
7.250-7.499 66 22,294,515.40 8.52
7.500-7.749 19 6,020,376.56 2.30
7.750-7.999 2 1,031,162.30 0.39
8.000-8.125 2 553,679.44 0.21
------------------- ------------------------ -------------------------
Total..................... 705 $261,755,825.62 100.00%
=================== ======================== =========================
The weighted average Loan Rate of the Group I Mortgage Loans as of the Cut-off Date was approximately 6.885% per year.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Original Loan-to-Value Ratios of the Group I Mortgage Loans
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Original Loan-to-Value Ratio (%) of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------------- ------------------ ------------------------ ------------------------
<S> <C> <C> <C>
20.00 - 50.00.......................... 73 $ 27,437,330.23 10.48%
50.01 - 55.00.......................... 30 12,183,554.22 4.65
55.01 - 60.00.......................... 51 19,548,036.21 7.47
60.01 - 65.00.......................... 75 30,807,892.90 11.77
65.01 - 70.00.......................... 79 31,029,415.51 11.85
70.01 - 75.00.......................... 174 59,309,754.68 22.66
75.01 - 80.00.......................... 204 74,378,721.11 28.42
80.01 - 85.00.......................... 4 1,795,508.58 0.69
85.01 - 90.00.......................... 13 4,716,477.25 1.80
90.01 - 95.00.......................... 2 549,134.93 0.21
------------------ ------------------------ ------------------------
Total................................ 705 $261,755,825.62 100.00%
================== ======================== ========================
The weighted average original Loan-to-Value Ratio of the Group I Mortgage Loans as of the Cut-off Date was approximately 68.14%.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Geographic Distribution of the Group I Mortgaged Properties
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Location of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------------- ------------------ ------------------------ ------------------------
<S> <C> <C> <C>
Alabama................................. 1 $385,408.17 0.15%
Arizona................................. 29 11,733,228.46 4.48
Colorado................................ 2 1,008,350.58 0.39
Florida................................. 51 19,365,315.03 7.40
Illinois................................ 1 538,882.73 0.21
Indiana................................. 38 14,598,089.90 5.58
Kentucky................................ 109 40,436,651.09 15.45
Michigan................................ 2 909,921.91 0.35
Ohio.................................... 455 166,555,603.16 63.63
South Carolina.......................... 1 310,871.98 0.12
Tennessee............................... 16 5,913,502.61 2.26
------------------ ------------------------ ------------------------
Total................................... 705 $261,755,825.62 100.00%
================== ======================== ========================
The greatest five-digit ZIP Code geographic concentration of Group I Mortgage Loans, by Principal Balance as of the Cut-off Date,
was approximately 7.30% in the 45243 ZIP Code (Madeira, Ohio).
</TABLE>
<PAGE>
Group II Mortgage Loan Statistics
The Group II Mortgage Loans have original terms to maturity of not less
than 20 and not more than 30 years. The following statistical information,
unless otherwise specified, is based upon the Group II Loan Balance as of the
Cut-off Date.
Each Group II Mortgage Loan is secured by a Mortgage creating a first
lien on a Mortgaged Property. Approximately 8.79% of the Group II Mortgage
Loans had Loan-to-Value Ratios at origination in excess of 80.00%.
Approximately 2.24% of the Group II Mortgage Loans had Loan-to-Value Ratios at
origination greater than 90.00% but not more than 95.00%. There can be no
assurance that the Loan-to-Value Ratio of any Group II Mortgage Loan
determined at any time after origination is less than or equal to its original
Loan-to-Value Ratio. All of the Group II Mortgage Loans have their Due Date on
the first day of the month.
Each Group II Mortgage Loan accrues interest at a Loan Rate of not less
than 6.000% per year and not more than 9.500% per year and as of the Cut-off
Date the weighted average Loan Rate of the Group II Mortgage Loans was
approximately 7.228% per year.
The weighted average remaining term to maturity of the Group II Mortgage
Loans was approximately 335 months as of the Cut-off Date. None of the Group
II Mortgage Loans had a first Due Date prior to September 1995 or after
November 1999 or had a remaining term to maturity of less than 219 months or
greater than 358 months as of the Cut-off Date. The latest maturity date of
any Group II Mortgage Loan is October 2029.
The average Principal Balance of the Group II Mortgage Loans at
origination was approximately $377,655. As of the Cut-off Date, the average
Principal Balance of the Group II Mortgage Loans was approximately $369,441.
No Group II Mortgage Loan had a Principal Balance of greater than
approximately $1,482,232 or less than approximately $100,908 as of the Cut-off
Date. The Group II Mortgage Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal
the total indicated due to rounding):
<PAGE>
<TABLE>
<CAPTION>
Principal Balances of the Group II Mortgage Loans as of the Cut-off Date
% of Aggregate
Number of Principal Balance Principal Balance
Mortgage Outstanding as of the Outstanding as of
Principal Balance ($) Loans Cut-off Date the Cut-off Date
------------------------------------------ -------------- ----------------------- -------------------------
<S> <C> <C> <C>
100,908 - 150,000 1 $ 100,907.90 0.03%
200,001 - 250,000 108 26,136,677.21 6.71
250,001 - 300,000 347 95,168,358.39 24.44
300,001 - 350,000 210 68,195,920.76 17.51
350,001 - 400,000 132 49,597,722.67 12.74
400,001 - 450,000 64 27,099,573.77 6.96
450,001 - 500,000 53 25,451,342.53 6.54
500,001 - 550,000 28 14,805,741.48 3.80
550,001 - 600,000 23 13,201,527.54 3.39
600,001 - 650,000 23 14,542,558.52 3.73
650,001 - 750,000 30 20,822,160.30 5.35
750,001 - 1,000,000 27 23,762,807.08 6.10
1,000,001 - 1,482,232 8 10,505.418.69 2.70
-------------- ----------------------- -------------------------
Total................................ 1,054 $389,390,716.84 100.00%
============== ======================= =========================
The average Principal Balance of the Group II Mortgage Loans as of the Cut-off Date was approximately $369,441.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Original Terms to Maturity of the Group II Mortgage Loans
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Original Term (months) of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------- ------------------- ------------------------ --------------------------
<S> <C> <C> <C>
240 65 $23,411,329.62 6.01%
289-300 2 1,181,403.04 0.30
301-312 3 888,549.97 0.23
313-324 2 1,338,843.28 0.34
325-336 3 861,356.45 0.22
337-348 4 1,544,055.30 0.40
349-360 975 360,165,179.18 92.49
------------------- ------------------------ --------------------------
Total..................... 1,054 $389,390,716.84 100.00%
=================== ======================== ==========================
The weighted average original term to maturity of the Group II Mortgage Loans as of the Cut-off Date was approximately 352 months.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Remaining Terms to Maturity of the Group II Mortgage Loans
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Remaining Term (months) of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------- ------------------- ------------------------ --------------------------
<S> <C> <C> <C>
219 - 228.................... 41 $15,089,347.09 3.88%
229 - 240.................... 24 8,321,982.53 2.14
253 - 264.................... 1 241,582.97 0.06
265 - 276.................... 2 589,451.89 0.15
277 - 288.................... 1 939,820.07 0.24
289 - 300.................... 2 661,541.33 0.17
301 - 312.................... 5 2,359,170.81 0.61
313 - 324.................... 60 21,892,264.50 5.62
325 - 336.................... 88 28,769,655.14 7.39
337 - 348.................... 607 218,327,552.03 56.07
349 - 358.................... 223 92,198,348.48 23.68
------------------- ------------------------ --------------------------
Total..................... 1,054 $389,390,716.84 100.00%
=================== ======================== ==========================
The weighted average remaining term to maturity of the Group II Mortgage Loans as of the Cut-off Date was approximately 335 months.
</TABLE>
<TABLE>
<CAPTION>
Property Types of the Group II Mortgage Loans
% of Aggregate
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of
Property Type Loans the Cut-off Date the Cut-off Date
- ------------------------------- --------------------- ------------------------ -------------------------
<S> <C> <C> <C>
Single Family................ 1,038 $383,010,724.96 98.36%
Condominium................. 16 6,379,991.88 1.64
--------------------- ------------------------ -------------------------
Total..................... 1,054 $389,390,716.84 100.00%
===================== ======================== =========================
</TABLE>
<TABLE>
<CAPTION>
Stated Occupancy Status of the Group II Mortgage Loans
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Stated Occupancy Status(1) of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------- ------------------- ------------------------ -------------------------
<S> <C> <C> <C>
Owner occupied as primary
residence................. 1,052 $388,511,987.17 99.77%
Non-owner occupied........... 2 878,729.67 0.23
------------------- ------------------------ -------------------------
Total..................... 1,054 $389,390,716.84 100.00%
=================== ======================== =========================
- -------------------------------------------------------------------------------------------------------------------
(1) Occupancy as represented by the borrower at the time of origination.
</TABLE>
<TABLE>
<CAPTION>
Purposes of the Group II Mortgage Loans
% of Aggregate
Number Principal Balance Principal Balance
of Mortgage Outstanding as of Outstanding as of the
Purpose Loans the Cut-off Date Cut-off Date
- ------------------------------- ------------------- ------------------------ -----------------------
<S> <C> <C> <C>
Rate/Term Refinance.......... 436 $164,789,330.95 42.32%
Cash Out Refinance........... 250 98,219,881.93 25.22
Purchase 368 126,381,503.96 32.46
------------------- ------------------------ -----------------------
Total..................... 1,054 $389,390,716.84 100.00%
=================== ======================== =======================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Loan Rates of the Group II Mortgage Loans
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Loan Rate (%) of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------- ------------------- ------------------------ -------------------------
<S> <C> <C> <C>
6.000-6.249 1 $ 290,357.92 0.07%
6.250-6.499 9 4,426,420.02 1.14
6.500-6.749 20 7,270,565.90 1.87
6.750-6.999 116 46,767,878.46 12.01
7.000-7.249 308 111,620,732.46 28.67
7.250-7.499 374 137,548,890.80 35.32
7.500-7.749 168 60,244,665.40 15.47
7.750-7.999 39 13,531,206.96 3.47
8.000-8.249 11 4,548,887.51 1.17
8.250-8.499 5 2,100,743.07 0.54
8.500-8.749 2 586,751.01 0.15
9.500-9.500 1 453,617.33 0.12
------------------- ------------------------ -------------------------
Total................. 1,054 $389,390,716.84 100.00%
=================== ======================== =========================
The weighted average Loan Rate of the Group II Mortgage Loans as of the Cut-off Date was approximately 7.228% per year.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Original Loan-to-Value Ratios of the Group II Mortgage Loans
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Original Loan-to-Value Ratio (%) of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------------- ------------------ ------------------------ ------------------------
<S> <C> <C> <C>
17.24 - 50.00........................ 40 $ 17,245,878.75 4.43%
50.01 - 55.00........................ 27 10,930,348.39 2.81
55.01 - 60.00........................ 39 17,441,248.88 4.48
60.01 - 65.00........................ 65 26,869,680.98 6.90
65.01 - 70.00........................ 103 38,786,384.12 9.96
70.01 - 75.00........................ 252 92,905,021.69 23.86
75.01 - 80.00........................ 412 151,000,607.08 38.78
80.01 - 85.00........................ 14 4,202,440.78 1.08
85.01 - 90.00........................ 70 21,285,911.34 5.47
90.01 - 95.00........................ 32 8,723,194.83 2.24
------------------ ------------------------ ------------------------
Total................................ 1,054 $389,390,716.84 100.00%
================== ======================== ========================
The weighted average original Loan-to-Value Ratio of the Group II Mortgage Loans as of the Cut-off Date was approximately 73.25%.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Geographic Distribution of the Group II Mortgaged Properties
% of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Location of Mortgage Loans the Cut-off Date the Cut-off Date
- ------------------------------------------- ------------------ ------------------------ ------------------------
<S> <C> <C> <C>
Arizona................................. 87 $30,854,170.66 7.92%
Colorado................................ 1 477,604.66 0.12
Connecticut............................. 1 264,005.79 0.07
Florida................................. 34 15,184,698.58 3.90
Indiana................................. 105 40,008,201.71 10.27
Kentucky................................ 138 47,405,050.14 12.17
Michigan................................ 3 1,354,806.12 0.35
North Carolina.......................... 2 526,667.72 0.14
Ohio.................................... 633 235,949,796.79 60.59
South Carolina.......................... 1 591,746.87 0.15
Tennessee............................... 37 13,418,233.58 3.45
Texas................................... 10 2,612,000.72 0.67
Virginia................................ 2 743,733.50 0.19
------------------ ------------------------ ------------------------
Total............................... 1,054 $389,390,716.84 100.00%
================== ======================== ========================
The greatest five-digit ZIP Code geographic concentration of Group II Mortgage Loans, by Principal Balance as of the Cut-off Date,
was approximately 4.43% in the 45243 ZIP Code (Madeira, Ohio).
</TABLE>
<PAGE>
THE SELLERS
The information set forth in this prospectus supplement with respect to
the Sellers has been provided by the Sellers, and neither the Depositor nor
any of its affiliates makes any representations or warranties as to the
accuracy or completeness of such information.
General
The Sellers consist of the following entities:
Fifth Third Mortgage Company, an Ohio corporation
Fifth Third Bank, Central Ohio, an Ohio state bank
Fifth Third Bank, Florida, a Florida state bank
Fifth Third Bank, Indiana, an Indiana state bank
Fifth Third Bank, Kentucky, Inc., a Kentucky state bank
Fifth Third Bank, Northern Kentucky, Inc., a Kentucky state bank
Fifth Third Bank, Northwestern, Ohio, N.A., a national banking association
Fifth Third Bank, Ohio Valley, an Ohio state bank
Fifth Third Bank, Southwest, F.S.B., a federal savings bank
Each of the Sellers is a subsidiary of Fifth Third Bancorp, an Ohio
corporation organized as a bank holding company and registered under the Bank
Holding Company Act. Each of the Sellers is also an affiliate of Fifth Third
Bank. See "The Master Servicer--General" below.
Each Mortgage Loan will have been sold to the Depositor by the related
Seller at a price equal to its Principal Balance as of the Cut-off Date.
Underwriting Standards
The Mortgage Loans will be acquired by the Depositor from the Sellers on
the Closing Date. All of the Mortgage Loans were originated by the Sellers or
their affiliates, generally in accordance with Fifth Third's underwriting
standards. The following is a brief description of Fifth Third's underwriting
standards for full documentation loan programs. Initially, a prospective
borrower is required to fill out a detailed application providing pertinent
credit information. As part of the application, the borrower is required to
provide a current balance sheet describing 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 merchants
and lenders and any record of bankruptcy. In addition, an employment
verification is obtained which reports the borrower's current salary and may
contain the length of employment and an indication as to 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
accounts.
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 condition and
that construction, if new, has been completed. The appraisal is based on
various factors, including the market value of comparable homes and the cost
of improvements. Certain of the appraisals may not meet the requirements of
Fannie Mae and Freddie Mac.
Once all applicable employment, credit and property information is
received, a determination is made as to whether the prospective borrower has
sufficient monthly income available to meet the borrower's monthly obligations
on the proposed mortgage loan and other expenses related to the home (such a
property taxes and hazard insurance) and other financial obligations and
monthly living expenses.
Fifth Third's underwriting standards may be varied in appropriate cases,
specifically in "reduced documentation" mortgage loan programs. Certain
reduced loan documentation programs, for example, do not require income,
employment or asset verifications. Generally, in order to be eligible for a
reduced loan documentation program, the Mortgaged Property must have a
Loan-to-Value Ratio which supports the amount of the Mortgage Loan and the
borrower must have a good credit history.
The Mortgaged Properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the borrower but rather must look solely to the property for
repayment in the event of foreclosure. Fifth Third's underwriting standards
applicable to all states require that the value of the property being
financed, as indicated by the appraisal, currently supports and is anticipated
to support in the future the outstanding loan balance, although there can be
no assurance that the value will support the loan balance in the future.
THE MASTER SERVICER
General
Fifth Third Bank is headquartered in Cincinnati, Ohio, and, together with
its affiliate banks, conducts an extensive range of consumer, corporate, and
trust banking activities through approximately 497 offices throughout the
States of Ohio, Kentucky, Indiana, Florida and Arizona. Fifth Third is the
result of mergers and acquisitions over the years involving thirty financial
institutions, the oldest of which was founded June 17, 1858, and is the
principal subsidiary of Fifth Third Bancorp, an Ohio corporation organized in
1974 and registered in 1975 as a bank holding company under the Bank Holding
Company Act of 1956.
As of September 30, 1999, Fifth Third was the 28th largest commercial
bank in the United States based on assets of approximately $32.9 billion.
Total deposits were approximately $19.5 billion. Fifth Third's principal
office is located at 38 Fountain Square Plaza, Cincinnati, Ohio 45263 and its
telephone number is (513) 579-5300.
Servicing Activities
Pursuant to the terms of the Pooling and Servicing Agreement, Fifth Third
will act as Master Servicer. The Master Servicer may perform any of its
obligations under the Pooling and Servicing Agreement through one or more
subservicers. Notwithstanding any subservicing arrangement, the Master
Servicer will remain liable for its servicing duties and obligations under the
Pooling and Servicing Agreement.
The following summaries of Fifth Third's servicing activities and
foreclosure experience apply only to loans originated by Fifth Third or its
affiliates (or obtained by Fifth Third through acquisitions of other financial
institutions) as described below.
Residential Mortgage Loan Servicing Activities of Fifth Third. The
residential and certain commercial mortgage loans originated by Fifth Third
and its affiliates, or by other originators (such mortgage loans obtained by
Fifth Third through acquisitions of other financial institutions), including
the Mortgage Loans, are serviced currently at its servicing facility located
in Cincinnati, Ohio (the "Cincinnati Center"). On September 30, 1999, Fifth
Third was servicing approximately 188,945 mortgage loans at the Cincinnati
Center, with an aggregate principal balance of approximately $15.7 billion.
The Cincinnati Center is responsible for receiving loan payments,
reporting to investors, maintaining hazard insurance or a single interest
policy, monitoring payment of taxes, assessments and (when applicable) private
mortgage insurance, and for all mortgage accounting and record keeping. The
Master Servicer will initially serve as custodian on behalf of the Trustee for
the mortgage files related to the Mortgage Loans as provided in the Pooling
and Servicing Agreement. The Cincinnati Center also maintains a department
responsible for collection efforts on delinquent residential and commercial
mortgage loans, a department to process all foreclosures thereon and a
department to manage and dispose of other real estate owned.
Because of the Cincinnati Center's role in servicing loans for
governmental and quasi-governmental agencies of the U.S. Government, the
servicing department is examined regularly by Fifth Third's internal auditors
and periodically by Fannie Mae, Freddie Mac, the Federal Reserve Bank of
Cleveland and the Ohio Division of Banks. Certain financial records of Fifth
Third relating to its mortgage servicing activities are reviewed annually by
Fifth Third Bancorp's independent public accountants.
Residential Mortgage Loan Portfolio of Fifth Third. Fifth Third's
residential mortgage loan portfolio consists predominantly of long-term
conventional loans made to owner-occupants and secured by first liens on
residential one-to four-family real property. Conventional loans are loans
which are not insured by the Federal Housing Administration or partially
guaranteed by the Veterans Administration. On September 30, 1999, the
residential mortgage loan portfolio held by Fifth Third for its own account
and serviced at the Cincinnati Center was approximately $4.8 billion.
In recent years, Fifth Third has sold a portion of the mortgage loans it
has originated to participants in the secondary mortgage markets, including
quasi-governmental agencies such as Fannie Mae and Freddie Mac. Fifth Third
has retained servicing obligations in substantially all sales transactions.
However, from time to time, it may sell individual or pools of mortgage loans
on a servicing-released basis. On September 30, 1999, Fifth Third was
servicing approximately $10.7 billion of mortgage loans it had originated and
sold in the secondary mortgage markets.
Foreclosure, Loss and Delinquency Experience of Fifth Third. The
following table set forth certain information concerning the delinquency
experience (including pending foreclosures) on one- to four-family residential
mortgage loans that were being serviced by Fifth Third on December 31, 1997,
December 31, 1998, and September 30, 1999. The indicated periods of
delinquency are based on the number of days due on a contractual basis. No
mortgage loan is considered delinquent for these purposes until, in general,
it is one month past due on a contractual basis.
There can be no assurance that the information set forth in the following
table will be representative of future delinquency experience.
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1998 At September 30, 1999
------------------------------- -------------------------------- ----------------------------------
By By By
Period of By No. Dollar Amount By No. Dollar Amount By No. Dollar Amount
Delinquency of Loans of Loans of Loans of Loans of Loans of Loans
- -------------- -------- --------------------- -------- -------------------- -------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
30-89 Days..... 2,757 $128,696,368 2.10% 5,877 $414,977,196 2.84% 5,273 $365,734,949 2.33%
90 + Days ..... 1,595 76,782,822 1.25% 1,451 101,297,011 0.69% 1,530 106,822,160 0.68%
Non-Accrual ... 114 3,241,822 0.05% 201 11,038,123 0.08% 198 10,703,034 0.07%
-------- --------------------- -------- ----------------------- -------- -----------------------
Total .... 4,466 $208,721,012 3.40% 7,529 $527,312,330 3.61% 7,001 $483,260,143 3.08%
======== ====================== ======== ======================= ======== =======================
Total Loans ... $6,131,463,129 $14,602,127,933 $15,673,418,888
</TABLE>
Year 2000 Compliance
Fifth Third has identified over 200 separate systems, 79 of which have
been classified as mission critical.
The Federal Financial Institutions Examination Council (FFIEC) have
established five phases for management of the Y2K project:
Phase Fifth Third Bank Status
--------------- -----------------------
Awareness Completed
Assessment Completed
Renovation Completed
Validation Completed
Implementation Completed
FFIEC guidelines require the monitoring of the "status of efforts by key
vendors, business partners, counter parties, and major loan customers to
address Year 2000 issues, including any weaknesses discovered and critical
decision dates." Fifth Third has complied fully with these guidelines.
Should the Master Servicer's software vendors and service providers fail
to timely identify, address and correct year 2000 issues, their failure could
have a material adverse impact on the Master Servicer's operations. The
adverse impacts may include significant overtime payments for the manual
processing of certain transactions and additional costs in the processing of
certain financing activity through a centralized administrative function. In
addition, if modifications made by software vendors and service providers to
address year 2000 issues are incompatible with the Master Servicer's systems,
such incompatibility could have a material adverse impact on the Master
Servicer's operations.
THE POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of December 1, 1999 (the "Pooling and Servicing
Agreement"), among the Depositor, the Sellers, the Master Servicer and the
Trustee. The Trust created under the Pooling and Servicing Agreement will
consist of (i) all of the Depositor's right, title and interest in the
Mortgage Loans, including the related mortgage notes, mortgages and other
related documents, (ii) all payments on or collections in respect of the
Mortgage Loans due after the Cut-off Date, together with any proceeds thereof,
(iii) any Mortgaged Properties acquired on behalf of Certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenues received
thereon, (iv) the rights of the Trustee under all insurance policies required
to be maintained pursuant to the Pooling and Servicing Agreement and (v) the
rights of the Trustee to enforce the representations and warranties made by
the Sellers with respect to the Mortgage Loans pursuant to the Pooling and
Servicing Agreement.
Assignment of the Mortgage Loans
On the Closing Date, the Depositor will transfer to the Trust all of its
right, title and interest in and to each of the Mortgage Loans, together with
the related mortgage notes, Mortgages and other related documents
(collectively, the "Related Documents"), including all scheduled payments with
respect to each Mortgage Loan due after the Cut-off Date. The Trustee,
concurrently with the transfer, will deliver the Certificates to the
Depositor, which will in turn deliver the Certificates to the Sellers. Each
Mortgage Loan transferred to the Trust will be identified on a schedule (the
"Mortgage Loan Schedule") delivered to the Trustee pursuant to the Pooling and
Servicing Agreement. The Mortgage Loan Schedule will include information such
as the Principal Balance of each Mortgage Loan as of the Cut-off Date, its
Loan Rate and certain additional information.
The Pooling and Servicing Agreement will require that, upon certain
conditions and within the time period specified therein, the Sellers deliver
or cause to be delivered to the Trustee (or a custodian, as the Trustee's
agent for such purpose) the mortgage notes evidencing the Mortgage Loans
endorsed in blank or to the Trustee on behalf of the Certificateholders,
together with the other Related Documents. In lieu of delivery of an original
Mortgage, if an original is not available or lost, a Seller may deliver or
cause to be delivered a true and correct copy.
Within 45 days after the receipt by the Trustee or its agent of the
Related Documents, the Trustee will review the Mortgage Loans and the Related
Documents pursuant to the Pooling and Servicing Agreement. If any Mortgage
Loan or Related Document is found to be defective in any material respect and
the defect is not cured within 90 days following notification to the
applicable Seller by the Trustee (or a custodian, as the Trustee's agent for
such purpose), that Seller will be obligated to either
(i) substitute for the defective Mortgage Loan an Eligible Substitute
Mortgage Loan (provided that a substitution is permitted only
within two years of the Closing Date and may not be made unless an
opinion of counsel is provided to the effect that the substitution
will not disqualify the Trust as a REMIC or result in a prohibited
transaction tax under the Code), or
(ii) purchase the defective Mortgage Loan at a price (the "Purchase
Price") equal to its outstanding Principal Balance as of the date
of purchase, plus all accrued and unpaid interest thereon, computed
at the Loan Rate through the end of the calendar month in which the
purchase is effected, plus the amount of any unreimbursed Advances
and Servicing Advances made by the Master Servicer.
The Purchase Price will be deposited in the Collection Account on or prior to
the next Determination Date after such obligation arises. The obligation of
the applicable Seller to repurchase or substitute for a defective Mortgage
Loan is the sole remedy regarding any defect in that Mortgage Loan and the
Related Documents available to the Trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the applicable Seller will be required to deposit in the Collection
Account, on or prior to the next Determination Date after such obligation
arises, an amount (the "Substitution Adjustment") equal to the excess of the
Principal Balance of the related defective Mortgage Loan over the Principal
Balance of the Eligible Substitute Mortgage Loan.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
a Seller for a defective Mortgage Loan which must, on the date of the
substitution:
(i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a single defective
Mortgage Loan, an aggregate Principal Balance), not in excess of,
and not more than 5% less than, the Principal Balance of the
defective Mortgage Loan;
(ii) have a Loan Rate not less than the Loan Rate of the defective
Mortgage Loan and not more than 1% in excess of the Loan Rate of
the defective Mortgage Loan;
(iii) have the same Due Date as the defective Mortgage Loan;
(iv) have a remaining term to maturity not more than one year earlier
and not later than the remaining term to maturity of the defective
Mortgage Loan;
(v) comply with each representation and warranty as to the Mortgage
Loans set forth in the Pooling and Servicing Agreement (deemed to
be made as of the date of substitution);
(vi) have been underwritten or reunderwritten by the applicable Seller
in accordance with the same underwriting criteria and guidelines as
the Mortgage Loan being replaced;
(vii) be of the same or better credit quality as the Mortgage Loan being
replaced; and
(viii) satisfy certain other conditions specified in the Pooling and
Servicing Agreement.
Each Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished by it to
the Trustee with respect to each Mortgage Loan sold by it (e.g., Principal
Balance as of the Cut-off Date and the Loan Rate) transferred by that Seller.
In addition, the Sellers will represent and warrant, on the Closing Date,
that, among other things (i) at the time of transfer, each Seller has
transferred or assigned all of its right, title and interest in each Mortgage
Loan and the Related Documents, free of any lien, and (ii) each Mortgage Loan
complied, at the time of origination, in all material respects with applicable
state and federal laws. Upon discovery of a breach of any such representation
and warranty which materially and adversely affects the interests of the
Certificateholders in the related Mortgage Loan and Related Documents, the
applicable Seller will have a period of 60 days after discovery or notice of
the breach to effect a cure. If the breach cannot be cured within the 60-day
period, that Seller will be obligated to (i) substitute for the defective
Mortgage Loan an Eligible Substitute Mortgage Loan or (ii) purchase the
defective Mortgage Loan from the Trust. The same procedure and limitations
that are set forth above for the substitution or purchase of defective
Mortgage Loans as a result of deficient documentation will apply to the
substitution or purchase of a defective Mortgage Loan as a result of a breach
of a representation or warranty in the Pooling and Servicing Agreement that
materially and adversely affects the interests of the Certificateholders.
Pursuant to the Pooling and Servicing Agreement, the Master Servicer will
service and administer the Mortgage Loans as more fully set forth therein.
Payments on Mortgage Loans; Deposits to Collection Account and Distribution
Account
The Master Servicer shall establish and maintain or cause to be
maintained a separate trust account (the "Collection Account") for the benefit
of the holders of the Certificates. The Collection Account will be an Eligible
Account (as defined below). Upon receipt by the Master Servicer of amounts in
respect of the Mortgage Loans (excluding amounts representing the Servicing
Fee, reimbursement for Advances and Servicing Advances and insurance proceeds
to be applied to the restoration or repair of a Mortgaged Property or similar
items), the Master Servicer will deposit these amounts in the Collection
Account. Amounts deposited in the Collection Account may be invested in
Eligible Investments (as described in the Pooling and Servicing Agreement)
maturing no later than one business day prior to the date on which the amount
on deposit is required to be deposited in the Distribution Account.
The Trustee will establish and maintain an account (the "Distribution
Account") into which will be deposited amounts withdrawn from the Collection
Account for distribution to Certificateholders on a Distribution Date. The
Distribution Account will be an Eligible Account. Amounts on deposit in the
Distribution Account may be invested in Eligible Investments maturing on or
before the business day prior to the related Distribution Date unless such
Eligible Investments are invested in investments managed or advised by the
Trustee or one of its affiliates, in which case the Eligible Investments may
mature on the related Distribution Date.
An "Eligible Account" is a segregated account that is (i) an account or
accounts maintained with a federal or state chartered depository institution
or trust company the short-term unsecured debt obligations of which (or, in
the case of a depository institution or trust company that is the principal
subsidiary of a holding company, the short-term unsecured debt obligations of
that holding company) are rated A-1 or its equivalent by each of the Rating
Agencies at the time any amounts are held on deposit therein, (ii) an account
or accounts the deposits in which are fully insured by the Federal Deposit
Insurance Corporation (to the limits established by it), the uninsured
deposits in which account are otherwise secured such that, as evidenced by an
opinion of counsel delivered to the Trustee and to the Rating Agencies, the
Certificateholders will have a claim with respect to the funds in such account
or a perfected first priority security interest against such collateral (which
shall be limited to Eligible Investments) securing such funds that is superior
to claims of any other depositors or creditors of the depository institution
with which such account is maintained, (iii) a trust account or accounts
maintained with the trust department of a federal or state chartered
depository institution, national banking association or trust company acting
in its fiduciary capacity or (iv) otherwise acceptable to the Rating Agencies
without reduction or withdrawal of its then current ratings of the Offered
Certificates as evidenced by a letter from each Rating Agency to the Trustee.
Eligible Investments are specified in the Pooling and Servicing Agreement and
are limited to investments which meet the criteria of each Rating Agency from
time to time as being consistent with its then current ratings of the Offered
Certificates.
Advances
Subject to the following limitations, the Master Servicer will be
obligated to advance or cause to be advanced not later than the third business
day prior to each Distribution Date its own funds, or funds in the Collection
Account that are not included in the Available Funds for that Distribution
Date, in an amount equal to the aggregate of all payments of principal and
interest, net of the Servicing Fee, that was due during the related Due Period
on the Mortgage Loans and that were delinquent on the related Determination
Date, plus certain amounts representing assumed payments not covered by any
current net income on the Mortgaged Properties acquired by foreclosure or deed
in lieu of foreclosure (any such advance, an "Advance").
Advances are required to be made unless they are deemed by the Master
Servicer to be non-recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making Advances is to
maintain a regular cash flow to the Certificateholders, rather than to
guarantee or insure against losses. The Master Servicer will not be required,
however, to make any Advances with respect to reductions in the amount of the
monthly payments on the Mortgage Loans due to bankruptcy proceedings or the
application of the Soldiers' and Sailors' Civil Relief Act of 1940 (the
"Relief Act"). Subject to the recoverability standard above, the Master
Servicer's obligation to make Advances as to any Mortgage Loan will continue
until the Mortgage Loan is paid in full or until the recovery of all related
liquidation proceeds.
All Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage
Loan as to which an unreimbursed Advance was made. In addition, any Advances
previously made in respect of any Mortgage Loan that are deemed by the Master
Servicer to be non-recoverable from related late collections, insurance
proceeds or liquidation proceeds may be reimbursed to the Master Servicer out
of any funds in the Collection Account prior to payments on the Certificates.
In the event the Master Servicer fails in its obligation to make an Advance,
the Trustee, in its capacity as successor Master Servicer, will be obligated
to make the Advance to the extent required in the Pooling and Servicing
Agreement.
In the course of performing its servicing obligations, the Master
Servicer will pay all reasonable and customary "out-of-pocket" costs and
expenses (including reasonable attorneys' fees and disbursements) incurred in
the performance of its servicing obligations, including, but not limited to,
the cost of (i) the preservation, restoration, inspection and protection of
the Mortgaged Properties, (ii) any enforcement or judicial proceedings,
including foreclosures, and (iii) the management and liquidation of Mortgaged
Properties acquired in satisfaction of the related Mortgages. Each such
expenditure will constitute a "Servicing Advance". The Master Servicer is
obligated to pay certain insurance premiums and certain ongoing expenses
associated with the Mortgage Loans and incurred by the Master Servicer in
connection with its responsibilities under the Pooling and Servicing Agreement
and is entitled to reimbursement for them as provided in the Pooling and
Servicing Agreement.
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including
liquidation proceeds, released mortgaged property proceeds, insurance proceeds
and such other amounts as may be collected by the Master Servicer from the
related borrower or otherwise relating to the Mortgage Loan in respect of
which the unreimbursed amounts are owed, unless the amounts are deemed to be
non-recoverable by the Master Servicer, in which event the Master Servicer
will be reimbursed from general funds in the Collection Account. Servicing Fee
and Other Compensation
The principal compensation (the "Servicing Fee") to be paid to the Master
Servicer in respect of its servicing activities for the Certificates will be
at the rate of 0.25% per year (the "Servicing Fee Rate") on the Principal
Balance of each Mortgage Loan. The amount of the Servicing Fee is subject to
adjustment with respect to prepaid Mortgage Loans, as described below under
"-Adjustment to Servicing Fee in Connection with Prepaid Mortgage Loans." As
additional servicing compensation, the Master Servicer is entitled to retain
all Master Servicer-related fees, including assumption fees, modification
fees, extension fees, late payment charges and other ancillary fees, to the
extent collected from borrowers, together with any interest or other income
earned on funds held in the Collection Account and any escrow accounts.
The "Determination Date" with respect to any Distribution Date will be
the 20th day of the calendar month in which that Distribution Date occurs or,
if the 20th is not a business day, the business day immediately following the
20th.
Adjustment to Servicing Fee in Connection with Prepaid Mortgage Loans
When a borrower prepays a Mortgage Loan between Due Dates, the borrower
is required to pay interest on the amount prepaid only to the date of
prepayment. Principal prepayments by borrowers received by the Master Servicer
in a calendar month will be distributed to Certificateholders on the
Distribution Date in the month following the month of receipt and,
accordingly, a shortfall in the amount of interest to be distributed to
Certificateholders with respect to the prepaid Mortgage Loans will result (a
"Prepayment Interest Shortfall"). Pursuant to the Pooling and Servicing
Agreement, the Servicing Fee for any month will be reduced, but not by more
than one-half of the Servicing Fee, by an amount ("Compensating Interest")
sufficient to pass through to Certificateholders the full amount of interest
to which they would be entitled for each prepaid Mortgage Loan on the related
Distribution Date. If the Prepayment Interest Shortfall exceeds an amount
equal to one-half of the Servicing Fee otherwise payable on the related
Distribution Date, the amount of interest available to be distributed to
Certificateholders will be reduced by the amount of the excess. See
"Description of the Certificates--Interest."
The Trustee
Bank One, National Association, a national banking association (the
"Trustee"), will act as Trustee for the Certificates pursuant to the Pooling
and Servicing Agreement. As of the Closing Date, the Trustee's principal
executive offices are located in the State of Illinois. The Trustee will be
entitled to compensation as specified in the Pooling and Servicing Agreement.
Voting Rights
With respect to any date of determination, the percentage of all the
Voting Rights allocated among holders of each Class of the Offered
Certificates shall be the fraction, expressed as a percentage, the numerator
of which is the aggregate Certificate Principal Balance of all the
Certificates of that Class then outstanding and the denominator of which is
the aggregate Certificate Principal Balance of all the Certificates then
outstanding. The Voting Rights allocated to a Class of Offered Certificates
shall be allocated among all holders of each such Class in proportion to the
outstanding certificate balances of those Certificates. The Class B-1, Class
B-2 and Class R Certificates will not have any Voting Rights while the Offered
Certificates are outstanding.
Amendment
The Pooling and Servicing Agreement may be amended by the Depositor, the
Master Servicer, the Sellers and the Trustee, without the consent of the
holders of the Certificates, 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 Sellers and the Trustee and the holders of a majority in
interest of each Class of Offered 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 holders of either Class of Offered
Certificates; provided, however, that no such amendment may
(i) reduce in any manner the amount of, or delay the timing of,
distributions required to be made on either Class of Offered
Certificates without the consent of the holders of all the affected
Certificates;
(ii) adversely affect in any material respect the interests of the
holders of either Class of Offered Certificates in a manner other
than as described in clause (i) above, without the consent of the
holders of that Class evidencing percentage interests aggregating
at least 66%; or
(iii) reduce the aforesaid percentages of the aggregate outstanding
principal amounts of the Offered Certificates, the holders of which
are required to consent to any such amendment, without the consent
of the holders of all those Certificates.
Termination
The Master Servicer will have the right to repurchase all of the Mortgage
Loans and REO Properties of a Loan Group, and thereby effect the early
retirement of the related Certificate Group, on any Distribution Date on which
the aggregate Principal Balance of the Mortgage Loans and REO Properties of
such Loan Group is equal to or less than 10% of the aggregate Principal
Balance of the Mortgage Loans of such Loan Group as of the Cut-off Date. In
the event that the option is exercised, the repurchase will be made at a price
(the "Termination Price") generally equal to par plus accrued interest for
each Mortgage Loan at the related Loan Rate up to but not including the first
day of the month in which the Termination Price is paid plus the amount of any
unreimbursed Advances and Servicing Advances made by the Master Servicer, if
any. Proceeds from the repurchase will be included in Available Funds and will
be distributed to the holders of the related Certificates in accordance with
the Pooling and Servicing Agreement. Any repurchase of the Mortgage Loans and
REO Properties in accordance with this paragraph will result in the early
retirement of any outstanding Certificates.
Optional Purchase of Defaulted Loans
As to any Mortgage Loan which is Delinquent in payment by 90 days or
more, the Master Servicer may, at its option, purchase that Mortgage Loan from
the Trust at its Purchase Price.
Events of Servicing Termination
An "Event of Servicing Termination" will consist, among other things, of:
o any failure by the Master Servicer to make an Advance and any other
failure by the Master Servicer to deposit in the Collection Account
or Distribution Account the required amounts or to remit to the
Trustee any payment which continues unremedied for one business day
following written notice to the Master Servicer;
o any failure by the Master Servicer to make a Servicing Advance or to
observe or perform in any material respect any other of its covenants
or agreements in the Pooling and Servicing Agreement, which continues
unremedied for 30 days after the first date on which (x) the Master
Servicer has actual knowledge of the failure or (y) written notice of
the failure is given to the Master Servicer;
o 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
o cumulative Realized Losses or delinquencies on the Mortgage Loans
included in either Loan Group as of any Distribution Date exceed the
levels specified in the Pooling and Servicing Agreement.
Rights upon Event of Servicing Termination
So long as an Event of Servicing Termination under the Pooling and
Servicing Agreement remains unremedied, the Trustee or the holders of Offered
Certificates evidencing not less than 51% of the Voting Rights may terminate
all of the rights and obligations of the Master Servicer in its capacity as
master servicer with respect to the Mortgage Loans, as provided in the Pooling
and Servicing Agreement, whereupon the Trustee will succeed or appoint a
successor to succeed to all of the responsibilities and duties of the Master
Servicer under the Pooling and Servicing Agreement, including the obligation
to make Advances. No assurance can be given that termination of the rights and
obligations of the Master Servicer under the Pooling and Servicing Agreement
would not adversely affect the servicing of the related Mortgage Loans,
including the loss and delinquency experience of the Mortgage Loans.
No holder of an Offered Certificate, solely by virtue of its status as a
holder of an Offered Certificate, will have any right under the Pooling and
Servicing Agreement to institute any proceeding with respect thereto, unless
the holder previously has given to the Trustee written notice of default and
unless the holders of Offered Certificates having not less than 51% of the
Voting Rights so agree and have offered indemnity reasonably acceptable to the
Trustee.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. Set forth below are summaries of the specific terms and provisions
pursuant to which the Offered Certificates will be issued. The following
summaries do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, the provisions of the Pooling and Servicing
Agreement. When particular provisions or terms used in the Pooling and
Servicing Agreement are referred to, the actual provisions (including
definitions of terms) are incorporated in this prospectus supplement by
reference.
Fifth Third Mortgage Loan Trust 1999-1 will issue the Class A-1 and Class
A-2 Certificates (together, the "Senior Certificates" or the "Offered
Certificates"), the Class B-1 and Class B-2 Certificates (together, the
"Subordinate Certificates") and the Class R Certificates (the "Residual
Certificates"). The Senior Certificates, the Subordinate Certificates and the
Residual Certificates are collectively referred to in this prospectus
supplement as the "Certificates". Only the Senior Certificates are offered by
this prospectus supplement and the accompanying prospectus.
The Class A-1 and Class B-1 Certificates collectively are referred to as
the "Group I Certificates" and the Class A-2 and Class B-2 Certificates
collectively are referred to as the "Group II Certificates." The Group I
Certificates and Group II Certificates each are referred to as a "Certificate
Group."
The Classes of Offered Certificates will have the respective Original
Certificate Principal Balances specified on the cover of this prospectus
supplement, subject to a permitted variance of plus or minus five percent. The
Class B-1 and Class B-2 Certificates will have original certificate principal
balances of approximately $8,507,126 and $18,496,117, respectively. The Class
R Certificates will not have original certificate principal balances and will
not bear interest.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $25,000 and integral multiples of $1 in excess thereof. The assumed final
maturity dates (each, an "Assumed Final Distribution Date") for the Class A-1
Certificates and Class A-2 Certificates are November 2015 and November 2030,
respectively.
Distributions on the Offered Certificates will be made by the Trustee on
the 25th day of each calendar month, or if the 25th day is not a business day,
on the first business day after the 25th day, commencing in January 2000
(each, a "Distribution Date"), to the persons in whose names the Offered
Certificates are registered at the close of business on the Record Date. The
"Record Date" is the last business day of the month immediately preceding the
month in which the related Distribution Date occurs.
Book-Entry Certificates
The Offered Certificates will be book-entry certificates ("Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the
Offered Certificates ("Certificate Owners" will hold those Certificates
through The Depository Trust Company ("DTC") if they are participants of DTC
(each, a "Participant"), or indirectly through organizations which are
Participants. The Book-Entry Certificates will be issued in one or more
certificates which equal the aggregate Certificate Principal Balance of each
Class of Offered Certificates and will initially be registered in the name of
Cede & Co., the nominee of DTC. Except as described below, no person acquiring
a Book-Entry Certificate (each, a "beneficial owner") will be entitled to
receive a physical certificate representing a Book-Entry Certificate (a
"Definitive Certificate"). Unless and until Definitive Certificates are
issued, it is anticipated that the only "Certificateholder" of the Offered
Certificates will be Cede & Co., as nominee of DTC. Certificate Owners will
not be Certificateholders as that term is used in the Pooling and Servicing
Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that maintains
the beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of the Book-Entry Certificate will be recorded on the
records of DTC (or of a Participant that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC,
if the beneficial owner's Financial Intermediary is not a Participant).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and
procedures creating and affecting DTC and its operations ("DTC's Rules"), DTC
is required to make book-entry transfers among Participants on whose behalf it
acts with respect to the Book-Entry Certificates and is required to receive
and transmit distributions of principal of, and interest on, the Book-Entry
Certificates. Participants and indirect participants with which Certificate
Owners have accounts with respect to Book-Entry Certificates similarly are
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates representing their
respective interests in the Book-Entry Certificates, DTC's Rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interest.
Certificateholders will not receive or be entitled to receive
certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless
and until Definitive Certificates are issued, Certificateholders who are not
Participants may transfer ownership of Book-Entry Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer Book-Entry Certificates, by book-entry
transfer, through DTC for the account of the purchasers of the Book-Entry
Certificates, which account is maintained with their respective Participants.
Under DTC's Rules and in accordance with DTC's normal procedures, transfers of
ownership of Book-Entry Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Certificateholders.
Transfers between Participants will occur in accordance with DTC's rules.
DTC which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives)
own DTC. In accordance with its normal procedures, DTC is expected to record
the positions held by each 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,
as in effect from time to time.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable Participants in
accordance with DTC's normal procedures. Each Participant will be responsible
for disbursing such payments to the beneficial owners of the Book-Entry
Certificates that it represents and to each Financial Intermediary for which
it acts as agent. Each such Financial Intermediary will be responsible for
disbursing funds to the beneficial owners of the Book-Entry Certificates that
it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since
such payments will be forwarded by the Trustee to Cede & Co. Because DTC can
only act on behalf of Financial Intermediaries, the ability of a beneficial
owner to pledge Book-Entry Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of the
Book-Entry Certificates, may be limited due to the lack of physical
certificates for the Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to beneficial
owners upon request, in accordance with DTC's Rules, and to the Financial
Intermediaries to whose DTC accounts the Book-Entry Certificates of such
beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing
Agreement only at the direction of one or more Financial Intermediaries to
whose DTC accounts the Book-Entry Certificates are credited, to the extent
that such actions are taken on behalf of Financial Intermediaries whose
holdings include such Book-Entry Certificates. DTC may take actions, at the
direction of the related Participants, with respect to some Book-Entry
Certificates which conflict with actions taken with respect to other
Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a)
DTC or the Depositor advises the Trustee in writing that DTC is no longer
willing, qualified or able to discharge properly its responsibilities as
nominee and depository with respect to the Book-Entry Certificates and the
Depositor or the Trustee is unable to locate a qualified successor, (b) the
Depositor, at its sole option, with the consent of the Trustee, elects to
terminate a book-entry system through DTC or (c) after the occurrence of an
Event of Default, beneficial owners having Percentage Interests aggregating
not less than 51% of the Book-Entry Certificates advise the Trustee and DTC
through the Financial Intermediaries and the DTC participants in writing that
the continuation of a book-entry system through DTC (or a successor thereto)
is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and
thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Pooling and Servicing Agreement.
Although DTC, has agreed to the foregoing procedures in order to
facilitate transfers of Book-Entry Certificates among Participants, it is
under no obligation to perform or continue to perform such procedures and such
procedures may be discontinued at any time.
None of the Depositor, the Master Servicer or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held
by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
DTC management is aware that some computer applications, systems, and the
like for processing date ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year
2000 problems". DTC has informed its Participants and other members of the
financial community (the "Industry") that it has developed and is implementing
a program so that its Systems, as the same relate to the timely payment of
distributions (including principal and income payments) to securityholders,
book-entry deliveries, and settlement of trades within DTC ("DTC Services"),
continue to function appropriately. This program includes a technical
assessment and a remediation plan, each of which is complete. Additionally,
DTC's plan includes a testing phase, which is expected to be completed within
appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information of the provision of
services, including telecommunication and electrical utility service
providers, among others. DTC has informed the Industry that it is contacting
(and will continue to contact) third party vendors from whom DTC acquires
services to: (i) impress upon them the importance of such services being year
2000 compliant; and (ii) determine the extent of their efforts for Year 2000
remediation (and, as appropriate, testing) of their services. In addition, DTC
is in the process of developing such contingency plans as it deems
appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended
to serve as a representation, warranty, or contract modification of any kind.
Priority of Distributions of the Certificates
Available Funds will be determined for each Loan Group (the "Group I
Available Funds" and the "Group II Available Funds", respectively) and in each
case will be equal to the sum of the following amounts received with respect
to the related Mortgage Loans, net of amounts reimbursable therefrom to the
Master Servicer (including payment of the Servicing Fee) and the Trustee:
o the aggregate amount of scheduled payments due during the related Due
Period on deposit in the Collection Account with respect to each Loan
Group as of the immediately preceding Determination Date;
o Advances with respect to each Loan Group for that Distribution Date
and any amounts deposited by the Master Servicer in the Collection
Account in respect of Compensating Interest for each Loan Group; and
o certain unscheduled payments in respect of the related Mortgage
Loans, including full and partial prepayments, insurance proceeds,
Net Liquidation Proceeds and proceeds from purchases of and
substitutions for Mortgage Loans with respect to each Loan Group
during the related Prepayment Period.
"Available Funds" for any Distribution Date will equal the sum of the Group I
Available Funds and the Group II Available Funds.
On each Distribution Date the Trustee shall withdraw from the
Distribution Account the Available Funds and make the following disbursements
and transfers in the order of priority described below and to the extent of
the Available Funds.
As more fully described in this prospectus supplement, distributions on
the Group I Certificates will be made on each Distribution Date from Group I
Available Funds and will be made to the Classes of Group I Certificates in the
following order of priority:
first, as interest on the Class A-1 Certificates (less certain net
interest shortfalls);
second, as interest on the Class B-1 Certificates (less certain net
interest shortfalls);
third, as principal of the Classes of Group I Certificates then entitled
to receive distributions of principal, in the order and subject to the
priorities set forth under "--Principal" below; and
fourth, any remaining amounts to the holders of the Class R Certificates.
As more fully described in this prospectus supplement, distributions on
the Group II Certificates will be made on each Distribution Date from Group II
Available Funds and will be made to the Classes of Group II Certificates in
the following order of priority:
first, as interest on the Class A-2 Certificates (less certain net
interest shortfalls);
second, as interest on the Class B-2 Certificates (less certain net
interest shortfalls);
third, as principal of the Classes of Group II Certificates then entitled
to receive distributions of principal, in the order and subject to the
priorities set forth under "--Principal" below; and
fourth, any remaining amounts to the holders of the Class R Certificates.
The "Prepayment Period" for any Distribution Date means the calendar
month preceding the month in which that Distribution Date occurs.
Interest
On each Distribution Date, to the extent of the Group I Available Funds
or the Group II Available Funds, as applicable, each Class of Certificates of
the related Certificate Group will be entitled to receive the Interest
Distributable Amount for that Class for the related Interest Accrual Period.
The "Interest Accrual Period" for a given Distribution Date will be the
calendar month preceding the month in which that Distribution Date occurs,
based on an assumed 360-day year consisting of twelve 30-day months.
The "Interest Distributable Amount" for any Distribution Date and Class
equals the sum of (i) the Monthly Interest Distributable Amount for that Class
and (ii) the Unpaid Interest Shortfall Amount for that Class.
The "Monthly Interest Distributable Amount" for any Distribution Date and
each Class of Certificates equals the amount of interest accrued during the
related Interest Accrual Period at the related Pass-Through Rate on the
Certificate Principal Balance of that Class immediately prior to that
Distribution Date.
The "Unpaid Interest Shortfall Amount" means (i) for each Class of
Certificates and the first Distribution Date, zero, and (ii) for each Class of
Certificates and any subsequent Distribution Date, the amount, if any, by
which (a) the sum of (1) the Monthly Interest Distributable Amount for that
Class for the immediately preceding Distribution Date and (2) the outstanding
Unpaid Interest Shortfall Amount, if any, for that Class for the preceding
Distribution Date exceeds (b) the aggregate amount distributed on that Class
in respect of interest pursuant to clause (a) of this definition on the
preceding Distribution Date.
The interest entitlement described above for each Class of
interest-bearing Certificates will be reduced by the amount of Net Interest
Shortfalls for that Distribution Date. Net Interest Shortfalls with respect to
each Certificate Group will be allocated on each Distribution Date, pro rata,
based on the amount of interest each affected Class would otherwise be
entitled to receive on that Distribution Date before taking into account any
reduction resulting from Net Interest Shortfalls.
With respect to any Distribution Date and each Certificate Group, the
"Net Interest Shortfall" is equal to the sum of
o any Prepayment Interest Shortfall not offset by Compensating Interest
for that date with respect to the related Loan Group, and
o the amount of interest which would otherwise have been received with
respect to any Mortgage Loan in the related Loan Group that was the
subject of a Relief Act Reduction.
A "Relief Act Reduction" is a reduction in the amount of monthly interest
payment on a Mortgage Loan pursuant to the Relief Act. See "Certain Legal
Aspects of the Loans-Soldiers' and Sailors' Civil Relief Act" in the
accompanying prospectus.
Pass-Through Rates
The "Pass-Through Rate" for the Class A-1, Class A-2, Class B-1 and Class
B-2 Certificates, as applicable, for any Distribution Date will equal the
difference between (x) the average of the Loan Rates of the Mortgage Loans in
the related Loan Group as of the first day of the month preceding the month of
that Distribution Date (or, in the case of the first Distribution Date, the
Closing Date), weighted on the basis of the related Principal Balances as of
the first day of the immediately preceding Interest Accrual Period and (y) the
Servicing Fee Rate.
Principal
General. All payments and other amounts received in respect of principal
of the Mortgage Loans in each Loan Group will be allocated between the related
Senior Certificates and Subordinate Certificates.
Group Principal Distribution Amount. On each Distribution Date, the Group
Principal Distribution Amount with respect to each Certificate Group will be
applied as principal.
The "Certificate Principal Balance" of any Class of Certificates on any
Distribution Date will be equal to its Certificate Principal Balance on the
Closing Date (the "Original Certificate Principal Balance") reduced by the sum
of (i) all amounts actually distributed in respect of principal of that Class
on all prior Distribution Dates and (ii) all Realized Losses applied in
reduction of principal of that Class on all prior Distribution Dates.
A "Due Period" with respect to any Distribution Date is the period
commencing on the second day of the month preceding the month in which that
Distribution Date occurs and ending on the first day of the month in which
that Distribution Date occurs.
The "Group Principal Distribution Amount" for each Certificate Group and
any Distribution Date will be equal to the sum of:
(i) each scheduled payment of principal collected or advanced on the
related Mortgage Loans by the Master Servicer in the related Due
Period;
(ii) that portion of the Purchase Price, representing principal of any
repurchased Mortgage Loan in that Loan Group, deposited in the
Collection Account during the related Prepayment Period;
(iii) the principal portion of any related Substitution Adjustments
deposited in the Collection Account during the related Prepayment
Period;
(iv) the principal portion of all insurance proceeds received during the
related Prepayment Period with respect to Mortgage Loans in that
Loan Group that are not yet Liquidated Mortgage Loans;
(v) the principal portion of all Net Liquidation Proceeds received
during the related Prepayment Period with respect to Liquidated
Mortgage Loans in that Loan Group; and
(vi) the principal portion of all partial and full principal prepayments
of the related Mortgage Loans received during the related
Prepayment Period.
Senior Principal Distribution Amount. On each Distribution Date, the
Senior Principal Distribution Amount will be distributed as principal of the
Senior Certificates of the related Certificate Group until their Certificate
Principal Balance is reduced to zero.
The "Senior Principal Distribution Amount" for the Class of Senior
Certificates of each Certificate Group and any Distribution Date will equal
the sum of:
o the related Senior Percentage of all amounts described in clauses (i)
through (iv) of the definition of "Group Principal Distribution
Amount" with respect to the related Certificate Group for that
Distribution Date;
o for each Mortgage Loan in the related Loan Group that became a
Liquidated Mortgage Loan prior to the related Determination Date, the
lesser of
(a) the related Senior Percentage of the Stated Principal
Balance of that Mortgage Loan and
(b) the related Senior Prepayment Percentage of the amount of
the Net Liquidation Proceeds allocable to principal
received on that Mortgage Loan; and
o the related Senior Prepayment Percentage of the amounts described in
clause (vi) of the definition "Group Principal Distribution Amount"
for that Distribution Date.
The "Senior Percentage" for each Certificate Group and any Distribution
Date is the percentage equivalent of a fraction the numerator of which is the
Certificate Principal Balance of the related Class of Senior Certificates on
that Distribution Date and the denominator of which is the aggregate of the
Certificate Principal Balances of the Classes of Senior and Subordinate
Certificates in that Certificate Group on that Distribution Date. The
"Subordinated Percentage" for each Certificate Group and any Distribution Date
will be calculated as the difference between 100% and the related Senior
Percentage for that Distribution Date. The Senior Percentage and the
Subordinated Percentage for Certificate Group I will initially be
approximately 96.75% and 3.25%, respectively. The Senior Percentage and the
Subordinated Percentage for Certificate Group II will initially be
approximately 95.25% and 4.75%, respectively.
The "Senior Prepayment Percentage" for each Certificate Group and any
Distribution Date up to and including the Distribution Date in December 2004
will equal 100%. Thereafter, the Senior Prepayment Percentage for each
Certificate Group and any Distribution Date will be subject to gradual
reduction as follows:
Month of Distribution Date Senior Prepayment Percentage
-------------------------- ----------------------------
January 2005 through December 2005 Senior Percentage plus 70% of the
related Subordinated Percentage
for that Distribution Date
January 2006 through December 2006 Senior Percentage plus 60% of the
related Subordinated Percentage
for that Distribution Date
January 2007 through December 2007 Senior Percentage plus 40% of the
related Subordinated Percentage
for that Distribution Date
January 2008 through December 2008 Senior Percentage plus 20% of the
related Subordinated Percentage
for that Distribution Date
January 2009 and later Senior Percentage for that
Distribution Date
provided, however, that if on any Distribution Date the Senior Percentage
exceeds the initial Senior Percentage, the Senior Prepayment Percentage for
that Distribution Date will once again equal 100%.
Notwithstanding the foregoing, no decrease in the Senior Prepayment
Percentage will occur unless both of the step-down conditions listed below are
satisfied:
first, the outstanding Principal Balance of the Mortgage Loans in the
related Loan Group delinquent 60 days or more (averaged over
the preceding six month period) does not equal or exceed 50% of
the Certificate Principal Balance of the related Class of
Subordinate Certificates on that Distribution Date, and
second, cumulative Realized Losses on the Mortgage Loans in the related
Loan Group do not exceed
o for the Distribution Date in January 2005, 30% of the
Certificate Principal Balance of the related Class of
Subordinate Certificates as of the Cut-off Date,
o for the Distribution Date in January 2006, 35% of the
Certificate Principal Balance of the related Class of
Subordinate Certificates as of the Cut-off Date,
o for the Distribution Date in January 2007, 40% of the
Certificate Principal Balance of the related Class of
Subordinate Certificates as of the Cut-off Date,
o for the Distribution Date in January 2008, 45% of the
Certificate Principal Balance of the related Class of
Subordinate Certificates as of the Cut-off Date, and
o for the Distribution Date in January 2009, 50% of the
Certificate Principal Balance of the related Class of
Subordinate Certificates as of the Cut-off Date.
If on any Distribution Date the allocation to a Class of Senior
Certificates then entitled to distributions of principal of full and partial
principal prepayments and other amounts in the percentage required above would
reduce the Certificate Principal Balance of that Class of Senior Certificates
below zero, the distribution of the Senior Prepayment Percentage of those
amounts for that Distribution Date will be limited to the percentage necessary
to reduce the Certificate Principal Balance of that Class to zero.
This disproportionate allocation of unscheduled payments of principal
will have the effect of accelerating the amortization of the Senior
Certificates which receive these unscheduled payments of principal while, in
the absence of Realized Losses, increasing the interest in the related Loan
Group Balance evidenced by the related Subordinate Certificates. Increasing
the respective interest of the Subordinate Certificates relative to that of
the Senior Certificates of each Certificate Group is intended to preserve the
availability of the subordination provided by the related Subordinate
Certificates.
Allocation of Losses
On each Distribution Date, all Realized Losses with respect to each Loan
Group, other than Excess Losses, will be allocated first to the related Class
of Subordinate Certificates until the Certificate Principal Balance of that
Class has been reduced to zero, and then to the related Class of Senior
Certificates.
On each Distribution Date, Excess Losses with respect to each Loan Group
will be allocated pro rata between the related Classes of Senior Certificates
and Subordinate Certificates based upon their respective Certificate Principal
Balances.
In general, a "Realized Loss" means, for a Mortgage Loan that is finally
liquidated (a "Liquidated Mortgage Loan"), the amount by which the remaining
Principal Balance of the Mortgage Loan exceeds the amount of all liquidation
proceeds net of amounts reimbursable to the Master Servicer for related
Advances, Servicing Advances and Servicing Fees (such net amount, the "Net
Liquidation Proceeds"). "Excess Losses" are Special Hazard Losses in excess of
the Special Hazard Loss Coverage Amount, Bankruptcy Losses in excess of the
Bankruptcy Loss Coverage Amount and Fraud Losses in excess of the Fraud Loss
Coverage Amount. "Special Hazard Losses" are Realized Losses in respect of
Special Hazard Mortgage Loans. "Bankruptcy Losses" are losses that are
incurred as a result of Debt Service Reductions and Deficient Valuations.
"Fraud Losses" are Realized Losses sustained on a Liquidated Mortgage Loan by
reason of a default arising from fraud, dishonesty or misrepresentation. See
"Description of the Certificates - Subordination of the Subordinate
Certificates" in this prospectus supplement.
A "Special Hazard Mortgage Loan" is a Liquidated Mortgage Loan as to
which the ability to recover the full amount due thereunder was substantially
impaired by a hazard not insured against under a standard hazard insurance
policy of the type described in the prospectus under "Credit
Enhancement-Special Hazard Insurance Policies". See "Description of the
Certificates - Subordination of the Subordinate Certificates" in this
prospectus supplement.
Subordination of the Subordinate Certificates
The rights of holders of the Subordinate Certificates to receive
distributions with respect to the Mortgage Loans in the related Loan Group
will be subordinate to the rights of the holders of the related Senior
Certificates to the extent described in this prospectus supplement. This
subordination is intended to enhance the likelihood of regular receipt by
holders of the Senior Certificates of the full amount of the monthly
distributions due them, and to afford them protection against Realized Losses
other than Excess Losses. The Subordinate Certificates of a Certificate Group
will provide limited protection to the related Senior Certificates against
Special Hazard Losses, Bankruptcy Losses and Fraud Losses up to the Special
Hazard Loss Coverage Amount, the Bankruptcy Loss Coverage Amount and the Fraud
Loss Coverage Amount, respectively, for the related Loan Group as described in
the following paragraphs. Realized Losses, other than Excess Losses, will be
allocated to the related Class of Subordinate Certificates until the
Certificate Principal Balance of that Class has been reduced to zero.
Each Class of Subordinate Certificates will provide limited protection to
the related Class of Senior Certificates against:
o Special Hazard Losses in an initial amount expected to be
approximately $2,862,736 for Loan Group I and $3,893,907 for Loan
Group II (each, a "Special Hazard Loss Coverage Amount"),
o Bankruptcy Losses in an initial amount expected to be approximately
$50,000 for Loan Group I and $50,000 for Loan Group II (each, a
"Bankruptcy Loss Coverage Amount"), and
o Fraud Losses in an initial amount expected to be approximately
$7,852,674 for Loan Group I and $11,681,721 for Loan Group II (each,
a "Fraud Loss Coverage Amount").
The Special Hazard Loss Coverage Amount for each Loan Group will be
reduced, from time to time, so as to equal on any Distribution Date the lesser
of
o the related 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, and
o the greater of
o 1% of the related Loan Group Balance,
o twice the Principal Balance of the largest Mortgage Loan in that Loan
Group
All Principal Balances for the purpose of this definition will be calculated
as of the first day of the calendar month before the month in which the
Distribution Date occurs after giving effect to scheduled installments of
principal and interest on the Mortgage Loans then due, whether or not paid.
The Fraud Loss Coverage Amount for each Loan Group will be reduced from
time to time by the amount of Fraud Losses allocated to the related Classes of
Certificates. In addition, the Fraud Loss Coverage Amount for each Loan Group
will be reduced on the fifth anniversary of the Cut-off Date to zero, and on
the first, second, third and fourth anniversaries of the Cut-off Date to an
amount equal to the lesser of (a) (x) 2% of the then current Loan Group
Balance in the case of the first anniversary and (y) 1% of the then current
Loan Group Balance in the case of each of the second, third and fourth
anniversaries and (b) 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 related Class of Certificates since the preceding
anniversary.
The Bankruptcy Loss Coverage Amount for each Loan Group will be reduced
from time to time by the amount of Bankruptcy Losses allocated to the related
Classes of Certificates.
The amount of coverage provided by each Class of Subordinate Certificates
for related 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 rating of the related Class of Senior Certificates
assigned by each Rating Agency is not adversely affected as a result. In
addition, a reserve fraud or other form of credit enhancement may be
substituted for the protection provided by each Class of Subordinate
Certificates for related Special Hazard Losses, Bankruptcy Losses and Fraud
Losses.
A "Deficient Valuation" is a bankruptcy proceeding whereby the bankruptcy
court may establish the value of a Mortgaged Property at an amount less than
the then outstanding Principal Balance of the related Mortgage Loan secured by
the Mortgaged Property or may reduce the outstanding Principal Balance of the
related Mortgage Loan. In the case of a reduction in that value of the related
Mortgaged Property, the amount of the secured debt could be reduced to that
value, and the holder of the Mortgage Loan thus would become an unsecured
creditor to the extent the outstanding Principal Balance of the Mortgage Loan
exceeds the value so assigned to the related Mortgaged Property by the
bankruptcy court. In addition, other modifications of the terms of a Mortgage
Loan can result from a bankruptcy proceeding, including the reduction (a "Debt
Service Reduction") of the amount of the monthly payment on the related
Mortgage Loan. However, none of these shall be considered a Debt Service
Reduction or Deficient Valuation with respect to any Mortgage Loan so long as
the Master Servicer is pursuing any other remedies that may be available with
respect to the related Mortgage Loan and either the Mortgage Loan has not
incurred a payment default or scheduled monthly payments of principal and
interest are being advanced by the Master Servicer without giving effect to
any Debt Service Reduction or Deficient Valuation.
Reports to Certificateholders
On each Distribution Date, the Trustee will forward to each holder of a
Certificate and the Rating Agencies a statement (based on information received
from the Master Servicer) generally setting forth, among other things:
(i) the amount of the distributions, separately identified, with
respect to each Class of Certificates;
(ii) the amount of the distributions set forth in clause (i) allocable
to principal, separately identifying the aggregate amount of any
principal prepayments or other unscheduled recoveries of principal
included therein;
(iii) the amount of the distributions set forth in clause (i) allocable
to interest and the calculation thereof;
(iv) the amount of any Unpaid Interest Shortfall Amount with respect to
each Class of Certificates;
(v) the Certificate Principal Balance of each Class of Certificates
after giving effect to the distribution of principal on that
Distribution Date;
(vi) each Loan Group Balance at the end of the related Prepayment
Period;
(vii) the Senior Percentage and Subordinated Percentage for the
following Distribution Date;
(viii) the Senior Prepayment Percentage for the following Distribution
Date;
(ix) the amount of the Servicing Fee paid to or retained by the Master
Servicer;
(x) the amount of Advances for the related Due Period;
(xi) the number and aggregate Principal Balance of Mortgage Loans by
Loan Group that were (A) delinquent (exclusive of Mortgage Loans
in foreclosure) (1) 30 to 59 days, (2) 60 to 89 days and (3) 90 or
more days, (B) in foreclosure and Delinquent (1) 30 to 59 days,
(2) 60 to 89 days and (3) 90 or more days and (C) in bankruptcy as
of the close of business on the last day of the calendar month
preceding that Distribution Date;
(xii) the rolling six month delinquency rate for that Distribution Date
by Loan Group;
(xiii) for any Mortgage Loan as to which the related Mortgaged Property
was acquired by the Trust in foreclosure or by deed in lieu of
foreclosure (any such property, an "REO Property") during the
preceding calendar month, the loan number, the Principal Balance
of that Mortgage Loan as of the close of business on the last day
of the related Due Period and the date of acquisition thereof;
(xiv) the total number and principal balance of any REO Properties as of
the close of business on the last day of the preceding Due Period;
(xv) the aggregate amount of Realized Losses by Loan Group incurred
during the preceding calendar month;
(xvi) the cumulative amount of Realized Losses by Loan Group;
(xvii) the aggregate amount of Special Hazard Losses, Bankruptcy Losses
and Fraud Losses by Loan Group incurred during the preceding
calendar month;
(xviii) the cumulative amount of Special Hazard Losses, Bankruptcy Losses
and Fraud Losses of Loan Group;
(xix) the Special Hazard Loss Coverage Amount, the Fraud Loss Coverage
Amount and the Bankruptcy Loss Coverage Amount, in each case as of
the related Determination Date;
(xx) the Realized Losses and Excess Losses, if any, allocated to each
Class of Certificates on that Distribution Date; and
(xxi) the Pass-Through Rate for each Class of the Group I and Group II
Certificates for that Distribution Date.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
Certificate of record during the previous calendar year a statement containing
information necessary to enable holders of the Certificates to prepare their
tax returns. These statements will not have been examined and reported upon by
an independent public accountant.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity of each Class of Offered Certificates will be
sensitive to defaults on the Mortgage Loans in the related Loan Group to the
extent that the related credit enhancement is insufficient. 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 the related credit enhancement is
insufficient, the purchaser's actual yield to maturity will be lower than its
anticipated yield. In general, the earlier a loss occurs, the greater is the
effect on an investor's yield to maturity. There can be no assurance that the
delinquency, foreclosure or loss experience with respect to the Mortgage Loans
in either Loan Group will be consistent with the delinquency, foreclosure or
loss experience assumed by the purchaser of an Offered Certificate.
As described elsewhere in this prospectus supplement, principal
distributions on the Group I Certificates relate to principal payments on the
Group I Mortgage Loans and principal distributions on the Group II
Certificates relate to principal payments on the Group II Mortgage Loans.
The rate of principal payments, the aggregate amount of distributions and
the yields to maturity of each Class of Offered Certificates will be related
to the rate and timing of payments of principal on the Mortgage Loans in the
related Loan Group. 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 (including for this purpose, prepayments
resulting from refinancing, liquidations of the Mortgage Loans due to
defaults, casualties or condemnations and repurchases by the Sellers or the
Master Servicer). The Mortgage Loans are subject to the "due-on-sale"
provisions included in the related mortgage notes. See "The Mortgage Loan
Groups" in this prospectus supplement.
Prepayments, liquidations and purchases of the Mortgage Loans in a Loan
Group (including any optional purchase) will result in distributions on the
related Certificate Group of principal amounts which would otherwise be
distributed over the remaining terms of the Mortgage Loans. Since the rate of
payment of principal on the Mortgage Loans will depend on future events and a
variety of other factors, no assurance can be given as to the rate of
principal prepayments. The extent to which the yield to maturity of a Class of
Offered Certificates may vary from an investor's anticipated yield will depend
upon the degree to which a Certificate is purchased at a discount or a
premium, and the degree to which the timing of payments on a Certificate is
sensitive to prepayments, liquidations and purchases of the Mortgage Loans in
the related Loan Group. Further, an investor should consider the risk that, in
the case of any Offered Certificate purchased at a discount, a slower than
anticipated rate of principal payments (including prepayments) on the Mortgage
Loans in the related Loan Group could result in an actual yield to the
investor that is lower than the anticipated yield and, in the case of any
Offered Certificate purchased at a premium, a faster than anticipated rate of
principal payments on the Mortgage Loans in the related Loan Group could
result in an actual yield to the investor that is lower than the anticipated
yield.
The rate of principal payments (including prepayments) on the Mortgage
Loans may vary significantly over time and may be influenced by a variety of
economic, geographic, social and other factors, including changes in
borrowers' housing needs, job transfers, unemployment, borrowers' net equity
in the related Mortgaged Properties and decisions by the Master Servicer. In
general, if prevailing interest rates were to fall significantly below the
Loan Rates on the Mortgage Loans, the Mortgage Loans could be subject to
higher prepayment rates than if prevailing interest rates were to remain at or
above the Loan Rates on the Mortgage Loans. Conversely, if prevailing interest
rates were to rise significantly, the rate of prepayments on the Mortgage
Loans generally would be expected to decrease.
Weighted Average Lives
The timing of changes in the rate of principal prepayments on the
Mortgage Loans may significantly affect an investor's actual yield to
maturity, even if the average rate of principal prepayments is consistent with
the investor's expectation. In general, the earlier principal prepayments on
the Mortgage Loans occur, the greater the effect of the principal prepayments
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.
The projected weighted average life of each Class of Offered Certificates
is the average amount of time that will elapse from the Closing Date, until
each dollar of principal is scheduled to be repaid to the investors in that
Class. Because it is expected that there will be prepayments and defaults on
the Mortgage Loans, the actual weighted average lives of the Classes of
Offered Certificates are expected to vary substantially from the weighted
average remaining terms to stated maturity of the Mortgage Loans as set forth
in this prospectus supplement under "The Mortgage Loan Groups".
The Assumed Final Distribution Date for each Class of Offered
Certificates is as set forth in this prospectus supplement under "Description
of the Certificates--General" above. The Assumed Final Distribution Date for
each Class of Offered Certificates is the Distribution Date in the 13th month
following the latest maturity date of any Mortgage Loan in the related Loan
Group. The weighted average life of each Class of Offered Certificates is
likely to be shorter than would be the case if payments actually made on the
Mortgage Loans conformed to the foregoing assumptions, and the final
Distribution Date with respect to the Offered Certificates could occur
significantly earlier than the related Assumed Final Distribution Date because
(i) prepayments are likely to occur, and (ii) the Master Servicer may cause a
termination of the Trust as provided in this prospectus supplement.
Prepayments of mortgage loans are commonly measured relative to a
prepayment standard or model. The model (the "Prepayment Assumption") used
with respect to the Mortgage Loans, the standard prepayment assumption
("SPA"), assumes prepayment rates of 0.2% per annum of the then outstanding
principal balance of such mortgage loans in the first month after origination
and that this annual prepayment rate increases by 0.2% per annum each month
through the thirtieth month after origination and remains constant at 6% per
annum in each month thereafter. SPA does not purport to be an historical
description of prepayment experience or a prediction of the anticipated rate
of prepayment of any pool of mortgage loans, including the Mortgage Loans.
The tables on pages S-62 and S-63 were prepared on the basis of the
assumptions in the following paragraph and the tables set forth below. There
are certain differences between the loan characteristics included in such
assumptions and the characteristics of the actual Mortgage Loans. Any such
discrepancy may have an effect upon the percentages of Original Certificate
Principal Balances outstanding and weighted average lives of the Offered
Certificates set forth in the tables on pages S-62 and S-63. In addition,
since the actual Mortgage Loans in the Trust will have characteristics that
differ from those assumed in preparing the tables set forth below, the
distributions of principal of the Classes of Offered Certificates may be made
earlier or later than indicated in the tables. The percentages and weighted
average lives in the tables on pages S-62 and S-63 were determined assuming
that (the "Structuring Assumptions"):
(i) each Loan Group consists of one Mortgage Loan with the
characteristics set forth in the table below,
(ii) distributions on the Certificates are received, in cash, on the
25th day of each month, commencing in January 2000,
(iii) the Mortgage Loans prepay at the indicated constant percentages of
SPA,
(iv) no defaults or delinquencies occur in the payment by the
mortgagors of principal and interest on the Mortgage Loans and no
shortfalls due to the application of the Relief Act are incurred,
(v) none of the Sellers or the Master Servicer purchases from the
Trust Fund any Mortgage Loan pursuant to any obligation or option
under the Pooling and Servicing Agreement,
(vi) scheduled monthly payments on the Mortgage Loans are received on
the first day of each month commencing in January 2000, and are
computed prior to giving effect to any prepayments received in the
prior month,
(vii) prepayments representing payment in full of individual Mortgage
Loans are received on the last day of each month (commencing in
December 1999) and include 30 days' interest thereon,
(viii) the scheduled monthly payment for each Mortgage Loan is calculated
based on its Principal Balance, Loan Rate and original and
remaining term to maturity such that the Mortgage Loan will
amortize in amounts sufficient to repay the remaining Principal
Balance of such Mortgage Loan by its remaining term to maturity
and
(ix) the Certificates are purchased on December 29, 1999.
<PAGE>
<TABLE>
<CAPTION>
Assumed Mortgage Loan Characteristics
Principal Balance as of the Original Term to Remaining Term to
Cut-Off Date ($) Mortgage Rate (%) Maturity (Months) Maturity (Months)
- ------------------------------------------- ------------------ ------------------------ ------------------------
<S> <C> <C> <C>
Loan Group 1 261,755,825.62 6.88506 178 159
Loan Group 2 389,390,716.84 7.22845 352 335
</TABLE>
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the tables. Any
such discrepancy may have an effect upon the percentages of the initial
Certificate Principal Balance outstanding (and the weighted average lives) of
the Senior Certificates set forth in the table. In addition, to the extent
that the actual Mortgage Loans have characteristics that differ from those
assumed in preparing the tables set forth below, the Senior Certificates may
mature earlier or later than indicated by the table. Based on the foregoing
assumptions, the following tables indicate the projected weighted average
lives of each Class of Offered Certificates and set forth the percentages of
the initial Certificate Principal Balance of each such Class that would be
outstanding after each of the Distribution Dates shown, at various constant
percentages of SPA. Neither the prepayment model used herein nor any other
prepayment model or assumption purports to be an historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the Mortgage Loans included in the
Trust. Variations in the prepayment experience and the balance of the Mortgage
Loans that prepay may increase or decrease the percentages of initial
Certificate Principal Balances (and weighted average lives) shown in the
following tables. Such variations may occur even if the average prepayment
experience of all such Mortgage Loans equals any of the specified percentages
of the prepayment assumption.
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Certificate Principal Balance Outstanding
Class A-1
---------------------------------------------------------
Distribution Date 0% 100% 225% 350% 500%
- ----------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Initial Percentage........................ 100 100 100 100 100
December 25, 2000......................... 95 90 84 78 70
December 25, 2001......................... 90 80 68 57 46
December 25, 2002......................... 85 70 55 42 29
December 25, 2003......................... 79 61 44 30 18
December 25, 2004......................... 72 53 35 22 11
December 25, 2005......................... 66 45 27 15 7
December 25, 2006......................... 58 38 21 10 4
December 25, 2007......................... 51 31 15 7 2
December 25, 2008......................... 42 24 11 5 1
December 25, 2009......................... 33 18 8 3 1
December 25, 2010......................... 24 12 5 2 *
December 25, 2011......................... 14 7 2 1 *
December 25, 2012......................... 3 1 * * *
December 25, 2013......................... 0 0 0 0 0
Weighted Average Life (years)
To maturity (1)...................... 7.6 5.8 4.3 3.2 2.4
- -------------------------------------------------------------------------------------------------------------------
* Indicates an outstanding balance greater than 0% and less than 0.5% of the Original Certificate Principal Balance.
(1) The weighted average life of any Class of Certificates is determined by (i) multiplying the assumed net reduction, if any,
in the principal amount on each Distribution Date on that Class of Certificates 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 principal amount on that Class of Certificates.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Certificate Principal Balance Outstanding
Class A-2
---------------------------------------------------------
Distribution Date 0% 100% 225% 350% 500%
- ----------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Initial Percentage........................ 100 100 100 100 100
December 25, 2000......................... 99 94 88 82 74
December 25, 2001......................... 98 87 74 63 50
December 25, 2002......................... 96 80 63 48 33
December 25, 2003......................... 95 74 53 36 21
December 25, 2004......................... 93 68 44 27 13
December 25, 2005......................... 92 63 37 20 8
December 25, 2006......................... 90 58 31 15 5
December 25, 2007......................... 88 53 26 12 3
December 25, 2008......................... 86 49 22 9 2
December 25, 2009......................... 84 45 19 7 1
December 25, 2010......................... 81 41 16 5 1
December 25, 2011......................... 79 37 13 4 1
December 25, 2012......................... 76 34 11 3 *
December 25, 2013......................... 73 30 9 2 *
December 25, 2014......................... 70 27 8 2 *
December 25, 2015......................... 67 24 6 1 *
December 25, 2016......................... 63 22 5 1 *
December 25, 2017......................... 59 19 4 1 *
December 25, 2018......................... 55 17 3 1 *
December 25, 2019......................... 50 14 3 * *
December 25, 2020......................... 45 12 2 * *
December 25, 2021......................... 40 10 2 * *
December 25, 2022......................... 34 8 1 * *
December 25, 2023......................... 28 6 1 * *
December 25, 2024......................... 22 5 1 * *
December 25, 2025......................... 15 3 * * *
December 25, 2026......................... 7 1 * * *
December 25, 2027......................... 0 0 0 0 0
Weighted Average Life (years)
To maturity (1)...................... 18.4 10.3 5.9 3.9 2.7
- -------------------------------------------------------------------------------------------------------------------
* Indicates an outstanding balance greater than 0% and less than 0.5% of the Original Certificate Principal Balance.
(1) The weighted average life of any Class of Certificates is determined by (i) multiplying the assumed net reduction, if any,
in the principal amount on each Distribution Date on that Class of Certificates 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 principal amount on that Class of Certificates.
</TABLE>
<PAGE>
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
Two separate elections will be made to treat assets of the Trust as real
estate mortgage investment conduits (each, a "REMIC") for U.S. federal income
tax purposes. The Class A-1 and Class B-1 Certificates will constitute
"regular interests" in one REMIC and the Class A-2 and Class B-2 Certificates
will constitute "regular interests" in the other REMIC. The Class R
Certificates will represent beneficial ownership of the sole class of
"residual interests" in both REMICs. Upon issuance of the Offered
Certificates, Brown & Wood LLP ("Tax Counsel") will deliver its opinion
concluding, assuming compliance with the Pooling and Servicing Agreement, for
U.S. federal income tax purposes, the Trust will be characterized as two
separate REMICs within the meaning of Section 860D of the Code.
Taxation of Regular Interests
A holder of a Class of Offered Certificates will be treated for federal
income tax purposes as owning a regular interest in the REMIC. See "Certain
Federal Income Tax Considerations" in the accompanying prospectus.
Interest on the Offered Certificates must be included in income by a
Certificateholder under the accrual method of accounting, regardless of the
Certificateholder's regular method of accounting. In addition, a regular
interest could be considered to have been issued with original issue discount
("OID"). See "Certain Federal Income Tax Considerations" in the prospectus.
OID must be included in income as it accrues on a constant yield method,
regardless of whether the Certificateholder receives currently the cash
attributable to such OID. The prepayment assumption that will be used to in
determining the accrual of any OID, market discount, or bond premium, if any,
will equal the rate described above under "Yield, Prepayment and Maturity
Considerations--Weighted Average Lives." No representation is made that the
Mortgage Loans will prepay at such a rate or at any other rate.
On June 27, 1996 the IRS issued proposed regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject
to Code Section 1272(a)(6) such as the Certificates. Absent further guidance
from the IRS, the Trustee intends to account for amortizable bond premium in
the manner described above. Prospective purchasers of the Certificates should
consult their tax advisors regarding the possible application of the
Amortizable Bond Premium Regulations.
Status of the Offered Certificates
In the opinion of Tax Counsel (i) Certificates held by a domestic
building and loan association will constitute "a regular or a residual
interest in a REMIC" within the meaning of section 7701(a)(19)(C)(xi) of the
Code (assuming that at least 95% of the related REMIC's assets consist of
cash, government Certificates, "loans secured by an interest in real
property," and other types of assets described in section 7701(a)(19)(C)) of
the Code; and (ii) Certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of section 856(c)(4)(A) of
the Code, and income with respect to the Certificates will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of section 856(c)(3)(B) of the Code
(assuming, for both purposes, that at least 95% of the REMIC's assets are
qualifying assets). If less than 95% of the related REMIC's assets consist of
assets described in clause (i) or (ii) above, then a Certificate will qualify
for the tax treatment described in clause (i) or (ii) in the proportion that
such REMIC assets are qualifying assets. The Offered Certificates will be
"qualified mortgages" under section 860G(a)(3) of the Code for another REMIC
and "permitted investments" under section 860L(c)(1)(G) of the Code for a
financial asset securitization investment trust.
Non-U.S. Persons
For purposes of the following discussion, the term "non-U.S. Person"
means any person other than (i) a citizen or resident of the United States;
(ii) a corporation (or entity treated as a corporation for tax purposes)
created or organized in the United States or under the laws of the United
States or of any state thereof, including, for this purpose, the District of
Columbia; (iii) a partnership (or entity treated as a partnership for tax
purposes) organized in the United States or under the laws of the United
States or of any state thereof, including, for this purpose, the District of
Columbia (unless provided otherwise by future Treasury regulations); (iv) an
estate whose income is includible in gross income for United States income tax
purposes regardless of its source; or (v) a trust, if a court within the
United States is able to exercise primary supervision over the administration
of the trust and one or more U.S. Persons have authority to control all
substantial decisions of the trust. Notwithstanding the last clause of the
preceding sentence, to the extent provided in Treasury regulations, certain
trusts in existence on August 20, 1996, and treated as U.S. Persons prior to
such date, may elect to continue to be U.S. Persons.
Interest paid to or accrued by a Certificateholder who is a non-U.S.
Person will be considered "portfolio interest", and will not be subject to
U.S. federal income tax and withholding tax, if the interest is not
effectively connected with the conduct of a trade or business within the
United States by the non-U.S. Person and the non-U.S. Person (i) is not
actually or constructively a "10 percent shareholder" of the Trust or a
"controlled foreign corporation" with respect to which the Trust is a "related
person" within the meaning of the Code and (ii) provides the Trust or other
person who is otherwise required to withhold U.S. tax with respect to the
Offered Certificates with an appropriate statement (on Form W-8 or a
substantially similar form), signed under penalties of perjury, certifying
that the beneficial owner of the Offered Certificate is a non-U.S. Person and
providing the non-U.S. Person's name and address. If an Offered Certificate is
held through a securities clearing organization or certain other financial
institutions, the organization or institution may provide the relevant signed
statement to the withholding agent; in that case, however, the signed
statement must be accompanied by a Form W-8 or substitute form provided by the
non-U.S. Person that owns the Certificate.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of an Offered Certificate by a non-U.S. Person will be
exempt from United States federal income and withholding tax, provided that
(i) such gain is not effectively connected with the conduct of a trade or
business in the United States by the non-U.S. Person and (ii) in the case of
an individual, the individual is not present in the United States for 183 days
or more in the taxable year.
Prohibited Transactions Tax and Other Taxes
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions, a prohibited transaction
means the disposition of a Mortgage Loan, the receipt of income from a source
other than a Mortgage Loan or certain other permitted investments, the receipt
of compensation for services, or gain from the disposition of an asset
purchased with the payments on the Mortgage Loans for temporary investment
pending distribution on the Certificates. It is not anticipated that the Trust
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a trust that elects to be treated
as a REMIC made after the day on which such trust issues all of its interests
could result in the imposition of a tax on the trust equal to 100% of the
value of the contributed property (the "Contributions Tax"). It is anticipated
that the Trust will not accept contributions that would subject it to such
tax.
In addition, a trust that elects to be treated as a REMIC may also be
subject to federal income tax at the highest corporate rate on "net income
from foreclosure property," determined by reference to the rules applicable to
real estate investment trusts. "Net income from foreclosure property"
generally means gain from the sale of a foreclosure property other than
qualifying rents and other qualifying income for a real estate investment
trust. It is not anticipated that the Trust will recognize net income from
foreclosure property subject to federal income tax.
Backup Withholding
Certain Certificate Owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Offered Certificates if the
Certificate Owners, upon issuance, fail to supply the Trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends, or other
"reportable payments" (as defined in the Code) properly, or, under certain
circumstances, fail to provide the Trustee or their broker with a certified
statement, under penalty of perjury, that they are not subject to backup
withholding.
The Trustee will be required to report annually to the Internal Revenue
Service (the "IRS"), and to each Certificateholder of record, the amount of
interest paid (and OID accrued, if any) on the Offered Certificates (and the
amount of interest withheld for federal income taxes, if any) for each
calendar year, except as to exempt holders (generally, holders that are
corporations, certain tax-exempt organizations or nonresident aliens who
provide certification as to their status as nonresidents). As long as the only
holder of record of a Class of Offered Certificates is Cede & Co., as nominee
of DTC, the IRS and Certificate Owners of such Class will receive tax and
other information, including the amount of interest paid on such Certificates
owned, from Participants and Financial Intermediaries rather than from the
Trustee. (The Trustee, however, will respond to requests for necessary
information to enable Participants, Financial Intermediaries and certain other
persons to complete their reports.) Each non-exempt Certificate Owner will be
required to provide, under penalty of perjury, a certificate on IRS form W-9
containing his or her name, address, correct federal taxpayer identification
number and a statement that he or she is not subject to backup withholding.
Should a nonexempt Certificate Owner fail to provide the required
certification, the Participants or Financial Intermediaries (or the Paying
Agent) will be required to withhold 31% of the interest (and principal)
otherwise payable to the holder, and remit the withheld amount to the IRS as a
credit against the holder's federal income tax liability.
Such amounts will be deemed distributed to the affected Certificate Owner
for all purposes of the related Certificates and the Pooling and Servicing
Agreement.
New Withholding Regulations
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations") which make certain modifications to the withholding, 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, 2000, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Offered Certificates.
ERISA CONSIDERATIONS
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, regulatory 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
Certificates. See "ERISA Considerations" in the Prospectus.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in the Offered 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 the Offered Certificates should
consider, among other factors, the extreme sensitivity of the investments to
the rate of principal payments (including prepayments) on the Mortgage Loans.
In Prohibited Transaction Exemption 83-1 (the "Exemption"), the
Department of Labor exempted from ERISA's prohibited transaction rules
o certain transactions relating to the operation of residential
mortgage pool investment trusts and
o the purchase, sale and holding of "mortgage pool pass-through
certificates" on the initial issuance of such certificates.
The Exemption permits, subject to certain conditions, transactions that might
otherwise be prohibited between Plans and "parties in interest" with respect
to those Plans related to
o 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
o the acquisition and holding of certain mortgage pool pass-through
certificates representing an interest in such mortgage pools by
Plans.
If the general conditions of the Exemption are satisfied, investments by
a Plan in certificates that represent interests in a mortgage pool consisting
of mortgage loans representing loans for single family homes ("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
o the Plan purchases the Single Family Certificates at no more than
fair market value and
o the Certificates are not subordinated to the other Certificates
issued by the same pool,
and will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition,
o the purchase is approved by an independent fiduciary,
o no sales commission is paid to the pool sponsor,
o a Plan does not purchase more than twenty-five percent (25%) of all
Single Family Certificates and
o at least fifty percent (50%) of all Single Family Certificates are
purchases by persons independent of the pool sponsor or pool trustee.
It is expected that the Exemption will apply to the acquisition and
holding by Plans of the Offered Certificates and that all conditions of the
Exemption other than those within the control of the investors will be met.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the
Exemption, and the potential consequences in their specific circumstances,
prior to making an investment in the Offered 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.
LEGAL INVESTMENT CONSIDERATIONS
The Class A-1 Certificates and Class A-2 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") so long as they are rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization and, as such, are legal investments for certain entities
to the extent provided for in SMMEA.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Offered Certificates or to
purchase Offered 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 Offered Certificates constitute
legal investments for such investors. See "Legal Investment" in the
prospectus.
METHOD OF DISTRIBUTION
The Sellers will acquire the Offered Certificates from the Depositor in a
negotiated transaction upon their initial issuance, concurrently with the
transfer of the Mortgage Loans from the Sellers to the Depositor, as described
in this prospectus supplement under the heading "The Pooling and Servicing
Agreement - Assignment of the Mortgage Loans". The Sellers may offer the
Offered Certificates from time to time to the public, directly or through
dealers, in one or more negotiated transactions, or otherwise, at varying
prices to be determined at the time of sale.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Offered
Certificates will be passed upon by Brown & Wood LLP, New York, New York, as
counsel for the Depositor. Certain legal matters will be passed upon for the
Sellers and the Master Servicer by James Hubbard, General Counsel for Fifth
Third Bank and by Brown & Wood LLP, New York, New York, special counsel to the
Sellers and the Master Servicer. Certain federal income tax consequences with
respect to the Certificates will be passed upon for the Trust by Brown & Wood
LLP, New York, New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Class A-1 and Class A-2 Certificates be rated "Aaa" by Moody's Investors
Service, Inc. and "AAA" by Fitch IBCA, Inc. (each a "Rating Agency").
The ratings assigned by each Rating Agency to mortgage pass-through
certificates address the likelihood of the receipt of all distributions on the
mortgage loans by the related certificateholders under the agreements pursuant
to which those certificates are issued. Each Rating Agency's ratings take into
consideration the credit quality of the related mortgage pool, including any
credit support providers, structural and legal aspects associated with those
certificates, and the extent to which the payment stream on that mortgage pool
is adequate to make payments required by those certificates. Each Rating
Agency's ratings on those certificates do not, however, constitute a statement
regarding frequency of prepayments on the related mortgage loans.
The ratings of Each Rating Agency do not address the possibility that, as
a result of principal prepayments, holders of the Offered Certificates may
receive a lower than anticipated yield.
The ratings assigned to the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A rating is
not a recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time by either Rating Agency.
The Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Offered Certificates. However, there can be
no assurance as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by that rating
agency. Any rating on the Offered Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Offered
Certificates by the Rating Agencies.
<PAGE>
INDEX OF DEFINED TERMS
Page
----
Advance..........................................S-38
Amortizable Bond Premium Regulations.............S-64
Assumed Final Distribution Date..................S-43
Available Funds..................................S-47
Bankruptcy Loss Coverage Amount..................S-54
Bankruptcy Losses................................S-53
Beneficial Owner.................................S-44
Book-Entry Certificates..........................S-44
Certificate Owners...............................S-44
Certificate Principal Balance....................S-49
Certificateholder................................S-44
Certificates.....................................S-43
Code..............................................S-7
Collection Account...............................S-37
Debt Service Reduction...........................S-55
Deficient Valuation..............................S-55
Definitive Certificate...........................S-44
Determination Date...............................S-40
Distribution Account.............................S-38
Distribution Date................................S-43
DTC..............................................S-44
DTC's Rules......................................S-44
Due Date.........................................S-15
Due Period.......................................S-50
Eligible Account.................................S-38
Eligible Substitute Mortgage Loan................S-36
ERISA............................................S-67
Excess Losses....................................S-53
Exemption........................................S-68
Financial Intermediary...........................S-44
Fraud Loss Coverage Amount.......................S-54
Fraud Losses.....................................S-53
Group I Available Funds..........................S-47
Group I Loan Balance.............................S-14
Group I Mortgage Loans...........................S-14
Group II Available Funds.........................S-47
Group II Loan Balance............................S-14
Group II Mortgage Loans..........................S-14
Group Principal Distribution Amount..............S-50
Industry.........................................S-46
Interest Accrual Period..........................S-48
Interest Distributable Amount....................S-48
IRS..............................................S-66
Liquidated Mortgage Loan.........................S-53
Loan Group.......................................S-14
Loan Rate........................................S-15
Monthly Interest Distributable Amount............S-48
Mortgage.........................................S-15
Mortgage Loan Schedule...........................S-35
Mortgage Loans...................................S-14
Mortgaged Property...............................S-15
Net income from foreclosure property.............S-66
New Regulations..................................S-67
non-U.S. Person..................................S-65
Offered Certificates.............................S-43
OID..............................................S-64
Original Certificate Principal Balance...........S-49
Participant......................................S-44
Pass-Through Rate................................S-49
Plan.............................................S-67
Pooling and Servicing Agreement..................S-35
Prepayment Assumption............................S-59
Prepayment Period................................S-48
Principal Balance................................S-14
Prohibited Transactions Tax......................S-66
Purchase Price...................................S-36
Rating Agency....................................S-70
Realized Loss....................................S-53
Record Date......................................S-43
regular interests.................................S-7
Related Documents................................S-35
Relief Act.......................................S-39
Relief Act Reduction.............................S-49
REMIC............................................S-64
Residual Certificates............................S-43
Residual Interests................................S-7
Senior Certificates..............................S-43
Senior Percentage................................S-51
Senior Prepayment Percentage.....................S-51
Senior Principal Distribution Amount.............S-50
Servicing Advance................................S-39
Servicing Fee....................................S-39
Servicing Fee Rate...............................S-39
Single Family Certificates.......................S-68
SMMEA............................................S-69
Special Hazard Loss Coverage Amount..............S-54
Special Hazard Losses............................S-53
Special Hazard Mortgage Loan.....................S-53
Structuring Assumptions..........................S-59
Subordinate Certificates.........................S-43
Subordinated Percentage..........................S-51
Substitution Adjustment..........................S-36
Systems..........................................S-46
Tax Counsel......................................S-64
Termination Price................................S-41
Trust............................................S-14
Trustee..........................................S-40
Unpaid Interest Shortfall Amount.................S-48
Year 2000 problems...............................S-46
<PAGE>
PROSPECTUS
Mortgage Pass-Through Certificates
(Issuable in Series)
GREENWICH CAPITAL ACCEPTANCE, INC.
Depositor
The Certificates
- --------------------------------
Consider carefully the risk | Greenwich Capital Acceptance, Inc., as
factors beginning on page 5 of | depositor, will sell the certificates.
this prospectus. | Each issue of certificates will have its
| own series designation and will evidence
The certificates represent | the ownership of certain trust assets.
obligations of the trust only |
and do not represent an | Each series of certificates will consist
interest in or obligation of | of one or more classes. Each class of
the depositor, the seller, the | certificates will represent the
master servicer or any of | entitlement to a specified portion of
their affiliates. | future interest payments and a specified
| portion of future principal payments on
This prospectus may be used to | the assets in the related trust. In each
offer and sell the securities | case, the specified portion may equal
only if accompanied by a | from 100% to 0%. A series may include one
prospectus supplement. | or more classes of securities that are
- --------------------------------- senior in right of payment to one or more
other classes. One or more classes of
securities may be entitled to receive
distributions of principal, interest or
both prior to one or more other classes
or before or after certain specified
events have occurred. The related
prospectus supplement will specify each
of these features.
The Trust and Its Assets
As specified in the related prospectus supplement, the assets of a trust will
include primarily the following:
o mortgage loans secured by senior liens on one- to four-family
residential properties or participation interests in loans of this
type;
o mortgage loans secured by senior liens on multifamily residential
properties (including cooperative apartment buildings) or
participation interests in loans of this type;
o conditional sales contracts, installment sales agreements or loan
agreements secured by manufactured housing;
o mortgage pass-through securities issued or guaranteed by the
Government National Mortgage Association (Ginnae Mae), the Federal
National Mortgage Association (Fannie Mae) or the Federal Home Loan
Mortgage Corporation (Freddie Mac); or
o private mortgage-backed securities.
Each trust may be subject to early termination in certain circumstances.
Market for the Certificates
No market will exist for the certificates of any series before they are
issued. In addition, even after the certificates of a series have been issued
and sold, there can be no assurance that a resale market will develop.
Offers of the Certificates
Offers of the certificates may be made through one or more different methods,
including through underwriters. All certificates will be distributed by, or
sold through underwriters managed by, Greenwich Capital Markets, Inc.
Neither the Securities and Exchange Commission nor any state securities
commission has approved these securities or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal
offense.
December 10, 1999
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT...................4
RISK FACTORS........................................................................................................5
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..........................................................................................24
Representations by Sellers; Repurchases............................................................................24
DESCRIPTION OF THE CERTIFICATES....................................................................................25
General............................................................................................................26
Distributions on Certificates......................................................................................27
Advances...........................................................................................................29
Reports to Certificateholders......................................................................................30
CREDIT ENHANCEMENT.................................................................................................31
General............................................................................................................31
Subordination......................................................................................................31
Mortgage Pool Insurance Policies...................................................................................32
FHA Insurance; VA Guarantees.......................................................................................33
Special Hazard Insurance Policies..................................................................................35
Bankruptcy Bonds...................................................................................................36
FHA Insurance on Multifamily Loans.................................................................................36
Reserve Accounts...................................................................................................37
Cross Support......................................................................................................37
Other Insurance, Surety Bonds, Guaranties, Letters of Credit and Similar Instruments or Agreements.................37
YIELD AND PREPAYMENT CONSIDERATIONS................................................................................38
THE POOLING AND SERVICING AGREEMENT................................................................................39
Assignment of Mortgage Assets......................................................................................39
Payments on Mortgage Loans; Deposits to Certificate Account........................................................41
Sub-Servicing by Sellers...........................................................................................42
Collection Procedures..............................................................................................44
Hazard Insurance...................................................................................................45
Realization upon Defaulted Mortgage Loans..........................................................................46
Servicing and Other Compensation and Payment of Expenses...........................................................47
Evidence as to Compliance..........................................................................................47
Certain Matters Regarding the Master Servicer and the Depositor....................................................48
Events of Default..................................................................................................49
Rights upon Event of Default.......................................................................................49
Amendment..........................................................................................................49
Termination; Optional Termination..................................................................................50
The Trustee........................................................................................................50
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS........................................................................50
General............................................................................................................51
Foreclosure/Repossession...........................................................................................53
Environmental Risks................................................................................................55
Rights of Redemption...............................................................................................56
Anti-Deficiency Legislation and Other Limitations on Lenders.......................................................57
Due-on-Sale Clauses................................................................................................58
Prepayment Charges.................................................................................................58
Applicability of Usury Laws........................................................................................58
Soldiers' and Sailors' Civil Relief Act............................................................................59
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............................................................................59
General............................................................................................................59
NON-REMIC CERTIFICATES.............................................................................................59
Single Class of Senior Certificates................................................................................59
Multiple Classes of Senior Certificates............................................................................63
Possible Application of Contingent Payment Regulations to Certain Non-REMIC Certificates...........................66
Sale or Exchange of a Senior Certificate...........................................................................66
Non-U.S. Persons...................................................................................................67
Information Reporting and Backup Withholding.......................................................................67
New Withholding Regulations........................................................................................68
REMIC CERTIFICATES.................................................................................................68
Tiered REMIC Structures............................................................................................69
Regular Certificates...............................................................................................69
Residual Certificates..............................................................................................77
Prohibited Transactions and Other Taxes............................................................................81
Liquidation and Termination........................................................................................81
Administrative Matters.............................................................................................81
Tax-Exempt Investors...............................................................................................82
Non-U.S. Persons...................................................................................................82
Tax-Related Restrictions on Transfers of Residual Certificates.....................................................82
STATE TAX CONSIDERATIONS...........................................................................................84
ERISA CONSIDERATIONS...............................................................................................84
LEGAL INVESTMENT...................................................................................................87
METHOD OF DISTRIBUTION.............................................................................................88
LEGAL MATTERS......................................................................................................88
FINANCIAL INFORMATION..............................................................................................89
AVAILABLE INFORMATION..............................................................................................89
RATINGS............................................................................................................89
INDEX OF DEFINED TERMS.............................................................................................90
.....................................................................................................................
</TABLE>
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of certificates is contained in two separate
documents:
o this prospectus, which provides general information, some of which
may not apply to a particular series; and
o the accompanying prospectus supplement for a particular series,
which describes the specific terms of the certificates of that
series. If the prospectus supplement contains information about a
particular series that differs from the information contained in
this prospectus, you should rely on the information in the
prospectus supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide
you with information that is different from that contained in this prospectus
and the accompanying prospectus supplement. The information in this prospectus
is accurate only as of the date of this prospectus.
Beginning with the section titled "The Trust Fund", certain capitalized terms
are used in this prospectus to assist you in understanding the terms of the
certificates. The capitalized terms used in this prospectus are defined on the
pages indicated under the caption "Index of Defined Terms" beginning on page
90 of this prospectus.
_______________________
If you require additional information, the mailing address of our principal
executive offices is Financial Asset Securities Corp., 600 Steamboat Road,
Greenwich, Connecticut 06830 and the telephone number is (203) 625-2756. For
other means of acquiring additional information about us or a series of
securities, see "The Trust Fund --- Incorporation of Certain Information by
Reference" beginning on page 22 of this prospectus.
_______________________
<PAGE>
RISK FACTORS
You should carefully consider the following information, since it identifies
certain significant sources of risk associated with an investment in the
certificates.
Limited Liquidity.......................... No market will exist for the
certificates of any series
before they are issued. In
addition, there can be no
assurance that a resale market
will develop following the
issuance and sale of any series
of the certificates. Even if a
resale market does develop, it
might not provide investors with
liquidity of investment or
continue for the life of the
certificates.
Limited Assets............................. Unless the applicable prospectus
supplement provides otherwise,
the certificates of each series
will be payable solely from the
assets of the related trust,
including any applicable credit
enhancement, and will not have a
claim against the assets of any
other trust. Moreover, at the
times specified in the related
prospectus supplement, certain
assets of the trust (and/or the
related security account) may be
released to the depositor,
master servicer, any servicer,
credit enhancement provider or
other specified person, if:
o all payments then due on
the related certificates have
been made;
o adequate provision for
future payments on certain
classes of the certificates
has been made; and
o any other payments
specified in the related
prospectus supplement have
been made.
Once released, such assets will
no longer be available to make
payments to certificateholders.
There will be no recourse
against the depositor or the
master servicer if any required
distribution on the certificates
is not made. The certificates
will not represent an interest
in the depositor, the master
servicer, any servicer or any of
their respective affiliates, nor
will the certificates represent
an obligation of any of them.
The only obligations of the
depositor with respect to the
related trust or the
certificates would arise from
the representations and
warranties that the depositor
may make concerning the related
trust assets. The depositor does
not have significant assets and
is unlikely to have significant
assets in the future. If the
depositor should be required to
repurchase a loan from a trust
because of the breach of a
representation or warranty, the
depositor's sole source of funds
for the repurchase would be:
o funds obtained from
enforcing any similar
obligation of the seller or
originator of the loan, or
o funds from a reserve
account or similar credit
enhancement established to
pay for loan repurchases.
In addition, the master servicer
may be obligated to make certain
advances if loans are
delinquent, but only to the
extent it deems the advances to
be recoverable from amounts it
expects to receive on those
loans.
Credit Enhancement......................... Credit enhancement is intended
to reduce the effect of
delinquent payments or loan
losses on those classes of
certificates that have the
benefit of the credit
enhancement. Nevertheless, the
amount of any credit enhancement
is subject to the limits
described in the related
prospectus supplement. Moreover,
the amount of credit enhancement
may decline or be depleted under
certain circumstances before the
certificates are paid in full.
As a result, certificateholders
may suffer losses. In addition,
credit enhancement may not cover
all potential sources of risk of
loss, such as fraud or
negligence by a loan originator
or other parties. Prepayment and
Yield Considerations........................ The timing of principal payments
on the certificates of a series
will be affected by a number of
factors, including the
following:
o the extent of prepayments on
the underlying loans in the
trust or, if the trust is
comprised of underlying
securities, on the loans
backing the underlying
securities;
o how payments of principal are
allocated among the classes
of certificates of that
series as specified in the
related prospectus
supplement;
o if any party has an option to
terminate the related trust
early, the effect of the
exercise of the option;
o the rate and timing of
defaults and losses on the
assets in the related trust;
and
o repurchases of assets in the
related trust as a result of
material breaches of
representations and
warranties made by the
depositor or master servicer.
The rate of prepayment of the
loans included in or underlying
the assets in each trust may
affect the yield to maturity of
the certificates.
Interest payable on the
certificates on any given
distribution date will include
all interest accrued during the
related interest accrual period.
The interest accrual period for
the certificates of each series
will be specified in the
applicable prospectus
supplement. If the interest
accrual period ends two or more
days before the related
distribution date, your
effective yield will be less
than it would be if the interest
accrual period ended the day
before the distribution date. As
a result, your effective yield
at par would be less than the
indicated coupon rate.
Balloon Payments........................... Certain of the underlying loans
may not be fully amortizing and
may require a substantial
principal payment (i.e., a
"balloon" payment) at their
stated maturity. Loans of this
type involve a greater degree of
risk than fully amortizing loans
since the related borrower must
generally be able to refinance
the loan or sell the related
property prior to the loan's
maturity date. The borrower's
ability to do so will depend on
such factors as the level of
available mortgage rates at the
time of sale or refinancing, the
relative strength of the local
housing market, the borrower's
equity in the property, the
borrower's general financial
condition and tax laws.
Nature of Mortgages........................ The following factors, among
others, could adversely affect
property values in such a way
that the outstanding balance of
the related loans would equal or
exceed those values:
o an overall decline in the
residential real estate
markets where the properties
are located,
o failure of borrowers to
maintain their properties
adequately, and
o natural disasters that are
not necessarily covered by
hazard insurance, such as
earthquakes and floods.
If property values decline,
actual rates of delinquencies,
foreclosures and losses on the
underlying loans could be higher
than those currently experienced
by the mortgage lending industry
in general.
Even if you assume that the
properties provide adequate
security for the loans,
substantial delays could occur
before defaulted loans are
liquidated and the proceeds
forwarded to investors. Property
foreclosure actions are
regulated by state statutes and
rules and are subject to many of
the delays and expenses that
characterize other types of
lawsuits if defenses or
counterclaims are made. As a
result, foreclosure actions can
sometimes take several years to
complete. Moreover, some states
prohibit a mortgage lender from
obtaining a judgment against the
borrower for amounts not covered
by property proceeds if the
property is sold outside of a
judicial proceeding. As a
result, if a borrower defaults,
these restrictions may impede
the servicer's ability to
dispose of the borrower's
property and obtain sufficient
proceeds to repay the loan in
full. In addition, the servicer
is entitled to deduct from
liquidation proceeds all the
expenses it reasonably incurs in
trying to recover on the
defaulted loan, including legal
fees and costs, real estate
taxes, and property preservation
and maintenance expenses.
State laws generally regulate
interest rates and other loan
charges, require certain
disclosures, and often require
licensing of loan originators
and servicers. In addition, most
states have other laws and
public policies for the
protection of consumers that
prohibit unfair and deceptive
practices in the origination,
servicing and collection of
loans. Depending on the
provisions of the particular law
or policy and the specific facts
and circumstances involved,
violations may limit the ability
of the servicer to collect
interest or principal on the
loans. Also, the borrower may be
entitled to a refund of amounts
previously paid and the servicer
may be subject to damage claims
and administrative sanctions.
Environmental Risks........................ Federal, state and local laws
and regulations impose a wide
range of requirements on
activities that may affect the
environment, health and safety.
In certain circumstances, these
laws and regulations impose
obligations on owners or
operators of residential
properties such as those that
secure the loans included in a
trust. Failure to comply with
these laws and regulations can
result in fines and penalties
that could be assessed against
the trust as owner of the
related property.
In some states, a lien on the
property due to contamination
has priority over the lien of an
existing mortgage. Further, a
mortgage lender may be held
liable as an "owner" or
"operator" for costs associated
with the release of petroleum
from an underground storage tank
under certain circumstances. If
the trust is considered the
owner or operator of a property,
it will suffer losses as a
result of any liability imposed
for environmental hazards on the
property.
Certain Other Legal Considerations
Regarding the Loans..................... The loans may also be subject to
federal laws relating to the
origination and underwriting.
These laws
o require certain disclosures
to the borrowers regarding
the terms of the loans;
o prohibit discrimination on
the basis of age, race,
color, sex, religion, marital
status, national origin,
receipt of public assistance
or the exercise of any right
under the consumer credit
protection act, in the
extension of credit;
o regulate the use and
reporting of information
related to the borrower's
credit experience; and
o require additional
application disclosures,
limit changes that may be
made to the loan documents
without the borrower's
consent and restrict a
lender's ability to declare a
default or to suspend or
reduce a borrower's credit
limit to certain enumerated
events.
Certain loans are also subject
to federal laws which impose
additional disclosure
requirements on creditors with
respect to non-purchase money
mortgage loans with high
interest rates or high up-front
fees and charges. These laws can
impose specific statutory
liabilities upon creditors that
fail to comply and may affect
the enforceability of the
related loans. In addition, any
assignee of the creditor
(including the trust) would
generally be subject to all
claims and defenses that the
borrower could assert against
the creditor, including the
right to rescind the loan.
Certain loans relating to home
improvement contracts are
subject to federal laws that
protect the borrower from
defective or incomplete work by
a contractor. These laws permit
the borrower to withhold payment
if the work does not meet the
quality and durability standards
agreed to between the borrower
and the contractor. These laws
have the effect of subjecting
any assignee of the seller
(including the trust) to all
claims and defenses which the
borrower in a sale transaction
could assert against the seller
of defective goods.
If certain provisions of these
federal laws are violated, the
master servicer may be unable to
collect all or part of the
principal or interest on the
loans. The trust also could be
subject to damages and
administrative enforcement.
Ratings of the Certificates................ Any class of certificates issued
under this prospectus and the
accompanying prospectus
supplement will be rated in one
of the four highest rating
categories of a nationally
recognized rating agency. A
rating is based on the adequacy
of the value of the trust assets
and any credit enhancement for
that class and reflects the
rating agency's assessment of
how likely it is that holders of
the class of certificates will
receive the payments to which
they are entitled. A rating does
not constitute an assessment of
how likely it is that principal
prepayments on the underlying
loans will be made, the degree
to which the rate of prepayments
might differ from that
originally anticipated or the
likelihood of early, optional
termination of the certificates.
You must not view a rating as a
recommendation to purchase, hold
or sell certificates because it
does not address the market
price or suitability of the
certificates for any particular
investor.
There is no assurance that any
rating will remain in effect for
any given period of time or that
the rating agency will not lower
or withdraw it entirely in the
future. The rating agency could
lower or withdraw its rating due
to:
o any decrease in the adequacy
of the value of the trust
assets or any related credit
enhancement,
o an adverse change in the
financial or other condition
of a credit enhancement
provider or
o a change in the rating of the
credit enhancement provider's
long-term debt.
Book-Entry Registration.................... Limit on Liquidity of
Certificates. Certificates
issued in book-entry form may
have only limited liquidity in
the resale market, since
investors may be unwilling to
purchase certificates for which
they cannot obtain physical
instruments.
Limit on Ability to Transfer or
Pledge. Transactions in
book-entry certificates can be
effected only through The
Depository Trust Company
("DTC"), its participating
organizations, its indirect
participants and certain banks.
As a result, your ability to
transfer or pledge certificates
issued in book-entry form may be
limited.
Delays in Distributions. You may
experience some delay in the
receipt of distributions on
book-entry certificates since
the distributions will be
forwarded by the trustee to DTC
for DTC to credit the accounts
of its participants. In turn,
these participants will
thereafter credit the
distributions to your account
either directly or indirectly
through indirect participants.
Pre-Funding Accounts....................... The related prospectus
supplement may provide that the
depositor deposit a specified
amount in a pre-funding account
on the date the securities are
issued. In this case, the
deposited funds may only be used
to acquire additional assets for
the trust during a set period
after the initial issuance of
the certificates. Any amounts
remaining in the account at the
end of the period will be
distributed as a prepayment of
principal to the holders of the
related certificates.
Lower Credit Quality Trust Fund Assets..... Certain of the trust assets may
have been made to lower credit
quality borrowers who fall into
one of two categories:
o customers with moderate
income, limited assets and
other income characteristics
that cause difficulty in
borrowing from banks and
other traditional lenders;
and
o customers with a history of
irregular employment,
previous bankruptcy filings,
repossession of property,
charged-off loans or
garnishment of wages.
The average interest rate
charged on loans made to these
types of borrowers is generally
higher than that charged by
lenders that typically impose
more stringent credit
requirements. There is a greater
likelihood of late payments on
loans made to these types of
borrowers than on loans to
borrowers with a higher credit
quality. Payments from borrowers
with a lower credit quality are
more likely to be sensitive to
changes in the economic climate
in the areas in which they
reside.
Delinquent Trust Fund Assets............... No more than 20% (by principal
balance) of the trust assets for
any particular series of
certificates will be
contractually delinquent as of
the related cut-off date.
Other Considerations....................... There is no assurance that the
value of the trust assets for
any series of certificates at
any time will equal or exceed
the principal amount of the
outstanding certificates of the
series. If trust assets have to
be sold because of an event of
default or otherwise, providers
of services to the trust
(including the trustee, the
master servicer and the credit
enhancer, if any) generally will
be entitled to receive the
proceeds of the sale to the
extent of their unpaid fees and
other amounts due them before
any proceeds are paid to
investors. As a result, the
proceeds of such a sale may be
insufficient to pay the full
amount of interest and principal
of the related certificates.
<PAGE>
THE TRUST FUND
The trust fund (each, a "Trust Fund") for each series (each, a
"Series") of Mortgage Pass-Through Certificates (the "Certificates") 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) 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 (as
defined herein), 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
holders of the Certificates 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:
(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 (a "balloon payment"). 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 borrowers 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 Federal Housing Administration (the "FHA") or partially
guaranteed by the Veterans Administration (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 within the 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 the FHA
under the Housing Act or under 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 of the 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 will
be a "fully modified pass-through" mortgage-backed certificate issued and
serviced by a mortgage banking company or other financial concern (a "GNMA
Issuer") approved by GNMA or approved by FNMA as a seller-servicer of FHA
Loans and/or VA Loans. The GNMA Certificates may be issued under either the
GNMA I program ("GNMA I Certificates") or under the GNMA II program ("GNMA II
Certificates"). 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 shareholder-owned,
government sponsored enterprise created pursuant to Title III of the Emergency
Home Finance Act of 1970, as amended (the "FHLMC Act"). 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.
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.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and
Exchange Commission (the "SEC") at 450 Fifth Street, N.W., Washington, DC
20549. Investors may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains a website at http:\\www.sec.gov containing reports, proxy and
information statements and other information regarding issuers, including each
Trust Fund, that file electronically with the SEC.
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" ( each, 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" herein.
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 (each, 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 November 1, 1998 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 $50,570. 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" herein.
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" herein 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" herein, 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" herein. 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 Internal Revenue Code of 1986, as amended (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" herein.
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" herein.
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 imposes liability
for such costs on any and all "responsible parties," including owners or
operators. However, CERCLA excludes from the definition of "owner or operator"
a secured creditor who holds indicia of ownership primarily to protect its
security interest but does not "participate in the management" of the property
(the "secured creditor exclusion"). Thus, if a lender's activities begin to
encroach on the actual management of a contaminated facility or property, the
lender may incur liability as an "owner or operator" under CERCLA. Similarly,
if a lender forecloses and takes title to a contaminated facility or property,
the lender may incur CERCLA liability in various circumstances, including, but
not limited to, when it holds the facility or property as an investment
(including leasing the facility or property to a third party), or fails to
market the property in a timely fashion.
Whether actions taken by a lender would constitute such participation
in the management of a property, so that the lender would lose the protection
of the secured creditor exclusion, has been a matter of judicial
interpretation of the statutory language, and court decisions have
historically been inconsistent. In 1990, the United States Court of Appeals
for the Eleventh Circuit suggested, in United States v. Fleet Factors Corp.,
that the mere capacity of the lender to influence a borrower's decisions
regarding disposal of hazardous substances was sufficient participation in the
management of the borrower's business to deny the protection of the secured
creditor exclusion to the lender, regardless of whether the lender actually
exercised such influence. Other judicial decisions did not interpret the
secured creditor exclusion as narrowly as did the Eleventh Circuit.
This ambiguity appears to have been resolved by the enactment of the
Asset Conservation, Lender Liabiltiy and Deposit Insurance Protection Act of
1996 (the "Asset Conservation Act"), which took effect on September 30, 1996.
The Asset Conservation Act provides that in order to be deemed to have
participated in the management of a secured property, a lender must actually
participate in the operational affairs of the property or of the borrower. The
Asset Conservation Act also provides that participation in the management of
the property does not include "merely having the capacity to influence, or
unexercised right to control" operations. Rather, a lender will lose the
protection of the secured creditor exclusion only if it exercises
decision-making control over the borrower's environmental compliance and
hazardous substance handling and disposal practices, or assumes day-to-day
management of all operational functions of the secured property.
If a lender is or becomes liable, it can bring an action for
contribution against any other "responsible parties," including a previous
owner or operator, who crated the environmental hazard, but those persons or
entities may be bankrupt or otherwise judgment proof. The costs associated
with environmental cleanup may be substantial. It is conceivable that such
costs arising from the circumstances set forth above would result in a loss to
Certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under such rule, a holder
of a security interest in an underground storage tank or real property
containing an underground storage tank is not considered an operator of the
underground storage tank as long as petroleum is not added to, stored in or
dispensed from the tank. Moreover, under the Asset Conservation Act, the
protections accorded to lenders under CERCLA are also accorded to holders of
security interests in underground petroleum storage tanks. It should be noted,
however, that liability for cleanup of petroleum contamination may be governed
by state law, which may not provide for any specific protection for secured
creditors.
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 REMIC under 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 section 162 or 212 of the
Code, 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) of the Code
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) of the Code 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) of the Code
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) of the Code 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) of the Code 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 of the
Code. 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) of the Code. 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 of the Code (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 of the
Code.
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 of the Code, 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 of the Code, section 1286 treats a stripped bond or
a stripped coupon as an obligation issued on the date that such stripped
interest is created. If a Trust Fund is created with two classes of Senior
Certificates, one class of Senior Certificates will represent the right to
principal and interest, or principal only, on all or a portion of the Mortgage
Loans (the "Stripped Bond Certificates"), while the second class of Senior
Certificates will represent the right to some or all of the interest on such
portion (the "Stripped Coupon Certificates").
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) of the Code and "loans . . . secured by, an interest in
real property which is . . . residential real property" within the meaning of
section 7701(a)(19)(C)(v) of the Code, 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) of the Code, 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) of the Code.
B. Senior Certificates Representing Interests in Loans Other than ARM Loans
The original issue discount rules of sections 1271 through 1275 of
the Code 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 of the
Code, 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).
Non-corporate taxpayers are subject to reduced maximum rates on
long-term capital gains and are generally subject to tax at ordinary income
rates on short-term capital gains. The deductibility of capital losses is
subject to certain limitations. Prospective investors should consult their own
tax advisors concerning these tax law provisions.
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) of the Code, 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 of the Code)
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) of the Code; (ii) Certificates held by a real estate
investment trust will constitute "real estate assets" within the meaning of
section 856(c)(4)(A) of the Code; 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) of the Code. 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) of the Code and REMIC
Certificates held by a regulated investment company will not constitute
"Government Securities" within the meaning of section 851(b)(4)(A)(ii) of the
Code. REMIC Certificates held by certain financial institutions will
constitute "evidences of indebtedness" within the meaning of section 582(c)(1)
of the Code.
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)
of the Code 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) of
the Code or (ii) "loans secured by an interest in real property" under section
7701(a)(19)(C) of the Code; and (b) whether the income on such Certificates is
interest described in section 856(c)(3)(B) of the Code.
Regular Certificates
General. Except as otherwise stated in this discussion, Regular
Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC and not as ownership interests in the REMIC or
its assets. Moreover, holders of Regular Certificates that otherwise report
income under a cash method of accounting will be required to report income
with respect to Regular Certificates under an accrual method.
Original Issue Discount and Premium. The Regular Certificates may be
issued with "original issue discount" within the meaning of section 1273(a) of
the Code. 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 of the Code. 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 Prepayment Assumption relating to the
Regular Certificates. 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) of the Code, 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 of the
Code 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 of the Code.
Under these provisions and the OID Regulations, "market discount" equals the
excess, if any, of (i) the Regular Certificate's stated principal amount or,
in the case of a Regular Certificate with original issue discount, the
adjusted issue price (determined for this purpose as if the purchaser had
purchased such Regular Certificate from an original holder) over (ii) the
price for such Regular Certificate paid by the purchaser. A Certificateholder
that purchases a Regular Certificate at a market discount will recognize
income upon receipt of each distribution representing stated redemption price.
In particular, under section 1276 of the Code such a holder generally will be
required to allocate each such principal distribution first to accrued market
discount not previously included in income and to recognize ordinary income to
that extent. A Certificateholder may elect to include market discount in
income currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder using the accrual method of accounting
to elect to accrue all interest, discount (including de minimis market or
original issue discount) and premium in income as interest, based on a
constant yield method. If such an election 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 of the Code.
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 of the Code. 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) of the
Code 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 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 of the Code.
Non-corporate taxpayers are subject to reduced maximum rates on
long-term capital gains and are generally subject to tax at ordinary income
rates on short-term capital gains. The deductibility of capital losses is
subject to certain limitations. Prospective investors should consult their own
tax advisors concerning these tax law provisions.
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) of the Code 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) of the Code, up to the amount of interest that would have
accrued at the applicable federal rate under section 1274(d) of the Code 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) of the Code 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 of the Code. 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 of the Code 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 of the Code)
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 of the
Code 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 of the Code 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 of the Code 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) of
the Code, 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) of the Code, 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)) of the Code 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 of the Code. 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.
Non-corporate taxpayers are subject to reduced maximum rates on
long-term capital gains and are generally subject to tax at ordinary income
rates on short-term capital gains. The deductibility of capital losses is
subject to certain limitations. Prospective investors should consult their own
tax advisors concerning these tax law provisions.
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) of the Code, 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 of the Code 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 of the Code 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 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
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. 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.
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) or 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 The Employment
Retirement Security Act of 1974, as amended ("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 and Keogh plans) and on
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 section 3(32) of ERISA) and, if no election has been made under
section 410(d) of the Code, church plans (as defined in section 3(33) of
ERISA), are not subject to 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, trusts 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, partnership or trusts 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, or give rise to, a prohibited transaction under sections 406 and 407
of ERISA 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"), 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 sections 406(a) and 407
of ERISA (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
sections 406(b)(1) and (2) of ERISA (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.
<PAGE>
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.
AVAILABLE INFORMATION
The Depositor has filed with the SEC (the ("SEC") 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 SEC.
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 SEC 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 SEC 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 SEC.
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.
<PAGE>
INDEX OF DEFINED TERMS
Page
1986 Act........................................................64
Accrual Certificates............................................28
AFR.............................................................66
Agency Securities...............................................12
Agreement.......................................................14
Amortizable Bond Premium Regulations............................61
Applicable Amount...............................................75
APR.............................................................16
ARM Loans.......................................................64
Asset Conservation Act..........................................56
Available Funds.................................................27
Bankruptcy Bond.................................................36
Bankruptcy Code.................................................39
BIF.............................................................41
CERCLA..........................................................55
Certificate Account.............................................41
Certificate Principal Balance...................................28
Certificate Register............................................26
Certificates....................................................12
Charter Act.....................................................19
Closing Date....................................................69
Code............................................................44
Collateral Value................................................14
Contingent Payment Regulations..................................66
Contracts.......................................................12
Cooperative Loans...............................................15
Cooperatives....................................................15
Deferred Interest...............................................65
Detailed Description............................................12
Determination Date..............................................27
DOL.............................................................85
EPA.............................................................55
ERISA...........................................................84
Events of Default...............................................49
FDIC............................................................24
FHA.............................................................15
FHA Loans.......................................................16
FHLMC...........................................................12
FHLMC Act.......................................................18
FHLMC Certificate Group.........................................18
FNMA............................................................12
FTC Rule........................................................57
Garn-St Germain Act.............................................58
GCA.............................................................22
GCM.............................................................88
GNMA............................................................12
GNMA Certificate................................................16
GNMA I Certificates.............................................16
GNMA II Certificates............................................16
GNMA Issuer.....................................................16
Guaranty Agreement..............................................16
Housing Act.....................................................16
HUD.............................................................34
Incorporation of Certain Information by Reference...............22
Insolvency Trustee..............................................39
Insurance Proceeds..............................................42
Insured Expenses................................................42
IRS.............................................................61
Legislative History.............................................65
Liquidation Expenses............................................42
Liquidation Proceeds............................................42
Loan-to-Value Ratio.............................................14
Manufactured Homes..............................................16
Manufacturer Invoice Price......................................14
Mark-to-Market Regulations......................................78
Master REMIC....................................................69
Mortgage........................................................40
Mortgage Assets.................................................12
Mortgage Loans..................................................12
Mortgage Pool...................................................12
Mortgage Pool Insurance Policy..................................32
Mortgage Rate...................................................13
Mortgaged Properties............................................12
Multifamily Loans...............................................12
NCUA............................................................87
New Regulations.................................................68
Non-economic Residual Certificate...............................83
OID Regulations.................................................61
Parties in Interest.............................................85
Payment Lag Certificates........................................75
Permitted Investments...........................................42
Plans...........................................................84
PMBS Agreement..................................................21
PMBS Issuer.....................................................21
PMBS Servicer...................................................21
PMBS Trustee....................................................21
Policy Statement................................................87
Pool Insurer....................................................32
Prepayment Assumption...........................................65
Primary Insurer.................................................46
Primary Mortgage Insurance Policy...............................12
Principal Prepayments...........................................29
PTE 83-1........................................................85
Purchase Price..................................................25
Rating Agency...................................................41
RCRA............................................................56
Record Date.....................................................26
Refinance Loans.................................................14
Regular Certificateholders......................................69
Regular Certificates............................................68
Relief Act......................................................59
REMIC...........................................................26
REMIC Regulations...............................................59
Reserve Account.................................................27
Residual Certificates...........................................68
Retained Interest...............................................25
SAIF............................................................41
SEC.............................................................22
Sellers.........................................................12
Senior Certificates.............................................31
Series..........................................................12
Single Family Certificates......................................85
Single Family Loans.............................................12
SMMEA...........................................................87
Special Hazard Insurance Policy.................................35
Special Hazard Insurer..........................................35
Stripped ARM Obligations........................................65
Stripped Bond Certificates......................................63
Stripped Coupon Certificates....................................63
Subordinated Certificates.......................................32
Sub-Servicer....................................................14
Sub-Servicing Account...........................................41
Sub-Servicing Agreement.........................................42
Subsidiary REMIC................................................69
Super-Premium Certificates......................................70
Support Agreement...............................................30
Support Servicer................................................30
Title V.........................................................58
Treasury........................................................62
Trust Fund......................................................12
U.S. Person.....................................................67
UCC.............................................................52
Underwriter Exemption...........................................86
VA .............................................................15
VA Guaranty Policy..............................................34
VA Loans........................................................16
Until 90 days after the date of this prospectus supplement, all dealers
effecting transactions in the securities offered by this prospectus
supplement, whether or not participating in this distribution, may be required
to deliver this prospectus supplement and the prospectus. This is in addition
to the obligation of dealers to deliver this prospectus supplement and the
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
$624,143,300
(Approximate)
Mortgage Loan Pass-Through Certificates,
Series 1999-1
$253,248,700 Class A-1 Weighted Average Pass-Through Rate
$370,894,600 Class A-2 Weighted Average Pass-Through Rate
GREENWICH CAPITAL ACCEPTANCE, INC.
Depositor
CERTAIN AFFILIATES OF FIFTH THIRD BANK
Sellers
FIFTH THIRD BANK
Master Servicer
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PROSPECTUS SUPPLEMENT
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You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the offered certificates in any state where the offer is
not permitted.
We do not claim that the information in this prospectus supplement and the
accompanying prospectus is accurate as of any date other than the dates stated
on their respective covers.
December 29, 1999
