Rule 424(b)(5)
Registration No. 33-77722
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 27, 1995)
$34,853,754
DLJ MORTGAGE ACCEPTANCE CORP.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1996-Q4
$ 0 CLASS SA CERTIFICATES VARIABLE RATE*
$13,000,000 CLASS A-1 CERTIFICATES 7.25%
$14,000,000 CLASS A-2 CERTIFICATES 7.25%
$ 3,493,138 CLASS A-3 CERTIFICATES 7.25%
$ 2,790,794 CLASS B-1 CERTIFICATES 7.25%
$ 697,699 CLASS B-2 CERTIFICATES 7.25%
$ 872,123 CLASS B-3 CERTIFICATES 7.25%
*Based on the Notional Amount as described herein.
The Series 1996-Q4 Mortgage Pass-Through Certificates (the
"Certificates") will consist of the following ten Classes: (i) Class SA
Certificates (the "Variable Strip Certificates"), (ii) Class P Certificates
(the "Principal Only Certificates"), (iii) Class A-1 Certificates, Class A-2
Certificates and Class A-3 Certificates (together, the "Class A Certificates,"
and collectively with the Variable Strip Certificates and the Principal Only
Certificates, the "Senior Certificates"), (iv) Class B-1 Certificates, Class
B-2 Certificates and Class B-3 Certificates (together, the "Class B
Certificates"), (iv) Class SB Certificates and (v) Class R Certificates (the
"Residual Certificates"). Only the Variable Strip Certificates, the Class A
Certificates and the Class B Certificates (collectively, the "Offered
Certificates") are offered hereby.
The Certificates will, in the aggregate, evidence the entire
beneficial ownership interest in a trust fund (the "Trust Fund") consisting
primarily of a pool of certain conventional, fixed- and
adjustable-rate, fully-amortizing, one- to four-family, first lien mortgage
loans (the "Mortgage Loans") to be deposited by DLJ Mortgage Acceptance
Corp. (the "Depositor") into the Trust Fund for the benefit of the
Certificateholders. The Mortgage Loans will have an aggregate principal
balance as of February 1, 1996 (the "Cut-off Date") of $34,884,929.88 and
will have original terms to maturity from the due dates of their first
scheduled monthly payment of interest and principal of not more than 30
years. All of the Mortgage Loans were originated or acquired by Quality
Mortgage USA, Inc. (the "Seller") and will have been sold by the Seller to DLJ
Mortgage Capital, Inc., an affiliate of the Depositor, prior to the date of
initial issuance of the Certificates (the "Delivery Date") and acquired by
the Depositor from such affiliate on the Delivery Date. The Mortgage Loans
will be serviced by Temple-Inland Mortgage Corporation (the "Master
Servicer"). Certain characteristics of the Mortgage Loans are described
herein under "Description of the Mortgage Pool," and certain
matters related to the servicing of the Mortgage Loans are described
herein under "Pooling and Servicing Agreement" and in the Prospectus under
"Servicing of Loans" and "The Pooling and Servicing Agreements."
The rights of the holders of the Class B-3 Certificates to receive
distributions with respect to the Mortgage Loans will be subordinate to the
rights of the holders of the Class B-2 Certificates, the Class B-1 Certificates
and the Senior Certificates. The rights of the holders of the Class B-2
Certificates to receive distributions with respect to the Mortgage Loans will
be subordinate to the rights of the holders of the Class B-1 Certificates and
the Senior Certificates. The rights of the holders of the Class B-1
Certificates to receive distributions with respect to the Mortgage Loans will
be subordinate to the rights of the holders of the Senior Certificates, in each
case as and to the extent described herein.
(CONTINUED ON NEXT PAGE)
------------------------------
THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, THE SELLER, THE MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE
LOANS WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE DEPOSITOR, THE SELLER, THE MASTER SERVICER, THE
TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
______________________________
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
______________________________
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK
FACTORS," WHICH BEGINS ON PAGE S-23 OF THIS PROSPECTUS SUPPLEMENT, AND ALSO
SHOULD CONSIDER THE FACTORS SET FORTH UNDER "SPECIAL CONSIDERATIONS," WHICH
BEGINS ON PAGE 16 OF THE PROSPECTUS.
-----------
The Offered Certificates are being offered by the Underwriter from time
to time to the public in negotiated transactions or otherwise at varying prices
to be determined at the time of sale. Proceeds to the Depositor are expected to
be approximately $35,139,161.03 plus accrued interest, before deducting
issuance expenses payable by the Depositor.
The Offered Certificates are offered when, as and if delivered to and
accepted by the Underwriter, and subject to various conditions, including the
Underwriter's right to reject orders in whole or in part. It is expected that
the Variable Strip Certificates and the Class A Certificates will be
delivered in book-entry form through the Same Day Funds Settlement System of
The Depository Trust Company as further discussed herein, and that all other
Offered Certificates will be delivered in registered and certificated form at
the office of Donaldson, Lufkin & Jenrette Securities Corporation, New York,
New York, on or about March 5, 1996, against payment therefor in immediately
available funds.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MARCH 4, 1996
(CONTINUED FROM PREVIOUS PAGE)
Distributions on the Offered Certificates will be made on the 25th day of
each month or, if such day is not a business day, then on the next succeeding
business day, commencing in March 1996 (each, a "Distribution Date"). As more
fully described herein, interest distributions on the Offered Certificates will
be based on the Certificate Principal Balances thereof (or the Notional Amount
(as defined herein) in the case of the Variable Strip Certificates) and the
related Pass-Through Rates. The Pass-Through Rates on the Offered Certificates
(other than the Variable Strip Certificates) will be 7.25% per annum. The
Pass-Through Rate with respect to the first Distribution Date for the Variable
Strip Certificates will be approximately 2.278% per annum.
Distributions in respect of principal will be allocated among the various
Classes of Certificates (other than the Variable Strip Certificates and the
Class SB Certificates), as described herein. No principal prepayments on the
Mortgage Loans will be distributed to holders of the Class B Certificates prior
to the Distribution Date occurring in March 2001 and no principal prepayments
on the Mortgage Loans will be distributed to the holders of the Class B
Certificates thereafter if certain criteria relating to the delinquency and
loss performance of the Mortgage Loans described herein are not satisfied,
unless the Class A Certificates have been retired. Furthermore, to the extent
described herein, all amounts otherwise distributable to the Class SB
Certificates and the Class R Certificates prior to the Class B Certificate
Termination Date (as defined herein), and thereafter a portion of such amounts,
otherwise distributable to the Class SB Certificates and the Class R
Certificates will be distributed as principal to the holders of the Class A
Certificates and the Class B Certificates.
THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON, AMONG
OTHER THINGS, THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS,
REPURCHASES, DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE LOANS WHICH MAY VARY
SIGNIFICANTLY OVER TIME. THE YIELD TO MATURITY ON THE CLASS B CERTIFICATES WILL
BE EXTREMELY SENSITIVE TO LOSSES ON THE MORTGAGE LOANS (AND THE TIMING THEREOF)
TO THE EXTENT THAT SUCH LOSSES ARE NOT COVERED BY THE CLASSES OF CERTIFICATES
SUBORDINATE THERETO, AS DESCRIBED HEREIN. THE MORTGAGE LOANS GENERALLY MAY BE
PREPAID IN FULL OR IN PART AT ANY TIME; HOWEVER, PREPAYMENT MAY SUBJECT THE
MORTGAGOR TO A PREPAYMENT CHARGE. THE YIELD TO INVESTORS ON THE OFFERED
CERTIFICATES WILL BE ADVERSELY AFFECTED BY ANY SHORTFALLS IN INTEREST COLLECTED
ON THE MORTGAGE LOANS DUE TO PREPAYMENTS, LIQUIDATIONS OR OTHERWISE TO THE
EXTENT THAT SUCH SHORTFALLS ARE NOT OTHERWISE COVERED, AS DESCRIBED HEREIN. THE
YIELD TO INVESTORS ON THE VARIABLE STRIP CERTIFICATES WILL BE EXTREMELY
SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS,
REPURCHASES, DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE LOANS WHICH MAY VARY
SIGNIFICANTLY OVER TIME. A RAPID RATE OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS, REPURCHASES, DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE LOANS
COULD RESULT IN THE FAILURE OF INVESTORS IN THE VARIABLE STRIP CERTIFICATES TO
RECOVER THEIR INITIAL INVESTMENT. SEE "THE SELLER LOAN DELINQUENCY,
FORBEARANCE, FORECLOSURE, BANKRUPTCY AND REO PROPERTY STATUS" AND "--REO
PROPERTY LIQUIDATION EXPERIENCE" HEREIN FOR IMPORTANT INFORMATION REGARDING THE
DELINQUENCY, FORBEARANCE, FORECLOSURE, BANKRUPTCY AND REO PROPERTY STATUS AND
LOSS EXPERIENCE OF CERTAIN MORTGAGE LOANS PREVIOUSLY ORIGINATED OR ACQUIRED BY
THE SELLER UNDER SUBSTANTIALLY THE SAME UNDERWRITING CRITERIA PURSUANT TO WHICH
THE MORTGAGE LOANS WERE ORIGINATED OR ACQUIRED. IN ADDITION, THE YIELD ON THE
VARIABLE STRIP CERTIFICATES WILL BE SENSITIVE TO FLUCTUATIONS IN THE LEVEL OF
THE INDEX, WHICH MAY VARY SIGNIFICANTLY OVER TIME. SEE "SUMMARY OF PROSPECTUS
SUPPLEMENT--SPECIAL PREPAYMENT CONSIDERATIONS," "--SPECIAL YIELD CONSIDERATIONS"
AND "CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS" HEREIN, AND "SPECIAL
CONSIDERATIONS" AND "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" IN THE
PROSPECTUS.
It is a condition to the issuance of the Offered Certificates that the
Class A Certificates, the Principal Only Certificates and the Variable Strip
Certificates be rated "Aaa" by Moody's Investors Service, Inc. ("Moody's") and
"AAA" by Duff & Phelps Credit Rating Co. ("DCR"), the Class B-1 Certificates be
rated "Aa3" by Moody's and "AA" by DCR, the Class B-2 Certificates be rated
"A3" by Moody's and "A+" by DCR and the Class B-3 Certificates be rated "Baa3"
by Moody's and "BBB" by DCR.
As described herein, a "real estate mortgage investment conduit"
("REMIC") election will be made in connection with the Trust Fund for federal
income tax purposes. Each Class of the Offered Certificates will constitute a
"regular interest" in the REMIC. See "Certain Federal Income Tax Consequences"
herein and in the Prospectus.
S-2
There is currently no secondary market for the Offered Certificates.
Donaldson, Lufkin & Jenrette Securities Corporation (the "Underwriter") intends
to make a secondary market in the Offered Certificates but has no obligation to
do so. There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue or will
provide investors with a sufficient level of liquidity. The Offered
Certificates will not be listed on any securities exchange. See "Special
Considerations" in the Prospectus.
The information set forth herein under "Summary of Prospectus Supplement
The Mortgage Pool," "Description of the Mortgage Pool" and "The Seller" (other
than the information set forth herein under "The Seller Loan Delinquency,
Forbearance, Foreclosure, Bankruptcy and REO Property Status" and, to the
extent provided by Lomas Mortgage USA, Inc. as described herein, the
information set forth herein under "The Seller REO Property Liquidation
Experience") has been provided by the Seller. No representation is made by the
Depositor, the Underwriter, the Master Servicer, the Trustee or any of their
respective affiliates as to the accuracy or completeness of the information
provided by the Seller. The information set forth herein under "The Seller Loan
Delinquency, Forbearance, Foreclosure, Bankruptcy and REO Property
Status" and, other than to the extent provided by the Seller, the information
set forth herein under "The Seller REO Property Liquidation Experience" has
been provided by Lomas Mortgage USA, Inc. in its capacity as servicer during
the periods indicated. No representation is made by the Depositor, the
Underwriter, the Master Servicer, the Seller, the Trustee or any of their
respective affiliates as to the accuracy or completeness of the information
provided by Lomas Mortgage USA, Inc.
------------------------------------
No person is authorized in connection with this offering to give any
information or to make any representation about the Depositor, the Seller, the
Master Servicer, the Trustee, the Offered Certificates or any other matter
referred to herein, other than those contained in this Prospectus Supplement or
the Prospectus. If any other information or representation is given or
made, such information or representation may not be relied upon as having been
authorized by the Depositor, the Seller, the Trustee or the Master Servicer.
This Prospectus Supplement and the Prospectus do not constitute an offer to
sell or a solicitation of an offer to buy securities other than the Offered
Certificates, or an offer to sell or a solicitation of an offer to buy
securities in any jurisdiction or to any person to whom it is unlawful to make
such offer in such jurisdiction. Neither the delivery of this Prospectus
Supplement or the Prospectus nor any sale hereunder or thereunder shall, under
any circumstances, create any implication that the information contained
herein or therein is correct as of any time subsequent to their respective
dates.
------------------------------------
THE OFFERED CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT WILL BE
PART OF A SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE DEPOSITOR
PURSUANT TO ITS PROSPECTUS DATED MARCH 27, 1995, OF WHICH THIS PROSPECTUS
SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE
PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT
CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS
AND THIS PROSPECTUS SUPPLEMENT IN FULL.
------------------------------------
UNTIL JUNE 4, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT
AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
S-3
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
SUMMARY OF PROSPECTUS SUPPLEMENT . . . . . . . . . . . . . . S-5
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . S-23
DESCRIPTION OF THE MORTGAGE POOL . . . . . . . . . . . . . S-24
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . S-35
THE SELLER . . . . . . . . . . . . . . . . . . . . . . . . S-35
DESCRIPTION OF THE CERTIFICATES . . . . . . . . . . . . . . S-42
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS . . . . . . . . S-59
POOLING AND SERVICING AGREEMENT . . . . . . . . . . . . . . S-65
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . S-71
METHOD OF DISTRIBUTION . . . . . . . . . . . . . . . . . . S-72
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . S-73
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . S-73
RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . . S-73
LEGAL INVESTMENT . . . . . . . . . . . . . . . . . . . . . S-74
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . S-74
PROSPECTUS
Prospectus Supplement . . . . . . . . . . . . . . . . . . . . . 2
Additional Information . . . . . . . . . . . . . . . . . . . . 2
Reports to Certificateholders . . . . . . . . . . . . . . . . . 2
Incorporation of Certain Documents by Reference . . . . . . . . 2
Summary of Terms of the Certificates . . . . . . . . . . . . . 3
Special Considerations . . . . . . . . . . . . . . . . . . . 16
Description of the Certificates . . . . . . . . . . . . . . . 19
Yield, Prepayment and Maturity Considerations . . . . . . . . 24
The Trust Funds . . . . . . . . . . . . . . . . . . . . . . . 29
Loan Underwriting Procedures and Standards . . . . . . . . . 42
Servicing of Loans . . . . . . . . . . . . . . . . . . . . . 49
Credit Support . . . . . . . . . . . . . . . . . . . . . . . 61
Description of Mortgage and Other Insurance . . . . . . . . . 65
The Pooling and Servicing Agreements . . . . . . . . . . . . 72
Certain Legal Aspects of Loans . . . . . . . . . . . . . . . 84
Certain Federal Income Tax Consequences . . . . . . . . . . . 97
State and Other Tax Consequences . . . . . . . . . . . . . . 127
ERISA Considerations . . . . . . . . . . . . . . . . . . . . 127
Legal Investment . . . . . . . . . . . . . . . . . . . . . . 130
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . 131
The Depositor . . . . . . . . . . . . . . . . . . . . . . . . 131
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . 132
Plan of Distribution . . . . . . . . . . . . . . . . . . . . 132
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . 133
S-4
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE HEREIN AND IN THE PROSPECTUS.
CAPITALIZED TERMS USED HEREIN AND NOT OTHERWISE DEFINED HEREIN HAVE THE
MEANINGS ASSIGNED IN THE PROSPECTUS.
TITLE OF SECURITIES . . . . . Mortgage Pass-Through Certificates,
Series 1996-Q4.
DEPOSITOR . . . . . . . . . . DLJ Mortgage Acceptance Corp. (the
"Depositor"). See "The Depositor" in
the Prospectus.
MASTER SERVICER . . . . . . . Temple-Inland Mortgage Corporation
("TIMC" or the "Master Servicer").
See "Pooling and Servicing Agreement--The
Master Servicer" herein.
TRUSTEE . . . . . . . . . . . Bankers Trust Company (the "Trustee"). See
"Pooling and Servicing Agreement--The
Trustee" herein.
SELLER . . . . . . . . . . . Quality Mortgage USA, Inc. (the "Seller").
See "The Seller" herein.
CUT-OFF DATE . . . . . . . . February 1, 1996.
DELIVERY DATE . . . . . . . . On or about March 5, 1996.
DENOMINATIONS . . . . . . . . The Variable Strip Certificates will be
issued, maintained and transferred on
the book-entry records of the
Depository Trust Company ("DTC") and
its Participants in minimum initial
Notional Amounts (as defined herein) of
$25,000 and integral multiples of $1.00
in excess thereof. The Class A
Certificates will be issued, maintained
and transferred on the book-entry
records of DTC and its Participants in
minimum denominations of $25,000 and
integral multiples of $1.00 in excess
thereof. The Class B-1 Certificates will
be issued in minimum denominations of
$25,000 and integral multiples of $1,000
in excess thereof, and the Class B-2
Certificates and the Class B-3
Certificates will be issued in minimum
denominations of $250,000 and integral
multiples of $1,000 in excess thereof;
provided, however, that one Certificate
of each such Class may be issued
evidencing the sum of an authorized
denomination thereof and the remainder
of the aggregate initial Certificate
Principal Balance of such Class.
REGISTRATION . . . . . . . . The Variable Strip Certificates and the
Class A Certificates (collectively, the
"DTC Registered Certificates") will
be represented by one or more
Certificates registered in the name of
Cede & Co., as nominee of DTC. No person
acquiring a beneficial interest in a
Class of DTC Registered Certificates
(each, a "Beneficial Owner") will be
entitled to receive a Certificate of
such Class in certificated form, except
under the limited circumstances
described herein.
S-5
For each Certificate held by DTC, DTC
will effect payments to and transfers of
the related DTC Registered Certificates
among the respective Beneficial Owners by
means of its electronic recordkeeping
services, acting through organizations
that participate in DTC. This arrangement
may result in certain delays in receipt
of distributions by Beneficial Owners and
may restrict a Beneficial Owner's ability
to pledge the Certificates beneficially
owned by it. All references in this
Prospectus Supplement to the DTC
Registered Certificates reflect the
rights of Beneficial Owners of such
Certificates only as such rights may be
exercised through DTC and its
participating organizations so long as
such Certificates are held by DTC. The
Class B Certificates will be offered in
registered and certificated form. See
"Description of the Certificates--
Book-Entry Registration" in the
Prospectus.
THE MORTGAGE POOL . . . . . . Based solely upon information provided
by the Seller, the Mortgage Loans will
have the characteristics described
herein. The Trust Fund (as defined
herein) will consist primarily of a pool
(the "Mortgage Pool") of conventional,
fixed- and adjustable-rate, fully
amortizing mortgage loans (the "Mortgage
Loans") with an aggregate principal
balance as of the Cut-off Date of
$34,884,929.88. The Mortgage Loans are
secured by first liens on fee simple
interests in one- to four-family
residential real properties (each, a
"Mortgaged Property") and have original
terms to maturity from the due dates of
their first scheduled monthly payment of
interest and principal (each such
payment, a "Monthly Payment") of not
more than 30 years. All of the Mortgage
Loans have Monthly Payments due on the
first day of each month.
The interest rate (each, a "Mortgage
Rate") will be fixed for approximately
97.03% of the Mortgage Loans (the "Fixed
Rate Loans"), by aggregate principal
balance as of the Cut-off Date.
The Mortgage Rates on approximately 2.97%
of the Mortgage Loans (the "Adjustable
Rate Loans"), by aggregate principal
balance as of the Cut-off Date, will be
subject to adjustment commencing
approximately seven years after their
respective dates of origination, and
semi-annually thereafter, on the
Adjustment Dates (as defined herein)
applicable thereto to equal, as to each
Adjustable Rate Loan and any related
Adjustment Date, the sum, rounded to the
nearest 0.125%, of the Index (as defined
below) and a fixed percentage amount
(the "Gross Margin"), subject to certain
periodic rate caps and to maximum and
minimum Mortgage Rates (as described
herein) that, in the case of such
periodic rate caps, will not be
applicable on the first Adjustment Date
of such
S-6
Adjustable Rate Loan. With respect to
each Adjustable Rate Loan and any related
Adjustment Date, the Index applicable to
the determination of the related Mortgage
Rate will be the average of the interbank
offered rates for six-month United States
dollar deposits in the London interbank
market based on quotations of major banks
("LIBOR"), as published in the Western
Edition of The Wall Street Journal and
most recently available (i) as of the
date 45 days prior to such Adjustment
Date with respect to a majority of the
Mortgage Loans or (ii) as of the first
business day of the month immediately
preceding the month in which the
Adjustment Date occurs.
All of the Mortgage Loans will be either
Fixed Rate Loans or Adjustable Rate
Loans, and none of the Mortgage Loans
will have provisions for balloon
payments, negative amortization or
deferred interest. See "Description
of the Mortgage Pool" herein for
a further description of certain
characteristics of the Mortgage Loans.
Approximately 2.96% of the Mortgage Loans
(by aggregate principal balance as of
the Cut-off Date) were thirty days or
more but less than sixty days
delinquent in their Monthly Payments as
of the Cut-off Date (such Mortgage
Loans, "Thirty-Day Delinquent Mortgage
Loans"). Approximately 0.08% of the
Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) were
sixty days or more but less than
ninety days delinquent in their
Monthly Payments (such Mortgage Loans,
"Sixty-Day Delinquent Mortgage Loans")
as of the Cut-off Date, and no
Mortgage Loans will be Sixty-Day
Delinquent Mortgage Loans as of the
Closing Date. There were no Mortgage
Loans ninety days or more delinquent as
of the Cut-off Date. Prospective
investors in the Offered Certificates
should be aware, however, that only
approximately 12.68% of the Mortgage
Loans (by aggregate principal balance as
of the Cut-off Date) had a first
Monthly Payment due on or before
January 1, 1996 and that
only approximately 0.75% of the
Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) had a
first Monthly Payment due on or before
December 1, 1995, and therefore, the
remaining Mortgage Loans could not have
been Thirty-Day Delinquent Mortgage
Loans or Sixty-Day Delinquent
Mortgage Loans as of the Cut-off Date.
In addition to the foregoing,
approximately 0.08% of the Mortgage
Loans (by aggregate principal balance as
of the Cut-off Date) will have been
thirty days or more delinquent in
their Monthly Payments more than once
during the twelve months preceding the
Cut-off Date.
All of the Mortgage Loans were originated
or acquired under the Seller's regular
lending program, as described
S-7
herein. Mortgage loans originated or
acquired under the regular lending
program are likely to experience rates of
delinquency, foreclosure, bankruptcy and
loss that are higher, and that may be
substantially higher, than those of
mortgage loans originated in a more
traditional manner. See "Risk Factors
Underwriting Standards and Potential
Delinquencies" and "Description of the
Mortgage Pool Underwriting Standards"
herein. In addition, see "The Seller Loan
Delinquency, Forbearance, Foreclosure,
Bankruptcy and REO Property Status" and
"--REO Property Liquidation Experience"
herein for important information
regarding the delinquency, forbearance,
foreclosure, bankruptcy and REO property
status and loss experience of certain
mortgage loans previously originated or
acquired by the Seller under
substantially the same underwriting
criteria pursuant to which the Mortgage
Loans were originated or acquired.
THE OFFERED CERTIFICATES . . The Offered Certificates will be issued
pursuant to a Pooling and Servicing
Agreement, to be dated as of February
1, 1996, among the Depositor, the
Master Servicer and the Trustee (the
"Pooling and Servicing Agreement"). The
Class A-1 Certificates, the Class A-2
Certificates, the Class A-3
Certificates, the Class B-1
Certificates, the Class B-2
Certificates and the Class B-3
Certificates will evidence initial
undivided beneficial ownership interests
of approximately 37.265%, 40.132%,
10.013%, 8.000%, 2.000% and 2.500%,
respectively, in a trust fund (the
"Trust Fund") consisting primarily of
the Mortgage Pool. The Offered
Certificates (other than the Variable
Strip Certificates) will have the
following approximate Certificate
Principal Balances as of the Cut-off
Date:
Class A-1 Certificates $13,000,000
Class A-2 Certificates $14,000,000
Class A-3 Certificates $ 3,493,138
Class B-1 Certificates $ 2,790,794
Class B-2 Certificates $ 697,699
Class B-3 Certificates $ 872,123
The Variable Strip Certificates (and the
Class SB Certificates) have no
Certificate Principal Balance and will
accrue interest on the Notional Amount
(as defined herein) of such
Class of Certificates.
The Pass-Through Rate on each Class of
Offered Certificates (other than the
Variable Strip Certificates) and the
Class R Certificates for each
Distribution Date will be equal to
7.250% per annum. The Pass-Through
Rate on the Variable Strip
Certificates for each Distribution
Date will be equal to the weighted
average, as determined as of the Due
Date in the month preceding the month
in which such
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Distribution Date occurs, of the Pool
Strip Rates (as defined below) on the
Non-Discount Mortgage Loans (as
defined below), which will be
approximately 2.278% per annum with
respect to the first Distribution Date.
The Pass-Through Rate on the Class SB
Certificates will be equal to 1.00% per
annum (the "Fixed Strip Rate"). With
respect to any Distribution Date, the
Pool Strip Rate on each Non-Discount
Mortgage Loan will equal the
then-applicable Net Mortgage Rate thereon
minus 8.250%. The Pool Strip Rates on the
Non-Discount Mortgage Loans ranged from
0.000% to 11.050% per annum as of the
Cut-off Date. The "Net Mortgage Rate" on
each Mortgage Loan will equal the
Mortgage Rate thereon minus 0.500% per
annum, the annual rate at which the
related servicing fee accrues (the
"Servicing Fee Rate").
INTEREST DISTRIBUTIONS . . . Holders of the Variable Strip
Certificates and the Class A
Certificates will be entitled to
receive interest distributions in an
amount equal to the Accrued
Certificate Interest (as defined herein)
for each such Class on each Distribution
Date (for such Certificates in the
aggregate, the "Priority Interest
Distribution Amount"), to the extent of
the Available Distribution Amount (as
defined herein) for such Distribution
Date.
Holders of the Class B-1 Certificates
will be entitled to receive interest
distributions in an amount equal to
the Accrued Certificate Interest for
such Class on each Distribution Date,
to the extent of the portion of the
Available Distribution Amount for such
Distribution Date remaining after
interest and principal are
distributed to the Senior Certificates
and reimbursement is made to the Master
Servicer for certain Advances as
described herein. Holders of the Class
B-2 Certificates will be entitled
to receive interest distributions
in an amount equal to the Accrued
Certificate Interest for such Class on
each Distribution Date, to the extent of
the portion of the Available
Distribution Amount remaining after
interest and principal are distributed
to the Senior Certificates and the Class
B-1 Certificates and reimbursement is
made to the Master Servicer for certain
Advances as described herein. Holders of
the Class B-3 Certificates will be
entitled to receive interest
distributions in an amount equal to the
Accrued Certificate Interest for such
Class on each Distribution Date, to the
extent of the portion of the Available
Distribution Amount remaining after
interest and principal are distributed
to the Senior Certificates, the Class
B-1 Certificates and the Class B-2
Certificates and reimbursement is made
to the Master Servicer for certain
Advances as described herein.
S-9
With respect to any Distribution Date,
Accrued Certificate Interest will be
equal to (a) in the case of each Class
of Offered Certificates (other than
the Variable Strip Certificates) and the
Class R Certificates, one month's
interest accrued on the Certificate
Principal Balance of the Certificates of
such Class at the related
Pass-Through Rate and (b) in the
case of the Variable Strip
Certificates, and the Class
SB Certificates, one month's interest
accrued on the Notional Amount at
the related Pass-Through Rate, in each
case less (i) any interest shortfalls
not covered with respect to such Class
by Subordination (as defined herein and
allocated as described herein),
including any Prepayment Interest
Shortfall (as defined herein) for
such Distribution Date to the
extent not covered by payments by the
Master Servicer as described herein and
(ii) the interest portions of any
Realized Losses (as defined herein)
allocated thereto. See "Description of
the Certificates Interest Distributions"
herein.
The notional amount (the "Notional
Amount") with respect to the Variable
Strip Certificates, as of any date of
determination, will equal the aggregate
Stated Principal Balance of all of the
Non-Discount Mortgage Loans, except that
the initial Notional Amount will be
rounded down to the nearest dollar
increment. The Notional Amount of the
Variable Strip Certificates will be
equal to $34,083,541 as of the Cut-off
Date. The Notional Amount with respect
to the Class SB Certificates, as of any
date of determination, will equal the
aggregate Stated Principal Balance of
all of the Mortgage Loans, except that
the initial Notional Amount will be
rounded down to the nearest dollar
increment. The Notional Amount of the
Class SB Certificates will be equal to
$34,884,929 as of the Cut-off Date.
References herein to a Notional Amount
in respect of a Class of Certificates
are used solely for certain calculations
and do not represent the right of the
holders of such Class of Certificates to
receive distributions of such amount.
See "Description of the Certificates
Interest Distributions" herein.
PRINCIPAL DISTRIBUTIONS . . . Holders of the Class A Certificates
will be entitled to receive on each
Distribution Date, in the manner and
priorities set forth herein, to the
extent of the portion of the Available
Distribution Amount remaining after the
Priority Interest Distribution Amount
and the Principal Only Distribution
Amount (as defined below) are
distributed, a distribution allocable to
principal (the "Senior Principal
Distribution Amount") that will, as more
fully described herein, include (i) the
Senior Percentage (as defined below) of
scheduled principal payments due on the
Mortgage Loans and of
S-10
certain unscheduled collections of
principal on the Mortgage Loans as
described herein (other than the
applicable Discount Fraction described
below of such payments and collections in
respect of the Discount Mortgage Loans,
as defined herein), (ii) the
then-applicable Senior Prepayment
Percentage (as defined herein) of all
principal prepayments made by the
mortgagors during the related Prepayment
Period (other than the applicable
Discount Fraction of such principal
prepayments in respect of the Discount
Mortgage Loans), (iii) in connection with
a Mortgage Loan for which a Cash
Liquidation or an REO Disposition (each
as defined herein) occurred during the
related Prepayment Period and did not
result in any Excess Special Hazard
Losses, Excess Fraud Losses, Excess
Bankruptcy Losses or Extraordinary Losses
(each as defined herein), an amount equal
to the lesser of (A) the then-applicable
Senior Percentage of the Stated Principal
Balance (as defined herein) of such
Mortgage Loan and (B) the Senior
Prepayment Percentage for such
Distribution Date multiplied by the
related collections, to the extent
applied as recoveries of principal of
such Mortgage Loan (other than, in each
case, the portion of such collections
payable to the holders of the Principal
Only Certificates in respect of a
Discount Mortgage Loan), and (iv) after
certain other distributions on the
Offered Certificates as described herein,
the Senior Accrual Diversion Amount (as
defined herein) for such Distribution
Date.
The Senior Percentage initially will be
equal to approximately 87.489%, and will
be recalculated, as more fully described
herein, after each Distribution Date to
reflect the entitlement of the holders
of the Class A Certificates to
subsequent distributions allocable to
principal. For each Distribution Date
occurring prior to the Distribution Date
in March 2001, the Senior Prepayment
Percentage will be equal to 100% and no
principal prepayments will be
distributed to the Class B Certificates
unless the Certificate Principal Balance
of the Class A Certificates have been
reduced to zero. Thereafter, during
certain periods, subject to certain loss
and delinquency criteria described
herein, the Senior Prepayment Percentage
may be 100% or otherwise
disproportionately large (relative to
the Senior Percentage) and the
percentage of principal prepayments
distributable in respect of the Class
B-1 Certificates, the Class B-2
Certificates and the Class B-3
Certificates may be disproportionately
small (relative to the Class B-1
Percentage, the Class B-2 Percentage and
the Class B-3 Percentage, respectively).
Prior to the first Distribution Date on
which the Senior Percentage is equal to
100% (the "Credit Support Depletion
Date"), holders of the Principal Only
Certificates will be
S-11
entitled to receive on each Distribution
Date, in the manner and priority set
forth herein, to the extent of the
portion of the Available Distribution
Amount remaining after the Priority
Interest Distribution Amount is
distributed, a distribution allocable to
principal (the "Principal Only
Distribution Amount") that will, as more
fully described herein, include (i) the
applicable Discount Fraction of scheduled
principal payments due on the Discount
Mortgage Loans and of certain unscheduled
collections of principal on the Discount
Mortgage Loans as described herein, (ii)
the applicable Discount Fraction of all
principal prepayments made by the
mortgagors in respect of the Discount
Mortgage Loans during the related
Prepayment Period, (iii) in connection
with a Discount Mortgage Loan for which a
Cash Liquidation or an REO Disposition
occurred during the related Prepayment
Period and did not result in any Excess
Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or
Extraordinary Losses, an amount equal to
the lesser of (A) the applicable Discount
Fraction of the Stated Principal Balance
of such Discount Mortgage Loan, net of
the principal portion of any related
Realized Loss allocable to the Principal
Only Certificates, and (B) the related
collections, to the extent applied as
recoveries of principal of such Discount
Mortgage Loan and (iv) the lesser of the
related Eligible Shortfall Funding Amount
(as defined herein) and the aggregate of
any Principal Only Collection Shortfalls
(as defined herein) not previously
distributed to the holders of the
Principal Only Certificates. On and after
the occurrence of the Credit Support
Depletion Date, holders of the Principal
Only Certificates will be entitled to
receive the applicable Discount Fractions
of the scheduled principal payments and
the unscheduled collections of principal
received or advanced in respect of the
Discount Mortgage Loans.
A "Discount Mortgage Loan" will be any
Fixed Rate Loan with a Net Mortgage Rate
of less than 8.250% per annum. With
respect to each Discount Mortgage Loan,
the "Discount Fraction" will equal a
fraction, expressed as a percentage, the
numerator of which will be 7.250% minus
the difference between (a) the Net
Mortgage Rate thereon and (b) the Fixed
Strip Rate and the denominator of which
will be 7.250%. The Mortgage Loans other
than the Discount Mortgage Loans are
referred to herein as the "Non-Discount
Mortgage Loans."
Holders of the Class B-1 Certificates will
be entitled to receive on each
Distribution Date, to the extent of the
portion of the Available Distribution
Amount remaining after the Priority
Interest Distribution Amount, the
Principal Only Distribution Amount and
the Senior
S-12
Principal Distribution Amount are
distributed, after reimbursement is made
to the Master Servicer for certain
Advances as described herein, and after
distributions in respect of interest on
such Class, a distribution allocable to
principal (subject to reduction as
described herein) that will, as more
fully described herein, include (i) the
Class B-1 Percentage (as defined below)
of scheduled principal payments due on
the Mortgage Loans and of certain
unscheduled collections of principal on
the Mortgage Loans as described herein
(other than the applicable Discount
Fraction of such payments and collections
in respect of the Discount Loans), (ii)
the Class B-1 Percentage divided by the
Class B Percentage (as defined herein) of
all principal prepayments that were made
by the mortgagors during the related
Prepayment Period to the extent not
allocated to the Senior Certificates
(other than the applicable Discount
Fraction of such principal prepayments in
respect of the Discount Mortgage Loans)
and (iii) such Class' pro rata share,
based on the Certificate Principal
Balances of the Class B-1 Certificates,
Class B-2 Certificates, Class B-3
Certificates and the Class R
Certificates, of all amounts received in
connection with a Cash Liquidation or an
REO Disposition that occurred during the
related Prepayment Period and that did
not result in any Excess Special Hazard
Losses, Excess Fraud Losses, Excess
Bankruptcy Losses or Extraordinary
Losses, to the extent applied as
recoveries of principal of the related
Mortgage Loan and to the extent not
otherwise payable to the holders of the
Senior Certificates. In addition, after
certain other distributions on the
Offered Certificates as described herein,
the holders of the Class B-1 Certificates
will be entitled to receive on each
Distribution Date a further distribution
in respect of principal equal to the
Class B-1 Percentage divided by the Class
B Percentage multiplied by the portion of
the Available Distribution Amount
remaining after the distributions
described above.
Holders of the Class B-2 Certificates
will be entitled to receive on each
Distribution Date, to the extent of
the portion of the Available
Distribution Amount remaining after
the Priority Interest Distribution
Amount, the Principal Only
Distribution Amount and the Senior
Principal Distribution Amount are
distributed, after reimbursement is
made to the Master Servicer for
certain Advances as described herein,
and after distributions in respect of
principal and interest on the Class B-1
Certificates and distributions in
respect of interest on the Class B-2
Certificates, a distribution allocable
to principal (subject to reduction
as described herein) that will, as more
fully described herein, include (i)
the Class B-2 Percentage (as defined
below) of scheduled principal payments
due on the Mortgage Loans and of
certain unscheduled collections
S-13
of principal on the Mortgage Loans as
described herein (other than the
applicable Discount Fraction of such
payments and collections in respect of
the Discount Loans), (ii) the Class B-2
Percentage divided by the Class B
Percentage of all principal prepayments
that were made by the mortgagors during
the related Prepayment Period to the
extent not allocated to the Senior
Certificates (other than the applicable
Discount Fraction of such principal
prepayments in respect of the Discount
Mortgage Loans) and (iii) such Class' pro
rata share, based on the Certificate
Principal Balances of the Class B-1
Certificates, Class B-2 Certificates,
Class B-3 Certificates and the Class R
Certificates, of all amounts received in
connection with a Cash Liquidation or an
REO Disposition that occurred during the
related Prepayment Period and that did
not result in any Excess Special Hazard
Losses, Excess Fraud Losses, Excess
Bankruptcy Losses or Extraordinary
Losses, to the extent applied as
recoveries of principal of the related
Mortgage Loan and to the extent not
otherwise payable to the holders of the
Senior Certificates. In addition, after
certain other distributions on the
Offered Certificates as described herein,
the holders of the Class B-2 Certificates
will be entitled to receive on each
Distribution Date a further distribution
in respect of principal equal to the
Class B-2 Percentage divided by the Class
B Percentage multiplied by the portion of
the Available Distribution Amount
remaining after the distributions
described above.
Holders of the Class B-3 Certificates
will be entitled to receive on each
Distribution Date, to the extent of
the portion of the Available
Distribution Amount remaining after
the Priority Interest Distribution
Amount, the Principal Only
Distribution Amount and the Senior
Principal Distribution Amount are
distributed and after distributions
in respect of principal and interest
on the Class B-1 Certificates and the
Class B-2 Certificates, after
reimbursement is made to the Master
Servicer for certain Advances as
described herein, and after
distributions in respect of interest
on the Class B-3 Certificates, a
distribution allocable to principal
(subject to reduction as described
herein) that will, as more fully
described herein, include (i) the
Class B-3 Percentage (as defined
below) of scheduled principal payments
due on the Mortgage Loans and of
certain unscheduled collections of
principal on the Mortgage Loans as
described herein (other than the
applicable Discount Fraction of such
payments and collections in respect
of the Discount Loans), (ii) the
Class B-3 Percentage divided by the
Class B Percentage of all principal
prepayments that were made by
the mortgagors during the related
Prepayment Period to the extent not
allocated to the Senior Certificates
(other than the applicable Discount
Fraction of such principal
prepayments
S-14
in respect of the Discount Mortgage
Loans) and (iii) such Class' pro rata
share, based on the Certificate Principal
Balances of the Class B-1 Certificates,
Class B-2 Certificates, Class B-3
Certificates and the Class R
Certificates, of all amounts received in
connection with a Cash Liquidation or an
REO Disposition that occurred during the
related Prepayment Period and that did
not result in any Excess Special Hazard
Losses, Excess Fraud Losses, Excess
Bankruptcy Losses or Extraordinary
Losses, to the extent applied as
recoveries of principal of the related
Mortgage Loan and to the extent not
otherwise payable to the holders of the
Senior Certificates. In addition, after
certain other distributions on the
Offered Certificates as described herein,
the holders of the Class B-3 Certificates
will be entitled to receive on each
Distribution Date a further distribution
in respect of principal equal to the
Class B-3 Percentage divided by the Class
B Percentage multiplied by the portion of
the Available Distribution Amount
remaining after the distributions
described above.
Holders of the Variable Strip Certificates
will not be entitled to receive any
distributions of principal.
The Class B-1 Percentage, Class B-2
Percentage and Class B-3 Percentage
initially will be equal to
approximately 8.007%, 2.002% and
2.502%, respectively, and will be
recalculated, as more fully described
herein, after each Distribution Date
to reflect the entitlement of the
Class B Certificates to
subsequent distributions of principal.
The Class B Percentage will equal the
sum of the Class B-1 Percentage, the
Class B-2 Percentage and the Class B-3
Percentage.
See "Description of the Certificates--
Principal Distributions on the Senior
Certificates," "--Principal Distributions
on the Class B Certificates" and "-
Additional Principal Distributions on
the Certificates" herein.
ADVANCES . . . . . . . . . . The Master Servicer is required to make
advances ("Advances") in respect of
delinquent payments of principal and
interest (net of the related
Servicing Fees) on the Mortgage Loans,
subject to the limitations described
herein. The Trustee will be obligated to
make any such Advance if the Master
Servicer fails in its obligation to do
so, to the extent provided in the
Pooling and Servicing Agreement. See
"Description of the Certificates--
Advances" herein.
ALLOCATION OF LOSSES;
SUBORDINATION . . . . . . . Neither the Offered Certificates nor
the Mortgage Loans are insured or
guaranteed by any governmental
agency or instrumentality or by the
Depositor, the Master Servicer, the
Seller, the Trustee or any of their
respective affiliates.
S-15
Subject to the limitations described
below, Realized Losses on the Mortgage
Loans will be allocated first to the
Class R Certificates, then to the Class
SB Certificates (to the extent of the
interest portions thereof), then to the
Class B-3 Certificates, then to the Class
B-2 Certificates, then to the Class B-1
Certificates, in each case (other than
for the Class SB Certificates) until the
Certificate Principal Balance thereof is
reduced to zero, and thereafter, with
respect to Realized Losses on the
Discount Mortgage Loans, to the Principal
Only Certificates in an amount equal to
the Discount Fraction of the principal
portions of such Realized Losses, and the
remainder of such Realized Losses and all
such Realized Losses on the
Non-Discounted Mortgage Loans to the
Variable Strip Certificates and the Class
A Certificates on a pro rata basis as
described herein. Notwithstanding the
foregoing, Realized Losses on the
Mortgage Loans will not be allocated to
any of the Senior Certificates or the
Class B Certificates on any Distribution
Date to the extent that such Realized
Losses are less than the sum of (i) the
Remaining Available Distribution Amount
(as defined herein) on such Distribution
Date and (ii) the Certificate Principal
Balance of the Class R Certificates
immediately prior to such Distribution
Date. In addition, any excess of the
Remaining Available Distribution Amount
over the Senior Accrual Diversion Amount
on any Distribution Date may be applied
to reimburse the principal portions of
Realized Losses previously allocated to
the Senior Certificates or the Class B
Certificates. See "Description of the
Certificates Additional Principal
Distributions on the Certificates"
herein. The Subordination provided to
each Class of Certificates by the
Certificates subordinate thereto, as
described herein, will cover Realized
Losses on the Mortgage Loans resulting
from defaults on the Mortgage Loans and
from Special Hazard Losses, Fraud Losses
and Bankruptcy Losses (each as defined
herein). However, the aggregate amounts
of Realized Losses which may be allocated
through Subordination, other than to the
Class SB Certificates and Class R
Certificates, to cover Special Hazard
Losses, Fraud Losses and Bankruptcy
Losses initially are limited to $777,081,
$1,046,548 and $100,000 respectively.
All of the foregoing amounts are
subject to periodic reduction as
described herein. In the event that the
Certificate Principal Balance of
the Class R Certificates, the
Class SB Certificates and the Class B
Certificates are reduced to zero, all
additional losses (including, without
limitation, all Special Hazard
Losses, Fraud Losses and
Bankruptcy Losses) will be allocated
among the Senior Certificates as
described herein. In addition, any
Excess Special Hazard Losses,
Excess Fraud Losses, Excess
S-16
Bankruptcy Losses and Extraordinary
Losses on the Mortgage Loans will be
borne by the holders of the
Certificates on a pro rata basis as
and to the extent described herein.
See "Description of the
Certificates Allocation of
Losses; Subordination" herein.
CERTIFICATES
NOT OFFERED HEREBY . . . . The Principal Only Certificates will
have an initial Certificate Principal
Balance of approximately $31,175.26 and
no Pass-Through Rate, and the holders of
the Principal Only Certificates will not
be entitled to receive distributions of
interest. The Class SB Certificates have
no Certificate Principal Balance and
will not be entitled to receive
distributions of principal. The Class SB
Certificates will accrue interest at the
related Pass-Through Rate on the
Notional Amount of such Certificates.
The holders of the Class SB Certificates
will not be entitled to receive interest
distributions prior to the Class B
Certificate Termination Date (as defined
herein). On and after the Class B
Certificate Termination Date, the Class
SB Certificates will be entitled to
receive interest distributions to the
extent such amounts are not otherwise
payable to the Class A Certificates as a
Senior Accrual Diversion Amount and are
not required to retire the Class B
Certificates, subject to available
funds. See "Description of the
Certificates Additional Principal
Distributions on the Certificates"
herein.
The Class R Certificates will have a
Certificate Principal Balance equal to
$0.00 as of the Cut-off Date.
However, interest accrued and unpaid on
the Class SB Certificates will
generally have the effect of
increasing the Certificate Principal
Balance of the Class R Certificates
and interest accrued and unpaid
on the Class R Certificates prior
to the Class B Certificate
Termination Date generally will be
added to the Certificate Principal
Balance of the Class R Certificates, in
each case as further described herein.
The Principal Only Certificates, Class SB
Certificates and Residual Certificates
are not being offered hereby.
OPTIONAL TERMINATION . . . . At its option, the Master Servicer
may purchase from the Trust Fund all
remaining Mortgage Loans and other
assets thereof, and thereby effect
early retirement of the Certificates, on
any Distribution Date when the aggregate
principal balance of the Mortgage Loans
is less than 5% of the aggregate
principal balance of such Mortgage Loans
as of the Cut-off Date. See "Pooling and
Servicing Agreement--Termination" herein
and "The Pooling and Servicing
Agreements--Termination" in the
Prospectus.
S-17
SPECIAL PREPAYMENT
CONSIDERATIONS . . . . . . GENERAL: The rate of principal payments
on the Offered Certificates (other than
the Variable Strip Certificates) will
depend on, among other things, the rate
and timing of principal payments
(including prepayments, repurchases,
defaults and liquidations) on the
Mortgage Loans. As is the case with
mortgage-backed securities generally,
the Offered Certificates are subject to
substantial inherent cash-flow
uncertainties because the Mortgage Loans
may be prepaid at any time. Generally,
when prevailing interest rates increase,
prepayment rates on mortgage loans tend
to decrease in subsequent periods,
resulting in a reduced return of
principal to investors at a time when
reinvestment at such higher prevailing
rates would be desirable. Conversely,
when prevailing interest rates decline,
prepayment rates on mortgage loans tend
to increase in subsequent periods,
resulting in an accelerated return of
principal to investors at a time when
reinvestment at comparable yields may
not be possible. In addition,
approximately 45.20% of the Mortgage
Loans (by aggregate principal balance as
of the Cut-off Date) provide for payment
of a prepayment charge. A majority of
the Mortgage Loans with a prepayment
charge provision provide for a
prepayment charge for partial
prepayments and full prepayments made
within approximately five years after
the dates of origination of such
Mortgage Loans. Such prepayment charges
(which will not be distributable to the
Certificates) may reduce the rate of
prepayment on the Mortgage Loans.
SEQUENTIALLY PAYING CLASSES: All Classes
of Class A Certificates are subject to
various priorities for payment
of principal, as described
herein. Distributions of principal on
the Classes of Class A Certificates
having an earlier priority of payment
will be affected by the rates of
prepayment of the Mortgage Loans early
in the life of the Mortgage Pool. The
timing of commencement of principal
distributions and the weighted average
lives of the Classes of Class A
Certificates with a later priority
of payment will be affected by the
rates of prepayment experienced both
before and after the commencement
of principal distributions on such
Classes.
VARIABLE STRIP CERTIFICATES: The Notional
Amount, and therefore the amount of
interest distributions on the
Variable Strip Certificates, will
be highly sensitive to the rate
and timing of principal payments
(including prepayments, repurchases,
defaults and liquidations) on the
Mortgage Loans. See "--Special Yield
Considerations" below and "Certain
Yield and Prepayment Considerations"
herein.
S-18
CLASSES WITH SUBORDINATION FEATURES:
As described herein, during certain
periods all or a disproportionately
large percentage of principal
prepayments on the Mortgage Loans will
be allocated among the Senior
Certificates and, therefore, during
certain periods none or a
disproportionately small percentage of
such prepayments will be allocated among
the Class B Certificates and the Class R
Certificates. As a result, the weighted
average life of the Class B Certificates
will be extended and, as a relative
matter, the Subordination afforded the
Senior Certificates by the Class B
Certificates, the Class SB Certificates
and the Class R Certificates will be
increased (to the extent not otherwise
offset by Realized Losses), which will
cause the Class B Certificate
Termination Date to occur later than
would otherwise be the case. However, as
described herein, because the Class A
Certificates and the Class B
Certificates will be entitled to certain
principal distributions that include
amounts, to the extent received or
advanced, that would otherwise be
distributable to holders of the Class SB
Certificates and the Class R
Certificates, the weighted average life
of the Class A Certificates and the
Class B Certificates may be shorter than
otherwise would be the case.
See "Description of the Certificates--
Principal Distributions on the Senior
Certificates," "--Principal
Distributions on the Class B
Certificates" "-Additional Principal
Distribution on the
Certificates," and "Certain Yield
and Prepayment Considerations" herein,
and see "Yield, Prepayment and
Maturity Considerations" in the
Prospectus.
SPECIAL YIELD CONSIDERATIONS GENERAL: The yield to maturity on
each Class of Offered Certificates
will depend on, among other things, the
rate and timing of principal payments
(including prepayments, repurchases,
defaults and liquidations) on the
Mortgage Loans and the allocation
thereof to reduce the Certificate
Principal Balance of such Class of
Certificates (or the Notional Amount).
The yield to maturity on each Class
of Offered Certificates will also
depend on other factors such as the
Pass-Through Rate (and, in the case of
the Variable Strip Certificates, any
adjustments thereto) and the purchase
price for such Certificates. The
yield to investors on any Class of
Offered Certificates will be adversely
affected by any allocation thereto of
any Prepayment Interest Shortfalls on
the Mortgage Loans to the extent not
covered by payments by the Master
Servicer as described herein.
In general, if a Class of Offered
Certificates is purchased at a premium
and principal payments on the Mortgage
Loans occur at a rate faster than
anticipated at the time of purchase,
the investor's actual yield to
maturity will be lower than that
originally anticipated. Conversely,
if a
S-19
Class of Offered Certificates is
purchased at a discount and principal
payments on the Mortgage Loans occur at
a rate slower than anticipated at the
time of purchase, the investor's actual
yield to maturity will be lower than that
originally anticipated.
VARIABLE STRIP CERTIFICATES: The yield
to investors on the Variable Strip
Certificates will be extremely
sensitive to the rate and timing
of principal payments on the Mortgage
Loans (including prepayments,
repurchases, defaults and
liquidations), which may
fluctuate significantly over time. A
rapid rate of principal payments on the
Mortgage Loans could result in the
failure of investors in the Variable
Strip Certificates to recover their
initial investments. The yield on the
Variable Strip Certificates will also
be materially and adversely affected
if the Mortgage Loans experience a
high rate of defaults and liquidations.
In addition to the foregoing, the yield
on the Variable Strip Certificates
will be materially and adversely
affected to a greater extent than
the yields on the other Classes of
Offered Certificates if the
Non-Discount Mortgage Loans with
higher Net Mortgage Rates prepay
faster than the Non-Discount Mortgage
Loans with lower Net Mortgage Rates,
because holders of the Variable
Strip Certificates generally will have
rights to relatively larger portions
of interest payments on the
Non-Discount Mortgage Loans with
higher Net Mortgage Rates than on the
Non-Discount Mortgage Loans with
lower Net Mortgage Rates.
CLASSES WITH SUBORDINATION FEATURES: The
yield to maturity on the Class B-1
Certificates, the Class B-2 Certificates
and the Class B-3 Certificates will be
extremely sensitive to certain losses on
the Mortgage Loans (and the timing
thereof) to the extent such losses are
not covered by the Certificates
subordinate thereto as described herein,
because the entire amount of such losses
(rather than a pro rata portion thereof)
will be allocable to such Certificates.
See "Certain Yield and Prepayment
Considerations" herein and "Yield,
Prepayment and Maturity
Considerations" in the Prospectus.
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES . . . . . A real estate mortgage investment conduit
("REMIC") election will be made with
respect to the Trust Fund for
federal income tax purposes. Upon the
issuance of the Offered Certificates,
Thacher Proffitt & Wood, counsel to the
Depositor, will deliver its opinion
generally to the effect that, assuming
compliance with all provisions of the
Pooling and Servicing Agreement, for
federal income tax purposes, the Trust
Fund will qualify as a REMIC within the
meaning of Sections 860A through 860G of
the Internal
S-20
Revenue Code of 1986 (the "Code"). For
federal income tax purposes, the Senior
Certificates, the Class B Certificates
and the Class SB Certificates will be
"regular interests" in the REMIC and the
Class R Certificates will be the sole
Class of "residual interests" in the
REMIC. The Senior Certificates, the Class
B Certificates and the Class SB
Certificates generally will be treated as
debt obligations of the Trust Fund for
federal income tax purposes.
For federal income tax reporting purposes,
the Class A-1 Certificates, the Class
A-2 Certificates, the Class A-3
Certificates and the Class B-1
Certificates will not, and the Variable
Strip Certificates, the Class B-2
Certificates and the Class B-3
Certificates will, be treated as having
been issued with original issue
discount. The prepayment assumption that
will be used in determining the rate of
accrual of original issue discount,
market discount and premium, if any, for
federal income tax purposes will be a
CPR percentage (as defined herein) equal
to 18%. No representation is made that
the Mortgage Loans will prepay at such
rate or at any other rate.
If the method for computing original issue
discount described in the Prospectus
results in a negative amount for any
period, a holder of a Variable Strip
Certificate will be permitted to offset
such amount only against the future
income, if any, from such Certificate.
See "Certain Federal Income Tax
Consequences" herein and in the
Prospectus.
For further information regarding the
federal income tax consequences of
investing in the Offered Certificates
see "Certain Federal Income Tax
Consequences" herein and in the
Prospectus.
RATINGS . . . . . . . . . . . It is a condition to the issuance of the
Offered Certificates that the Class A
Certificates, the Principal Only
Certificates and the Variable Strip
Certificates be rated "Aaa" by Moody's
Investors Service, Inc. ("Moody's") and
"AAA" by Duff & Phelps Credit Rating Co.
("DCR"), the Class B-1 Certificates be
rated "Aa3" by Moody's and "AA" by DCR,
the Class B-2 Certificates be rated "A3"
by Moody's and "A+" by DCR and the Class
B-3 Certificates be rated "Baa3" by
Moody's and "BBB" by DCR. 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. A security rating does not
address the frequency of principal
prepayments or the corresponding effect
on yield to investors. The ratings of
the Variable Strip Certificates do not
address the possibility that the holders
of such Certificates may fail to fully
recover their initial investment. See
"Certain Yield and Prepayment
Considerations" and "Ratings" herein and
S-21
"Yield, Prepayment and Maturity
Considerations" in the Prospectus.
LEGAL INVESTMENT . . . . . . The Offered Certificates (other than the
Class B-2 Certificates and Class B-3
Certificates) will constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") for so long as
they are rated as described herein and,
as such, will be legal investments for
certain entities to the extent provided
in SMMEA. SMMEA, however, provides for
state limitation on the authority of
such entities to invest in "mortgage
related securities," provided that such
restricting legislation was enacted on
or prior to October 3, 1991. The Class B
Certificates will not constitute
"mortgage related securities" for
purposes of SMMEA.
The Depositor makes no representations as
to the proper characterization of any
Class of Offered Certificates for legal
investment or other purposes, or as to
the ability of particular investors to
purchase any Class of Offered
Certificates under applicable legal
investment restrictions. These
uncertainties may adversely affect the
liquidity of the Offered Certificates.
Accordingly, all institutions whose
investment activities are subject to
legal investment laws and regulations,
regulatory capital requirements or
review by regulatory authorities should
consult with their own legal advisors in
determining whether and to what extent
any Class of Offered Certificates, and
in particular, the Class B Certificates
constitutes a legal investment or is
subject to investment, capital or other
restrictions. See "Legal Investment" and
"ERISA Considerations" herein and in the
Prospectus.
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RISK FACTORS
In addition to the matters described elsewhere in this Prospectus
Supplement and the Prospectus, prospective investors should carefully consider
the following factors before deciding to invest in the Offered Certificates.
REPURCHASE OBLIGATIONS OF THE SELLER
No person other than the Seller is obligated with respect to the
representations and warranties respecting the Mortgage Loans and the remedies
for any breach thereof that are assigned to the Trustee for the benefit of the
Certificateholders, and the Seller has only limited assets available to perform
its repurchase obligations in respect of any breach of such representations and
warranties. Therefore, prospective investors in the Offered Certificates should
consider the possibility that the Seller will not have sufficient assets with
which to satisfy its repurchase obligations in the event that a substantial
amount of Mortgage Loans are required to be repurchased due to breaches of
representations and warranties.
UNDERWRITING STANDARDS AND POTENTIAL DELINQUENCIES
The Seller's underwriting standards are primarily intended to assess the
value of the mortgaged property and to evaluate the adequacy of such property
as collateral for the mortgage loan. While one of the Seller's primary
considerations in underwriting a mortgage loan is the value of the mortgaged
property, the Seller also considers, among other things, a mortgagor's credit
history, repayment ability and debt service-to-income ratio, as well as the
type and use of the mortgaged property.
AS A RESULT OF THE SELLER'S UNDERWRITING STANDARDS, THE MORTGAGE LOANS
ARE LIKELY TO EXPERIENCE RATES OF DELINQUENCY, FORECLOSURE, BANKRUPTCY AND LOSS
THAT ARE HIGHER, AND THAT MAY BE SUBSTANTIALLY HIGHER, THAN THOSE EXPERIENCED
BY MORTGAGE LOANS UNDERWRITTEN IN A MORE TRADITIONAL MANNER. SEE "THE SELLER--
LOAN DELINQUENCY, FORBEARANCE, FORECLOSURE, BANKRUPTCY AND REO PROPERTY STATUS"
AND "--REO PROPERTY LIQUIDATION EXPERIENCE" HEREIN FOR IMPORTANT INFORMATION
REGARDING THE DELINQUENCY, FORBEARANCE, FORECLOSURE, BANKRUPTCY AND REO
PROPERTY STATUS AND LOSS EXPERIENCE OF CERTAIN MORTGAGE LOANS PREVIOUSLY
ORIGINATED OR ACQUIRED BY THE SELLER UNDER SUBSTANTIALLY THE SAME UNDERWRITING
CRITERIA PURSUANT TO WHICH THE MORTGAGE LOANS WERE ORIGINATED OR ACQUIRED.
Furthermore, changes in the values of Mortgaged Properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the Mortgage Loans than on mortgage loans originated in a more traditional
manner. No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at the levels in effect on the dates of
origination of the related Mortgage Loans. Approximately 46.87% of the Mortgage
Loans (by aggregate principal balance as of the Cut-off Date) are secured by
Mortgaged Properties located in the State of California. Property values of
residential real estate in California have declined in recent years. If the
California residential real estate market should continue to experience a
decline in property values after the dates of origination of the Mortgage
Loans, the rates of delinquency, foreclosure, bankruptcy and loss on the
Mortgage Loans may be expected to increase, and may increase substantially, as
compared to such rates in a stable or improving real estate market. See
"Description of the Mortgage Pool--Underwriting Standards" herein.
INTERIM FUNDING
As described herein under "Description of the Mortgage Pool--General" and
"The Seller," DLJ Mortgage Capital, Inc. ("DLJMC"), an affiliate of the
Depositor and Donaldson, Lufkin & Jenrette Securities Corporation (the
"Underwriter"), has provided funding to the Seller with respect to various
mortgage loans, including the Mortgage Loans, by means of certain mortgage loan
purchase agreements and by means of a master repurchase agreement. Such
transactions were entered into with the expectation that DLJMC would recover
such funding through the proceeds of the issuance of the Certificates and
through the sale of mortgage loans in other secondary market transactions.
S-23
SERVICING EXPERIENCE OF THE MASTER SERVICER
Prospective investors in the Offered Certificates should be aware that
the residential mortgage loan servicing portfolio of the Master Servicer
consists primarily of mortgage loans underwritten in a more traditional manner
than the Mortgage Loans and that the Master Servicer has had limited experience
in servicing mortgage loans originated or acquired in accordance with
underwriting standards similar to the underwriting criteria pursuant to which
the Mortgage Loans were originated or acquired. As a result, the rates of
delinquency, foreclosure and loss on the Mortgage Loans may be higher, and
could be substantially higher, than the rates of delinquency, foreclosure and
loss on mortgage loans in the Master Servicer's residential mortgage loan
servicing portfolio and on mortgage loans previously originated or acquired by
the Seller under substantially the same underwriting criteria pursuant to which
the Mortgage Loans were originated or acquired.
See also, "Special Considerations" in the Prospectus.
DESCRIPTION OF THE MORTGAGE POOL
The information set forth in the following paragraphs has been provided
by the Seller. Neither the Depositor, the Underwriter, the Master Servicer, the
Trustee nor any of their respective affiliates have made or will make any
representation as to the accuracy or completeness of such information.
GENERAL
The Trust Fund (as defined herein) will consist primarily of a pool (the
"Mortgage Pool") of mortgage loans (the "Mortgage Loans") with an aggregate
principal balance as of the Cut-off Date of $34,884,929.88. The Mortgage Loans
will be conventional, fixed- and adjustable-rate, fully-amortizing mortgage
loans secured by first liens on fee simple interests in one- to four-family
residential real properties (each, a "Mortgaged Property"). The Mortgage Loans
will have original terms to maturity from the due dates of their first
scheduled monthly payment of interest and principal (each such payment, a
"Monthly Payment") of not more than 30 years and will have Monthly Payments due
on the first day of each month. All of the Mortgage Loans were originated or
acquired by the Seller in accordance with the underwriting criteria under its
regular lending program, as described herein.
The Mortgage Loans will have been sold to DLJMC by Quality Mortgage USA,
Inc., in its capacity as the Seller, on or prior to the Delivery Date pursuant
to certain mortgage loan purchase agreements between DLJMC and the Seller
(each, a "Purchase Agreement") and will be acquired by the Depositor from DLJMC
on the Delivery Date pursuant to an Assignment Agreement between the Depositor
and DLJMC (the "Assignment Agreement"). The representations and warranties made
by the Seller in each Purchase Agreement with respect to the related Mortgage
Loans will be restated by the Seller on and as of the Delivery Date pursuant to
such Purchase Agreement. Further, insofar as it relates to the representations
and warranties of the Seller made in or pursuant to any Purchase Agreement and
the remedies provided therein or pursuant thereto for any breaches of such
representations and warranties, such Purchase Agreement will be assigned by
DLJMC to the Depositor pursuant to the Assignment Agreement and, as described
herein under "Pooling and Servicing Agreement--Assignment of Mortgage Loans," by
the Depositor to the Trustee for the benefit of the holders of the Certificates
pursuant to the Pooling and Servicing Agreement (as defined herein).
The interest rates (each, a "Mortgage Rate") will be fixed for
approximately 97.03% of the Mortgage Loans (the "Fixed Rate Loans"), by
aggregate principal balance as of the Cut-off Date. The Mortgage Rates on
approximately 2.97% of the Mortgage Loans (the "Adjustable Rate Loans"), by
aggregate principal balance as of the Cut-off Date, will be subject to
adjustment commencing approximately seven years after their respective dates of
origination, and semi-annually thereafter, on the dates specified in the
related Mortgage Notes (each date of adjustment, an "Adjustment Date") to
equal, as to each Adjustable Rate Loan and any related Adjustment Date, the
sum, rounded to the nearest 0.125%, of (i) the average of the interbank offered
rates for six-month United States dollar deposits in the London interbank
market based on quotations of major banks, as published in the Western Edition
of The Wall Street Journal (the "Index") and most recently available (a) as of
the date 45 days prior to such Adjustment Date with respect to a majority of
the Mortgage Loans or (b) as of the first business day of the month immediately
preceding the month in which the Adjustment Date occurs, and (ii) the fixed
percentage amount (the
S-24
"Gross Margin") specified in the related Mortgage Note (such sum, as rounded and
based on the Index as of the first day of any month, the "Fully Indexed Rate");
provided, however, that the Mortgage Rate on any Adjustable Rate Loan will not
increase or decrease by more than 1.000% (the "Periodic Rate Cap") on any
related Adjustment Date other than the initial Adjustment Date thereof, will in
no event be greater than the initial Mortgage Rate thereof plus 6.500% (the
"Maximum Rate") and will in no event be less than the amount specified in the
related Mortgage Note as the minimum interest rate thereunder (the "Minimum
Rate"). See "--The Index" herein. Effective with the first Monthly Payment due
on an Adjustable Rate Loan after any related Adjustment Date, the amount of the
Monthly Payment will be adjusted to an amount that will fully amortize the
principal balance of the Loan over its remaining term and pay interest at the
Mortgage Rate as adjusted on such Adjustment Date.
Certain of the Fixed Rate Loans will have original terms to maturity from
the due dates of their first Monthly Payments of 15 years (the "Fifteen Year
Loans"), and the other Fixed Rate Loans will have original terms to maturity
from the due dates of their first Monthly Payments of 30 years (the "Thirty
Year Loans"). The Gross Margins on the Adjustable Rate Loans ranged from 4.750%
to 8.250% as of the Cut-off Date and had a weighted average (based on the
aggregate principal balance of the Adjustable Rate Loans as of the Cut-off
Date) of approximately 6.073% as of the Cut-off Date. The Maximum Rates and the
Minimum Rates on the Adjustable Rate Loans ranged from 16.490% to 20.750% per
annum and from 9.990% to 14.250% per annum, respectively, as of the Cut-off
Date and had weighted averages (based on the aggregate principal balance of the
Adjustable Rate Loans as of the Cut-off Date) of approximately 18.385% and
11.885% per annum, respectively, as of the Cut-off Date. Approximately 32.38%
of the Adjustable Rate Loans (by aggregate principal balance of the Adjustable
Rate Loans as of the Cut-off Date) were originated with Mortgage Rates below
the Fully Indexed Rates thereon at their respective dates of origination. Due
to the application of the Periodic Rate Cap and the Maximum Rate, the Mortgage
Rate on any Adjustable Rate Loan, as adjusted on any related Adjustment Date,
may be less than the Fully Indexed Rate thereon for such date.
Approximately 2.96% of the Mortgage Loans (by aggregate principal balance
as of the Cut-off Date) were thirty days or more but less than sixty days
delinquent in their Monthly Payments as of the Cut-off Date (such Mortgage
Loans, "Thirty-Day Delinquent Mortgage Loans"). Approximately 0.08% of the
Mortgage Loans (by aggregate principal balance as of the Cut-off Date) were
sixty days or more but less than ninety days delinquent in their Monthly
Payments (such Mortgage Loans, "Sixty-Day Delinquent Mortgage Loans") as of the
Cut-off Date, and no Mortgage Loans will be Sixty-Day Delinquent Mortgage Loans
as of the Closing Date. There were no Mortgage Loans ninety days or more
delinquent as of the Cut-off Date. Prospective investors in the Offered
Certificates should be aware, however, that only approximately 12.68% of the
Mortgage Loans (by aggregate principal balance as of the Cut-off Date) had a
first Monthly Payment due on or before January 1, 1996 and that only
approximately 0.75% of the Mortgage Loans (by aggregate principal balance as of
the Cut-off Date) had a first Monthly Payment due on or before December 1,
1995, and therefore, the remaining Mortgage Loans could not have been Thirty-
Day Delinquent Mortgage Loans or Sixty-Day Delinquent Mortgage Loans as of the
Cut-off Date. In addition to the foregoing, approximately 0.08% of the Mortgage
Loans (by aggregate principal balance as of the Cut-off Date) will have been
thirty days or more delinquent in their Monthly Payments more than once during
the twelve months preceding the Cut-off Date.
Approximately 35.91% of the Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) are Mortgage Loans that were originated on or
after October 1, 1995, that are not purchase money mortgage loans and that have
interest rates or origination costs in excess of certain prescribed levels
(such Mortgage Loans, the "High Cost Loans"), and therefore are subject to
special rules, disclosure requirements and other provisions that were added to
the federal Truth in Lending Act by the Homeownership and Equity Protection Act
of 1994. Purchasers or assignees of any High Cost Loan or interest therein
could be liable for all claims and defenses arising under such provisions that
the borrower could assert against the Seller. Remedies available to the
borrower include monetary penalties, as well as rescission rights if the
appropriate disclosures were not given as required. The Seller represented and
warranted that all of the Mortgage Loans were originated in compliance with all
applicable state and federal laws, including without limitation
truth-in-lending and disclosure laws.
Each Mortgage Loan will contain a customary "due-on-sale" clause.
Further, approximately 45.20% of the Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) provide for payment of a prepayment charge. As
to each such Mortgage Loan, the prepayment charge generally is the maximum
amount permitted under applicable state law (or, if no maximum prepayment
charge is specified, the prepayment charge generally is
S-25
calculated as set forth in the following sentence). A majority of the Mortgage
Loans with a prepayment charge provision provide for payment of a prepayment
charge for partial prepayments and full prepayments made within approximately
five years of the origination of the related Mortgage Loan, in an amount equal
to six months' advance interest on the amount of the prepayment that, when added
to all other amounts prepaid during the twelve-month period immediately
preceding the date of the prepayment, exceeds twenty percent (20%) of the
original principal balance of such Mortgage Loan. With respect to the remainder
of the Mortgage Loans with a prepayment charge provision, the prepayment charge
is calculated in a different manner. The Seller will retain the right to all
prepayment charges and late payment charges received on the Mortgage Loans and
such amounts will not be available for distribution on the Certificates.
Each Mortgage Loan will have been originated or acquired by the Seller on
or before February 1, 1996. Certain of the Mortgage Loans will have their first
Monthly Payments due on April 1, 1996. As to those Mortgage Loans, no interest
payments or principal amortization payments will be distributed (unless
prepayments are received thereon) until the Distribution Date occurring in
April 1996, the month in which the first Monthly Payment is due. However, on
the Closing Date, cash will be deposited in the Master Servicer's Custodial
Account in an amount equal to one month's interest accrued from February 1,
1996 (adjusted to the applicable Net Mortgage Rate) on such Mortgage Loans, to
be remitted to the Trustee for distribution to Certificateholders on the
Distribution Date occurring in March 1996, the month prior to the month in
which the first Monthly Payment is due.
Pursuant to its terms, each Mortgage Loan is required to be covered by a
standard hazard insurance policy in an amount equal to the lower of the
original principal loan amount or the replacement value of the improvements on
the Mortgaged Property. None of the Mortgage Loans will be covered by a primary
mortgage insurance policy. See "Description of Mortgage and Other Insurance--
Hazard Insurance on the Loans--Standard Hazard Insurance Policies" in the
Prospectus.
The Mortgage Loans will have the following approximate characteristics as
of the Cut-off Date:
FIXED ADJUSTABLE ALL
RATE LOANS RATE LOANS MORTGAGE LOANS
Number of Mortgage Loans . 525 22 547
Aggregate Principal Balance $33,849,794.02 $1,035,135.86 $34,884,929.88
Mortgage Rates:
Weighted Average . . . 10.941% 11.885% 10.969%
Range . . . . . . . . . 7.900%- 9.990%- 7.900%-
19.800% 14.250% 19.800%
Weighted Average
Remaining Term to
Maturity (in months) . . 344 356 345
The Mortgage Loans will have the following approximate characteristics as
of the Cut-off Date (expressed as a percentage of the aggregate principal
balance of the Mortgage Loans having such characteristics relative to the
aggregate principal balance of the Mortgage Loans specified, provided, that the
sum of the percentages in certain of the following paragraphs may not equal
100% due to rounding):
The initial Adjustment Dates for the Adjustable Rate Loans will occur in
the following months: December 1, 2002, 5.70%, January 1, 2003, 23.90% and
February 1, 2003, 70.39%.
Approximately 8.26% of the Mortgage Loans had original terms to maturity
from the due dates of their first Monthly Payments of 15 years, and
approximately 91.74% of the Mortgage Loans had original terms to maturity from
the due dates of their first Monthly Payments of 30 years. None of the Mortgage
Loans had a first Monthly Payment due prior to December 1, 1995, and the latest
maturity date of any of the Mortgage Loans is March 1, 2026.
S-26
The Mortgage Loans will each have an outstanding principal balance of not
less than $9,997.58 or more than $388,540.47. The Mortgage Loans will have an
average outstanding principal balance of $63,775.01.
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans will be approximately 64.14%, no Mortgage Loan will have a Loan-to-Value
Ratio at origination exceeding 85.00% and no Mortgage Loan will have a combined
Loan-to-Value Ratio at origination, including any then existing second mortgage
subordinate to the lien of the Mortgage, in excess of 90.00%.
At origination, approximately 2.72% of the Mortgage Loans were secured by
a Mortgaged Property that was subject to a then-existing lien subordinate to
that of the related Mortgage.
With respect to approximately 7.71% of the Mortgage Loans, the proceeds
were used to purchase the related Mortgaged Properties. Approximately 19.70% of
the Mortgage Loans were rate and term refinancings and approximately 72.60% of
the Mortgage Loans were equity take-out refinancings.
No more than approximately 1.80% of the Mortgage Loans will be secured by
Mortgaged Properties located in any one zip code area.
Approximately 0.75%, 11.93%, 34.41%, 52.21% and 0.70% of the Mortgage
Loans have had or will have had their first Monthly Payments due in December
1995, January 1996, February 1996, March 1996 and April 1996, respectively.
Approximately 87.91%, 1.88%, 2.00% and 8.21% of the Mortgage Loans will
be secured by detached one-family dwelling units, by units in condominiums, by
units in planned unit developments and by two- to four-family dwelling units,
respectively. Approximately 9.23% and 0.66% of the Mortgage Loans will be
secured by investor properties and by secondary residences, respectively, and
with respect to all of the other Mortgage Loans, the mortgagor represented in
the documents submitted by such mortgagor for the closing of the related
Mortgage Loan that the Mortgaged Property initially would be owner-occupied as
the mortgagor's primary residence.
Approximately 1.30%, 37.52%, 25.30%, 18.29%, 12.82% and 4.76% of the
Mortgage Loans are expected to be graded in the Seller's A+ Risk, A Risk, B
Risk, C1 Risk, C2 Risk and D Risk categories, respectively. Approximately
52.67%, 1.38% and 45.95% of the Mortgage Loans were underwritten under the
Seller's Full Documentation Program, Quick Qualifier Program and Quick
Qualifier Plus Program, respectively. See "--Underwriting Standards" below.
The table below sets forth as of the Cut-off Date the number, aggregate
principal balance and percentage of the Mortgage Loans (by aggregate principal
balance of such Mortgage Loans relative to the aggregate principal balance of
all of the Mortgage Loans) having Loan-to-Value Ratios at origination in each
given range. (The sum of the amounts and the percentages in the table below may
not equal the totals due to rounding.)
LOAN-TO-VALUE RATIOS
PERCENTAGE OF
MORTGAGE
LOAN-TO-VALUE RATIOS NUMBER OF AGGREGATE LOANS BY AGGREGATE
AT ORIGINATION (%) MORTGAGE PRINCIPAL PRINCIPAL
LOANS BALANCE BALANCE
60.00 and below . . . 208 $ 11,024,489.31 31.60%
60.01-65.00 . . . . . 108 6,468,826.59 18.54
65.01-70.00 . . . . . 106 7,426,579.06 21.29
70.01-75.00 . . . . . 73 6,499,625.23 18.63
75.01-80.00 . . . . . 42 2,774,274.69 7.95
80.01-85.00 . . . . . 10 691,135.00 1.98
--- -------------- ------
Total . . . . . . . . 547 $34,884,929.88 100.00%
--- -------------- ------
--- -------------- ------
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The table below sets forth as of the Cut-off Date the number, aggregate
principal balance and percentage of the Mortgage Loans (by aggregate principal
balance of such Mortgage Loans relative to the aggregate principal balance of
all of the Mortgage Loans) having the initial Mortgage Rates in each given
range. (The sum of the amounts and the percentages in the table below may not
equal the totals due to rounding.)
INITIAL MORTGAGE RATES
PERCENTAGE OF
NUMBER OF AGGREGATE MORTGAGE LOANS BY
INITIAL MORTGAGE MORTGAGE PRINCIPAL AGGREGATE PRINCIPAL
RATES (%) LOANS BALANCE BALANCE
7.751 - 8.000 1 $ 65,807.57 0.19%
8.251 - 8.500 7 578,174.47 1.66
8.501 - 8.750 9 748,469.36 2.15
8.751 - 9.000 19 2,029,128.65 5.82
9.001 - 9.250 17 1,665,008.55 4.77
9.251 - 9.500 26 2,467,673.66 7.07
9.501 - 9.750 13 836,630.02 2.40
9.751 - 10.000 57 4,718,236.56 13.53
10.001 - 10.250 19 1,247,084.01 3.57
10.251 - 10.500 36 2,592,273.87 7.43
10.501 - 10.750 28 2,151,667.30 6.17
10.751 - 11.000 24 1,845,534.45 5.29
11.001 - 11.250 23 1,470,407.47 4.22
11.251 - 11.500 22 1,034,803.69 2.97
11.501 - 11.750 24 1,414,709.37 4.06
11.751 - 12.000 23 1,346,204.51 3.86
12.001 - 12.250 26 1,298,205.88 3.72
12.251 - 12.500 29 1,513,126.11 4.34
12.501 - 12.750 24 1,003,700.64 2.88
12.751 - 13.000 18 927,081.03 2.66
13.001 - 13.250 18 734,902.85 2.11
13.251 - 13.500 19 835,389.65 2.39
13.501 - 13.750 13 417,356.99 1.20
13.751 - 14.000 12 410,269.42 1.18
14.001 - 14.250 12 421,114.09 1.21
14.251 - 14.500 5 200,104.12 0.57
14.501 - 14.750 6 301,141.64 0.86
14.751 - 15.000 2 44,537.05 0.13
15.001 - 15.250 2 49,000.00 0.14
15.251 - 15.500 2 85,000.00 0.24
15.501 - 15.750 1 19,995.13 0.06
15.751 - 16.000 1 28,200.00 0.08
16.501 - 16.750 1 43,875.00 0.13
17.001 - 17.250 1 58,000.00 0.17
17.251 - 17.500 1 18,977.46 0.05
18.001 - 18.250 3 90,493.68 0.26
19.251 - 19.500 1 26,000.00 0.07
19.501 - 19.750 1 89,995.63 0.26
19.751 - 20.000 1 56,650.00 0.16
--- -------------- ------
Total 574 $34,884,929.88 100.00%
--- -------------- ------
--- -------------- ------
S-28
The table below sets forth as of the Cut-off Date the number, aggregate
principal balance and percentage of the Mortgage Loans (by aggregate principal
balance of such Mortgage Loans relative to the aggregate principal balance of
all of the Mortgage Loans) secured by Mortgaged Properties located in each
given state. (The sum of the amounts and the percentages in the table below may
not equal the totals due to rounding.)
GEOGRAPHIC DISTRIBUTION
PERCENT OF MORTGAGE
NUMBER OF AGGREGATE PRINCIPAL LOSS BY AGGREGATE
LOCATION MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
Arizona 2 $ 57,825.00 0.17%
Arkansas 13 404,424.74 1.16
California 180 16,351,959.34 46.87
Colorado 14 902,374.22 2.59
Connecticut 6 280,204.44 0.80
Florida 38 1,787,298.95 5.12
Georgia 11 643,268.40 1.84
Hawaii 4 755,140.47 2.16
Idaho 4 204,071.94 0.58
Illinois 29 1,465,702.04 4.20
Indiana 6 168,944.90 0.48
Kansas 2 98,000.00 0.28
Kentucky 2 73,500.00 0.21
Louisiana 14 577,157.03 1.65
Massachusetts 2 135,453.04 0.39
Michigan 19 759,466.98 2.18
Minnesota 9 436,174.84 1.25
Mississippi 7 229,714.13 0.66
Missouri 3 94,896.49 0.27
Montana 2 140,000.00 0.40
Nebraska 3 100,036.91 0.29
New Jersey 1 151,000.00 0.43
New Mexico 1 18,900.00 0.05
New York 17 850,625.71 2.44
North Carolina 14 809,017.92 2.32
Ohio 11 450,642.91 1.29
Oklahoma 10 366,230.00 1.05
Oregon 3 182,456.50 0.52
Pennsylvania 3 165,775.00 0.48
Rhode Island 1 46,783.82 0.13
South Carolina 16 467,247.18 1.34
Tennessee 25 1,151,972.40 3.30
Texas 38 2,086,389.13 5.98
Utah 5 252,674.12 0.72
Virginia 4 214,617.54 0.62
Washington 25 1,867,998.28 5.35
West Virginia 1 48,000.00 0.14
Wisconsin 1 48,985.51 0.14
Wyoming 1 40,000.00 0.11
--- -------------- ------
Total 547 $34,884,929.88 100.00%
--- -------------- ------
--- -------------- ------
UNDERWRITING STANDARDS
GENERAL DESCRIPTION OF THE SELLER'S REGULAR LENDING PROGRAM
The Seller's underwriting standards are primarily intended to assess the
value of the mortgaged property and to evaluate the adequacy of such property
as collateral for the mortgage loan. It is contemplated that all of the
mortgage loans originated by the Seller will also be underwritten with a view
toward the resale thereof in the secondary mortgage market. While one of the
Seller's primary considerations in underwriting a mortgage loan is the value of
the mortgaged property, the Seller also considers, among other things, a
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the type and use of the mortgaged property. The maximum
Loan-to-Value Ratio permitted under the Seller's regular lending program is 90%
(however, DLJMC generally will not purchase, and the Trust Fund will not
include, mortgage loans with Loan-to-Value Ratios in excess of 85%). Second
lien financing of the Mortgaged Properties may be provided by lenders other
than the Seller at any time (including at origination), in which case the
combined Loan-to-Value Ratio may exceed 85%; however, the Seller will not
provide second lien financing on any Mortgaged Property securing a Mortgage
Loan included in the Trust Fund. All of the Mortgage Loans included in the
Trust Fund will be first lien mortgage loans. All of
S-29
the Mortgage Loans generally bear higher rates of interest than mortgage loans
that are originated in accordance with FNMA and FHLMC standards. The combination
of these factors is likely to result in rates of delinquency, foreclosure,
bankruptcy and loss that are higher, and that may be substantially higher, than
those experienced by mortgage loans underwritten in a more traditional manner.
See "The Seller Loan Delinquency, Forbearance, Foreclosure, Bankruptcy and REO
Property Status" and "--REO Property Liquidation Experience" herein for
important information regarding the delinquency, forbearance, foreclosure,
bankruptcy and REO property status and loss experience of certain mortgage loans
previously originated or acquired by the Seller under substantially the same
underwriting criteria pursuant to which the Mortgage Loans were originated or
acquired.
As a result of the Seller's underwriting criteria, changes in the values
of Mortgaged Properties may have a greater effect on the delinquency,
foreclosure, bankruptcy and loss experience on the Mortgage Loans than on
mortgage loans originated in a more traditional manner. No assurance can be
given that the values of the Mortgaged Properties have remained or will remain
at the levels in effect on the dates of origination of the related Mortgage
Loans. Approximately 46.87% of the Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) are secured by Mortgaged Properties located in
the State of California. Property values of residential real estate in
California have declined in recent years. If the California residential real
estate market should continue to experience a decline in property values after
the dates of origination of the Mortgage Loans, the rates of delinquency,
foreclosure, bankruptcy and loss on the Mortgage Loans may be expected to
increase substantially as compared to such rates in a stable or improving real
estate market.
Substantially all of the Seller's current single family mortgage loan
volume is originated or acquired primarily based on loan application packages
submitted through mortgage brokerage companies. Such loan application packages,
which generally contain relevant credit, property and underwriting information
on the loan request, are compiled by the applicable mortgage brokerage company
and submitted to the Seller for approval and funding. The mortgage brokerage
companies receive all or a portion of the loan origination fee charged to the
borrower at the time the loan is made. As part of its quality control
procedures, the Seller maintains a file with respect to each broker including
reports of any complaints received by the Seller with respect to such broker.
No more than approximately 7.74% of the Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) were originated based on loan application
packages submitted through any single mortgage brokerage company.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit
history, employment history and personal information. The Seller requires a
credit report on each applicant from a credit reporting company. The report
typically contains information relating to such matters as credit history with
local and national merchants and lenders, installment debt payments and any
record of defaults, bankruptcies, repossessions or judgments.
One-to four-family (sometimes referred to herein as "single family")
properties that are to secure mortgage loans are appraised by qualified
independent appraisers who are approved by the Seller's internal chief
appraiser. Such appraisers inspect and appraise the subject property and verify
that such property is in acceptable condition. Following each appraisal, the
appraiser prepares a report which includes a market value analysis based on
recent sales of comparable homes in the area and, when deemed appropriate,
replacement cost analysis based on the current cost of constructing a similar
home. All appraisals are required to conform to the Uniform Standards of
Professional Appraisal Practice adopted by the Appraisal Standards Board of the
Appraisal Foundation and must be on forms acceptable to FNMA and FHLMC. Every
independent appraisal is reviewed by either a Seller staff appraiser who is
supervised by the Seller's chief appraiser, or by another independent appraiser
approved by the Seller's chief appraiser, to confirm the adequacy of the
property as collateral, and substantially all independent appraisals are
reviewed before the mortgage loan is made. If the value of the subject property
as determined by the Seller's review appraisal is more than either 5% or 10%
(depending upon the original appraisal value and the state in which the subject
property is located) below the original appraisal value, then the Seller's
review appraisal value is used for purposes of establishing the maximum
permissible Loan-to-Value Ratio of the mortgage loan. In all other cases, the
value of the subject property as determined by the original appraisal is used
for purposes of establishing the maximum permissible Loan-to-Value Ratio of the
mortgage loan.
All of the Mortgage Loans were originated or acquired under the Seller's
regular lending program, and were underwritten by the Seller pursuant to its
"Full Documentation," "Quick Qualifier" and "Quick Qualifier Plus" residential
loan programs. Under each of these residential loan programs, the Seller
reviews the loan applicant's
S-30
source of income, calculates the amount of income from sources indicated on the
loan application or similar documentation, reviews the credit history of the
applicant, calculates the debt service-to-income ratio to determine the
applicant's ability to repay the loan, reviews the type and use of the property
being financed and reviews the property for compliance with the regular lending
program's standards. In determining the ability of the applicant to repay a loan
of the type included in the Mortgage Pool, the Seller uses a rate (the
"Qualifying Rate") equal to, in the case of each fixed rate loan, the interest
rate thereon and in the case of each adjustable rate loan having a seven-year
fixed initial interest rate period, the initial interest rate thereon. The
Seller's underwriting standards are applied in a standardized procedure which
complies with applicable federal and state laws and regulations. The Seller
requires its underwriters to be satisfied that the value of the property being
financed, as indicated by an appraisal and a review appraisal, currently
supports and is anticipated to support in the future the outstanding loan
balance. In general, the maximum loan amount for mortgage loans originated under
the regular lending program is $350,000; however, the Seller approves mortgage
loans in excess of such amount on a case-by-case basis. The single family, fixed
rate loans originated or acquired by the Seller under its regular lending
program and characteristic of the Fixed Rate Loans, for the period from October
1, 1994 through September 1, 1995, totalled approximately $162,569,222, had a
weighted average loan-to-value ratio at origination of approximately 64.80% and
had an average original principal balance of approximately $56,350. The single
family, fixed rate loans originated or acquired by the Seller under its regular
lending program and characteristic of the Fixed Rate Loans, for the period from
October 1, 1995 through December 31, 1995, totalled approximately $70,822,119,
had a weighted average loan-to-value ratio at origination of approximately
65.08% and had an average original principal balance of approximately $68,960.
The single family adjustable rate loans originated or acquired by the Seller
under its regular lending program and characteristic of the Adjustable Rate
Loans, for the period from October 1, 1994 through September 30, 1995, totalled
approximately $32,778,929 had a weighted average Loan-to-Value Ratio at
origination of approximately 66.31% and had an average original principal
balance of approximately $64,272. The single family adjustable rate loans
originated or acquired by the Seller under its regular lending program and
characteristic of the Adjustable Rate Loans, for the period from October 1, 1995
through December 31, 1995, totalled approximately $3,138,255, had a weighted
average Loan-to-Value Ratio at origination of approximately 64.91% and had an
average original principal balance of approximately $57,059. The discussion
herein and the statistics set forth in the preceding four sentences excludes
mortgage loans originated under the Seller's equity lending program, mortgage
loans originated by the Seller under its REO underwriting guidelines and certain
other mortgage loans originated under the Seller's regular lending program
having characteristics that are not similar to those of the Mortgage Loans. The
Seller underwrites single-family loans with Loan-to-Value Ratios at origination
of up to 90% (however, DLJMC generally will not purchase, and the Trust Fund
will not include, mortgage loans with Loan-to-Value Ratios in excess of 85%),
depending on, among other things, a mortgagor's credit history, repayment
ability and debt service-to-income ratio, as well as the type and use of the
property. Under each risk category of underwriting criteria described below, the
maximum combined Loan-to-Value Ratio at origination, including any then existing
second mortgages subordinate to the Seller's first mortgage, is 100% (however,
DLJMC generally will not purchase, and the Trust Fund will not include, mortgage
loans with combined Loan-to-Value Ratios in excess of 90%).
The Seller verifies the income of each borrower (except as described
below) and a portion of the source of funds required to be deposited by the
applicant with the appropriate closing agent or into escrow under its various
residential loan programs as follows: under the Full Documentation program,
borrowers are generally required to submit two forms of verification of stable
monthly income for the last 24 months (or if the Loan-to-Value Ratio is less
than or equal to 70%, for the last 12 months); provided that as an alternative,
bank statements for the appropriate time period alone may be accepted as
adequate verification of stable monthly income. Under the Quick Qualifier and
Quick Qualifier Plus programs, one such form of verification is generally
required for the last six months and for any period of less than six months,
respectively, except that borrowers may be qualified based upon monthly income
as stated on the mortgage loan application, without verification, if the
borrower and the mortgaged property meet certain criteria. Under all of the
foregoing programs, the Seller generally performs a telephone verification of
the borrower's employment. Verification of a portion of the source of funds (if
any) required to be deposited by the applicant with the appropriate closing
agent or into escrow is required under the Full Documentation program if the
Loan-to-Value Ratio is greater than 70%; however, no such verification is
required under the other programs.
S-31
The Seller uses the following categories and characteristics as
guidelines to grade the potential likelihood that the mortgagor will satisfy
the repayment conditions of a mortgage loan:
A+ RISK. Under the A+ Risk category, the prospective mortgagor must have
generally repaid installment or revolving debt according to its terms. No
30-day late payments within the past 12 months are permissible on an existing
mortgage loan. Minor derogatory items are allowed as to non-mortgage credit and
a letter of explanation may be required under the Full Documentation program. A
bankruptcy filing by the prospective mortgagor is permitted if it occurred at
least two years previously, provided, however, that if the Loan-to-Value Ratio
is greater than 75%, the bankruptcy must have been dismissed or the prospective
mortgagor's debts must have been discharged for a minimum of two years. The
mortgaged property must be in at least average condition. A maximum
Loan-to-Value Ratio of 85% (or 75% for mortgage loans originated under the
Quick Qualifier and Quick Qualifier Plus programs) is permitted for a mortgage
loan on a single family owner occupied property. A maximum Loan-to-Value Ratio
of 75% (or 65% for mortgage loans originated under the Quick Qualifier and
Quick Qualifier Plus programs) is permitted for a mortgage loan on a single
family non-owner occupied property. If the prospective mortgagor has owned the
subject property for less than nine months, then the maximum Loan-to-Value
Ratio is based on the lesser of the documented original acquisition cost or the
current appraisal value. For refinance mortgage loans, the prospective
mortgagor may not receive more than $1,000 "cash out" at the closing directly
from the mortgage loan proceeds, exclusive of amounts used to pay off
outstanding consumer debts or other financial obligations of the prospective
mortgagor concurrent with loan funding. The restrictions set forth in the
preceding two sentences apply only if the Loan-to-Value Ratio is greater than
80% on an owner occupied property (or 70% on a non-owner occupied property).
A RISK. Under the A Risk category, the prospective mortgagor must have
generally repaid installment or revolving debt according to its terms. A
maximum of two 30-day late payments, and no 60-day late payments, within the
last 12 months is acceptable on an existing mortgage loan. The Seller generally
will consider a continuous sequence of 30-day late payments as a single 30-day
late payment for the purpose of determining a prospective mortgagor's mortgage
payment history. An existing mortgage loan is not required to be current at the
time the application is submitted. Minor derogatory items are allowed as to
non-mortgage credit, and a letter of explanation may be required under the Full
Documentation program. A previous bankruptcy filing by the prospective
mortgagor is permitted if it occurred at least two years previously; provided,
however, that if the Loan-to-Value Ratio is greater than 75%, the bankruptcy
must have been dismissed or the prospective mortgagor's debts must have been
discharged for a minimum of two years. The mortgaged property must be in at
least average condition. A maximum Loan-to-Value Ratio of 85% (or 75% for
mortgage loans originated under the Quick Qualifier and Quick Qualifier Plus
programs) is permitted for a mortgage loan on a single family owner occupied
property. A maximum Loan-to-Value Ratio of 75% (or 65% for mortgage loans
originated under the Quick Qualifier or Quick Qualifier Plus programs) is
permitted for a mortgage loan on a non-owner occupied property. A maximum
Loan-to-Value Ratio of 70% is permitted for a refinance mortgage loan on a
non-owner occupied property. If the prospective mortgagor has owned the subject
property for less than nine months, then the maximum Loan-to-Value Ratio is
based on the lesser of the documented original acquisition cost or the current
appraisal value. For refinance mortgage loans, the prospective mortgagor may
not receive more than $1,000 "cash out" at the closing directly from the
mortgage loan proceeds, exclusive of amounts used to pay off outstanding
consumer debts or other financial obligations of the prospective mortgagor
concurrent with loan funding. The restrictions set forth in the preceding two
sentences apply only if the Loan-to-Value Ratio is greater than 80% on an
owner-occupied property.
B RISK. Under the B Risk category, the prospective mortgagor must have
generally repaid all installment or revolving debt according to its terms. A
maximum of four 30-day late payments and no 60-day late payments (or,
alternatively, two 30-day late payments and one 60-day late payment), within
the last 12 months is acceptable on an existing mortgage loan. The Seller
generally will consider a continuous sequence of 30-day late payments as a
single 30-day late payment for the purpose of determining a prospective
mortgagor's mortgage payment history. An existing mortgage loan is not required
to be current at the time the application is submitted. As to non-mortgage
credit, some prior defaults may have occurred (provided, that under the Full
Documentation program, any open charge-offs or collection accounts of $500 or
more must be paid at closing if the Loan-to-Value Ratio is greater than
S-32
70%). A bankruptcy filing by the prospective mortgagor is permitted if it
occurred at least two years previously; provided, however, that if the
Loan-to-Value Ratio is greater than 75%, the bankruptcy must have been dismissed
or the prospective mortgagor's debts must have been discharged for a minimum of
two years. The mortgaged property must be in at least average condition. A
maximum Loan-to-Value Ratio of 80% (or 75% for mortgage loans originated under
the Quick Qualifier and Quick Qualifier Plus programs) is permitted for a
mortgage loan on an owner-occupied property. A maximum Loan-to-Value Ratio of
70% (or 65% for mortgage loans originated under the Quick Qualifier or Quick
Qualifier Plus programs) is permitted for a mortgage loan on a
non-owner-occupied property.
C1 RISK. Under the C1 Risk category, the prospective mortgagor may have
experienced significant credit problems in the past. A maximum of six 30-day
late payments, including one 60-day late payment and one 90-day late payment,
within the last 12 months is acceptable on an existing mortgage loan. The Seller
generally will consider a continuous sequence of 30-day late payments as a
single 30-day late payment for the purpose of determining a prospective
mortgagor's mortgage payment history. An existing mortgage loan is not required
to be current at the time the application is submitted. As to non-mortgage
credit, significant prior defaults may have occurred. A bankruptcy filing by the
prospective mortgagor is permitted, if it occurred at least 18 months
previously. The mortgaged property must be in adequate condition. A maximum
Loan-to-Value Ratio of 70% (or 65% for mortgage loans originated under the Quick
Qualifier Plus program) is permitted for a mortgage loan on an
owner-occupied property; provided, however, that a maximum Loan-to-Value Ratio
of 80% is permitted under the Full Documentation program if the principal
balance of the mortgage loan at origination is $50,000 or less, and the
prospective mortgagor warrants an upgrade or exception. See "--Variations" below
for a description of certain compensating factors which the Seller may consider
in granting such an upgrade or exception. A maximum Loan-to-Value Ratio of 65%
(or 60% for mortgage loans originated under the Quick Qualifier Plus Program)
is permitted for a mortgage loan on a non-owner-occupied property.
C2 RISK. Under the C2 Risk category, the prospective mortgagor may have
experienced significant credit problems in the past. A maximum of 120 days late
within the last 12 months is acceptable on an existing mortgage loan and the
existing mortgage loan is not required to be current at the time the
application is submitted. As to non-mortgage credit, significant prior defaults
may have occurred. A bankruptcy filing by the prospective mortgagor is
permitted but the bankruptcy must be dismissed or the prospective mortgagor's
debts must be discharged prior to or concurrent with loan funding. The
mortgaged property may exhibit some deferred maintenance. A maximum
Loan-to-Value Ratio of 65% (or 60% for mortgage loans originated under the
Quick Qualifier Plus program) is permitted for a mortgage loan on an
owner-occupied property. A maximum Loan-to-Value Ratio of 65% (or 55% for
mortgage loans originated under the Quick Qualifier Plus program) is permitted
for a mortgage loan on a non-owner occupied property. However, the maximum
Loan-to-Value Ratio may be increased to 70% (or 65% under the Quick Qualifier
Plus program) on an owner occupied property provided the mortgaged property
meets the following criteria: (a) the property is a detached single-unit
dwelling structure; (b) the property has a minimum of 800 square feet of living
area with a minimum of two bedrooms; and (c) the property value as determined
by the Seller's review appraisal is not more than 5% below the original
appraisal value unless the Seller's review value is used for establishing the
Loan-to-Value Ratio of the mortgage loan.
D RISK. Under the D Risk category, the prospective mortgagor may have
experienced significant credit problems in the past. An existing mortgage loan
is not required to be current at the time the application is submitted and may
have been delinquent more than 120 days at the time of mortgage loan approval
or during the previous 12 months. As to non-mortgage credit, significant prior
defaults may have occurred. A bankruptcy filing by the borrower is permitted
but the bankruptcy must be dismissed or the borrower's debt must be discharged
prior to or concurrent with mortgage loan funding. The mortgaged property must
be in at least adequate condition and there may not be any significant deferred
maintenance or construction in progress unless: (a) the Loan-to-Value Ratio is
60% or less; (b) the value of the mortgaged property used in determining the
Loan-to-Value Ratio does not include any value of any construction in progress;
and (c) all appropriate title insurance endorsements are provided. The
mortgaged property may exhibit deferred maintenance that is cosmetic only, and
must not exhibit any structural problems. A maximum Loan-to-Value Ratio of 65%
(or 60% for mortgage loans originated under the Quick Qualifier Plus program)
is permitted for a mortgage loan on an owner occupied property. A
S-33
maximum Loan-to-Value Ratio of 65% (or 55% for mortgage loans originated under
the Quick Qualifier Plus program) is permitted for a mortgage loan on a
non-owner occupied property. However, the maximum Loan-to-Value Ratio may be
increased to 70% (or 65% under the Quick Qualifier Plus program) on an owner
occupied property provided that the mortgaged property meets the following
criteria: (a) the property is a detached single-unit dwelling structure; (b) the
property has a minimum of 800 square feet of living area with a minimum of two
bedrooms; and (c) the property value as determined by the Seller's review
appraisal is not more than 5% below the original appraisal value unless the
Seller's review value is used for establishing the Loan-to-Value Ratio of the
mortgage loan. In addition, an existing mortgage loan may not have been more
than 180 days delinquent in the last 12 months and the prospective mortgagor may
not receive more than $1,000 "cash out" at the closing directly from the
mortgage loan proceeds, exclusive of amounts used to pay off outstanding
consumer debts or other financial obligations of the prospective mortgagor
concurrent with mortgage loan funding in order to qualify for the increased
Loan-to-Value Ratio.
DEBT SERVICE-TO-INCOME RATIOS. In addition to the Loan-to-Value Ratio
limitations imposed under the risk categories outlined above, the Seller also
considers each prospective mortgagor's debt service-to-income ratio based on
the Qualifying Rate (which may be less than the Fully Indexed Rate) in
establishing the maximum Loan-to-Value Ratio available for each mortgage loan
application as follows: to qualify for a maximum Loan-to-Value Ratio of up to
90%, a prospective mortgagor's debt service-to-income ratio generally must be
45% or less (provided, DLJMC generally will not purchase, and the Trust Fund
will not include, mortgage loans with Loan-to-Value Ratios in excess of 85%);
to qualify for a maximum Loan-to-Value Ratio of up to 80%, a prospective
mortgagor's debt service-to-income ratio must generally be 50% or less; to
qualify for a maximum Loan-to-Value Ratio of up to 75%, a prospective
mortgagor's debt service-to-income ratio generally must be 55% or less; and to
qualify for a maximum Loan-to-Value Ratio of up to 70%, a prospective
mortgagor's debt service-to-income ratio must generally be 60% or less. The
Seller generally will not originate a mortgage loan if the prospective
mortgagor's debt service-to-income ratio exceeds 60%.
VARIATIONS. As described above, the Seller uses the foregoing categories
and characteristics as guidelines only. On a case-by-case basis, the Seller may
determine that the prospective mortgagor warrants a risk category upgrade, a
debt service-to-income ratio exception, a pricing exception or some other
exception to its underwriting guidelines. Such an upgrade or exception may be
allowed if the application reflects certain compensating factors, including,
among others: low loan-to-value ratio; pride of ownership; a maximum of one
30-day late payment on all mortgage loans during the last 12 months; favorable
mortgage credit history (as opposed to non-mortgage credit history); stable
employment of five or more years at the applicant's current place of
employment; and residence of five or more years at the applicant's current
residence. Such an upgrade or exception may also be allowed in a purchase
transaction if the applicant deposits a downpayment with the appropriate
closing agent or into escrow of at least 20% of the purchase price of the
mortgaged property. Accordingly, the Seller may classify in a more favorable
risk category certain mortgage loans that, in the absence of such compensating
factors, would satisfy only the criteria of a less favorable risk category.
In addition to the Seller's regular lending program, the Seller also
originates or acquires residential mortgage loans under its equity lending
program. The Seller's equity lending program employs a different set of
underwriting guidelines that place more emphasis on the value of the mortgaged
property and less emphasis on the mortgagor's credit history. Mortgage loans
originated under either the Seller's regular lending program or its equity
lending program may include mortgage loans to facilitate the sale of real
estate owned properties ("REO properties") acquired by the Seller, provided
that all guidelines under the applicable lending program are met; however, no
such mortgage loans are included in the Mortgage Pool. The Seller also
originates mortgage loans to facilitate the sale of REO properties under
separate underwriting guidelines, which are not included under either the
Seller's regular or equity lending programs and which may have Loan-to-Value
Ratios of up to 90%.
S-34
THE INDEX
With respect to each Adjustable Rate Loan and any related Adjustment
Date, the Index is the average of the interbank offered rates for six month
United States dollar deposits in the London interbank market based on
quotations of major banks ("LIBOR"), as published in the Western Edition of The
Wall Street Journal. The Index applicable on any Adjustment Date is the most
recent Index figure available (i) as of the date 45 days before such Adjustment
Date with respect to a majority of the Mortgage Loans or (ii) as of the first
business day of the month immediately preceding the month in which the
Adjustment Date occurs. Listed below are some historical average values for the
months indicated of LIBOR (as made available from Reuters and published by Data
Resources, Inc.), which values may differ from those published in the Western
Edition of The Wall Street Journal:
YEAR
MONTH 1996 1995 1994 1993 1992 1991 1990
January . . 5.40% 6.80% 3.41% 3.47% 4.23% 7.35% 8.37%
February . 6.63 3.66 3.35 4.29 6.71 8.42
March . . . 6.44 4.15 3.35 4.58 6.68 8.64
April . . . 6.44 4.43 3.33 4.32 6.36 8.73
May . . . . 6.13 4.99 3.32 4.12 6.21 8.63
June . . . 5.90 4.96 3.49 4.14 6.44 8.42
July . . . 5.85 5.27 3.48 3.64 6.43 8.26
August . . 5.93 5.29 3.46 3.54 5.93 8.12
September . 5.87 5.49 3.36 3.31 5.75 8.22
October . . 5.88 5.90 3.39 3.42 5.48 8.16
November . 5.74 6.21 3.53 3.79 5.06 8.06
December . 5.61 6.86 3.49 3.69 4.58 7.74
If the Index becomes unpublished or is otherwise unavailable, the Master
Servicer will select an alternative index that is based upon comparable
information.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Loans and
the Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Offered
Certificates, Mortgage Loans may be removed from the Mortgage Pool as a result
of incomplete documentation or otherwise, if the Depositor deems such removal
necessary or appropriate. A limited number of other mortgage loans may be
included in the Mortgage Pool prior to the issuance of the Offered
Certificates.
A Current Report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed, together with the Pooling and Servicing
Agreement, with the Securities and Exchange Commission within fifteen days
after the initial issuance of the Offered Certificates. In the event that
Mortgage Loans are removed from or added to the Mortgage Pool as set forth in
the preceding paragraph, such removal or addition will be noted in such Current
Report on Form 8-K.
THE SELLER
The information set forth in the following paragraphs (other than the
information set forth under the caption "--Loan Delinquency, Forbearance,
Foreclosure, Bankruptcy and REO Property Status" and, to the extent provided by
Lomas Mortgage USA, Inc. ("Lomas") as described herein, the information set
forth under the caption "--REO Property Liquidation Experience") has been
provided by the Seller. Neither the Depositor, the Underwriter, the Master
Servicer, the Trustee nor any of their respective affiliates have made or will
make any representation as to the accuracy or completeness of the information
provided by the Seller. The information set forth below under the caption
"Loan Delinquency, Forbearance, Foreclosure, Bankruptcy and REO Property Status"
and, other than to the extent provided by the Seller, the information set forth
below under the caption "--REO Property Liquidation Experience" has been
provided by Lomas in its capacity as servicer of loans originated or acquired
by the Seller
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during the relevant periods indicated. No representation is made by the
Depositor, the Underwriter, the Master Servicer, the Seller, the Trustee or any
of their respective affiliates as to the accuracy or completeness of the
information provided by Lomas.
Quality Mortgage USA, Inc. (the "Seller"), a California corporation, was
incorporated in 1984, and is approved as a non-supervised mortgagee by the U.S.
Department of Housing and Urban Development. Prior to September 1991, the
Seller did not engage in lending activities of the type involved under its
present lending programs, and was owned and operated by persons no longer
connected with the Seller. In September 1991, the Seller was acquired by CALMAC
Funding, a Nevada corporation, for the purpose of commencing operations as an
originator and seller of residential mortgage loans. The Seller began
originating and acquiring mortgage loans under its regular lending program in
January 1992 and began originating and acquiring mortgage loans under its
equity lending program in September 1992.
The initial working capital for the Seller's operations was provided by
CALMAC Funding. CALMAC Funding presently owns 51% of the voting stock of the
Seller and has the right to appoint three out of five of the Seller's
directors. Accordingly, CALMAC Funding generally has the rights of a majority
shareholder of the Seller, subject to the rights of DLJMC as described below.
CALMAC Funding also has a consulting agreement with the Seller to provide
certain marketing, administrative, cost containment and expense reduction
services to the Seller including, among other things, the promotion of the
Seller's present lending programs to mortgage brokerage companies. The
principal executive officers of CALMAC Funding, who are also the directors and
sole shareholders of CALMAC Funding, are the former principal executive
officers of Guardian Savings and Loan Association ("Guardian"), a
California-chartered, SAIF-insured savings and loan association which was
placed into receivership by the Resolution Trust Corporation ("RTC") during
1991. In addition, one such principal executive officer was the shareholder of
Guardian's holding company. In December 1995, the principal executive officers
of CALMAC Funding announced that they had entered into definitive agreements
with the RTC and the Office of Thrift Supervision ("OTS") in full settlement
and release of all potential claims which could be asserted against the
principal executive officers of CALMAC, as well as all former officers and
directors of Guardian, by the RTC and the OTS and other Federal agencies in
connection with Guardian without admitting or denying any such claims. Under
the terms of the agreements, the foregoing individuals agreed to a restitution
payment as well as an agreement not to operate a bank or other federally
insured institution without the prior consent and approval by federal banking
regulators.
The Seller has experienced significant changes in the composition of its
staff and management in recent months, largely as a result of a program to cut
costs and expenses so as to remain competitive in the marketplace. In addition,
the Seller's president and a number of the Seller's other officers resigned
from their positions in 1995. The Seller has filled all of the vacant
management positions that were not eliminated by the Seller's program to cut
costs and expenses. The Seller has also appointed one of the Seller's directors
as an interim president to serve until a permanent successor to its former
president is appointed. A number of the officers who departed in recent months
have become shareholders, directors or officers of companies that compete with
the Seller. Concurrently with the foregoing developments, CALMAC Funding has
taken a more active role in advising the management of the Seller.
The majority of the mortgage loans originated or acquired by the Seller
under its current programs are funded by the purchase thereof under a master
repurchase agreement by DLJMC, an affiliate of the Depositor and the
Underwriter. It is contemplated that substantially all mortgage loans
originated or acquired by the Seller and approved by DLJMC will be purchased by
DLJMC or an affiliate with a view towards securitization or other resale
transactions in the secondary mortgage market. DLJMC owns 49% of the voting
stock of the Seller. Two employees of DLJMC serve as directors of the Seller,
and pursuant to certain provisions of the applicable agreements, DLJMC has the
right to control certain aspects of the management of the Seller. In addition,
DLJMC maintains one or more mortgage loan underwriters, who are employees of
DLJMC, at the principal executive offices of the Seller for the purpose of
reviewing the underwriting of all the mortgage loans originated or acquired by
the Seller after the origination or acquisition of such mortgage loans.
Under arrangements in effect as of the date hereof, certain of the first
lien mortgage loans originated or acquired by the Seller initially are serviced
by Temple-Inland Mortgage Corporation ("TIMC"), and the other of such first
lien mortgage loans, and all of the second lien mortgage loans originated or
acquired by the Seller, initially are serviced by the Seller. The mortgage
loans that are approved for purchase by DLJMC from the Seller
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consist only of first lien mortgage loans and are purchased by DLJMC on a
servicing-released basis. After such mortgage loans are purchased by DLJMC, such
mortgage loans continue to be serviced by TIMC or the Seller until either the
servicing for such mortgage loans is transferred as part of the sale of such
mortgage loans on a servicing-released basis or, in the case of mortgage loans
serviced by the Seller, the servicing for such mortgage loans is transferred to
TIMC. No such mortgage loans are serviced by the Seller after being transferred
to REMIC trust funds other than for an interim servicing period. In addition, as
to any mortgage loans that are not purchased by DLJMC, the Seller either keeps
or obtains from TIMC and either retains or transfers such servicing for such
mortgage loans, depending on the circumstances in each case.
As of September 30, 1994, the Seller had total assets of $210,276,119,
total liabilities of $173,282,456 and shareholders' equity of $36,993,663. For
the year ended September 30, 1994, the Seller had net income (after taxes) of
$18,246,494. As of September 30, 1995, the Seller had total assets of
$270,699,630, total liabilities of $242,860,791 and shareholders' equity of
$27,838,839. For the year ended September 30, 1995, the Seller had net income
(after taxes) of 13,120,173. On April 14, 1995, the Seller declared a dividend
of approximately $12.4 million, and on September 7, 1995, the Seller declared
an additional dividend of approximately $10.0 million. The Seller's principal
executive offices are located at 16800 Aston Street, Irvine, California 92714.
The Seller currently maintains additional loan origination offices at various
locations in the States of California, Colorado, Nevada, Washington, Maryland,
Oregon, Missouri, Indiana, Ohio, Minnesota, Pennsylvania, North Carolina, South
Carolina, Kansas, Tennessee, Oklahoma, Wisconsin, Utah, Louisiana, Arkansas,
Kentucky, Illinois, Florida, Idaho, Georgia, Hawaii, New Mexico, Connecticut,
Michigan and Rhode Island.
No person other than the Seller is obligated with respect to the
representations and warranties respecting the Mortgage Loans and the remedies
for any breach thereof that are assigned to the Trustee for the benefit of the
Certificateholders. Moreover, as discussed above, the Seller has only limited
assets available to perform its repurchase obligations in respect of any breach
of such representations and warranties, relative to the potential amount of
repurchase liability, and the total potential amount of repurchase liability is
expected to increase over time as the Seller continues to originate, acquire
and sell mortgage loans. There can be no assurance that the Seller will
continue to generate operating earnings, or that it will be successful under
its current business plan. Therefore, prospective investors in the Offered
Certificates should consider the possibility that the Seller will not have
sufficient assets with which to satisfy its repurchase obligations in the event
that a substantial amount of Mortgage Loans are required to be repurchased due
to breaches of representations and warranties.
The Seller is currently a defendant in several pending lawsuits that
allege, among other things, violations of certain federal and state consumer
credit laws and regulations and related common law claims. The plaintiffs in
three of these lawsuits are seeking class certification but the court in each
such lawsuit has not yet reached a decision on such request. Each of these
lawsuits is in the preliminary stages of litigation. Accordingly, the Seller is
unable to predict either the outcome of any of such lawsuits or whether any
adverse outcome would have a material adverse effect on the Seller's financial
condition.
The Seller will retain the right to all prepayment charges and late
payment charges received on the Mortgage Loans and the Certificateholders will
have no right thereto. In addition, it is anticipated that the Seller will be
the holder of a Percentage Interest equal to 99.99% of the Residual
Certificates. The Seller may sell such interest at any time, subject to certain
conditions set forth in the Pooling and Servicing Agreement.
LOAN DELINQUENCY, FORBEARANCE, FORECLOSURE, BANKRUPTCY AND REO PROPERTY STATUS
Based solely upon information provided by Lomas, the table below
summarizes, at the respective dates indicated, the delinquency, forbearance,
foreclosure, bankruptcy and REO property status with respect to all mortgage
loans originated or acquired under the Seller's regular lending program that,
in each case, were transferred to REMIC trust funds as of the respective dates
three months prior to the dates indicated. The table below is based solely upon
information provided by Lomas, as servicer of such mortgage loans during the
periods indicated, and does not include information with respect to: (i)
mortgage loans that were not purchased by DLJMC, (ii) mortgage loans purchased
by DLJMC but not transferred to REMIC trust funds, (iii) mortgage loans
originated or acquired under the D Risk category of the Seller's regular
lending program, (iv) mortgage loans originated or acquired under the Seller's
equity lending program, or (v) mortgage loans originated by the Seller under
its REO underwriting guidelines. The indicated periods of delinquency are based
on the number of days past due on a contractual basis.
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The monthly payments under all of such mortgage loans are due on the first day
of each calendar month. (The sum of the amounts and the percentages in the table
below may not equal the totals due to rounding.)
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
(DOLLARS IN THOUSANDS)
Total Loans Outstanding . . . . 18,808 $1,901,843 14,670 $1,633,885
DELINQUENCY(1)
Period of Delinquency:
31-60 Days . . . . . . . 350 $ 37,283 160 $ 18,607
61-90 Days . . . . . . . 34 3,184 8 986
91-120 Days or More . . . 12 965 4 534
--- -------- --- --------
Total Delinquencies . . . 396 $ 41,432 172 $ 20,127
--- -------- --- --------
--- -------- --- --------
Delinquencies as a Percentage of
Total Loans Outstanding . . . . 2.11% 2.18% 1.17% 1.23%
FORBEARANCE LOANS(2) . . . . . 11 $1,316 5 $761
Forbearance Loans as a
Percentage of
Total Loans Outstanding . . . . 0.06% 0.07% 0.03% 0.05%
FORECLOSURES PENDING(3) . . . . 985 $113,125 410 $50,453
Foreclosures Pending as a
Percentage of
Total Loans Outstanding . . . . 5.24% 5.95% 2.79% 3.09%
BANKRUPTCIES PENDING(4) . . . . 445 $51,998 229 $30,213
Bankruptcies Pending as a
Percentage of
Total Loans Outstanding . . . . 2.37% 2.73% 1.56% 1.85%
TOTAL DELINQUENCIES PLUS
FORBEARANCE LOANS, FORECLOSURES
PENDING AND BANKRUPTCIES
PENDING . . . . . . . . . . . . 1,837 $207,871 816 $101,554
Total Delinquencies plus
Forbearance Loans, Foreclosures
Pending and Bankruptcies
Pending as Percentage of Total
Loans Outstanding . . . . . . . 9.77% 10.93% 5.56% 6.22%
REO PROPERTIES(5) . . . . . . . 415 $47,956 96 $12,418
REO Properties as a Percentage
of
Total Loans Outstanding . . . . 2.21% 2.52% 0.65% 0.76%
- ------------
(1) The delinquency balances, percentages and numbers set forth under this
heading exclude (a) delinquent mortgage loans that were subject to
forbearance agreements with the related mortgagors at the respective
dates indicated ("Forbearance Loans"), (b) delinquent mortgage loans
that were in foreclosure at the respective dates indicated ("Foreclosure
Loans"), (c) delinquent mortgage loans as to which the related mortgagor
was in bankruptcy proceedings at the respective dates indicated
("Bankruptcy Loans") and (d) REO properties that have been purchased by
or on behalf of REMIC trust funds upon foreclosure of the related
mortgage loans (other than REO properties purchased by the Seller as
described below under "--REO Property Liquidation Experience." All
Forbearance Loans, Foreclosure Loans, Bankruptcy Loans and
REO properties have been segregated into the sections of the table
entitled "Forbearance Loans," "Foreclosures Pending," "Bankruptcies
Pending" and "REO Properties," respectively, and are not included in the
"31-60 Days," "61-90 Days," "91-120 Days or More" and "Total
Delinquencies" sections of the table. See the section of the table
entitled "Total Delinquencies plus Forbearance Loans, Foreclosures
Pending and Bankruptcies Pending" for total delinquency balances,
percentages and numbers which include Forbearance Loans, Foreclosure
Loans and Bankruptcy Loans, and see the section of the table entitled
S-38
"REO Properties" for delinquency balances, percentages and numbers
related to REO properties that have been purchased by or on behalf of
REMIC trust funds upon foreclosure of the related mortgage loans (other
than REO properties purchased by the Seller as described below under
"--REO Property Liquidation Experience").
(2) For each of the Forbearance Loans, the servicer has entered into a
written forbearance agreement with the related mortgagor, based on the
servicer's determination that the mortgagor is temporarily unable to
make the scheduled monthly payment on such mortgage loan. Prior to
entering into each forbearance agreement, the servicer confirmed the
continued employment status of the mortgagor and found the payment
history of such mortgagor to be satisfactory. There can be no assurance
that the mortgagor will be able to make the payments as required by the
forbearance agreement, and any failure to make such payments will
constitute a delinquency. None of the Mortgage Loans included in the
Mortgage Pool are Forbearance Loans.
(3) Mortgage loans that are in foreclosure but as to which the mortgaged
property has not been liquidated at the respective dates indicated. It is
generally the policy, with respect to mortgage loans originated by the
Seller, to commence foreclosure proceedings when a mortgage loan is
between 31 and 60 days delinquent.
(4) Mortgage loans as to which the related mortgagor is in bankruptcy
proceedings at the respective dates indicated.
(5) REO properties that have been purchased by or on behalf of REMIC trust
funds upon foreclosure of the related mortgage loans, including
mortgaged properties that were purchased by the Seller after the
respective dates indicated, as described below under "--REO Property
Liquidation Experience," but not including mortgaged properties that the
Seller had already purchased as of such dates. In April 1995, the
Seller indicated that it did not intend to purchase additional mortgaged
properties, and since then, the Seller has discontinued its practice of
purchasing mortgaged properties. Consequently, the number of REO
properties held by or on behalf of REMIC trust funds from time to time is
expected to increase. See "--REO Property Liquidation Experience" below.
The above data does not include information with respect to mortgage
loans originated or acquired under the D Risk category of the Seller's regular
lending program. Such mortgage loans have not been outstanding long enough to
be transferred to REMIC trust funds as of the respective dates three months
prior to the dates indicated. Prospective investors should be aware that based
on the underwriting standards applicable to such mortgage loans, the
delinquency, forbearance, foreclosure, bankruptcy and REO property percentages
with respect to such mortgage loans may be expected to be higher, and may be
substantially higher, than the percentages indicated above.
The above data on delinquency, forbearance, foreclosure, bankruptcy and
REO property status are calculated on the basis of the total mortgage loans
originated or acquired under the Seller's regular lending program that, in each
case, were transferred to a REMIC trust fund as of the dates three months prior
to the respective dates indicated. However, the total amount of mortgage loans
on which the above data are based includes many mortgage loans which were not,
as of the respective dates indicated, outstanding long enough to give rise to
some of the indicated periods of delinquency, to foreclosure or bankruptcy
proceedings or to forbearance or REO property status. In the absence of such
mortgage loans, the delinquency, forbearance, foreclosure, bankruptcy and REO
property percentages indicated above would be higher and could be substantially
higher. Because the Mortgage Pool will consist of a fixed group of Mortgage
Loans, the actual delinquency, forbearance, foreclosure, bankruptcy and REO
property percentages with respect to the Mortgage Pool may therefore be
expected to be higher, and may be substantially higher, than the percentages
indicated above. Prospective investors should also be aware that while the
information set forth in the table above has been compiled on the basis of
reports that are prepared as of the last day of each month, monthly remittance
reports that will be sent to investors will include delinquency and foreclosure
information on the Mortgage Loans included in the Mortgage Pool that will be
based on reports prepared as of the fifteenth day of each month (the "Monthly
Remittance Reports"), and that the delinquency and foreclosure information
appearing in the Monthly Remittance Reports may therefore be expected to be
higher than would be the case if such information were based on reports
prepared as of the last day of each month. For example, for purposes of the
foregoing table, a payment due on November 1 would be treated as 31 to 60 days
delinquent only if the payment was not received as of December 31, while the
same payment would be treated as 31 to 60 days delinquent for purposes of the
Monthly Remittance Report in December if the payment was not received as of
S-39
December 15. In addition, the delinquency and foreclosure information appearing
in the Monthly Remittance Reports is used in the calculation of the Senior
Prepayment Percentage for the Mortgage Pool.
REO PROPERTY LIQUIDATION EXPERIENCE
The pooling and servicing agreements relating to the REMIC trust funds to
which mortgage loans originated or acquired under the Seller's regular lending
program were transferred by the Depositor prior to October 1, 1995 (the "REMIC
Agreements") permit the Seller at its sole option to purchase any mortgaged
property acquired or about to be acquired by foreclosure by the servicer
thereof on behalf of the related trustee, provided, that if the Seller fails to
purchase any two of such mortgaged properties from a REMIC trust fund, the
Seller will forfeit such option to purchase any further mortgaged properties
from such REMIC trust fund. Until recently, the Seller had not declined to
exercise the foregoing purchase option. However, in April 1995, the Seller
indicated that it did not intend to purchase additional mortgaged properties as
described above. Since then, the Seller has discontinued its practice of
purchasing mortgaged properties pursuant to the foregoing provisions.
The tables below summarize, respectively, for the periods indicated (i)
the total number of mortgage loans originated or acquired under the Seller's
regular lending program and transferred to REMIC trust funds, and the aggregate
outstanding principal balance thereof at origination, and (ii) the combined
experience of the Seller and Lomas, as servicer of such mortgage loans during
the periods indicated, as of December 31, 1995 with respect to all REO
properties relating to such mortgage loans that were transferred to REMIC trust
funds as of September 30, 1995. The experience of the Seller reflected in the
tables below relates to the period ending in April 1995, during which the
Seller purchased mortgaged properties as described above, and to REO properties
acquired by the Seller during such period and liquidated thereafter. The
experience of Lomas reflected in the tables below relates to the period
beginning in April 1995, following the Seller's decision to discontinue its
practice of purchasing mortgaged properties as described above, and to REO
properties acquired and liquidated by the respective REMIC trust funds after
such decision. The tables below do not include information with respect to
mortgage loans not purchased by DLJMC, mortgage loans purchased by DLJMC but
not transferred to REMIC trust funds, mortgage loans originated or acquired
under the Seller's equity lending program or mortgage loans originated by the
Seller under its REO underwriting guidelines.
JANUARY 17, 1992
THROUGH
SEPTEMBER 30,
1995(1)
Aggregate Principal Balance at Origination . . $2,846,213,983
Total Number of Loans . . . . . . . . . . . . . 26,841
OCTOBER 1, 1992
THROUGH
DECEMBER 31,
1995(2)
Total Number of Liquidated Properties(3) . . . 428
Aggregate Principal Balance of Liquidated $57,116,508
Properties(4) . . . . . . . . . . . . . . . . .
Aggregate Net Gains/(Losses)(5) . . . . . . . . $(15,720,300)
Average Net Gain/(Loss) per Liquidated (27.52)%
Property(6) . . . . . . . . . . . . . . . . . .
- ------------
(1) The Seller began originating and acquiring mortgage loans
under its regular lending program on January 17, 1992.
(2) Prior to October 1, 1992, no mortgaged property securing a mortgage loan
included in any REMIC trust fund had been acquired by foreclosure on
behalf of the trustee under the related REMIC Agreement. Accordingly,
prior to October 1, 1992, the Seller did not have any opportunity to
exercise its option to purchase any mortgaged properties acquired or
about to be acquired by foreclosure on behalf of a trustee under the
provisions of the REMIC Agreements.
(3) Total number of REO properties that were finally liquidated during the
indicated period (each, a "Liquidated Property"), including by sale with
Seller-provided financing.
(4) Aggregate of the outstanding principal balances of the related mortgage
loans at the respective dates such mortgage loans were converted to REO
property status (not including accrued interest).
S-40
(5) As to each Liquidated Property, the Net Gain/(Loss) is equal to (a) all
amounts received in connection with the liquidation of such Liquidated
Property (including the net proceeds of any Seller-provided financing),
minus (b) the unpaid principal balance, foreclosure costs, accrued
interest and all liquidation expenses related to such Liquidated
Property.
(6) Aggregate Net Gains/(Losses) divided by the Aggregate Balance of
Liquidated Properties.
The above data on loss experience are calculated on the basis of the
total mortgage loans originated or acquired under the Seller's regular lending
program that were transferred to REMIC trust funds as of September 30, 1995.
However, the total amount of mortgage loans on which the above data are based
includes many mortgage loans which were not, as of September 30, 1995,
outstanding long enough to give rise to the possibility of default and final
liquidation. The loss experience with respect to the Mortgage Pool may be
expected to be higher, and may be substantially higher, than indicated above.
The Seller will have no right to purchase Mortgaged Properties from the
Trust Fund as described above. Consequently, any losses incurred upon the
liquidation of defaulted Mortgage Loans will be borne by the Certificateholders
as described herein under "Description of the Certificates--Allocation of
Losses; Subordination," unless the related Mortgaged Properties are purchased
by the Master Servicer as described herein under "Description of the
Certificates--Optional Purchase of the Delinquent Mortgage Loans." Further,
Seller-provided financing has been used to facilitate the sale of REO
properties from time to time. Such financing may have had the effect of
minimizing losses that might otherwise have been incurred upon the liquidation
of REO properties if financing on terms equivalent to those provided by the
Seller were not available from other sources at the time of sale. However,
neither the Depositor, the Underwriter, the Seller, the Master Servicer, the
Trustee nor any other person will have any obligation to purchase Mortgaged
Properties from the Trust Fund as described above or to provide financing to
facilitate the sale of REO properties. THERE CAN BE NO ASSURANCE THAT THE LOSS
EXPERIENCE FOR FUTURE DISPOSITIONS OF MORTGAGED PROPERTIES ON BEHALF OF THE
TRUST FUND WILL BE SIMILAR TO THE LOSS EXPERIENCE INDICATED IN THE FOREGOING
TABLES.
S-41
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1996-Q4 Mortgage Pass-Through Certificates (the
"Certificates") will consist of the following ten Classes: (i) Class SA
Certificates (the "Variable Strip Certificates"), (ii) Class P Certificates
(the "Principal Only Certificates"), (iii) Class A-1 Certificates, Class A-2
Certificates and Class A-3 Certificates (together, the "Class A Certificates,"
and collectively with the Variable Strip Certificates and the Principal Only
Certificates, the "Senior Certificates"), (iv) Class B-1 Certificates, Class
B-2 Certificates and Class B-3 Certificates (together, the "Class B
Certificates"), (iv) Class SB Certificates and (v) Class R Certificates (the
"Residual Certificates"). Only the Variable Strip Certificates, the Class A
Certificates and the Class B Certificates (collectively, the "Offered
Certificates") are offered hereby.
The Certificates will, in the aggregate, evidence the entire beneficial
ownership interest in a trust fund (the "Trust Fund"). The Trust Fund will
consist of (i) the Mortgage Loans, (ii) such assets as from time to time are
identified as deposited in respect of the Mortgage Loans in the account
established by the Master Servicer for the collection of payments on the
Mortgage Loans (the "Custodial Account") and in the Excess Proceeds Account and
the Certificate Account (each as defined herein) and as belonging to the Trust
Fund, (iii) property acquired by foreclosure of such Mortgage Loans or by deed
in lieu of foreclosure, (iv) any applicable hazard insurance policies, any
other applicable insurance policies and all proceeds thereof and (v) the
representations and warranties made by the Seller with respect to the Mortgage
Loans.
Distributions on the Offered Certificates will be made on the 25th day of
each month or, if such day is not a business day, then on the next succeeding
business day (each, a "Distribution Date"), commencing in March 1996, to
Certificateholders of record on the immediately preceding Record Date. The
record date (the "Record Date") for each Distribution Date will be the close of
business on the last business day of the month immediately preceding the month
in which such Distribution Date occurs, except that the Record Date for the
Distribution Date in March 1996 will be the Delivery Date.
Distributions on the Offered Certificates will be made to each registered
holder entitled thereto, either (i) by check mailed to the address of such
Certificateholder as it appears on the books of the Trustee or (ii) at the
request, submitted to the Trustee in writing at least five business days prior
to the related Record Date, of any holder of an Offered Certificate having an
initial Certificate Principal Balance of not less than $2,500,000 (or, with
respect to a Variable Strip Certificate, an initial Notional Amount of not less
than $10,000,000), by wire transfer in immediately available funds, provided,
that the final distribution in respect of any Offered Certificate will be made
only upon presentation and surrender of such Certificate at the Corporate Trust
Office of the Trustee. See "Pooling and Servicing Agreement--The Trustee"
herein.
The Variable Strip Certificates and the Class A Certificates
(collectively, the "DTC Registered Certificates") will be issued, maintained
and transferred on the book-entry records of the Depository Trust Company
("DTC") and its Participants. The DTC Registered Certificates will be issued in
minimum denominations (or, in the case of the Variable Strip Certificates, in
initial Notional Amounts) of $25,000 and integral multiples of $1.00 in excess
thereof. The Class B-1 Certificates will be issued in minimum denominations of
$25,000 and integral multiples of $1,000 in excess thereof. The Class B-2
Certificates and the Class B-3 Certificates will be issued in registered and
certificated form in minimum denominations of $250,000 and integral multiples
of $1,000 in excess thereof, provided, however, that one Certificate of each
such Class may be issued evidencing the sum of an authorized denomination
thereof and the remainder of the aggregate initial Certificate Principal
Balance of such Class.
The DTC Registered Certificates will be represented by one or more
certificates registered in the name of the nominee of DTC. The Depositor has
been informed by DTC that DTC's nominee will be Cede & Co. ("Cede"). No person
acquiring an interest in the DTC Registered Certificates (each, a "Beneficial
Owner") will be entitled to receive a certificate representing such person's
interest (a "Definitive Certificate"), except as set forth below under
"--Book-Entry Registration of the DTC Registered Certificates--Definitive
Certificates." Unless and until
S-42
Definitive Certificates are issued for the DTC Registered Certificates under the
limited circumstances described herein, all references to actions by
Certificateholders with respect to the DTC Registered Certificates shall refer
to actions taken by DTC upon instructions from its Participants, and all
references herein to distributions, notices, reports and statements to
Certificateholders with respect to the DTC Registered Certificates shall refer
to distributions, notices, reports and statements to DTC or Cede, as the
registered holder of the DTC Registered Certificates, for distribution to
Beneficial Owners by DTC in accordance with DTC procedures.
BOOK-ENTRY REGISTRATION OF THE DTC REGISTERED CERTIFICATES
GENERAL. Beneficial Owners that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of,
or other interests in, the related DTC Registered Certificates may do so only
through Participants and Indirect Participants. In addition, Beneficial Owners
will receive all distributions of principal and interest on the related DTC
Registered Certificates through DTC and its Participants. Accordingly,
Beneficial Owners may experience delays in their receipt of payments. Unless
and until Definitive Certificates are issued for the related DTC Registered
Certificates, it is anticipated that the only registered Certificateholder of
such DTC Registered Certificates will be Cede, as nominee of DTC. Beneficial
Owners will not be recognized by the Trustee or the Master Servicer as
Certificateholders, as such term is used in the Pooling and Servicing
Agreement, and Beneficial Owners will be permitted to receive information
furnished to Certificateholders and to exercise the rights of
Certificateholders only indirectly through DTC, its Participants and Indirect
Participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of DTC Registered Certificates among Participants and to receive and transmit
distributions of principal and of interest on such DTC Registered Certificates.
Participants and Indirect Participants with which Beneficial Owners have
accounts with respect to such DTC Registered Certificates similarly are
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Beneficial Owners. Accordingly,
although Beneficial Owners will not possess physical certificates evidencing
their interests in the DTC Registered Certificates, the Rules provide a
mechanism by which Beneficial Owners, through their Participants and Indirect
Participants, will receive distributions and will be able to transfer their
interests in the DTC Registered Certificates.
None of the Depositor, the Master Servicer or the Trustee or any of their
respective affiliates will have any liability for any actions taken by DTC or
its nominee, including, without limitation, actions for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the DTC Registered Certificates held by Cede, as nominee for DTC,
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
DEFINITIVE CERTIFICATES. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
"Description of the Certificates--Book-Entry Registration."
Upon the occurrence of an event described in the Prospectus in the last
paragraph under "Description of the Certificates--Book-Entry Registration," the
Trustee (through DTC) is required to notify Participants who have ownership of
DTC Registered Certificates as indicated on the records of DTC of the
availability of Definitive Certificates for their DTC Registered Certificates.
Upon surrender by DTC of the definitive certificates representing the DTC
Registered Certificates and upon receipt of instructions from DTC for
re-registration, the Trustee will re-issue the DTC Registered Certificates as
Definitive Certificates in the respective principal amounts owned by individual
Beneficial Owners, and thereafter the Trustee and the Master Servicer will
recognize the holders of such Definitive Certificates as Certificateholders
under the Pooling and Servicing Agreement. Such Definitive Certificates will be
issued in minimum denominations of $1,000, except that any certificate that was
represented by a DTC Registered Certificate in an amount less than $1,000
immediately prior to the issuance of a Definitive Certificate shall be issued
in a minimum denomination equal to the amount represented by such DTC
Registered Certificate.
For additional information regarding DTC and the DTC Registered
Certificates, see "Description of the Certificates--Book-Entry Registration" in
the Prospectus.
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AVAILABLE DISTRIBUTION AMOUNT
The "Available Distribution Amount" for any Distribution Date will equal
(a) the sum of (i) the balance on deposit in the Custodial Account as of the
close of business on the related Determination Date, (ii) all Advances made
with respect to such Distribution Date and (iii) certain related amounts to be
deposited by the Master Servicer in the Certificate Account, reduced by (b) the
sum of (i) scheduled payments on the Mortgage Loans collected but due after the
related Due Date, (ii) reinvestment income on amounts in the Custodial Account,
(iii) all amounts reimbursable to the Master Servicer or any subservicer in
respect of the Mortgage Loans and (iv) any unscheduled payments, including
mortgagor prepayments on the Mortgage Loans, Insurance Proceeds, Liquidation
Proceeds and proceeds from repurchases of the Mortgage Loans occurring in the
month of such Distribution Date. With respect to any Distribution Date, (i) the
Due Date is the first day of the month in which such Distribution Date occurs
and (ii) the Determination Date is the 15th day of the month in which such
Distribution Date occurs or, if such day is not a business day, the immediately
preceding business day.
INTEREST DISTRIBUTIONS
Holders of each Class of Senior Certificates other than the Principal
Only Certificates will be entitled to receive interest distributions in an
amount equal to the Accrued Certificate Interest for such Class on each
Distribution Date (as to all such Senior Certificates in the aggregate, the
"Priority Interest Distribution Amount"), to the extent of the Available
Distribution Amount (as defined herein) for such Distribution Date. Holders of
the Class B-1 Certificates will be entitled to receive interest distributions
in an amount equal to the Accrued Certificate Interest for such Class on each
Distribution Date, to the extent of the portion of the Available Distribution
Amount for such Distribution Date remaining after distributions of interest and
principal to the holders of the Senior Certificates and reimbursement is made
to the Master Servicer for certain Advances as described herein. Holders of the
Class B-2 Certificates will be entitled to receive interest distributions in an
amount equal to the Accrued Certificate Interest for such Class on each
Distribution Date, to the extent of the portion of the Available Distribution
Amount for such Distribution Date remaining after distributions of principal
and interest to the holders of the Senior Certificates and the Class B-1
Certificates and reimbursement is made to the Master Servicer for certain
Advances as described herein. Holders of the Class B-3 Certificates will be
entitled to receive interest distributions in an amount equal to the Accrued
Certificate Interest for such Class on each Distribution Date, to the extent of
the portion of the Available Distribution Amount for such Distribution Date
remaining after distributions of principal and interest to the holders of the
Senior Certificates, the Class B-1 Certificates and the Class B-2 Certificates
and reimbursement is made to the Master Servicer for certain Advances as
described herein.
Holders of the Class SB Certificates will not be entitled to receive
interest distributions on any Distribution Date prior to the Class B
Certificate Termination Date. The Class B Certificate Termination Date is the
Distribution Date upon which the Certificate Principal Balances of the Class B
Certificates are reduced to zero. On each Distribution Date, the interest
accrued and unpaid on the Class SB Certificates, computed in the manner
described below and to the extent such interest otherwise would have been
distributed to the Class SB Certificates for such Distribution Date (such
amount, the "Class SB Accrual Amount") will have the effect of increasing the
Certificate Principal Balance of the Class R Certificates (except to the extent
of any concurrent reductions thereof resulting from the allocation of any
Realized Loss thereto) and will be carried forward as part of the Outstanding
Class SB Unpaid Interest Amount (as defined herein) distributable in respect of
the Class SB Certificates, as and to the extent described herein, on subsequent
Distribution Dates. On each Distribution Date, prior to the Class B Certificate
Termination Date, the Class SB Accrual Amount will be equal to the entire
amount of the Accrued Certificate Interest on the Class SB Certificates for
such Distribution Date. On each Distribution Date on or after the Class B
Certificate Termination Date, holders of the Class SB Certificates will be
entitled to receive interest distributions in an amount equal to the Accrued
Certificate Interest thereon for such Distribution Date to the extent of the
portion of the Remaining Available Distribution Amount (as defined below) for
such Distribution Date remaining after distributions of the Senior Accrual
Diversion Amount, distributions of any Loss Reimbursement Payment (as defined
herein) and distributions on the Class B Certificates as described below under
"--Additional Principal Distributions on the Certificates." In addition, on each
Distribution Date on or after the Class B Termination Date, holders of the
Class SB Certificates will be entitled to receive interest distributions in an
amount up to the Outstanding Class SB Unpaid Interest Amount for such
Distribution Date to the extent of the portion of the Available Distribution
Amount for such Distribution Date remaining immediately prior to the
distributions described below on the Class R Certificates.
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Holders of the Class R Certificates will not be entitled to receive
interest distributions on any Distribution Date prior to the Class B
Certificate Termination Date. On each Distribution Date on or prior to the
Class B Certificate Termination Date, the interest accrued and unpaid on the
Class R Certificates, computed in the manner described below and to the extent
such interest otherwise would have been distributed to the Class R Certificates
for such Distribution Date (such amount, the "Class R Accrual Amount") will be
added to the Certificate Principal Balance of the Class R Certificates (except
to the extent of any concurrent reduction thereof resulting from the allocation
of any Realized Loss thereto). On each Distribution Date occurring on or after
the Class B Certificate Termination Date, after the Outstanding Class SB Unpaid
Interest Amount has been reduced to zero, holders of the Class R Certificates
will be entitled to receive interest distributions in an amount equal to the
Accrued Certificate Interest thereon to the extent of the portion of the
Remaining Available Distribution Amount for such Distribution Date remaining
after distributions of the Senior Accrual Diversion Amount, distributions of
any Loss Reimbursement Payment, distributions to the holders of the Class B
Certificates and distributions of interest to the holders of the Class SB
Certificates. In the event that the amount available for interest distributions
on the Class R Certificates on any Distribution Date on or after the Class B
Certificate Termination Date is less than the amount of interest to which the
holders of the Class R Certificates are entitled to be paid on such
Distribution Date, the difference between such amounts will not be carried
forward to subsequent Distribution Dates and such difference will not be added
to the Certificate Principal Balance of the Class R Certificates.
With respect to any Distribution Date, Accrued Certificate Interest will
be equal to: (a) in the case of each Class of Certificates on which interest
accrues (other than the Variable Strip Certificates and the Class SB
Certificates) as to which the related Certificateholders are entitled to
receive distributions of interest, one month's interest accrued on the
Certificate Principal Balance (as in effect immediately prior to such
Distribution Date) of the Certificates of such Class at the related
Pass-Through Rate and (b) in the case of the Variable Strip Certificates and
the Class SB Certificates, one month's interest accrued on the Notional Amount
of such Certificates (as in effect immediately prior to such Distribution Date)
at the related Pass-Through Rate, in each case less interest shortfalls, if
any, for such Distribution Date not covered, (i) with respect to the Variable
Strip Certificates and the Class A Certificates, by the Subordination provided
by the Class B Certificates, the Class SB Certificates and the Class R
Certificates, (ii) with respect to the Class B-1 Certificates, by the
Subordination provided by the Class B-2 Certificates, the Class B-3
Certificates, the Class SB Certificates and the Class R Certificates, (iii)
with respect to the Class B-2 Certificates, by the Subordination provided by
the Class B-3 Certificates, the Class SB Certificates and the Class R
Certificates, and (iv) with respect to the Class B-3 Certificates, by the
Subordination provided by the Class SB Certificates and the Class R
Certificates, including (A) any related Prepayment Interest Shortfall (as
defined below) to the extent not covered by the Master Servicer as described
below, (B) the interest portions of Realized Losses (including Excess Special
Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses and Extraordinary
Losses) not allocated through Subordination, (C) the interest portion of any
Advances that were made with respect to delinquencies that were ultimately
determined to be Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses or Extraordinary Losses and (D) any other interest shortfalls
not covered by Subordination, including interest shortfalls relating to the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"),
or similar legislation or regulations, all allocated among the holders of all
Classes of Certificates in proportion to the respective amounts of Accrued
Certificate Interest for such Distribution Date on each such Class before
taking into account any such shortfall. In the case of the Class B
Certificates, the Class SB Certificates and the Class R Certificates, Accrued
Certificate Interest will be further reduced by the allocation of the interest
portion of certain losses thereto, if any, as described below under
"--Allocation of Losses; Subordination." Accrued Certificate Interest is
calculated on the basis of a 360-day year consisting of twelve 30-day months.
The Prepayment Interest Shortfall for any Distribution Date is equal to
the aggregate shortfall, if any, in collections of interest (adjusted to the
related Net Mortgage Rates described below) resulting from principal
prepayments on the Mortgage Loans received in the preceding calendar month
(each, a "Prepayment Period"). Such shortfalls will result because interest on
prepayments in full is distributed only to the date of prepayment and because
no interest is collected or distributed on prepayments in part, as such
prepayments in part are applied to reduce the outstanding principal balance of
such Mortgage Loan as of the Due Date in the month of prepayment. The Master
Servicer will be obligated to apply amounts otherwise payable to it as
servicing compensation in any month to cover any shortfalls in collections of
one full month's interest at the applicable Net Mortgage Rate resulting from
principal prepayments.
S-45
In the event that the amount available for distributions of interest on
Variable Strip Certificates and the Class A Certificates on any Distribution
Date is less than the Priority Interest Distribution Amount for such
Distribution Date, the shortfall will be allocated among the holders of such
Classes of Senior Certificates in proportion to the respective amounts of
Accrued Certificate Interest for such Distribution Date on each such Class. On
any Distribution Date, with respect to a shortfall in the amount available for
distributions of interest on any Class of Certificates entitled to receive
distributions of interest, the amount of such shortfall will be distributable
to the holders of the Certificates of such Class on subsequent Distribution
Dates, to the extent of available funds after distributions as required herein,
subject to the priorities described herein. Any such amounts so carried forward
will not bear interest.
The Pass-Through Rate on each Class of Certificates on which interest
accrues (other than the Variable Strip Certificates and the Class SB
Certificates) will be equal to 7.250% per annum for each Distribution Date. The
Pass-Through Rate on the Variable Strip Certificates for each Distribution Date
will be equal to the weighted average (based on the Stated Principal Balance of
each Non-Discount Mortgage Loan), as determined as of the Due Date in the month
preceding the month in which such Distribution Date occurs, of the Pool Strip
Rates on the Non-Discount Mortgage Loans (as defined below), which will be
approximately 2.278% per annum with respect to the first Distribution Date.
With respect to each Non-Discount Mortgage Loan (as defined herein) and any
Distribution Date, the Pool Strip Rate will equal the then-applicable Net
Mortgage Rate thereon minus 8.250%. The Pool Strip Rates on the Non-Discount
Mortgage Loans ranged from 0.000% to 11.050% per annum as of the Cut-off Date.
The "Net Mortgage Rate" on each Mortgage Loan will equal the Mortgage Rate
thereon minus the Servicing Fee Rate (as defined herein), which will be equal
to 0.500% per annum. The Pass-Through Rate on the Class SB Certificates will be
equal to 1.000% per annum (the "Fixed Strip Rate").
As described herein, the Accrued Certificate Interest allocable to each
Class of Certificates entitled to receive distributions of interest is based on
the Certificate Principal Balance of such Class or, in the case of the Variable
Strip Certificates and the Class SB Certificates, on the respective Notional
Amount of such Certificates. The Certificate Principal Balance of each such
Class of Certificates (other than the Variable Strip Certificates and the Class
SB Certificates) as of any date of determination is equal to the initial
Certificate Principal Balance thereof and reduced by the aggregate of (a) all
amounts allocable to principal previously distributed with respect to such
Certificate and (b) any reductions in the Certificate Principal Balance thereof
deemed to have occurred in connection with allocations of Realized Losses in
the manner described herein; provided, however, that after the Certificate
Principal Balances of the Class B-2 Certificates and the Class B-3 Certificates
have been reduced to zero and if the Certificate Principal Balance of the Class
R Certificates would be equal to zero if determined without regard to this
proviso, the Certificate Principal Balance of any Class B-1 Certificate shall
equal the Percentage Interest evidenced thereby multiplied by the excess, if
any, of (x) the then aggregate Stated Principal Balance of all of the Mortgage
Loans over (y) the then aggregate Certificate Principal Balance of the Senior
Certificates, (ii) after the Certificate Principal Balance of Class B-3
Certificates has been reduced to zero and if the Certificate Principal Balance
of the Class R Certificates would be equal to zero if determined without regard
to this proviso, the Certificate Principal Balance of any Class B-2 Certificate
shall equal the Percentage Interest evidenced thereby multiplied by the excess,
if any, of (x) the then aggregate Stated Principal Balance of all of the
Mortgage Loans over (y) the then aggregate Certificate Principal Balance of the
Senior Certificates and the Class B-1 Certificates, and (iii) if the
Certificate Principal Balance of the Class R Certificates would be zero if
determined without regard to this proviso, the Certificate Principal Balance of
any Class B-3 Certificates shall equal the Percentage Interest evidenced
thereby multiplied by the excess, if any, of (x) the then aggregate Stated
Principal Balance of all of the Mortgage Loans over (y) the then aggregate
Certificate Principal Balance of the Senior Certificates, the Class B-1
Certificates and the Class B-2 Certificates. The Certificate Principal Balance
of any Class R Certificate as of any date of determination is equal to the
Percentage Interest evidenced thereby multiplied by the excess, if any, of
(x) the then aggregate Stated Principal Balance of the Mortgage Loans over
(y) the then aggregate Certificate Principal Balance of the Senior Certificates
and the Class B Certificates. The Variable Strip Certificates and the Class SB
Certificates have no Certificate Principal Balance. The Notional Amount of the
Variable Strip Certificates, as of any date of determination, will be equal to
the aggregate Stated Principal Balance of all of the Non-Discount Mortgage
Loans, except that the initial Notional Amount of the Variable Strip
Certificates will be rounded down to the nearest dollar increment. The Notional
Amount of the Class SB Certificates, as of any date of determination, will be
equal to the aggregate Stated Principal Balance of all of the Mortgage Loans,
except that the initial Notional Amount of the Class SB Certificates will be
rounded down to the nearest dollar increment. References herein to the Notional
Amount
S-46
of any Class of Certificates are used solely for convenience in certain
calculations and do not represent the right of holders of such Certificates to
receive distributions of such amounts.
PRINCIPAL DISTRIBUTIONS ON THE SENIOR CERTIFICATES
Holders of the Class A Certificates will be entitled to receive on each
Distribution Date, to the extent of the portion of the Available Distribution
Amount remaining after distributions of the Priority Interest Distribution
Amount and the Principal Only Distribution Amount (as defined below), a
distribution allocable to principal equal to the sum of the following amounts:
(i) the product of (A) the then-applicable Senior
Percentage and (B) the Scheduled Principal and Net Recoveries
(as defined below) for such Distribution Date (other than the
applicable Discount Fraction described below of the Scheduled
Principal and Net Recoveries in respect of the Discount
Mortgage Loans);
(ii) an amount equal to the then-applicable Senior
Prepayment Percentage of all principal prepayments made by the
respective mortgagors during the related Prepayment Period
(other than the applicable Discount Fraction of such principal
prepayments in respect of the Discount Mortgage Loans);
(iii) in connection with a Mortgage Loan for which a Cash
Liquidation or an REO Disposition (each as defined below)
occurred during the related Prepayment Period and did not
result in any Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or Extraordinary Losses, an
amount equal to the lesser of (A) the then-applicable Senior
Percentage of the Stated Principal Balance of such Mortgage
Loan and (B) the Senior Prepayment Percentage for such
Distribution Date multiplied by the related collections
(including without limitation Insurance Proceeds and
Liquidation Proceeds) to the extent applied as recoveries of
principal of such Mortgage Loan (other than, in each case, the
portion of such collections payable to the holders of the
Principal Only Certificates in respect of a Discount Mortgage
Loan); and
(iv) any amounts allocable to principal for any previous
Distribution Date (calculated as described in the three
preceding clauses) that remain undistributed to the extent
that any such amounts are not attributable to Realized Losses
that were allocated to the Class B Certificates, the Class SB
Certificates or the Class R Certificates.
With respect to any Distribution Date, the lesser of (a) the balance of
the Available Distribution Amount remaining after the Priority Interest
Distribution Amount and the Principal Only Distribution Amount are distributed
and (b) the sum of the amounts described in clauses (i) through (iv) of the
preceding paragraph is hereinafter referred to as the "Senior Principal
Distribution Amount."
In addition to the foregoing amounts, the Class A Certificates may be
entitled to receive on each Distribution Date an additional distribution
allocable to principal as described below under "--Additional Principal
Distributions on the Certificates."
Scheduled Principal and Net Recoveries for any Distribution Date is equal
to the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly
payments on the Mortgage Loans due on the related Due Date,
whether or not received on or prior to the related
Determination Date, less the principal portion of Debt Service
Reductions (as defined below) which constitute Excess
Bankruptcy Losses;
(2) the principal portion of all proceeds of the
repurchase of a Mortgage Loan as required by the Pooling and
Servicing Agreement during the related Prepayment Period; and
(3) the principal portion of all Insurance Proceeds and
Liquidation Proceeds received during the related Prepayment
Period minus the aggregate amount of expenses incurred by the
Master Servicer
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in connection with the liquidation of the related Mortgage
Loans to the extent such expenses are not otherwise
recoverable from related Liquidation Proceeds, but only to the
extent that any such amounts either (A) were not received in
connection with a Cash Liquidation or REO Disposition, or (B)
were received in connection with a Cash Liquidation or REO
Disposition which resulted in an Excess Special Hazard Loss,
Excess Bankruptcy Loss, Excess Fraud Loss or Extraordinary
Loss.
Holders of the Principal Only Certificates will be entitled to receive on
each Distribution Date, to the extent of the portion of the Available
Distribution Amount remaining after the Priority Interest Distribution Amount
is distributed, a distribution allocable to principal equal to the Principal
Only Distribution Amount for such Distribution Date. With respect to any
Distribution Date prior to the occurrence of the Credit Support Depletion Date
(as defined below), the Principal Only Distribution Amount will equal the sum
of the following amounts:
(i) the applicable Discount Fraction of the Scheduled
Principal and Net Recoveries in respect of the Discount
Mortgage Loans for such Distribution Date;
(ii) the applicable Discount Fraction of all principal
prepayments made by the respective mortgagors in respect of
the Discount Mortgage Loans during the related Prepayment
Period;
(iii) in connection with a Discount Mortgage Loan for
which a Cash Liquidation or an REO Disposition occurred during
the related Prepayment Period and did not result in any Excess
Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses or Extraordinary Losses, an amount equal to the lesser
of (A) the applicable Discount Fraction of the Stated
Principal Balance of such Discount Mortgage Loan, net of the
principal portion of any related Realized Loss allocable to
the Principal Only Certificates, and (B) the related
collections, to the extent applied as recoveries of
principal of such Discount Mortgage Loan;
(iv) any amounts allocable to principal for any previous
Distribution Date (calculated as described in the three
preceding clauses) that remain undistributed; and
(v) the lesser of the related Eligible Shortfall Funding
Amount (as defined below) and the aggregate of any Principal
Only Collection Shortfalls (as defined below) not previously
distributed to the holders of the Principal Only Certificates.
On and after the occurrence of the Credit Support Depletion Date, the
Principal Only Distribution Amount will equal the aggregate of the applicable
Discount Fractions of the scheduled principal payments and the unscheduled
collections of principal received or advanced in respect of the Discount
Mortgage Loans.
With respect to each Cash Liquidation and REO Disposition of a Discount
Mortgage Loan that occurred during any Prepayment Period and that did not
result in any Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses or Extraordinary Losses, the "Principal Only Collection
Shortfall" will equal the excess, if any, of the amount described in clause
(iii)(A) above over the amount described in clause (iii)(B) above. With respect
to any Distribution Date, the "Eligible Shortfall Funding Amount" will equal
the excess, if any, of the Available Distribution Amount for such Distribution
Date over the sum of the Priority Interest Distribution Amount, the Senior
Principal Distribution Amount, the Principal Only Distribution Amount
(determined without regard to clause (v) of the description of such amount
above) and the aggregate amount of Accrued Certificate Interest on the Class B
Certificates for such Distribution Date. Notwithstanding anything herein to the
contrary, any distribution in respect of Principal Only Collection Shortfalls,
to the extent not covered by amounts otherwise distributable as principal in
respect of the Class A Certificates and the Class B Certificates as described
under "--Additional Principal Distributions on the Certificates," will reduce
the amount of principal distributable first, on the Class R Certificates,
second, on the Class B-3 Certificates, third, on the Class B-2 Certificates,
and fourth, on the Class B-1 Certificates. in each case to the extent of the
amount of principal otherwise distributable thereon for such Distribution Date.
A Cash Liquidation of a defaulted Mortgage Loan, other than a Mortgage
Loan as to which an REO Disposition occurred, is deemed to have occurred upon
the final receipt by or on behalf of the Master Servicer
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of all Insurance Proceeds, Liquidation Proceeds and other payments or cash
recoveries which the Master Servicer reasonably and in good faith expects to be
finally recoverable with respect to such Mortgage Loan.
An REO Disposition is deemed to have occurred upon the final receipt by
the Master Servicer of all Insurance Proceeds, Liquidation Proceeds and other
payments and recoveries (including proceeds of a final sale) which the Master
Servicer reasonably and in good faith expects to be finally recoverable from
the sale or other disposition of the related REO Property.
The Stated Principal Balance of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by all amounts allocable to
principal that have been distributed to Certificateholders with respect to such
Mortgage Loan on or before such date, and as further reduced to the extent that
any Realized Loss thereon has been allocated to one or more Classes of
Certificates on or before the date of determination.
A "Discount Mortgage Loan" will be any Fixed Rate Loan with a Net
Mortgage Rate of less than 8.250% per annum. With respect to each Discount
Mortgage Loan, the "Discount Fraction" will equal a fraction, expressed as a
percentage, the numerator of which will be 7.250% minus the difference between
(a) the Net Mortgage Rate thereon and (b) the Fixed Strip Rate and the
denominator of which will be 7.250%. The Mortgage Loans other than the Discount
Mortgage Loans are referred to herein as the "Non-Discount Mortgage Loans."
The "Senior Percentage," which initially will be equal to approximately
87.489% and will in no event exceed 100%, will be adjusted for each
Distribution Date to be the percentage equal to the aggregate Certificate
Principal Balances of the Class A Certificates immediately prior to such
Distribution Date divided by the aggregate of the Stated Principal Balances of
all of the Mortgage Loans (less the applicable Discount Fractions of the Stated
Principal Balances of the Discount Mortgage Loans) immediately prior to such
Distribution Date.
The "Subordinate Percentage" as of any date of determination is equal to
100% minus the Senior Percentage as of such date. The initial Senior Percentage
is less than the initial undivided beneficial ownership interest in the Trust
Fund evidenced by the Senior Certificates in the aggregate, because the Senior
Percentage is calculated without regard to the Certificate Principal Balance of
the Principal Only Certificates and the applicable Discount Fraction of the
Stated Principal Balances of the Discount Mortgage Loans.
The "Senior Prepayment Percentage" for any Distribution Date occurring
prior to the Distribution Date in March 2001 will equal 100% and, for any
Distribution Date occurring in or after the Distribution Date in March 2001,
will be as follows: for any Distribution Date occurring in or after March 2001
to and including the Distribution Date in February 2002, the Senior Percentage
for such Distribution Date plus 70% of the Subordinate Percentage for such
Distribution Date; for any Distribution Date occurring in or after March 2002
to and including the Distribution Date in February 2003, the Senior Percentage
for such Distribution Date plus 60% of the Subordinate Percentage for such
Distribution Date; for any Distribution Date occurring in or after March 2003
to and including the Distribution Date in February 2004, the Senior Percentage
for such Distribution Date plus 40% of the Subordinate Percentage for such
Distribution Date; for any Distribution Date occurring in or after March 2004
to and including the Distribution Date in February 2005, the Senior Percentage
for such Distribution Date plus 20% of the Subordinate Percentage for such
Distribution Date; and for any Distribution Date thereafter, the Senior
Percentage for such Distribution Date (unless on any such Distribution Date the
Senior Percentage exceeds the initial Senior Percentage or on any Distribution
Date occurring prior to March 2003 the Subordinate Percentage is less than
twice the initial Subordinate Percentage, in which case the Senior Prepayment
Percentage for such Distribution Date will once again equal 100%). Any
scheduled reduction to the Senior Prepayment Percentage described above will
not be made as of any Distribution Date unless either (a)(i) the outstanding
principal balance of the Mortgage Loans delinquent 60 days or more (including
foreclosures and REO Property) averaged over the last six months, as a
percentage of the aggregate outstanding principal balance of all Mortgage Loans
averaged over the last six months, does not exceed 2.000% and (ii) Realized
Losses on the Mortgage Loans to date for such Distribution Date, if occurring
during the sixth, seventh, eighth, ninth or tenth year (or any year thereafter)
after February 1996, are less than 30%, 35%, 40%, 45% or 50%, respectively, of
the sum of the aggregate initial Certificate Principal Balances of the Class B
Certificates and 2.500% of the initial Certificate Principal Balances of all
the Certificates or (b)(i) the aggregate outstanding principal balance of the
Mortgage Loans delinquent 60 days or more (including
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foreclosures and REO Property) averaged over the last six months, as a
percentage of the aggregate outstanding principal balance of all Mortgage Loans
averaged over the last six months, does not exceed 4% and (ii) Realized Losses
on the Mortgage Loans to date for such Distribution Date are less than 10% of
the sum of the aggregate initial Certificate Principal Balances of the Class B
Certificates and 2.500% of the aggregate initial Certificate Principal Balances
of all of the Certificates. Notwithstanding the foregoing, upon reduction of the
Certificate Principal Balances of the Class A Certificates to zero, the Senior
Prepayment Percentage will equal 0%.
Distributions of principal on the Class A Certificates on each
Distribution Date will be made after distribution of the Priority Interest
Distribution Amount) as follows:
(a) prior to the occurrence of the Credit Support
Depletion Date (as defined below), the Senior Principal
Distribution Amount will be allocated as follows:
(i) first, to the Class A-1 Certificates,
until the Certificate Principal Balance thereof has
been reduced to zero;
(ii) second, to the Class A-2 Certificates,
until the Certificate Principal Balance thereof has
been reduced to zero; and
(iii) third, to the Class A-3 Certificates, until
the Certificate Principal Balance thereof has been
reduced to zero.
(b) On or after the occurrence of the Credit Support
Depletion Date, all priorities relating to distributions as
described above in respect of principal among the Class A
Certificates will be disregarded and the Senior Principal
Distribution Amount will be distributed among the Class A
Certificates on a pro rata basis in accordance with their
respective outstanding Certificate Principal Balances.
(c) After the reduction of the Certificate Principal
Balances of the Class A Certificates to zero but prior to the
occurrence of the Credit Support Depletion Date, the Class A
Certificates will be entitled to no further distributions of
principal thereon and the Available Distribution Amount will
be paid solely to the holders of the Variable Strip
Certificates, the Principal Only Certificates, the Class B
Certificates, the Class SB Certificates and the Class R
Certificates, in each case as described herein.
The "Credit Support Depletion Date" will be the first Distribution Date
on which the Senior Percentage is equal to 100%.
PRINCIPAL DISTRIBUTIONS ON THE CLASS B CERTIFICATES
The portion of the Available Distribution Amount remaining after (a)
distributions of interest and principal to the holders of the Senior
Certificates, (b) reimbursement is made to the Master Servicer for certain
Advances remaining unreimbursed to the extent described below under
"--Advances," and (c) the amount of Accrued Certificate Interest required to be
distributed on the Class B-1 Certificates on such Distribution Date is
distributed to the holders of the Class B-1 Certificates, will be distributed
on each Distribution Date in the following order of priority, in each case to
the extent of remaining available funds included in the Available Distribution
Amount:
(A) to the holders of the Class B-1 Certificates, in
respect of principal, the sum of the following amounts
(subject to reduction with respect to the distribution of any
Principal Only Collection Shortfalls, as described above under
"--Principal Distributions on the Senior Certificates"):
(i) the product of (A) the then-applicable Class B-1
Percentage (as defined below) and (B) the Scheduled
Principal and Net Recoveries for such Distribution Date
(other than the applicable Discount Fraction of the
Scheduled Principal and Net Recoveries in respect of the
Discount Mortgage Loans);
(ii) an amount equal to (A) the then-applicable Class
B-1 Percentage divided by the then-applicable Class B
Percentage (as defined below) multiplied by (B) the
then-applicable Class
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B Prepayment Percentage (as defined below) of the
portion of all principal prepayments that were made by
the respective mortgagors during the related Prepayment
Period (other than the applicable Discount Fraction of
such principal prepayments in respect of the Discount
Mortgage Loans);
(iii) such Class's pro rata share, based on the
Certificate Principal Balances of the Class B
Certificates and the Class R Certificates then
outstanding, of all amounts received in connection with
a Cash Liquidation or an REO Disposition that occurred
during the related Prepayment Period and that did not
result in any Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or Extraordinary
Losses, to the extent applied as recoveries of principal
of the related Mortgage Loan and to the extent not
otherwise payable to the holders of the Senior
Certificates; and
(iv) any amounts allocable to principal for any
previous Distribution Date (calculated as described in
the three preceding clauses) that remain undistributed
to the extent that any such amounts are not attributable
to Realized Losses that were allocated to the Class B-2
Certificates, the Class B-3 Certificates, the Class SB
Certificates or the Class R Certificates;
(B) to the holders of the Class B-2 Certificates, in
respect of interest, an amount equal to the Accrued
Certificate Interest on such Class on such Distribution Date;
(C) to the holders of the Class B-2 Certificates, in
respect of principal, an amount equal to the aggregate of the
following amounts (subject to reduction with respect to the
distribution of any Principal Only Collection Shortfalls, as
described above under "--Principal Distributions on the Senior
Certificates"):
(i) the product of (A) the then-applicable Class B-2
Percentage (as defined below) and (B) the Scheduled
Principal and Net Recoveries for such Distribution Date
(other than the applicable Discount Fraction of the
Scheduled Principal and Net Recoveries in respect of the
Discount Mortgage Loans);
(ii) an amount equal to (A) the then-applicable Class
B-2 Percentage divided by the then-applicable Class B
Percentage (as defined below) multiplied by (B) the
then-applicable Class B Prepayment Percentage of the
portion of all principal prepayments that were made by
the respective mortgagors during the related Prepayment
Period (other than the applicable Discount Fraction of
such principal prepayments in respect of the Discount
Mortgage Loans);
(iii) such Class's pro rata share, based on the
Certificate Principal Balances of the Class B
Certificates and the Class R Certificates then
outstanding, of all amounts received in connection with
a Cash Liquidation or an REO Disposition that occurred
during the related Prepayment Period and that did not
result in any Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or Extraordinary
Losses, to the extent applied as recoveries of principal
of the related Mortgage Loan and to the extent not
otherwise payable to the holders of the Senior
Certificates; and
(iv) any amounts allocable to principal for any
previous Distribution Date (calculated as described in
the three preceding clauses) that remain undistributed
to the extent that any such amounts are not attributable
to Realized Losses that were allocated to the Class B-3
Certificates, the Class SB Certificates or the Class R
Certificates;
(D) to the holders of the Class B-3 Certificates, in
respect of interest, an amount equal to the Accrued
Certificate Interest on such Class on such Distribution Date;
(E) to the holders of the Class B-3 Certificates, in
respect of principal, an amount equal to the aggregate of the
following amounts (subject to reduction with respect to the
distribution of any Principal Only Collection Shortfalls, as
described above under "--Principal Distributions on the Senior
Certificates"):
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(i) the product of (A) the then-applicable Class B-3
Percentage (as defined below) and (B) the Scheduled
Principal and Net Recoveries for such Distribution Date
(other than the applicable Discount Fraction of the
Scheduled Principal and Net Recoveries in respect of
the Discount Mortgage Loans);
(ii) an amount equal to (A) the then-applicable Class
B-3 Percentage divided by the then-applicable Class B
Percentage (as defined below) multiplied by (B) the
then-applicable Class B Prepayment Percentage of the
portion of all principal prepayments that were made by
the respective mortgagors during the related Prepayment
Period (other than the applicable Discount Fraction of
such principal prepayments in respect of the Discount
Mortgage Loans);
(iii) such Class's pro rata share, based on the
Certificate Principal Balances of the Class B
Certificates and the Class R Certificates then
outstanding, of all amounts received in connection with
a Cash Liquidation or an REO Disposition that occurred
during the related Prepayment Period and that did not
result in any Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or Extraordinary
Losses, to the extent applied as recoveries of principal
of the related Mortgage Loan and to the extent not
otherwise payable to the holders of the Senior
Certificates; and
(iv) any amounts allocable to principal for any
previous Distribution Date (calculated as described in
the three preceding clauses) that remain undistributed
to the extent that any such amounts are not attributable
to Realized Losses that were allocated to the Class SB
Certificates or the Class R Certificates.
The Class B Prepayment Percentage with respect to any Distribution Date
will equal 100% minus the Senior Prepayment Percentage for such Distribution
Date.
The Class B-1 Percentage, Class B-2 Percentage, Class B-3 Percentage and
Class R Percentage, which initially will be equal to approximately 8.007%,
2.002%, 2.502% and 0.000%, respectively, and will in no event exceed 100%, will
each be adjusted for each Distribution Date to be the percentage equal to the
Certificate Principal Balance of such Class of Certificates immediately prior
to such Distribution Date divided by the aggregate Stated Principal Balance of
all of the Mortgage Loans (other than the applicable Discount Fraction of the
Stated Principal Balance of the Discount Mortgage Loans) immediately prior to
such Distribution Date. The Class B Percentage with respect to any Distribution
Date will equal the sum of the Class B-1 Percentage, the Class B-2 Percentage
and the Class B-3 Percentage.
In addition to the foregoing amounts, the Class B Certificates may be
entitled to receive on each Distribution Date, an additional distribution
allocable to principal as described below under "--Additional Principal
Distributions on the Certificates."
ADDITIONAL PRINCIPAL DISTRIBUTIONS ON THE CERTIFICATES
The portion of the Available Distribution Amount remaining after (a) the
sum of the Priority Interest Distribution Amount, the Principal Only
Distribution Amount and the Senior Principal Distribution Amount are
distributed and interest and principal is distributed to the Class B
Certificates as described in the preceding sections and (b) reimbursement is
made to the Master Servicer for certain Advances as described herein (in the
aggregate, the "Remaining Available Distribution Amount") will be distributed
on each Distribution Date in the following order of priority, in each case to
the extent of remaining available funds included in the Remaining Available
Distribution Amount:
(A) (i) if such Distribution Date occurs prior to the Credit Support
Depletion Date, to the holders of the Class A-1 Certificates, the Class A-2
Certificates and the Class A-3 Certificates, in that order, an amount equal to
the Senior Accrual Diversion Amount for such Distribution Date up to and in
reduction of the Certificate Principal Balance of such Certificates and (ii) if
such Distribution Date occurs on or after the Credit Support Depletion Date,
such amount equal to the Senior Accrual Diversion Amount for such Distribution
Date shall be
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distributed to the holders of the Class A Certificates pro rata based on the
Certificate Principal Balance of each Class of such Certificates up to and in
reduction of the Certificate Principal Balance thereof;
(B) (i) to the holders of the Principal Only Certificates and the Class A
Certificates pro rata based on the Certificate Principal Balances of each Class
of such Certificates, and then (ii) to the holders of the Class B-1
Certificates, the Class B-2 Certificates and the Class B-3 Certificates, in
that order, with respect to the principal portions of any Realized Losses
allocated thereto on any previous Distribution Date and not previously
reimbursed (any such payment, a "Loss Reimbursement Payment");
(C) to the Class B-1 Certificateholders, an amount equal to (i) the
then-applicable Class B-1 Percentage divided by the then-applicable Class B
Percentage multiplied by (ii) the amount remaining following the distribution
pursuant to clauses (A) and (B) above, up to and in reduction of the
Certificate Principal Balance thereof;
(D) to the Class B-2 Certificateholders, an amount equal to (i) the
then-applicable Class B-2 Percentage divided by the then-applicable Class B
Percentage multiplied by (ii) the amount remaining following the distribution
pursuant to clauses (A) and (B) above, up to and in reduction of the
Certificate Principal Balance thereof;
(E) to the Class B-3 Certificateholders, an amount equal to (i) the
then-applicable Class B-3 Percentage divided by the then-applicable Class B
Percentage multiplied by (ii) the amount remaining following the distribution
pursuant to clauses (A) and (B) above, up to and in reduction of the
Certificate Principal Balance thereof;
(F) to the holders of the Class SB Certificates, first, an amount equal
to the Accrued Certificate Interest on such Class on such Distribution Date, to
the extent such Accrued Certificate Interest is not added to the Outstanding
Class SB Unpaid Interest Amount on such Distribution Date and then, up to an
amount equal to the Outstanding Class SB Unpaid Interest Amount for such
Distribution Date, in reduction thereof; and
(G) to the holders of the Class R Certificates, first, in respect of
Accrued Certificate Interest thereon for such Distribution Date and, then, in
respect of principal, until the Certificate Principal Balance thereof is
reduced to zero.
For purposes of the foregoing, the "Outstanding Class SB Unpaid Interest
Amount" at any time is the aggregate of the Class SB Accrual Amounts for all
preceding Distribution Dates, minus the aggregate amount of all previous
distributions on the Class SB Certificates in reduction of the Outstanding
Class SB Unpaid Interest Amount pursuant to clause (H) above. The Outstanding
Class SB Unpaid Interest Amount will not accrue interest and will not represent
any portion of the principal amount of the Mortgage Loans. With respect to any
Distribution Date, the "Senior Accrual Diversion Amount" is equal to the lesser
of (A) the Accrued Certificate Interest on the Class SB Certificates for such
Distribution Date, and (B) the amount, if any, by which the aggregate of all
Senior Accrual Diversion Amounts for all preceding Distribution Dates is less
than the sum of (i) an amount equal to 2.500% of the aggregate Certificate
Principal Balance of all Classes of Certificates as of the Cut-off Date and
(ii) 100% of all Realized Losses with respect to such Distribution Date and all
preceding Distribution Dates, except to the extent such Realized Losses were
allocated to any of the Principal Only Certificates, the Class A Certificates
or the Class B Certificates on any such preceding Distribution Date.
The effect of the provisions described above will be that holders of the
Class B Certificates will receive on each Distribution Date prior to the Class
B Certificate Termination Date all amounts otherwise distributable to holders
of the Class R Certificates on such Distribution Date, which, absent any
delinquencies or losses on the Mortgage Loans, would be equal to (i) the
Accrued Certificate Interest on the Class R Certificates for such Distribution
Date, (ii) the Class R Percentage of the Scheduled Principal and Net Recoveries
for such Distribution Date, (iii) the amount of full and partial Principal
Prepayments not otherwise distributed to holders of the Class A Certificates or
the Class B Certificates; and (iv) all amounts received in connection with a
Cash Liquidation or an REO Disposition (x) that occurred during the preceding
calendar month and (y) that did not result in any Excess Special Hazard Losses,
Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses, to the
extent applied as recoveries of principal and to the extent not otherwise
payable to holders of the Class A Certificates or the Class B Certificates. In
addition, holders of the Class A Certificates will receive on each Distribution
Date all amounts otherwise distributable to holders of the Class SB
Certificates (which absent delinquencies or losses on the Mortgage Loans would
be equal to the Accrued Certificate Interest on the Class SB Certificates for
such Distribution
S-53
Date) up to the Senior Accrual Diversion Amount, and holders
of the Class B Certificates will receive on each Distribution Date prior to the
Class B Certificate Termination Date an amount equal to the excess, if any, of
all amounts otherwise distributable to holders of the Class SB Certificates on
such Distribution Date over the Senior Accrual Diversion Amount for such
Distribution Date.
As described above, holders of the Class SB Certificates will be entitled
to receive in respect of the Outstanding Class SB Unpaid Interest Amount the
portion, if any, of the Remaining Available Distribution Amount remaining after
the distributions described in clauses (C), (D) and (E) above. If, on any
Distribution Date, the entire Outstanding Class SB Unpaid Interest Amount for
such Distribution Date is distributed to the holders of the Class SB
Certificates as described in clause (F) above, holders of the Class R
Certificates will be entitled to receive the portion, if any, of the Remaining
Available Distribution Amount remaining after such distribution, applied as
described in clause (G) above. However, the distribution of all or any portion
of the Outstanding Class SB Unpaid Interest Amount for any Distribution Date
will cause the aggregate amount of distributions on the Class R Certificates to
be less than the full amount of the Certificate Principal Balance thereof and
Accrued Certificate Interest thereon.
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of distributions on the
Certificates for the first month of the Trust Fund's existence.
February 1 . Cut-off Date. The initial principal balance of the
Mortgage Pool will be the aggregate
principal balance of the Mortgage Loans
as of February 1, 1996, after deducting
any principal payments due on or
before such date. Any principal
and interest payments due on or before
February 1 will not be part of the
Mortgage Pool.
February 1 through
February 29 Prepayment Period. Partial principal prepayments and
prepayments in full with interest
thereon to the date of such prepayment
in full, received at any time during
this period will be deposited into the
Custodial Account for distribution to
Certificateholders on March 25.
March 5 . . . Record Date. Distributions on March 25 will be
made to Certificateholders of record at
the close of business on March 5.
February 2 through
March 15 . . Collection Period. Payments due during the related Due
Period (February 2 through March 1)
from mortgagors will be deposited in
the Custodial Account as received, and
will include scheduled principal
payments plus interest on the February
balances.
March 15 . . Determination Date. On the second business day following
the Determination Date, the amounts of
principal and interest that will be
distributed on March 25 will be
determined by the Trustee.
March 22 . . Certificate Account
Deposit Date. On the business day immediately
preceding the Distribution Date the
Master Servicer will remit to the
Trustee the amount of principal and
interest to be distributed to the
Certificateholders on such
Distribution Date from amounts on
deposit in the Custodial Account,
together with any Advances required to
be made by the Master Servicer for
such Distribution Date.
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March 25 . . Distribution Date. On March 25 the Trustee will
distribute or cause to be distributed
to the Certificateholders the amounts
determined as of the second business
day following the Determination Date. If
a Monthly Payment due during the related
Due Period is received from a mortgagor
after March 15 and an Advance has been
made with respect to such late payment
from the Custodial Account, such late
payment will be deposited into the
Custodial Account as reimbursement
therefor. If the Master Servicer has
made an Advance with respect to such
late payment from its own funds, the
Master Servicer will reimburse itself to
the extent permitted by the Pooling and
Servicing Agreement by withdrawing from
the Custodial Account the amount
relating to such Advance. If no such
Advance has been made with respect to
such late payment, the proceeds of such
late payment will be distributed to the
Certificateholders on the Distribution
Date occurring in April.
Succeeding months follow the same pattern, except for the Cut-off Date
and the Record Date. The Record Date shall be the close of business on the last
business day of the month immediately preceding the month of distribution.
ALLOCATION OF LOSSES; SUBORDINATION
As described above on each Distribution Date until the Class B
Certificate Termination Date, the Class SB Accrual Amount (representing all
interest accrued but unpaid on the Class SB Certificates) will be distributed
as additional principal distributions on the Class A Certificates up to certain
specified amounts and thereafter on the Class B Certificates. Following the
Class B Certificate Termination Date, the Class SB Accrual Amount will be
distributed as additional principal distributions on the Class A Certificates
up to the Senior Accrual Diversion Amount (representing certain payments in
respect of any Realized Losses). See "--Additional Principal Distributions on
the Certificates." Such additional principal distributions as and when made
will result in a corresponding increase in the Certificate Principal Balance of
the Class R Certificates (except to the extent of any concurrent reduction
thereof resulting from the allocation of any Realized Loss thereto), thereby
increasing the available subordination provided by the Class R Certificates for
purposes of allocations of Realized Losses as described below.
Any Realized Losses, other than losses of a type generally covered by a
special hazard insurance policy as described in the Prospectus under
"Description of Mortgage and other Insurance--Hazard Insurance on the Loans"
(any such loss, a "Special Hazard Loss") to the extent in excess of the Special
Hazard Amount ("Excess Special Hazard Losses"), losses incurred on defaulted
Mortgage Loans as to which there was fraud in the origination of such Mortgage
Loans (any such loss, a "Fraud Loss") to the extent in excess of the Fraud Loss
Amount ("Excess Fraud Losses"), losses attributable to certain actions which
may be taken by a bankruptcy court in connection with a Mortgage Loan,
including a reduction by a bankruptcy court of the principal balance or the
Mortgage Rate on a Mortgage Loan or an extension of its maturity (any such
loss, a "Bankruptcy Loss") to the extent in excess of the Bankruptcy Loss
Amount ("Excess Bankruptcy Losses"), and losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks ("Extraordinary Losses"), will be allocated as follows: Realized Losses
on the Mortgage Loans will be allocated first, to the Class R Certificates,
then to the Class SB Certificates (to the extent of the interest portions of
such Realized Losses), then to the Class B-3 Certificates, then to the Class
B-2 Certificates, then to the Class B-1 Certificates, then to the Class A
Certificates, in each case (other than for the Class SB Certificates) until the
Certificate Principal Balance thereof is reduced to zero, and thereafter, with
respect to Realized Losses on the Discount Mortgage Loans, to the Principal
Only Certificates in an amount equal to the related Discount Fraction of the
prior portions of such Realized Losses, and the remainder of such Realized
Losses and the entire amount of the Realized Losses on the Non-Discount
Mortgage Loans to the Variable Strip Certificates and the Class A Certificates
on a pro rata basis as described below. Notwithstanding the foregoing, such
Realized Losses on the Mortgage Loans will not be allocated to any of the
Senior Certificates or the Class B Certificates on any Distribution Date to the
extent that such Realized Losses are less than the sum of (i) the Remaining
Available Distribution Amount on such Distribution Date and (ii) the
Certificate Principal Balance of the Class R Certificates immediately prior to
such Distribution Date. In addition, any excess of the Remaining
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Available Distribution Amount over the Senior Accrual Diversion Amount on any
Distribution Date may be applied to reimburse the principal portions of Realized
Losses previously allocated to the Senior Certificates or the Class B
Certificates. Any allocation of a Realized Loss (other than a Debt Service
Reduction) to an Offered Certificate will generally be made by reducing the
Certificate Principal Balance thereof, in the case of the principal portion of
such Realized Loss, and the Accrued Certificate Interest thereon, in the case of
the interest portion of such Realized Loss, by the amount so allocated as of the
Distribution Date occurring in the month following the calendar month in which
such Realized Loss was incurred. As used herein, "Debt Service Reductions" means
reductions in the amount of monthly payments due to certain bankruptcy
proceedings, but does not include any permanent forgiveness of principal. In
addition to the foregoing allocations of Realized Losses, the Accrued
Certificate Interest on certain Classes of Offered Certificates is subject to
reduction due to shortfalls in collections of interest as described above under
"Description of the Certificates--Interest Distributions." Allocations of the
principal portion of Debt Service Reductions to the Class B-1 Certificates, the
Class B-2 Certificates, the Class B-3 Certificates and the Class R Certificates
will result from the priority of distributions of the Available Distribution
Amount as described herein. As used herein, "Subordination" refers to the
provisions discussed above for the sequential allocation of Realized Losses
(other than Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses or Extraordinary Losses) in respect of the Mortgage Loans among the
various Classes of Certificates, as well as all provisions effecting such
allocations including the priorities for distribution of cash flows in the
amounts described herein.
Any Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses, Extraordinary Losses or other losses of a type not covered by
Subordination on Non-Discount Mortgage Loans will be allocated on a pro rata
basis among the Variable Strip Certificates, the Class A Certificates, the
Class B Certificates, the Class SB Certificates and the Class R Certificates.
Notwithstanding the foregoing, any such Realized Losses not covered by
Subordination will not be allocated to any of the Senior Certificates or the
Class B Certificates on any Distribution Date to the extent that such Realized
Losses (together with any other Realized Losses for such Distribution Date) are
less than the sum of (i) the Remaining Available Distribution Amount on such
Distribution Date and (ii) the Certificate Principal Balance of the Class R
Certificates immediately prior to such Distribution Date. The principal
portions of such losses on Discount Mortgage Loans will be allocated to the
Principal Only Certificates in an amount equal to the related Discount
Fractions of such losses, and the remainder of such losses will be allocated
among the other Classes of Certificates on a pro rata basis as described below.
An allocation of a Realized Loss on a "pro rata basis" among two or more
Classes of Certificates means an allocation to each such Class of Certificates
on the basis of their then-outstanding Certificate Principal Balances, in the
case of the principal portion of a Realized Loss, or based on the Accrued
Certificate Interest thereon in the case of an interest portion of a Realized
Loss.
Losses of principal on the Mortgage Loans that are not covered by
Subordination will be allocated to the Principal Only Certificates only to the
extent they occur on Discount Mortgage Loans and only to the extent of the
related Discount Fractions of such losses. Such allocation of losses of
principal on the Discount Mortgage Loans may result in such losses being
allocated in amounts that are greater or less than would have been the case had
such losses been allocated in proportion to the Certificate Principal Balance
of the Principal Only Certificates. Thus, the Variable Strip Certificates and
the Class A Certificates will bear the entire amount of losses that are not
covered by Subordination other than the amount allocable to the Principal Only
Certificates, which losses will be allocated among such Classes of Certificates
on a pro rata basis.
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the related Certificateholders by deed in lieu of
foreclosure, or otherwise, the amount of loss realized, if any, will be equal
to the portion of the Stated Principal Balance remaining, if any, plus interest
thereon through the last day of the month in which such Mortgage Loan was
finally liquidated, after application of all amounts recovered (net of amounts
reimbursable to the Master Servicer or any subservicer for Advances and
expenses, including attorneys' fees) towards interest and principal owing on
the Mortgage Loan. Such amount of loss realized and any Special Hazard Losses,
Fraud Losses, Bankruptcy Losses and Extraordinary Losses are referred to herein
as "Realized Losses."
The Trustee will establish and maintain one or more separate accounts
(collectively, the "Excess Proceeds Account") in which the Master Servicer will
deposit or cause to be deposited on a daily basis, or as and when received from
subservicers, the excess, if any, of all amounts recovered on any Mortgage Loan
as to which an REO Disposition occurs (net of amounts reimbursable to the
Master Servicer or any subservicer for Advances and
S-56
expenses, including attorneys' fees) over the Stated Principal Balance of such
Mortgage Loan plus interest thereon through the last day of the month in which
such REO Disposition occurs (the "Excess Proceeds"). The Certificateholders will
be entitled to receive on each Distribution Date, in addition to the
distributions of interest and principal described above, a distribution of
Excess Proceeds (including any interest or other income earned thereon) in an
amount equal to the lesser of (a) the amount on deposit in the Excess Proceeds
Account as of the related Determination Date and (b) the aggregate of all
Realized Losses allocated among the Certificates on any Distribution Date and
not covered by any subsequent distribution. Such distribution will be allocated
in the following order of priority: first, to the holders of the Variable Strip
Certificates and the Class A Certificates on a pro rata basis to the extent of
the interest portions of Realized Losses allocated to such Classes of
Certificates on any Distribution Date and not covered by any subsequent
distribution, second, to the holders of the Principal Only Certificates and the
Class A Certificates on a pro rata basis, to the extent of the principal
portions of Realized Losses allocated to such Classes of Certificates on any
Distribution Date and not covered by any subsequent distribution, third, to the
holders of the Class B-1 Certificates, fourth, to the holders of the Class B-2
Certificates, fifth, to the holders of the Class B-3 Certificates, sixth, to the
holders SB Certificates, in each case to the extent of the interest and
principal portions, as applicable, of Realized Losses allocated to such Class of
Certificates on any Distribution Date and not covered by any subsequent
distribution, and then seventh, to the holders of the Class R Certificates. If
the amount on deposit in the Excess Proceeds Account exceeds an amount
calculated periodically pursuant to the terms of the Pooling and Servicing
Agreement or is in excess of zero upon the termination of the Trust Fund, the
excess amount will be distributed to the holders of the Class R Certificates in
accordance with the terms of the Pooling and Servicing Agreement. The
distribution of Excess Proceeds will not have the effect of reducing the
Certificate Principal Balance of or Accrued Certificate Interest on any Class of
Certificates to which such distribution is allocated. The amount on deposit in
the Excess Proceeds Account initially will be equal to zero and is not expected
to be substantial at any time when the Certificates are outstanding. Therefore,
prospective investors in the Offered Certificates should not rely on the Excess
Proceeds Account to provide significant protection against Realized Losses on
the Mortgage Loans. Further, prospective investors in the Offered Certificates
should not rely on the distribution of Excess Proceeds to provide a return on
the Offered Certificates in addition to the interest and principal to which the
holders of the Offered Certificates are entitled. The Excess Proceeds Account
will be an interest-bearing account of the type described in the Prospectus
under "Servicing of Loans--Deposits to and Withdrawals from the Collection
Account" and may be invested in Eligible Investments (as defined in the
Prospectus) for the benefit of and at the risk of the Certificateholders. Any
interest or other income earned on amounts in the Excess Proceeds Account will
be held therein until distributed as described above.
The application of the Senior Prepayment Percentage (when it exceeds the
Senior Percentage) as described herein to determine the Senior Principal
Distribution Amount will accelerate the amortization of the Class A
Certificates relative to the actual amortization of the Mortgage Loans. The
Principal Only Certificates will not receive more than the Discount Fraction of
any unscheduled payment or collection relating to a Discount Mortgage Loan.
Accordingly, to the extent that the Class A Certificates are amortized faster
than the Mortgage Loans, in the absence of offsetting Realized Losses allocated
to the Class B Certificates or the Class R Certificates, the undivided
beneficial ownership interest in the Trust Fund evidenced by the Class A
Certificates will be decreased (with a corresponding increase in the undivided
beneficial ownership interest in the Trust Fund evidenced by the Class B
Certificates and the Class R Certificates in the aggregate), thereby
increasing, as a relative matter, the Subordination afforded the Senior
Certificates by the Class B Certificates and the Class R Certificates.
The priority of payments (including principal prepayments) to each class
of Class B Certificates as described herein also may have the effect, during
certain periods and in the absence of losses, of decreasing the percentage
interest evidenced by each class of Class B Certificates, thereby increasing,
relative to its Certificate Principal Balance, the Subordination afforded to
the Class B Certificates by the Class R Certificates.
The aggregate amount of Realized Losses which may be allocated through
Subordination, other than to the Class SB Certificates and Class R
Certificates, in connection with Special Hazard Losses (the "Special Hazard
Amount") will initially be equal to $777,081. As of any date of determination
following the Cut-off Date, the Special Hazard Amount will equal the initial
amount thereof less the sum of (A) any amounts allocated through Subordination
in respect of Special Hazard Losses and (B) the Adjustment Amount. On each
anniversary of February 1, 1996, the Adjustment Amount will be equal to the
amount, if any, by which the Special Hazard Amount, without giving effect to
the deduction of the Adjustment Amount for such anniversary, exceeds the
greater of (i) 1.0% (or, if greater than 1.0%, the highest percentage of
Mortgage Loans, by principal balance, in any
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California zip code area) multiplied by the aggregate principal balance of all
of the Mortgage Loans on such anniversary and (ii) twice the principal balance
of the single Mortgage Loan having the largest principal balance.
The aggregate amount of Realized Losses which may be allocated through
Subordination, other than to the Class SB Certificates and Class R
Certificates, in connection with Fraud Losses (the "Fraud Loss Amount") will
initially be equal to $1,046,548. As of any date of determination after the
Cut-off Date, the Fraud Loss Amount will equal (X) prior to February 1, 1997 an
amount equal to 3.00% of the aggregate principal balance of all the Mortgage
Loans as of the Cut-off Date minus the aggregate amount allocated through
Subordination with respect to Fraud Losses up to such date of determination,
(Y) from February 1, 1997 through January 31, 1998 an amount equal to (1) the
lesser of (a) the Fraud Loss Amount as of February 1, 1997 and (b) 2.000% of
the aggregate principal balance of all of the Mortgage Loans as of February 1,
1997 minus (2) the aggregate amount allocated through Subordination with
respect to Fraud Losses since November 1, 1996 up to such date of
determination, and (Z) from February 1, 1998 through January 31, 2001, an
amount equal to (1) the lesser of (a) the Fraud Loss Amount as of the most
recent February 1st and (b) 1.00% of the aggregate principal balance of all of
the Mortgage Loans as of the most recent February 1st minus (2) the aggregate
amount allocated through Subordination with respect to Fraud Losses since the
most recent February 1st up to such date of determination. On and after
February 1, 2001, the Fraud Loss Amount will be zero and Fraud Losses will not
be allocated through Subordination but rather on a pro rata basis among all
Classes of Certificates, except to the Class SB Certificates and Class R
Certificates.
The aggregate amount of Realized Losses which may be allocated through
Subordination, other than to the Class SB Certificates and Class R
Certificates, in connection with Bankruptcy Losses (the "Bankruptcy Amount")
will initially be equal to $100,000. As of any date of determination prior to
February 1, 1997, the Bankruptcy Amount will equal the initial amount thereof
less the sum of any amounts allocated through Subordination for such losses up
to such date of determination. As of any date of determination on or after
February 1, 1997, the Bankruptcy Amount will equal the excess, if any, of (1)
the lesser of (a) the Bankruptcy Amount as of the business day next preceding
the most recent February 1st and (b) an amount calculated pursuant to the terms
of the Pooling and Servicing Agreement, which amount as calculated will provide
for a reduction in the Bankruptcy Amount, over (2) the aggregate amount of
Bankruptcy Losses allocated through Subordination since such anniversary. The
Bankruptcy Amount and the related formulas referred to above may be reduced or
modified upon written confirmation from each Rating Agency that such reduction
or modification will not adversely affect the then-current ratings assigned to
the Offered Certificates by such Rating Agency. Such a reduction or
modification may adversely affect the coverage provided by such Subordination
with respect to Bankruptcy Losses.
OPTIONAL PURCHASE OF DELINQUENT MORTGAGE LOANS
The Master Servicer will have the right to purchase from the Trust Fund
any Mortgage Loan that is 90 days or more delinquent (i.e., any Mortgage Loan
on which the related mortgagor has failed to make four consecutive monthly
payments) if the Master Servicer determines that such Mortgage Loan otherwise
would become subject to foreclosure or related proceedings. The purchase price
for any such Mortgage Loan will equal the outstanding principal balance of such
Mortgage Loan plus accrued and unpaid interest (adjusted to the Net Mortgage
Rate) to first day of the month in which the amount of such purchase price will
be distributed to the Certificateholders. The Master Servicer will be obligated
to deposit into the Custodial Account the purchase price for any Mortgage Loan
purchased by it as described above.
ADVANCES
Prior to each Distribution Date, the Master Servicer is required to make
Advances (out of its own funds or funds held in the Custodial Account for
future distribution or withdrawal) with respect to any payments of principal
and interest (net of the related Servicing Fees) that were due on the Mortgage
Loans on the immediately preceding Due Date and delinquent as of the close of
business on the related Determination Date.
Such Advances are required to be made only to the extent they are deemed
by the Master Servicer to be recoverable from related late collections,
Insurance Proceeds or Liquidation Proceeds or amounts otherwise distributable
on the Certificates after distribution of the Priority Interest Distribution
Amount, the Principal Only Distribution Amount and the Senior Principal
Distribution Amount. The purpose of making such Advances is to
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maintain a regular cash flow to the Certificateholders, rather than to guarantee
or insure against losses. The Master Servicer will not be required to make any
Advances with respect to reductions in the amount of the monthly payments on the
Mortgage Loans due to Debt Service Reductions or the application of the Relief
Act or similar legislation or regulations. Any failure by the Master Servicer to
make an Advance as required under the Pooling and Servicing Agreement will
constitute an Event of Default thereunder, in which case the Trustee, as
successor Master Servicer, will be obligated to make any such Advance, in
accordance with the terms of the Pooling and Servicing Agreement.
All Advances will be reimbursable to the Master Servicer on a first
priority basis from either (a) late collections, Insurance Proceeds and
Liquidation Proceeds from the Mortgage Loan as to which such unreimbursed
Advance was made, (b) as to any Advance that remains unreimbursed in whole or
in part following the final liquidation of the related Mortgage Loan from
amounts otherwise distributable on the Certificates after distributions of the
Priority Interest Distribution Amount, the Principal Only Distribution Amount
and the Senior Principal Distribution Amount or (c) out of any funds in the
Custodial Account prior to any distributions on any of the Certificates, if the
Master Servicer determines that such Advances will not otherwise be recoverable
as provided above; provided, however, that such Advances that were made with
respect to delinquencies which ultimately were determined to be Excess Special
Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary
Losses are reimbursable to the Master Servicer out of any funds in the
Custodial Account prior to distribution on any of the Certificates and the
amount of such losses will be allocated as described herein.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The effective yield to the holders of the Offered Certificates will be
lower than the yield otherwise produced by the related Pass-Through Rates and
purchase prices because monthly distributions will not be payable to such
holders until the 25th day (or the immediately following business day if such
25th day is not a business day) of the month following the month in which
interest accrues on the Mortgage Loans (without any additional distribution of
interest or earnings thereon in respect of such delay).
The yield to maturity and the aggregate amount of distributions on the
Offered Certificates will be affected by, among other things, the rate and
timing of principal payments on the Mortgage Loans and the amount and timing of
mortgagor defaults resulting in Realized Losses. Such yield may be adversely
affected by a higher or lower than anticipated rate of principal payments on
the Mortgage Loans. The rate of principal payments on such Mortgage Loans will
in turn be affected by the amortization schedules of the Mortgage Loans, the
rate and timing of prepayments thereon by the mortgagors, liquidations of
defaulted Mortgage Loans and repurchases of Mortgage Loans due to certain
breaches of representations. The timing of changes in the rate of prepayments,
liquidations and repurchases of the Mortgage Loans may, and the timing of
Realized Losses will, significantly affect the yield to an investor, even if
the average rate of principal payments experienced over time is consistent with
an investor's expectation. After the Certificate Principal Balance of the Class
R Certificates has been reduced to zero, the yield to maturity on the Class B-3
Certificates will be extremely sensitive to losses on the Mortgage Loans (and
the timing thereof) because the entire amount (subject to the limits described
herein with respect to certain types of losses as described herein) of such
losses (rather than a pro rata portion thereof) will be allocable to such Class
of Certificates. After the Certificate Principal Balances of the Class R
Certificates and the Class B-3 Certificates have been reduced to zero, the
yield to maturity on the Class B-2 Certificates will be extremely sensitive to
losses on the Mortgage Loans (and the timing thereof) because the entire amount
(subject to the limits described herein with respect to certain types of losses
as described herein) of such losses (rather than a pro rata portion thereof)
will be allocable to such Class of Certificates. After the Certificate
Principal Balances of the Class R Certificates, the Class B-3 Certificates and
the Class B-2 Certificates have been reduced to zero, the yield to maturity on
the Class B-1 Certificates will be extremely sensitive to losses on the
Mortgage Loans (and the timing thereof) because the entire amount (subject to
the limits described herein with respect to certain types of losses as
described herein) of such losses (rather than a pro rata portion thereof) will
be allocable to such Class of Certificates. (However, as described under
"--Additional Distributions on the Certificates," the Class A Certificates and
the Class B Certificates will be entitled to certain principal distributions of
amounts, to the extent received or advanced, that would otherwise be
distributable to the holders of the Class SB Certificates and the Class R
Certificates). Certain loss scenarios could lead to the failure of the Class B
Certificateholders to recover fully their initial investments. Since the rate
and
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timing of principal payments on the Mortgage Loans will depend on future events
and on a variety of factors (as described more fully herein and in the
Prospectus under "Yield, Prepayment and Maturity Considerations"), no assurance
can be given as to such rate or the timing of principal prepayments on the
Offered Certificates.
The Mortgage Loans may be prepaid by the mortgagors at any time;
however, in certain circumstances, the Mortgage Loans will be subject to a
prepayment charge for prepayments. See "Description of the Mortgage Pool"
herein. The Mortgage Loans generally contain due-on-sale clauses. Prepayments,
liquidations and repurchases of the Mortgage Loans will result in distributions
to holders of the Offered Certificates (other than the Variable Strip
Certificates) of principal amounts which would otherwise be distributed over
the remaining terms of the Mortgage Loans. Factors affecting prepayment
(including defaults and liquidations) of mortgage loans include changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties, changes in the value of the mortgaged properties,
mortgage market interest rates and servicing decisions.
As described under "Description of the Mortgage Loans" herein, the
Mortgage Pool consists of Fixed Rate Loans and Adjustable Rate Loans. If
prevailing mortgage rates fell significantly below the Mortgage Rates on the
Fixed Rate Loans or the Mortgage Rates on the Adjustable Rate Loans during the
seven-year fixed initial interest rate periods thereof, the rate of prepayments
(including from refinancings) on such Mortgage Loans would be expected to
increase. Conversely, if prevailing Mortgage Rates rose significantly above
such Mortgage Rates, the rate of prepayments on such Mortgage Loans would be
expected to decrease. After the initial Adjustment Dates of the Adjustable Rate
Loans, the Mortgage Rates thereon adjust periodically in response to the Index
as most recently available (i) as of the date 45 days prior to the related
Adjustment Dates with respect to a majority of the Mortgage Loans or (i) as of
the first business day of the month in which the Adjustment Date occurs.
Furthermore, the first distribution on the Certificates after a periodic
adjustment to scheduled monthly payments on the Adjustable Rate Loans will be
distributed to Certificateholders on the Distribution Date in the third month
following the month in which the related Index was published. The Index may not
rise or fall consistently with mortgage rates generally. Therefore, the Index
may be higher than mortgage Rates generally, resulting in prepayments when the
Mortgage Rates on the Mortgage Loans are increasing.
Because it is impossible to accurately predict the timing and dollar
amount of principal prepayments on the Mortgage Loans, if any, that will be
made, as well as the percentage according to which those prepayments will be
allocated among Classes of Certificates at any particular point in time,
investors in the Certificates, and particularly investors in the Class B
Certificates, may find it difficult to analyze the effect of principal
prepayments on the yield and average life of the various Classes of
Certificates.
The Pass-Through Rates on the Class A Certificates and the Class B
Certificates are fixed and will not change in response to changes in market
interest rates. The Pass-Through Rate on the Variable Strip Certificates is
based on the weighted average of the Pool Strip Rates on the Mortgage Loans,
which will not change in respect of any Fixed Rate Loan (but may change in
respect of any Adjustable Rate Loan). Accordingly, if market interest rates or
market yield for securities similar to the Offered Certificates were to rise,
the market value of the Offered Certificates may decline.
The Mortgage Rates on the Adjustable Rate Loans adjust periodically in
response to the Index as most recently available as of the date 45 days prior
to each Adjustment Date. Furthermore, the first distribution on the
Certificates reflecting a periodic adjustment to scheduled monthly payments on
the underlying Mortgage Loans will be distributed to Certificateholders on the
Distribution Date in the third month following the month in which the Index was
published. The Index may not rise or fall consistently with mortgage rates
generally. Therefore, the related Index may be higher than mortgage rates
generally, resulting in prepayments when the Mortgage Rates on the Mortgage
Loans are increasing.
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. Increases in the monthly payments on the Adjustable Rate Loans to
amounts in excess of the monthly payments required at their respective dates of
origination may result in a default rate higher than that on level payment
mortgage loans. With respect to each Adjustable Rate Loan, a substantial
increase in the amount of the monthly payments could occur after the initial
Adjustment Date thereof, because the Periodic Rate Cap thereon will not limit
increases in the related Mortgage Rate on such date, subject to the Maximum
Rate. The repayment of such
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Mortgage Loans will be dependent on the ability of the related mortgagors to
make larger monthly payments as a result of increases in the related Mortgage
Rates. The rate of default on Mortgage Loans which are refinance mortgage loans
or which were not originated under the Full Documentation program may be higher
than for other types of Mortgage Loans. As a result of the underwriting
standards for the Seller's regular lending program, the Mortgage Loans are
likely to experience rates of delinquency, foreclosure, bankruptcy and loss that
are higher, and that may be substantially higher, than those experienced by
mortgage loans underwritten in a more traditional manner. See "The Seller--Loan
Delinquency, Forbearance, Foreclosure, Bankruptcy and REO Property Status" and
"--REO Property Liquidation Experience" above for important information
regarding the delinquency, forbearance, foreclosure, bankruptcy and REO property
status and loss experience of certain mortgage loans previously originated by
the Seller under the regular lending program. In addition, because of such
underwriting criteria and their likely effect on the delinquency, foreclosure,
bankruptcy and loss experience of the Mortgage Loans, the Mortgage Loans will be
serviced in a manner intended to result in a faster exercise of remedies,
including foreclosure, in the event Mortgage Loan delinquencies and defaults
occur, than would be the case if the Mortgage Loans were serviced in a more
conventional manner. Furthermore, the rate and timing of prepayments, defaults
and liquidations on the Mortgage Loans will be affected by the general economic
condition of the region of the country in which the related Mortgaged Properties
are located. The risk of delinquencies and loss is greater and prepayments are
less likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values. See "Yield, Prepayment and Maturity Considerations" in the Prospectus.
As described under "Description of the Certificates--Allocation of Losses;
Subordination" and "Description of the Certificates--Advances," amounts
otherwise distributable to holders of the Class R Certificates, the Class SB
Certificates and the Class B Certificates will be made available to protect the
holders of the Senior Certificates against interruptions in distributions due
to certain mortgagor delinquencies, in each case to the extent not covered by
Advances. Such delinquencies will affect the yield to investors in the Class
B-3 Certificates to the extent not covered by the Class SB Certificates and the
Class R Certificates, the Class B-2 Certificates to the extent not covered by
the Class B-3 Certificates, the Class SB Certificates and the Class R
Certificates, the Class B-1 Certificates to the extent not covered by the Class
B-3 Certificate, the Class B-2 Certificates, the Class SB Certificates and the
Class R Certificates and the Senior Certificates to the extent not covered by
the Class B Certificates, the Class SB Certificates and the Class R
Certificates. Even if subsequently cured, such delinquencies may affect the
timing of the receipt of distributions by the holders of the Class B
Certificates or the Senior Certificates, because the entire amount (rather than
a pro rata portion) thereof would be borne by such Class of Certificates.
Furthermore, the Principal Only Certificates will share in the principal
portions of Realized Losses on the Mortgage Loans only to the extent they are
incurred with respect to Discount Mortgage Loans and only to the extent of the
related Discount Fractions thereof. Thus, after the Class B Certificates are
retired, or in the case of Excess Special Hazard Losses, Excess Fraud Losses,
Excess Bankruptcy Losses and Extraordinary Losses, the Class A Certificates may
be affected to a greater extent by losses on Non-Discount Mortgage Loans than
by losses on Discount Mortgage Loans. In addition, a higher than expected rate
of delinquencies or losses will also affect the rate of principal payments on
the Class B Certificates if it delays the scheduled reduction of the Senior
Prepayment Percentage or affects the allocation of prepayments among the Class
B Certificates.
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
immediately preceding monthly payment up to the date of such prepayment,
instead of for a full month. Partial principal prepayments are applied as of
the first day of the month of receipt, with a resulting reduction in interest
payable for the month during which the partial prepayment is made. Full or
partial prepayments (or other liquidations) received in any calendar month will
be distributed to Certificateholders on the Distribution Date in the month
following the month of receipt. With respect to such full or partial
prepayments (or other liquidations), the Master Servicer is obligated to fund
shortfalls in collection of one full month's interest (adjusted to the related
Net Mortgage Rate) but only to the extent of the servicing compensation
otherwise payable to the Master Servicer. Accordingly, to the extent any such
shortfall in interest collections exceeds the amount that the Master Servicer
is obligated to fund, the effect of any such principal prepayment will be to
reduce the aggregate amount of interest that is available for distribution to
the related Certificateholders, and will be allocated among the Certificates in
proportion to the interest otherwise distributable or accrued thereon.
In addition, the yield to maturity of the Offered Certificates will
depend on the prices paid by the holders of the Offered Certificates and the
related Pass-Through Rates. The extent to which the yield to maturity of an
Offered Certificate is sensitive to prepayments will depend upon the degree to
which it is purchased at a discount
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or premium. For additional considerations relating to the yield on the
Certificates, see "Yield, Prepayment and Maturity Considerations" in the
Prospectus.
WEIGHTED AVERAGE LIFE: Weighted average life refers to the average amount
of time that will elapse from the date of issuance of a security to the date of
distribution to the investor of each dollar distributed in reduction of
principal of such security (assuming no losses). The weighted average life of
the Offered Certificates will be influenced by, among other things, the rate at
which principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement
represents an assumed constant prepayment rate ("CPR") each month relative to
the then outstanding principal balance of a pool of mortgage loans for the life
of such mortgage loans. CPR does not purport to be either an historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any mortgage loans,
including the Mortgage Loans to be included in the Trust Fund.
The tables set forth below have been prepared on the basis of certain
assumptions, as described below, regarding the weighted average characteristics
of the Mortgage Loans that are expected to be included in the Trust Fund, as
described under "Description of the Mortgage Pool" herein, and the performance
thereof. The tables assume, among other things, that: (i) the Mortgage Loans
will have the characteristics of the mortgage loans described under
"Description of the Mortgage Pool," except that the Index is constant and
equals 5.25%, (ii) the principal and interest distributions in respect of the
Certificates are received in cash on the 25th day of each month commencing in
March 1996, (iii) no defaults or delinquencies in the payment by mortgagors of
principal of and interest on the Mortgage Loans are experienced, (iv) the
Master Servicer does not exercise its option to repurchase all of the Mortgage
Loans as described under the caption "Pooling and Servicing Agreement--
Termination," (v) prepayments representing payment in full of individual
Mortgage Loans are received on the last day of each month and include 30 days
interest thereon, commencing in February 1996, (vi) the scheduled monthly
payment for each Mortgage Loan is received on the first day of each month
commencing in March 1996 and has been calculated based on its outstanding
balance, interest rate and remaining term to stated maturity such that the
Mortgage Loan will amortize in amounts sufficient to repay the remaining
balance of such Mortgage Loan by its stated maturity, (vii) the Certificates
are purchased on February 28, 1996 and (viii) the number of days between the
date the Offered Certificates are purchased and the first Distribution Date is
27 days (such assumptions, collectively, the "Structuring Assumptions").
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the tables set forth below,
which are hypothetical in nature and are provided only to give a general sense
of how the principal cash flows might behave under varying prepayment
scenarios. For example, it is very unlikely that the Mortgage Loans will prepay
at a constant CPR level until maturity or that all of the Mortgage Loans will
prepay at the same CPR level. Moreover, the diverse remaining terms to maturity
of the Mortgage Loans could produce slower or faster principal distributions
than indicated in the tables at the various CPR percentages specified, even if
the various weighted average remaining terms to maturity of the Mortgage Loans
are as assumed. Any difference between such assumptions and the actual
characteristics and performance of the Mortgage Loans, or actual prepayment or
loss experience, will affect the percentages of initial Certificate Principal
Balances outstanding over time and the weighted average lives of the Classes of
Offered Certificates.
Subject to the foregoing discussion and assumptions, the tables below
indicate the weighted average life of each Class of Offered Certificates (other
than the Variable Strip Certificates) and set forth the percentages of the
initial Certificate Principal Balance of each such Class of Offered
Certificates that would be outstanding after each of the Distribution Dates
shown at various CPR percentages.
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PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF CPR
<TABLE>
<CAPTION>
CLASS A-1 CERTIFICATES CLASS A-2 CERTIFICATES
DISTRIBUTION 0% 6% 12% 15% 18% 24% 0% 6% 12% 15% 18% 24%
DATE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial . . . . 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
February 1997 . 96 80 64 56 48 32 100 100 100 100 100 100
February 1998 . 91 61 32 19 6 0 100 100 100 100 100 82
February 1999 . 88 44 5 0 0 0 100 100 100 88 73 46
February 2000 . 86 29 0 0 0 0 100 100 83 65 48 19
February 2001 . 84 15 0 0 0 0 100 100 65 45 28 0
February 2002 . 81 2 0 0 0 0 100 100 50 30 13 0
February 2003 . 78 0 0 0 0 0 100 91 38 18 3 0
February 2004 . 75 0 0 0 0 0 100 81 28 10 0 0
February 2005 . 71 0 0 0 0 0 100 73 20 3 0 0
February 2006 . 67 0 0 0 0 0 100 65 14 0 0 0
February 2007 . 63 0 0 0 0 0 100 58 9 0 0 0
February 2008 . 58 0 0 0 0 0 100 51 4 0 0 0
February 2009 . 52 0 0 0 0 0 100 44 0 0 0 0
February 2010 . 46 0 0 0 0 0 100 38 0 0 0 0
February 2011 . 39 0 0 0 0 0 100 32 0 0 0 0
February 2012 . 34 0 0 0 0 0 100 27 0 0 0 0
February 2013 . 29 0 0 0 0 0 100 22 0 0 0 0
February 2014 . 23 0 0 0 0 0 100 18 0 0 0 0
February 2015 . 16 0 0 0 0 0 100 14 0 0 0 0
February 2016 . 8 0 0 0 0 0 100 9 0 0 0 0
February 2017 . 0 0 0 0 0 0 100 5 0 0 0 0
February 2018 . 0 0 0 0 0 0 91 2 0 0 0 0
February 2019 . 0 0 0 0 0 0 82 0 0 0 0 0
February 2020 . 0 0 0 0 0 0 71 0 0 0 0 0
February 2021 . 0 0 0 0 0 0 59 0 0 0 0 0
February 2022 . 0 0 0 0 0 0 45 0 0 0 0 0
February 2023 . 0 0 0 0 0 0 30 0 0 0 0 0
February 2024 . 0 0 0 0 0 0 13 0 0 0 0 0
February 2025 . 0 0 0 0 0 0 0 0 0 0 0 0
February 2026 . 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years* 12.4 2.8 1.5 1.2 1.0 0.8 25.4 12.9 6.7 5.1 4.2 3.0
<CAPTION>
CLASS A-3 CERTIFICATES CLASS B-1, CLASS B-2 AND
CLASS B-3 CERTIFICATES
DISTRIBUTION 0% 6% 12% 15% 18% 24% 0% 6% 12% 15% 18% 24%
DATE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial . . . . 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
February 1997 . 100 100 100 100 100 100 99 99 99 99 99 99
February 1998 . 100 100 100 100 100 100 97 97 97 97 97 98
February 1999 . 100 100 100 100 100 100 91 93 95 95 95 95
February 2000 . 100 100 100 100 100 100 80 84 87 89 91 93
February 2001 . 100 100 100 100 100 99 68 74 79 82 84 88
February 2002 . 100 100 100 100 100 51 55 64 67 69 71 74
February 2003 . 100 100 100 100 100 21 41 53 54 55 57 58
February 2004 . 100 100 100 100 81 5 27 39 38 39 40 39
February 2005 . 100 100 100 100 62 0 11 22 21 21 21 19
February 2006 . 100 100 100 94 50 0 0 4 2 2 2 0
February 2007 . 100 100 100 78 40 0 0 0 0 0 0 0
February 2008 . 100 100 100 65 32 0 0 0 0 0 0 0
February 2009 . 100 100 99 53 25 0 0 0 0 0 0 0
February 2010 . 100 100 84 44 20 0 0 0 0 0 0 0
February 2011 . 100 100 71 36 16 0 0 0 0 0 0 0
February 2012 . 100 100 61 30 13 0 0 0 0 0 0 0
February 2013 . 100 100 52 24 10 0 0 0 0 0 0 0
February 2014 . 100 100 44 20 8 0 0 0 0 0 0 0
February 2015 . 100 100 37 16 6 0 0 0 0 0 0 0
February 2016 . 100 100 31 13 5 0 0 0 0 0 0 0
February 2017 . 100 100 26 10 4 0 0 0 0 0 0 0
February 2018 . 100 100 21 8 3 0 0 0 0 0 0 0
February 2019 . 100 92 17 6 2 0 0 0 0 0 0 0
February 2020 . 100 78 13 5 2 0 0 0 0 0 0 0
February 2021 . 100 64 10 4 1 0 0 0 0 0 0 0
February 2022 . 100 50 8 3 1 0 0 0 0 0 0 0
February 2023 . 100 37 5 2 0 0 0 0 0 0 0 0
February 2024 . 100 24 3 1 0 0 0 0 0 0 0 0
February 2025 . 79 12 1 0 0 0 0 0 0 0 0 0
February 2026 . 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years* 29.4 26.1 18.4 14.7 11.3 6.3 6.2 6.8 6.9 7.0 7.1 7.2
</TABLE>
* The weighted average life of a Certificate is determined by (i)
multiplying the amount of each distribution in reduction of the
Certificate Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii)
adding the results and (iii) dividing the sum by the initial
Certificate Principal Balance of the Certificate.
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VARIABLE STRIP CERTIFICATE YIELD CONSIDERATIONS
THE YIELD TO MATURITY ON THE VARIABLE STRIP CERTIFICATES WILL BE HIGHLY
SENSITIVE TO THE PREPAYMENT, REPURCHASE AND DEFAULT EXPERIENCE ON THE MORTGAGE
LOANS INCLUDED IN THE TRUST FUND. INVESTORS SHOULD CAREFULLY CONSIDER THE
ASSOCIATED RISKS, INCLUDING THE RISK THAT A RAPID RATE OF PRINCIPAL
PREPAYMENTS, DEFAULTS OR REPURCHASES OF THE MORTGAGE LOANS COULD RESULT IN THE
FAILURE OF INVESTORS IN THE VARIABLE STRIP CERTIFICATES TO FULLY RECOVER THEIR
INITIAL INVESTMENT.
The table below indicates the approximate pre-tax yields to maturity (on
a corporate bond equivalent basis (CBE)) on the Variable Strip Certificates for
the specified CPR percentages and assumed purchase prices based on the
Structuring Assumptions and on the further assumption that the purchase price
of the Variable Strip Certificates is equal to the sum of (a) the assumed
purchase price, as specified below, multiplied by the initial Notional Amount
and (b) 27 days of accrued interest.
PRE-TAX YIELD TO MATURITY (CBE) OF THE VARIABLE STRIP CERTIFICATES
PERCENTAGES OF CPR
ASSUMED PURCHASE PRICE 6% 12% 15% 18% 24%
5.2500% . . . . . . . . . . 37.9% 30.4% 26.5% 22.6% 14.6%
5.5000% . . . . . . . . . . 35.7% 28.3% 24.5% 20.6% 12.6%
5.7500% . . . . . . . . . . 33.7% 26.4% 22.6% 18.7% 10.8%
The yields set forth in the preceding table were calculated by
determining the monthly discount rates which, when applied to the assumed
stream of cash flows to be paid on the Variable Strip Certificates, would cause
the discounted present values of such assumed cash flows to equal the aggregate
assumed purchase prices of the Variable Strip Certificates, and by converting
such monthly discount rates to corporate bond equivalent rates. Such
calculations do not take into account the effect of any Prepayment Interest
Shortfalls or variations that may occur in the interest rates at which
investors may be able to reinvest funds received by them as distributions on
the Variable Strip Certificates and consequently do not purport to reflect the
return on any investment in the Variable Strip Certificates when such
reinvestment rates are considered.
The Mortgage Loans will not have all of the characteristics assumed above
and in the Structuring Assumptions. There can be no assurance that the Mortgage
Loans will prepay at any of the constant rates shown in the table or at any
other particular rate, that the pre-tax yields on the Variable Strip
Certificates will correspond to any of the pre-tax yields shown therein or that
the aggregate purchase prices paid for the Variable Strip Certificates will be
equal to any of the amounts assumed above. Because the rate of distributions of
principal on the Certificates will be related to the actual amortization
(including prepayments) of the Mortgage Loans, which may include Mortgage Loans
that have remaining terms to stated maturity shorter or longer than those
assumed and interest rates higher or lower than those assumed, the pre-tax
yields on the Variable Strip Certificates will differ from those set forth
above, even if all of the Mortgage Loans prepay at the indicated CPR
percentages. It is unlikely that any Mortgage Loan will prepay at a constant
rate to maturity or that all of the Mortgage Loans will prepay at the same
rate. The foregoing table assumes that all of the Mortgage Loans prepay at the
same constant rate. In fact, mortgage loans bearing different (or the same)
mortgage rates may prepay at different rates. Accordingly, investors should
calculate expected yields based on their own assumptions and should not rely on
the yields specified above.
The timing of changes in the rate of prepayments may significantly affect
the actual yields to investors on the Variable Strip Certificates, even if the
average rate of principal prepayments is consistent with the expectations of
investors. In general, the earlier the payment of principal of the Mortgage
Loans the greater the effect on an investor's yield to maturity. As a result,
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 Variable Strip Certificates will not
be offset by a subsequent like reduction (or increase) in the rate of principal
prepayments. Investors must make their own decisions as to the appropriate
prepayment assumptions to be used in deciding whether to purchase the Variable
Strip Certificates.
S-64
Investors in the Variable Strip Certificates should be aware that the
yields in the table above were calculated assuming no changes in the Mortgage
Rates on the Mortgage Loans other than as described in the Structuring
Assumptions. However, as described under "Description of the Mortgage Pool"
herein, portions of the Mortgage Pool will consist of Fixed Rate Loans and
Adjustable Rate Loans, respectively. The Mortgage Rate on each Adjustable Rate
Loan will be subject to adjustment commencing approximately seven years after
its date of origination, and semi-annually thereafter, based on the Index
(which may vary significantly over time). Further, to extent that a change in
the level of the Index results in an increase or decrease in the Mortgage Rates
on any of the Adjustable Rate Loans, such change will result in a like increase
or decrease in the Pool Strip Rates on such Adjustable Rate Loans. Because the
Pass-Through Rate on the Variable Strip Certificates is based on the weighted
average of the Pool Strip Rates on the Mortgage Loans, the yield to investors
on the Variable Strip Certificates will be sensitive to changes in the level of
the Index and might be reduced as a result of decreases in the level of the
Index.
In addition to the foregoing, holders of the Variable Strip Certificates
generally will have rights to relatively larger portions of interest payments
on the Mortgage Loans with higher Net Mortgage Rates than on Mortgage Loans
with lower Net Mortgage Rates. Thus, the yield on the Variable Strip
Certificates will be materially and adversely affected to a greater extent than
the yield on the other Classes of Offered Certificates if the Mortgage Loans
with higher Net Mortgage Rates prepay faster than the Mortgage Loans with lower
Net Mortgage Rates. Because the Mortgage Loans with higher Net Mortgage Rates
generally have higher Mortgage Rates, such Mortgage Loans generally are more
likely to be prepaid under most circumstances than are Mortgage Loans with
lower Net Mortgage Rates.
See "Description of the Certificates--Interest Distributions" herein.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement") dated as of February 1, 1996
among the Depositor, the Master Servicer, and Bankers Trust Company, as
Trustee. Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Offered Certificates. The Offered
Certificates will be transferable and exchangeable at the corporate trust
office of the Trustee, which will serve as Certificate Registrar and Paying
Agent. The Depositor will provide a prospective or actual Certificateholder
without charge, on written request, a copy (without exhibits) of the Pooling
and Servicing Agreement. Requests should be addressed to N. Dante LaRocca,
Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, 9th
Floor, New York, New York 10172.
The Master Servicer has the right to resign from the obligations and
duties imposed on it under the Pooling and Servicing Agreement upon the
appointment of a successor servicer and delivery to the Trustee of a letter
from each Rating Agency that such resignation and appointment will not, in and
of itself, result in a downgrading of the Certificates. The Master Servicer may
not assign its obligations and duties under the Pooling and Servicing
Agreement.
ASSIGNMENT OF MORTGAGE LOANS
The Mortgage Loans will be assigned by the Depositor to the Trustee
pursuant to the terms of the Pooling and Servicing Agreement, together with all
principal and interest due on the Mortgage Loans after the Cut-off Date. The
Trustee will, concurrently with such assignment, authenticate and deliver the
Certificates. Each Mortgage Loan will be identified in a schedule appearing as
an exhibit to the Pooling and Servicing Agreement which will specify with
respect to each Mortgage Loan, among other things, the original principal
balance, the principal balance as of the close of business on the Cut-off Date,
the Monthly Payment, the maturity date and the Mortgage Rate.
S-65
As to each Mortgage Loan, the following documents are required to be
delivered to the Trustee in accordance with the Pooling and Servicing
Agreement: (i) the related original Mortgage Note endorsed without recourse to
the Trustee, (ii) the original Mortgage with evidence of recording indicated
thereon (or, if such original recorded Mortgage has not yet been returned by
the recording office, a copy thereof certified by the Seller to be a true and
complete copy of such Mortgage sent for recording), (iii) an original recorded
assignment of the Mortgage to the Trustee (or if such original recorded
assignment has not yet been returned by the recording office, a copy thereof
certified by the Seller to be a true and complete copy of such assignment sent
for recording), (iv) the policies of title insurance issued with respect to
each Mortgage Loan and (v) the originals of any assumption, modification,
extension or guaranty agreements. The assignments to the Trustee in connection
with each Mortgage Loan are required to be submitted for recording promptly
after the Delivery Date. The Trustee will review each Mortgage File within 90
days of the Delivery Date, and if any such document is found to be defective in
any material respect and the Seller does not cure such defect within 60 days of
notice thereof from the Trustee, the Seller will be obligated to purchase the
related Mortgage Loan from the Trust Fund within 90 days of such notice.
Pursuant to the terms of the Pooling and Servicing Agreement, the
Depositor will assign to the Trustee for the benefit of the holders of the
Certificates all of its right, title and interest in and to each Purchase
Agreement insofar as it relates to the representations and warranties made by
the Seller in respect of the related Mortgage Loans and the remedies provided
for breach of such representations and warranties. The representations and
warranties made by the Seller with respect to the Mortgage Loans differ but are
similar in nature to the representations and warranties summarized in the
Prospectus under the caption "Loan Underwriting Procedures and Standards--
Representations and Warranties." Upon discovery by the Trustee of a breach of
any representation, warranty or covenant which materially and adversely affects
the interests of the Certificateholders in a Mortgage Loan, the Trustee will
promptly notify the Seller and the Master Servicer. The Seller will have 90
days from its discovery or its receipt of such notice to cure such breach or
repurchase the Mortgage Loan. The Seller will not have any right to substitute
another mortgage loan for a Mortgage Loan as to which such a breach has
occurred. See "The Seller" above.
Neither the Depositor, the Master Servicer, the Trustee nor any of their
respective affiliates will make any representations or warranties with respect
to the Mortgage Loans, or have any obligation to purchase a Mortgage Loan if
the Seller defaults on its obligation to repurchase a Mortgage Loan either in
connection with a breach of a representation and warranty or in connection with
a defective document as described above, and no assurance can be given that the
Seller will carry out such obligations with respect to Mortgage Loans. Although
the Subordination described herein will not be available to support the
Seller's obligation to repurchase any Mortgage Loan, to the extent any such
Mortgage Loan is not repurchased by the Seller and losses occur on such
Mortgage Loans, Subordination with respect to such Mortgage Loans will be
available to the extent provided herein. To the extent that the Subordination
is so utilized, such Subordination will be depleted more quickly than if such
Mortgage Loans had been repurchased by the Seller.
THE MASTER SERVICER
Temple-Inland Mortgage Corporation ("TIMC"), a Nevada corporation, will
serve as the Master Servicer under the Pooling and Servicing Agreement. TIMC is
a full service mortgage banking company and is a FNMA- and FHLMC-approved
seller/servicer. TIMC originates mortgage loans through a network of retail and
wholesale branches, and the mortgage loans it originates are generally sold in
the secondary market on a servicing-retained basis. In addition, TIMC services
loans in all fifty states and in the District of Columbia, and its servicing
portfolio includes a full range of mortgage products serviced for a variety of
mortgage loan and mortgage-backed security investors. TIMC's principal
executive offices are located at 1300 Mo-Pac Expressway South, Austin, Texas
78746, and its telephone number is (512) 434-8000.
TIMC is a wholly-owned subsidiary of Guaranty Federal Bank, F.S.B.
("GFB"), a Dallas, Texas-based financial institution. GFB is a wholly-owned
subsidiary of Temple-Inland Financial Services ("TIFS"), a financial services
holding company that is wholly-owned by Temple-Inland Inc. ("T-I"). T-I is a
Texas-based, holding company with interests primarily in paper, packaging,
building products and financial services. T-I's stock is publicly traded on the
New York Stock Exchange and the Pacific Stock Exchange.
S-66
The following table sets forth certain information concerning the
delinquency experience (including bankruptcies) and foreclosures in progress on
one- to four-family residential mortgage loans included in TIMC's servicing
portfolio at the end of the indicated periods. The indicated periods of
delinquency are based on the number of days past due on a contractual basis. No
mortgage loan is considered delinquent for these purposes until it is one month
past due on a contractual basis.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1992 AT DECEMBER 31, 1993 AT DECEMBER 31, 1994 AT DECEMBER 31, 1995
--------------------- -------------------- -------------------- --------------------
BY NUMBER PERCENT BY BY NUMBER PERCENT BY BY NUMBER PERCENT BY BY NUMBER PERCENT BY
OF NUMBER OF NUMBER OF NUMBER OF NUMBER
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Residential
Portfolio . . . . 142,912 N/A 144,497 N/A 149,393 N/A 184,310 N/A
Period of Delinquency:
31-60 days . . . . 1,134 0.79% 1,103 0.76% 1,145 0.76% 1,692 0.92%
61-90 days(1) . . 1,494 1.04% 941 0.65% 1,425 0.95% 756 0.41%
91 days or more(2) 1,487 0.81%
Foreclosures in
Progress . . . . . 494 0.34% 267 0.18% 404 0.27% 504 0.27%
Total Delinquent
Loans . . . . . . 3,122 2.18% 2,311 1.59% 2,974 1.99% 4,439 2.41%
Bankruptcy Loans . . 696 0.49% 669 0.46% 612 0.41% 723 0.39%
</TABLE>
(1) Includes mortgage loans 61 to 90 days and 91 days or more
delinquent at December 31, 1992, December 31, 1993 and
December 31, 1994.
(2) TIMC did not keep separate records of mortgage loans 91
days or more delinquent prior to January 1, 1995.
The aggregate principal balances of the one- to four-family residential
mortgage loans included in TIMC's servicing portfolio at close of business on
December 31, 1992, December 31, 1993, December 31, 1994 and December 31, 1995
were approximately $8.0 billion, $9.0 billion, $10.1 billion and $13.4 billion,
respectively.
The following table sets forth certain information concerning the
foreclosure experience on one- to four-family residential mortgage loans
included in TIMC's servicing portfolio at or for the indicated periods.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1992 DECEMBER 31, 1993 DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- ----------------- ----------------- -----------------
BY NUMBER BY NUMBER BY NUMBER BY NUMBER
OF OF OF OF
LOANS LOANS LOANS LOANS
<S> <C> <C> <C> <C>
Foreclosed Loans . . 1,238 788 786 786
Foreclosed Ratio . . 0.87% 0.55% 0.53% 0.43%
</TABLE>
There can be no assurance that the delinquency experience of the Mortgage
Loans comprising the Mortgage Pool will correspond to the delinquency
experience of TIMC's mortgage portfolio set forth in the foregoing tables. The
statistics shown above represent the delinquency experience for TIMC's
residential mortgage servicing portfolio only for the periods presented,
whereas the aggregate delinquency experience on the Mortgage Loans comprising
the Mortgage Pool will depend on the results obtained over the life of the
Mortgage Pool. Moreover, TIMC's residential mortgage servicing portfolio
includes mortgage loans with a variety of payment and other characteristics
(including geographic location) which are not necessarily representative of the
payment and other characteristics of the Mortgage Loans comprising the Mortgage
Pool. PROSPECTIVE INVESTORS IN THE OFFERED CERTIFICATES PARTICULARLY SHOULD BE
AWARE THAT PRIOR TO 1995 TIMC'S SERVICING PORTFOLIO, ON WHICH THE FOREGOING
TABLES ARE BASED, DID NOT INCLUDE ANY MORTGAGE LOANS HAVING UNDERWRITING
STANDARDS SIMILAR TO THOSE APPLICABLE TO THE MORTGAGE
S-67
LOANS AND CONSISTED PRIMARILY OF MORTGAGE LOANS UNDERWRITTEN IN A MORE
TRADITIONAL MANNER. TIMC HAS HAD LIMITED EXPERIENCE IN SERVICING MORTGAGE LOANS
ORIGINATED OR ACQUIRED IN ACCORDANCE WITH UNDERWRITING STANDARDS SIMILAR TO THE
UNDERWRITING CRITERIA PURSUANT TO WHICH THE MORTGAGE LOANS WERE ORIGINATED OR
ACQUIRED.
It also should be noted that if the residential real estate market should
experience a decline in property values, the actual rates of delinquency and
foreclosure could be higher than those previously experienced by TIMC. In
addition, adverse economic conditions may affect the timely payment by
mortgagors of scheduled payments of principal and interest on the Mortgage
Loans and, accordingly, the actual rates of delinquency, bankruptcy and
foreclosure with respect to the Mortgage Pool. See "The Seller--Loan
Delinquency, Forbearance, Foreclosure, Bankruptcy and REO Property Status" and
"--REO Property Liquidation Experience" herein for important information
regarding the delinquency, forbearance, foreclosure, bankruptcy and REO
property status and loss experience of mortgage loans previously originated by
the Seller under substantially the same underwriting criteria pursuant to which
the Mortgage Loans were originated or acquired.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The servicing fee (the "Servicing Fee") for each Mortgage Loan is payable
out of the interest payments on such Mortgage Loan. The Servicing Fee in
respect of each Mortgage Loan will be payable at a rate (the "Servicing Fee
Rate") equal to 0.500% per annum on the outstanding principal balance of each
Mortgage Loan. The Servicing Fees consist of (a) servicing compensation payable
to the Master Servicer in respect of its master servicing activities, (b)
subservicing and other related compensation payable to any subservicer
(including such compensation paid to the Master Servicer as the direct servicer
of a Mortgage Loan for which there is no subservicer) and (c) the fees payable
to the Trustee. The Master Servicer is entitled to retain as additional
servicing compensation any assumption and reconveyance fees, to the extent
collected from mortgagors, and any interest or other income earned on funds
held in the Custodial Account or the Certificate Account. It is not anticipated
that the Master Servicer will enter into any subservicing arrangements with
respect to the Mortgage Loans. However, the Master Servicer intends to enter
into an arrangement with a newly-formed affiliate of DLJMC under which such
affiliate will assist the Master Servicer in collection and loss mitigation
activities with respect to those Mortgage Loans that become delinquent. The
Master Servicer will pay the fee charged by such entity in connection
therewith. The Master Servicer is obligated to pay certain ongoing expenses
associated with the Trust Fund and incurred by the Master Servicer in
connection with its responsibilities under the Pooling and Servicing Agreement.
See "Servicing of Loans--Servicing Compensation and Payment of Expenses" in the
Prospectus for information regarding other possible compensation to the Master
Servicer and subservicers and for information regarding expenses payable by the
Master Servicer.
VOTING RIGHTS
Certain actions specified in the Prospectus that may be taken by holders
of Certificates evidencing a specified percentage of all undivided interests in
the Trust Fund may be taken by holders of Certificates entitled in the
aggregate to such percentage of the Voting Rights. 95% of all Voting Rights
will be allocated among all holders of the Certificates (other than the
Variable Strip Certificates, the Class SB Certificates and the Class R
Certificates) in proportion to their then outstanding Certificate Principal
Balances, 2%, 2%, and 1% of all Voting Rights will be allocated among holders
of the Variable Strip Certificates, the Class SB Certificates and the Class R
Certificates, respectively, in proportion to the Percentage Interests (as
defined in the Prospectus) evidenced by their respective Certificates. The
Pooling and Servicing Agreement will be subject to amendment without the
consent of the holders of the Residual Certificates in certain circumstances.
EVENTS OF DEFAULT AND TERMINATION EVENT
Events of default ("Events of Default") under the Pooling and Servicing
Agreement will consist of (i) any failure by the Master Servicer to distribute
or cause to be distributed to Certificateholders any required payment which
continues unremedied for five 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
evidencing not less than 25% of the Voting Rights; (ii) any failure by the
Master Servicer duly to observe or perform in any material respect any of its
other covenants or agreements in the Pooling and Servicing
S-68
Agreement which continues unremedied for thirty 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 evidencing not less than 25% of the Voting Rights; (iii) certain
events of 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;
and (iv) any failure of the Master Servicer to make any Advance as required
which is not remedied one business day prior to the related Distribution Date.
A termination event ("Termination Event") under the Pooling and Servicing
Agreement will consist of a determination by the Trustee on the Determination
Date in March of any year, commencing in March 1997 and ending in March 2006,
that (a) if such Determination Date occurs in or before March 2001, the Total
Expected Losses (as defined below) on such Determination Date is greater than
50% of the Initial Loss Coverage Amount (as defined below) and (b) if such
Determination Date occurs after March 2001 and in or before March 2006, the
Total Expected Losses on such Determination Date is greater than 75% of the
Initial Loss Coverage Amount.
On any Determination Date, "Total Expected Losses" will equal the sum of
(a) all Realized Losses previously allocated through Subordination and (b) all
Prospective Losses (as defined below) as of such Determination Date.
"Prospective Losses," as of any Determination Date, will be an amount equal to
the sum of (i) the product of (x) the aggregate Stated Principal Balance of the
Mortgage Loans that are 31 days to 60 days delinquent, (y) 25% and (z) the Loss
Severity Percentage (as defined below), (ii) the product of (x) the aggregate
Stated Principal Balance of the Mortgage Loans that are 61 days to 90 days
delinquent, (y) 50% and (z) the Loss Severity Percentage and (iii) the product
of (x) the aggregate Stated Principal Balance of the Mortgage Loans that are 91
days or more delinquent plus the aggregate Stated Principal Balance of all REO
Properties, if any, and (y) the Loss Severity Percentage. For purposes of
calculating Prospective Losses, Mortgage Loans in foreclosure will be
categorized based on their respective number of days of delinquency. The
"Initial Loss Coverage Amount" will equal the sum of the aggregate initial
Certificate Principal Balance of the Class B Certificates and 2.500% of the
aggregate Certificate Principal Balance of all of the Certificates and the
"Loss Severity Percentage" will be equal to 2.500%.
RIGHTS UPON EVENT OF DEFAULT OR TERMINATION EVENT
So long as an Event of Default under the Pooling and Servicing Agreement
as described in clauses (i), (ii) and (iii) of the third preceding paragraph
remains unremedied, the Depositor or the Trustee may, and at the direction of
holders of Certificates evidencing not less than 51% of the Voting Rights
shall, by notice in writing to the Master Servicer terminate all of the rights
and obligations of the Master Servicer under the Pooling and Servicing
Agreement and in and to the Trust Fund. If an Event of Default under the
Pooling and Servicing Agreement as described in clause (iv) of the third
preceding paragraph shall occur, the Trustee will, by notice to the Master
Servicer and the Depositor, terminate all of the rights and obligations of the
Master Servicer under the Pooling and Servicing Agreement and in and to the
Trust Fund; provided, however, that if the Trustee determines that the failure
by the Master Servicer to make any required Advance was due to circumstances
beyond its control and the required Advance was otherwise made, the Trustee
shall not terminate the Master Servicer. If a Termination Event under the
Pooling and Servicing Agreement as described in the second preceding paragraph
shall occur, the Trustee will give notice to the Master Servicer and the
Certificateholders of such Termination Event within 5 days and, upon the
direction of holders of Certificates entitled to at least 51% of the Voting
Rights received within 90 days of such notice, the Trustee shall, by notice to
the Master Servicer and the Depositor, terminate all of the rights and
obligations of the Master Servicer under the Pooling and Servicing Agreement
and in and to the Trust Fund. Upon receipt by the Master Servicer of any such
written notice, all authority and power of the Master Servicer under the
Pooling and Servicing Agreement will pass to and be vested in the Trustee, and
the Trustee will be authorized and empowered to execute and deliver, on behalf
of the Master Servicer, as attorney-in-fact, or otherwise, any and all
documents and other instruments, and to do or accomplish all other acts or
things necessary or appropriate to effect the purposes of such termination.
Upon receipt by the Master Servicer of notice of termination, the Trustee will
succeed to all the responsibilities, duties and liabilities of the Master
Servicer under the Pooling and Servicing Agreement and will be entitled to
similar compensation arrangements. In the event that the Trustee is unwilling,
it may, or if it is unable or if the holders of Certificates evidencing not
less than 51% of the Voting Rights request in writing, it shall, 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
S-69
to the Master Servicer under the Pooling and Servicing Agreement. Pending such
appointment, the Trustee is obligated to act in such capacity. The Trustee and
such successor may agree upon the servicing compensation to be paid, which in no
event may be greater than the compensation to the Master Servicer under the
Pooling and Servicing Agreement. In addition, holders of Certificates evidencing
at least 66% of the Voting Rights of Certificates affected by an Event of
Default may waive such Event of Default; provided, however, that (a) an Event of
Default with respect to the Master Servicer's obligation to make Advances may be
waived only by all of the holders of Certificates affected by such Event of
Default and (b) no such waiver is permitted that would materially adversely
affect any non-consenting Certificateholder. See "The Pooling and Servicing
Agreements--Rights Upon Event of Default" in the Prospectus.
LIMITATION ON RESIGNATION OF THE MASTER SERVICER
The Master Servicer may resign from its obligations and duties under the
Pooling and Servicing Agreement only if such resignation, and the appointment
of a successor, will not result in a downgrading of the ratings assigned to any
Class of Certificates, or upon a determination that its duties under the
Pooling and Servicing Agreement 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 responsibilities, liabilities,
obligations and duties under the Pooling and Servicing Agreement. Any proposed
successor Master Servicer must be an established mortgage loan servicing
institution, must be reasonably acceptable to the Trustee, must be acceptable
to each Rating Agency for purposes of maintaining its then-current ratings of
the Certificates and must comply with any further requirements of a successor
Master Servicer under the Pooling and Servicing Agreement.
TERMINATION
The obligations created by the Pooling and Servicing Agreement will
terminate upon payment to the Certificateholders of all amounts held in the
Certificate Account and the Excess Proceeds Account required to be paid to the
Certificateholders pursuant to such Pooling and Servicing Agreement, following
the earlier of (i) the final payment or other liquidation of the last Mortgage
Loan remaining in the Trust Fund or the disposition of all property acquired
upon foreclosure of any such Mortgage Loan and (ii) the repurchase of all of
the assets of the Trust Fund by the Master Servicer when the aggregate
principal balance of the Mortgage Loans equals 5% or less of the aggregate
principal balance as of the Cut-off Date, pursuant to a provision of the
Agreement giving the Master Servicer the right to do so. Written notice of
termination of the Pooling and Servicing Agreement will be given to each
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at an office or agency appointed by the
Trustee which will be specified in the notice of termination.
Any such repurchase of Mortgage Loans and property acquired in respect of
the Mortgage Loans shall be made at a price equal to the sum of (a) 100% of the
unpaid principal balance of each outstanding Mortgage Loan (net of unreimbursed
advances attributable to principal) as of the day of such repurchase plus
accrued interest thereon at the Net Mortgage Rate to the first day of the month
of such repurchase, plus (b) the appraised value of any property acquired in
respect of any defaulted Mortgage Loan (but not more than the unpaid principal
balance of that Mortgage Loan together with accrued interest at the applicable
Net Mortgage Rate to the first day of the month of such purchase) less the good
faith estimate of the Master Servicer of liquidation expenses to be incurred in
connection with its disposal thereof. The exercise of the right to purchase the
assets of the Trust Fund as set forth in clause (ii) of the preceding paragraph
will effect early retirement of the Certificates.
THE TRUSTEE
Bankers Trust Company will be the Trustee under the Pooling and Servicing
Agreement. The Depositor and the Seller may maintain other banking
relationships in the ordinary course of business with the Trustee. Offered
Certificates may be surrendered at the Corporate Trust Office of the Trustee
located at 4 Albany Street, Second Floor, New York, New York 10006, or at such
other addresses as the Trustee may designate from time to time by notice to the
Certificateholders, the Depositor and the Master Servicer.
The Trustee is eligible to serve as such under the Pooling and Servicing
Agreement only if it is a corporation or banking association organized and
doing business under the laws of the United States or any state
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thereof, authorized under such laws to exercise corporate trust powers and
subject to supervision or examination by federal or state authority and has
combined capital and surplus of at least $50,000,000.
The Trustee may, upon written notice to the Master Servicer, the
Depositor and all Certificateholders, resign at any time, in which event the
Master Servicer will be obligated to appoint a successor Trustee. If no
successor Trustee has been appointed and has accepted appointment within 60
days after giving such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for appointment of a successor
Trustee. Any such successor Trustee must be approved by Moody's and DCR. The
Trustee may also be removed at any time (i) by the Master Servicer, if the
Trustee ceases to be eligible to continue as such as described above or if the
Trustee becomes insolvent or (ii) by holders of Certificates evidencing at
least 51% of the Voting Rights. Any removal or resignation of the Trustee and
appointment of a successor Trustee as described above will not become effective
until acceptance of appointment by the successor Trustee.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Thacher Proffitt & Wood,
counsel to the Depositor, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the Pooling and Servicing
Agreement, for federal income tax purposes, the Trust Fund will qualify as a
REMIC within the meaning of Sections 860A through 860G of the Internal Revenue
Code of 1986 (the "Code").
For federal income tax purposes, the Senior Certificates, the Class B
Certificates and the Class SB Certificates will be "regular interests" in the
REMIC and the Class R Certificates will be the sole Class of "residual
interests" in the REMIC. The Senior Certificates, the Class B Certificates and
the Class SB Certificates generally will be treated as debt obligations of the
Trust Fund for federal income tax purposes.
For federal income tax reporting purposes, the Class A-1 Certificates,
the Class A-2 Certificates, the Class A-3 Certificates and the Class B-1
Certificates will not, and the Class SA Certificates, the Class B-2
Certificates and the Class B-3 Certificates will, be treated as having been
issued with original issue discount. The prepayment assumption that will be
used in determining the rate of accrual of original issue discount, market
discount and amortizable premium, if any, for federal income tax purposes will
be that subsequent to the date of any determination the Mortgage Loans will
prepay at a CPR percentage equal to 18%. No representation is made that the
Mortgage Loans will prepay at that rate or at any other rate. See "Certain
Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount," "--Market Discount" and "--Premium" in
the Prospectus.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificate issued with original issue discount, in particular the Variable
Strip Certificates, the amount of original issue discount allocable to such
period will be zero and the holder of such a Certificate will be permitted to
offset such negative amount only against future original issue discount, if
any, attributable to such Certificate. Although uncertain, a Certificateholder
may be permitted to deduct a loss to the extent that his or her respective
remaining basis in such Certificate exceeds the maximum amount of future
payments to which such Certificateholder is entitled, assuming no further
prepayments of the Mortgage Loans. Although the matter is not free from doubt,
any such loss might be treated as a capital loss.
The OID Regulations appear to permit in some circumstances the holder of
a debt instrument to recognize original issue discount under a method that
differs from that used by the issuer. Accordingly, it is possible that the
holder of an Offered Certificate may be able to select a method for recognizing
original issue discount that differs from that used by the Trust Fund in
preparing reports to the Certificateholders and the IRS. Prospective purchasers
of the Offered Certificates are advised to consult their tax advisors
concerning the tax treatment of such Certificates in this regard.
Certain Classes of Certificates may be treated as having been issued with
a premium. Certificateholders may elect to amortize such premium under a
constant yield method in which case such amortizable premium will generally be
allocated among the interest payments on such Certificates and will be applied
as an offset against such interest payments. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Premium"
in the Prospectus.
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The Offered Certificates will be treated as "qualifying real property
loans" under Section 593(d) of the Code, assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(5)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Offered Certificates will be
treated as "interest on obligations secured by mortgages on real property"
under Section 856(c)(3)(B) of the Code generally to the extent that such
Offered Certificates are treated as "real estate assets" under Section
856(c)(5)(A) of the Code. Moreover, the Offered Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3) of the Code. See
"Certain Federal Income Tax Consequences--REMICs--Characterization of
Investment in REMIC Certificates" in the Prospectus.
To the extent permitted by then applicable law, any "prohibited
transactions tax," "contributions tax," tax on "net income from foreclosure
property" or state or local income or franchise tax that may be imposed on the
Trust Fund will be borne by the Master Servicer or Trustee in either case out
of its own funds, provided that the Master Servicer or the Trustee, as the case
may be, has sufficient assets to do so, and provided further that such tax
arises out of a breach of the Master Servicer's or the Trustee's obligations,
as the case may be, under the Pooling and Servicing Agreement and in respect of
compliance with then applicable law. Any such tax not borne by the Master
Servicer or the Trustee will be payable out of the Trust Fund, which may reduce
the amounts otherwise payable to holders of the Offered Certificates, to the
extent any such tax exceeds amounts otherwise payable to holders of the
Certificates not offered hereby. See "Certain Federal Income Tax Consequences--
REMICs--Prohibited Transactions Tax and Other Taxes" in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates" in the
Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement (the "Underwriting Agreement") between the Depositor and Donaldson,
Lufkin & Jenrette Securities Corporation (the "Underwriter"), an affiliate of
the Depositor, the Depositor has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Depositor, the Offered
Certificates.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Offered Certificates is
subject to, among other things, the receipt of certain legal opinions and to
the conditions, among others, that no stop order suspending the effectiveness
of the Depositor's Registration Statement shall be in effect, and that no
proceedings for such purpose shall be pending before or threatened by the
Securities and Exchange Commission.
The distribution of the Offered Certificates by the Underwriter will be
effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined, in each case, at the time of
sale. The proceeds to the Depositor from the sale of the Offered Certificates
will be approximately $35,139,161.03 plus accrued interest at the weighted
average of the Net Mortgage Rates as of the Cut-off Date but before deducting
expenses payable by the Depositor. The Underwriter may effect such transactions
by selling its Certificates to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriter for whom they act as agent. In connection with the sale of
the Offered Certificates, the Underwriter may be deemed to have received
compensation from the Depositor in the form of an underwriting discount. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters and
any profit on the resale of the Offered Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter, and under limited circumstances the Underwriter will indemnify the
Depositor, against certain civil liabilities under the Securities Act of 1933,
or contribute to payments required to be made in respect thereof.
See "The Seller" for certain information regarding the relationship
between certain affiliates of the Underwriter and the Seller.
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There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue or will
provide investors with a sufficient level of liquidity. The primary source of
information available to investors concerning the Offered Certificates will be
the monthly statements discussed in the Prospectus under "The Pooling and
Servicing Agreements--Reports to Certificateholders," which will include
information as to the outstanding principal balance of the Offered Certificates
and the status of the applicable form of credit enhancement. There can be no
assurance that any additional information regarding the Offered Certificates
will be available through any other source. In addition, the Depositor is not
aware of any source through which price information about the Offered
Certificates will be generally available on an ongoing basis. The limited
nature of such information regarding the Offered Certificates may adversely
affect the liquidity of the Offered Certificates, even if a secondary market
for the Offered Certificates becomes available.
USE OF PROCEEDS
The Depositor will apply the net proceeds from the sale of the Offered
Certificates against the purchase price of the Mortgage Loans.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon
for the Depositor and for the Underwriter by Thacher Proffitt & Wood, New York,
New York.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Class A Certificates, the Principal Only Certificates and the Variable Strip
Certificates be rated "Aaa" by Moody's Investors Service, Inc. ("Moody's") and
"AAA" by Duff & Phelps Credit Rating Co. ("DCR"), the Class B-1 Certificates be
rated "Aa3" by Moody's and "AA" by DCR, the Class B-2 Certificates be rated
"A3" by Moody's and "A+" by DCR and the Class B-3 Certificates be rated "Baa3"
by Moody's and "BBB" by DCR.
The ratings assigned by Moody's to mortgage pass-through certificates
address the likelihood of the receipt by certificateholders of all
distributions on the underlying mortgage loans to which such certificateholders
are entitled. Ratings by Moody's address the structural, legal and
issuer-related aspects associated with the certificates, including the nature
and quality of the underlying mortgage loans. Such ratings 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. With respect to the Variable Strip Certificates, the ratings
address only the likelihood of receipt by the holders of the Variable Strip
Certificates of distributions thereon in the amounts calculated as described
herein and does not address the possibility that such Certificateholders might
suffer a lower than anticipated yield or the possibility that investors in the
Variable Strip Certificates may fail to fully recoup their initial investment.
The ratings assigned by DCR to mortgage pass-through certificates address
the likelihood of the receipt by certificateholders of all distributions to
which they are entitled under the transaction structure. DCR's ratings reflect
its analysis of the riskiness of the mortgage loans and its analysis of the
structure of the transaction as set forth in the operative documents. DCR's
ratings do not address the effect on the certificates' yield attributable to
prepayments or recoveries on the underlying mortgages. Further, in the case of
the Variable Strip Certificates, the rating does not address whether investors
will recoup their initial investment.
The Depositor has not requested ratings on the Offered Certificates by
any rating agency other than Moody's and DCR. However, there can be no
assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what ratings would be assigned by such other
rating agency. Ratings on the Offered Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Offered
Certificates by Moody's and DCR.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
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LEGAL INVESTMENT
The Offered Certificates (other than the Class B-2 Certificates and the
Class B-3 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 at least the second highest rating category by
Moody's or DCR and, as such, are legal investments for certain entities to the
extent provided in SMMEA. SMMEA provided that states could override its
provisions on legal investment and restrict or condition investment in mortgage
related securities by taking statutory action on or prior to October 3, 1991.
Certain states have enacted legislation which overrides the preemption
provisions of SMMEA. The Class B Certificates will not constitute "mortgage
related securities" for purposes of SMMEA.
The Federal Financial Institutions Examination Council issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions (to the extent adopted by the respective federal
regulators) setting forth guidelines for and significant restrictions on
investments in "high-risk mortgage securities." The Policy Statement has been
adopted by the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Comptroller of the Currency, the Office of
Thrift Supervision and, in part, by the National Credit Union Administration
(the "NCUA"). In addition, the NCUA has issued regulations governing federal
credit union investments which prohibit investment in certain specified types
of securities. The NCUA has indicated that its regulations will take precedence
over the Policy Statement. Similar policy statements and regulations have been
issued by other regulators having jurisdiction over depository institutions.
The Depositor makes no representations regarding the application of the Policy
Statement, or of such similar statements and regulations, to any Class of
Offered Certificates or the treatment of the Offered Certificates thereunder.
The Depositor makes no representations as to the proper characterization
of any Class of Offered Certificates for legal investment or other purposes, or
as to the ability of particular investors to purchase any Class of Offered
Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of the Offered Certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent any Class of the Offered Certificates,
and in particular the Class B Certificates, constitutes a legal investment or
is subject to investment, capital or other restrictions.
See "Legal Investment" in the Prospectus.
ERISA CONSIDERATIONS
The U.S. Department of Labor has granted to the Underwriter an individual
exemption (Prohibited Transaction Exemption 90-83) which generally exempts from
the application of certain of the prohibited transaction provisions of Section
406 of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") and the excise taxes imposed by Section 4975(a) and (b) of the Code
and 502(i) of ERISA, transactions relating to the purchase, sale and holding by
employee benefit plans and other persons subject to ERISA and the Code
("Plans") of pass-through certificates underwritten by the Underwriter,
provided that certain conditions are satisfied. In addition, other exemptions
may possibly apply to a Plan's investment in Certificates. Because the Class
A-2 Certificates, and the Class B Certificates will not qualify for the
foregoing prohibited transaction exemption (or any similar exemption that might
be available), transfers of such Certificates to any Plan as described above,
to a trustee or other Person acting on behalf of any Plan, or to any other
person who is using "plan assets" of any Plan to effect such acquisition
(including any insurance company using funds in its general or separate
accounts that may constitute "plan assets"), will not be registered unless the
transferee provides an opinion of counsel satisfactory to the Master Servicer,
the Depositor and the Trustee that the purchase of any such Certificate is
permissible under applicable law and will not subject the Master Servicer, the
Depositor or the Trustee to any obligation in addition to those undertaken in
the Pooling and Servicing Agreement. In the case of any transfer of the
foregoing Certificates to an insurance company, in lieu of such opinion of
counsel, the transferee may provide a certification substantially to the effect
that the source of funds used to purchase such Certificates is an "insurance
company general account" (as such term is defined in the Prohibited Transaction
Class Exemption 95-60 ("PTCE 95-60") issued by the United States Department of
Labor) and that there is no Plan with respect to which the amount of such
general account's reserves and liabilities for contracts held by or on behalf
of such Plan and all other Plans maintained by the same
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employer (or any "affiliate" thereof, as defined in PTCE 95-60), or by the same
employee organization, exceed 10% of the total of all reserves and liabilities
of such general account (as determined under PTCE 95-60) as of the date of
acquisition of such Certificates. See "ERISA Considerations" in the Prospectus.
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PROSPECTUS
MARCH 27, 1995
DLJ MORTGAGE ACCEPTANCE CORP.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
This Prospectus relates to Mortgage Pass-Through Certificates (the
"Certificates") which may be sold from time to time under this Prospectus and
related Prospectus Supplement in one or more series (each a "Series") by DLJ
Mortgage Acceptance Corp. (the "Depositor"). Capitalized terms not otherwise
defined herein have the meanings specified in the Glossary attached hereto.
Each Certificate of a Series will evidence a beneficial ownership
interest in assets deposited into a trust (a "Trust Fund") by the Depositor
pursuant to a Pooling and Servicing Agreement executed by the Depositor, the
Trustee and the Master Servicer for such Series specified in the related
Prospectus Supplement. The Trust Fund will consist of Mortgage Assets, which may
include Mortgage Loans or participation interests therein, Manufactured Home
Loans or participation interests therein, Agency Securities, Private
Mortgage-Backed Securities or any combination of the foregoing and other assets,
including any insurance policies, reserve funds or other credit supports
specified in the related Prospectus Supplement. Manufactured Home Loans and the
Mortgage Loans in the Trust Fund for a Series will have been originated by
various financial institutions and other entities engaged generally in the
business of originating and/or servicing housing loans. Some of the Mortgage
Loans or Manufactured Home Loans may have been originated by the Depositor or
any of its affiliates. The Mortgage Loans and the Manufactured Home Loans may
include (without limitation) fixed rate or adjustable rate Conventional Loans,
FHA Loans or VA Loans and may provide for graduated equity, graduated payment,
"buy-down" or other payment features, and may call for payments from the
obligors other than monthly, as specified in the related Prospectus Supplement,
Mortgage Loans underlying or comprising the Mortgage Assets will be secured by
property consisting of single family (one-to-four family) attached or detached
residential housing or multifamily residential rental properties or
cooperatively owned properties consisting of five or more attached or detached
dwelling units. Mortgage Loans that are Cooperative Loans will be secured by
assignments of shares and a proprietary lease or occupancy agreement on a
cooperative apartment. Manufactured Home Loans underlying or comprising the
Mortgage Assets will be secured by property consisting of a Manufactured Home.
See "THE TRUST FUNDS" herein. Manufactured Home Loans and the Mortgage Loans (or
participation interests therein) will be serviced by various servicers under the
supervision of the Master Servicer or by the Master Servicer directly as
specified in the related Prospectus Supplement. The Master Servicer's and any
Servicer's obligations will be limited to its contractual, supervisory and/or
servicing obligations and such other obligations as are specified in the related
Prospectus Supplement. See "SERVICING OF LOANS" herein.
Each Series of Certificates will consist of one or more Classes, and any
Class may include subclasses. If a Series includes multiple Classes, such
Classes may vary with respect to the amount, percentage and timing of
distributions of principal, interest or both and one or more Classes may be
subordinated to other Classes with respect to distributions of principal,
interest or both as described herein and in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, the Mortgage Assets held
under the Pooling and Servicing Agreement may be divided into one or more Asset
Groups and the Certificates of each separate Class will evidence beneficial
ownership of each corresponding Asset Group. See "DESCRIPTION OF THE
CERTIFICATES" herein.
Distribution of principal and interest of the Certificates of each Series
will be made on each Distribution Date for a Series. The rate of reduction of
the aggregate principal balance of each Class of a Series will depend
principally upon the rate of payment (including prepayments) with respect to the
Loans comprising or underlying the Mortgage Assets. A rate of prepayment lower
or higher than anticipated may affect yield on Certificates of a Series in the
manner described herein and in the related Prospectus Supplement. Under certain
limited circumstances described herein and in the related Prospectus Supplement,
the Mortgage Assets may be purchased by the entity specified in the related
Prospectus Supplement and the related Trust Fund terminated prior to the
maturity of the Mortgage Assets or the Final Scheduled Distribution Date of the
Certificates of the related Series. If so specified in the related Prospectus
Supplement, Certificates of a Series may be subject to special distributions in
reduction of principal balance under certain circumstances. See "DESCRIPTION OF
THE CERTIFICATES" and "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" herein.
The Certificates evidence an interest in the related Trust Fund only, and
are not guaranteed by any governmental agency, or by the Depositor, the Trustee,
the Master Servicer, or by any of their respective affiliates or, unless
otherwise specified in the related Prospectus Supplement, by any other person or
entity. The Depositor's only obligations with respect to any Series will be
pursuant to certain representations and warranties set forth in the related
Pooling and Servicing Agreement as described herein or in the related Prospectus
Supplement. See "THE POOLING AND SERVICING AGREEMENTS" herein.
If specified in the related Prospectus Supplement, an election may be
made to treat the Trust Fund for a Series as a "Real Estate Mortgage Investment
Conduit" (a "REMIC") for federal income tax purposes. See "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS" herein.
Certificates of a Series offered hereby and by the related Prospectus
Supplement may be made through one or more different methods, including
offerings through Donaldson, Lufkin & Jenrette Securities Corporation, an
affiliate of the Depositor, as more fully described herein and in the related
Prospectus Supplement. See "PLAN OF DISTRIBUTION" herein.
The Certificates are offered when, as and if delivered to and accepted by
the Underwriters subject to prior sale, withdrawal or modification of the offer
without notice, the approval of counsel and other conditions. Retain this
Prospectus for future reference. This Prospectus may not be used to consummate
sales of the securities offered hereby unless accompanied by a Prospectus
Supplement.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to each Series of Certificates will,
among other things, set forth with respect to such Series: (a) the aggregate
initial principal balances, the Pass-Through Rate or Certificate Rate (or method
for determining it in the case of Floating Interest Certificates) and authorized
denominations of each Class of such Series; (b) certain information concerning
the Trust Fund for such Series, including the principal amount, type and
characteristics of Mortgage Assets included in the Trust Fund on the date of
issue, and, if applicable, the amount of Reserve Funds, if any, for such Series;
(c) where Private Mortgage-Backed Securities are included in the Trust Fund,
information concerning the PMBS Issuer, the PMBS Trustee, the PMBS Servicer, if
any, under which Special Distributions of principal may be made or a Trust Fund
terminated prior to the Final Scheduled Distribution Date; (e) the Final
Scheduled Distribution Date of each Class of a Multiple Class Series; (f) the
method used to calculate the aggregate amount of principal to be distributed
with respect to the Certificates of such Series on each Distribution Date; (g)
the order of the application of principal distributions to the respective
Classes and the allocation of principal to be so applied; (h) the extent of
subordination of each Class of Subordinate Certificates, if any; (i) the
identity of each Class of Compound Interest Certificates, Floating Interest
Certificates, Principal Weighted Certificates, Interest Weighted Certificates,
Subordinate Certificates and Reduced Volatility Certificates ("RV Certificates")
included in such Series, if any; (j) the principal amount of each Class of a
Multiple Class Series that would be outstanding on specified Distribution Dates,
if the Loans underlying or comprising the Mortgage Assets for such Series were
prepaid at various assumed rates; (k) the Distribution Dates for the respective
Classes; (l) the Assumed Reinvestment Rate (if applicable); (m) the percentage
of Excess Cash Flow to be applied to distributions in reduction of principal
balance of Certificates of a Multiple Class Series; (n) additional information
with respect to any pool insurance policy, special hazard insurance policy,
bankruptcy bond or repurchase bond or other credit support, if any, relating to
the Series or the Mortgage Assets; and (o) the plan of distribution for such
Series.
ADDITIONAL INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus, which forms a part
of the Registration Statement, omits certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the Commission.
The Registration Statement and the exhibits thereto can be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at certain of its Regional Offices
located as follows: Chicago Regional Office, Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661; and New York Regional
Office, 75 Park Place, New York, New York 10007. Copies of such material can
also be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning the related Trust Fund are
required under the Pooling and Servicing Agreement to be forwarded to
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, such reports will not be examined and reported on by an independent
public accountant. See "THE POOLING AND SERVICING AGREEMENTS--Reports to
Certificateholders" herein.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by the Depositor on behalf of the Trust
Fund referred to in the accompanying Prospectus Supplement with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), after the date of such Prospectus
Supplement and prior to the termination of any offering of the Certificates
issued by such Trust Fund shall be deemed to be incorporated by reference in
this Prospectus and to be a part of this Prospectus from the date of the filing
of such documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein (or in the accompanying Prospectus Supplement) or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference modifies or replaces such statement. Any such statement so modified or
superseded shall not be deemed, except as modified or superseded, to constitute
a part of this Prospectus.
The Depositor on behalf of any Trust Fund will provide without charge to
each person to whom this Prospectus is delivered, on the written or oral request
of such person, a copy of any or all of the documents referred to above that
have been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to: DLJ Mortgage
Acceptance Corp., 140 Broadway, New York, New York 10005, Attention:
N. Dante LaRocca.
SUMMARY OF TERMS OF THE CERTIFICATES
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the Prospectus
Supplement with respect to the Series offered thereby and to the terms and
provisions of the related Pooling and Servicing Agreement (the "Pooling and
Servicing Agreement") executed by the Depositor, the master servicer (the
"Master Servicer") and the trustee (the "Trustee") as specified in the related
Prospectus Supplement. All capitalized terms not otherwise defined in this
Prospectus or the related Prospectus Supplement for a Series have the respective
meanings assigned to them in the "GLOSSARY."
SECURITIES OFFERED
The Mortgage Pass-Through Certificates (the "Certificates") are issuable
from time to time in separate Series pursuant to separate Pooling and Servicing
Agreements. Each Certificate of a Series will evidence a beneficial ownership
interest in the Trust Fund for such Series, or in an Asset Group specified in
the related Prospectus Supplement. The Certificates will be issuable in fully
registered form in the authorized minimum denominations and multiples thereof
specified in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement, the Certificates or certain classes of such Certificates
offered thereby may be available in book-entry form only.
The Certificates of a Series will evidence interests in the related Trust
Fund only and will not be guaranteed by any governmental agency, by the
Depositor, the Trustee, the Master Servicer or by any of their respective
affiliates, or unless otherwise specified in the related Prospectus Supplement,
by any other person or entity. See "SPECIAL CONSIDERATIONS" and "CREDIT SUPPORT"
herein.
Each series of Certificates will consist of one or more Classes. If a
Series consists of multiple Classes, the respective Classes may differ with
respect to the amount, percentage and timing of distributions of principal,
interest or both. Additionally, one or more Classes may consist of Subordinate
Certificates which are subordinated to other Classes of Certificates with
respect to the right to receive distributions of principal, interest, or both
under the circumstances and in such amounts as described herein and in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, any Class of Certificates of a Series will be offered
hereby and by such Prospectus Supplement only if rated by at least one Rating
Agency in one of its two highest rating categories. See "DESCRIPTION OF THE
CERTIFICATES--General," "CREDIT SUPPORT--Subordinated Certificates" and
"SPECIAL CONSIDERATIONS" herein.
DEPOSITOR
DLJ Mortgage Acceptance Corp., a Delaware corporation (the "Depositor"),
is a limited purpose corporation organized primarily for the purpose of
investing in the Mortgage Assets for each Trust Fund. The principal executive
offices of the Depositor are located at 140 Broadway, New York, New York and its
telephone number is (212) 504-3000. All of the outstanding capital stock of the
Depositor is owned by Donaldson, Lufkin & Jenrette, Inc. The Depositor's only
obligations with respect to the Certificates will be pursuant to certain
representations and warranties described herein under "THE POOLING AND SERVICING
AGREEMENTS." Neither the Depositor, its parent nor any affiliate of the
Depositor will guarantee the Certificates or the assets included in the Trust
Fund for a Series. See "SPECIAL CONSIDERATIONS" and "THE DEPOSITOR."
3
TRUSTEE
The Trustee with respect to a Series will be specified in the related
Prospectus Supplement. See "THE POOLING AND SERVICING AGREEMENTS" herein for a
description of the Trustee's rights and obligations.
INTEREST DISTRIBUTIONS
Interest Distributions on the Certificates of a Series will be made from
amounts available therefor in the related Certificate Account on each
Distribution Date at the applicable Pass-Through Rate or Certificate Rate
specified in (or, with respect to Floating Interest Certificates, determined in
the manner set forth in) the related Prospectus Supplement. The Pass-Through
Rate on Certificates of a Series may be variable and change with changes in the
mortgage rate or pass-through rates of the Mortgage Assets included in the
related Trust Fund and/or as prepayments occur with respect to such Mortgage
Assets.
Principal Weighted Certificates may not be entitled to receive any
interest distributions or may be entitled to receive only nominal interest
distributions.
Compound Interest Certificates will not receive distributions of interest
but interest accruing with respect to the principal balance of such compound
Interest Certificates will be added to such principal balance on each
Distribution Date until the Accrual Termination Date. Following the Accrual
Termination Date, interest distributions with respect to such Compound Interest
Certificates will be made on the basis of their Compound Value.
A Multiple Class Series may include one or more Classes of Floating
Interest Certificates. With respect to any such Class of Floating Interest
Certificates, the related Prospectus Supplement will set forth: (a) the initial
Floating Rate (or manner of determining the initial Floating Rate); (b) the
method by which the Floating Rate will be determined from time to time; (c) the
periodic intervals at which such determination will be made; and (d) the Maximum
Floating Rate and the Minimum Floating Rate, if any.
See "DESCRIPTION OF THE CERTIFICATES" and "YIELD, PREPAYMENT AND MATURITY
CONSIDERATIONS" herein.
PRINCIPAL DISTRIBUTIONS (INCLUDING PREPAYMENTS)
Principal distributions on the Certificates of a Series will be made from
amounts available therefor in the related Certificate Account on each
Distribution Date in an aggregate amount determined as specified in the related
Prospectus Supplement. Principal distributions will be allocated among the
respective Classes of a Series in the manner and in the priority set forth in
the related Prospectus Supplement.
Interest Weighted Certificates may not be entitled to any principal
distributions or may be entitled to receive only nominal principal
distributions.
To the extent specified in the related Prospectus Supplement,
Certificates of a Multiple Class Series having other than monthly Distribution
Dates may, if so specified in the related Prospectus Supplement, be subject to
Special Distributions of principal if, as a result of principal prepayments with
respect to the housing loans comprising or underlying the Mortgage Assets in the
related Trust Fund, low reinvestment yields or both, it is determined (based on
assumptions specified in the related Pooling and
4
Servicing Agreement) that the amount of cash anticipated to be available in the
Certificate Account for such Series on the next Distribution Date may be less
than the scheduled distributions to be made on such Distribution Date. See
"DESCRIPTION OF THE CERTIFICATES" and "YIELD, PREPAYMENT AND MATURITY
CONSIDERATIONS" herein.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date for each Class of a Series is the
date after which no Certificates of such Class will remain outstanding, assuming
timely payments or distributions are made on the Mortgage Assets in the related
Trust Fund in accordance with their terms. The Final Scheduled Distribution Date
of a Class may equal the maturity date of the Mortgage Asset in the related
Trust Fund which has the latest stated maturity or will be determined as
described herein and in the related Prospectus Supplement.
The actual maturity date of the Certificates of a Series will depend
primarily upon the level of prepayments with respect to the housing loans
comprising or underlying the Mortgage Assets in the related Trust Fund. The
actual maturity of any Certificate is likely to occur earlier and may occur
substantially earlier than its Final Scheduled Distribution Date as a result of
the application of prepayments to the reduction of the principal balances of the
Certificates. The rate of prepayments on the housing loans comprising or
underlying Mortgage Assets in the Trust Fund for a Series will depend on a
variety of factors, including certain characteristics of such housing loans and
the prevailing level of interest rates from time to time, as well as on a
variety of economic, demographic, tax, legal, social and other factors. No
assurance can be given as to the actual prepayment experience with respect to a
Series. See "SPECIAL CONSIDERATIONS" and "YIELD, PREPAYMENT AND MATURITY
CONSIDERATIONS" herein.
OPTIONAL TERMINATIONS
If so specified in the related Prospectus Supplement, the Depositor, the
Master Servicer, or such other entity that is specified in the related
Prospectus Supplement, may, at its option, cause an early termination of the
related Trust Fund by repurchasing all of the Mortgage Assets remaining in the
Trust Fund on or after a specified date, or on or after such time as the
aggregate unpaid principal balance of the Mortgage Assets is less than the
percentage specified in the related Prospectus Supplement. See "DESCRIPTION OF
THE CERTIFICATES--Optional Termination."
THE TRUST FUND
The Trust Fund for a Series will consist of Private Mortgage-Backed
Securities, Agency Securities, Mortgage Loans or participation interests
therein, Manufactured Home Loans or participation interests therein, or any
combination of the foregoing (the "Mortgage Assets"), together with certain
accounts, reserve funds, insurance policies and related agreements specified in
the related Prospectus Supplement. (Mortgage Loans and Manufactured Home Loans
are referred to herein as "Loans".) If so specified in the related Prospectus
Supplement, the Mortgage Assets may be divided into Asset Groups and the
Certificates of separate Classes will evidence beneficial interests of a
corresponding Asset Group. The Trust Fund for a Series will also include the
Collection Account, the Certificate Account, and may include certain policies of
insurance relating to the Mortgage Assets, and various credit supports, all as
specified in the related Prospectus. See "THE TRUST FUNDS--Collection Account
and Certificate
5
Account" and "CREDIT SUPPORT" and "DESCRIPTION OF MORTGAGE AND OTHER INSURANCE"
herein.
a. MORTGAGE ASSETS
The Mortgage Assets for a Series of Certificates may consist of any
combination of the following to the extent and as specified in the related
Prospectus Supplement:
(1) PRIVATE MORTGAGE-BACKED SECURITIES
Private Mortgage-Backed Securities may include (a) mortgage
participations or pass-through certificates representing beneficial interests in
certain Loans, (b) collateralized mortgage obligations secured by such Loans or
(c) pass-through certificates representing beneficial interests in Agency
Securities. Although individual Loans underlying a Private Mortgage-Backed
Security may be insured or guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and the Private Mortgage-Backed
Securities themselves will not be so insured or guaranteed. See "THE TRUST
FUNDS--Private Mortgage-Backed Securities." Unless otherwise specified in the
Prospectus Supplement relating to a Series of Certificates, payments on the
Private Mortgage-Backed Securities will be distributed directly to the Trustee
as registered owner of such Private Mortgage-Backed Securities. See "THE TRUST
FUNDS--Private Mortgage-Backed Securities" herein.
The related Prospectus Supplement for a Series will specify (i) the
aggregate approximate principal amount and type of any Private Mortgage-Backed
Securities to be included in the Trust Fund for such Series; (ii) certain
characteristics of the Loans which comprise the underlying assets for the
Private Mortgage-Backed Securities including (A) the payment features of such
Loans (i.e., whether they are fixed rate or adjustable rate and whether they
provide for fixed level payments, negative amortization, or other payment
features), (B) the approximate aggregate principal amount, if known, of the
underlying Loans which are insured or guaranteed by a governmental entity, (C)
the servicing fee or range of servicing fees with respect to the Loans, and (D)
the minimum and maximum stated maturities of the Loans at origination; (iii) the
maximum original term-to-stated maturity of the Private Mortgage-Backed
Securities; (iv) the weighted average term-to-stated maturity of the Private
Mortgage-Backed Securities; (v) the pass-through or certificate rate or ranges
thereof for the Private Mortgage-Backed Securities; (vi) the weighted average
pass-through or certificate rate of the Private Mortgage-Backed Securities;
(vii) the Issuer of the Private Mortgage-Backed Securities (the "PMBS Issuer"),
the Servicer of the Private Mortgage-Backed Securities (the "PMBS Servicer") and
the trustee of the Private Mortgage-Backed Securities (the "PMBS Trustee");
(viii) certain characteristics of credit support, if any, such as reserve funds,
insurance policies, letters of credit or guarantees, relating to the Loans
underlying the Private Mortgage-Backed Securities, or to such Private
Mortgage-Backed Securities themselves; (ix) the terms on which underlying Loans
for such Private Mortgage-Backed Securities may, or are required to, be
repurchased prior to stated maturity; and (x) the terms on which substitute
Loans may be delivered to replace those initially deposited with the PMBS
Trustee. See "THE TRUST FUNDS" herein.
(2) AGENCY SECURITIES
Mortgage Assets for a series may consist, in whole or part, of certain
assets (the "Agency Securities") of GNMA Certificates, FNMA Certificates, FHLMC
Certificates or a combination thereof. Any GNMA Certificates included in a Trust
Fund will be guaranteed as to full and timely payment of principal and interest
by GNMA, which guaranty is backed by the full faith and credit of the United
6
States. Any FHLMC Certificates included in the Trust Fund will be guaranteed as
to the timely payment of interest and ultimate collection (and if so specified
in the related Prospectus Supplement timely payment of principal) by FHLMC. Any
FNMA Certificates included in a Trust Fund will be guaranteed as to timely
payment of scheduled payments of principal and interest by FNMA. No FNMA or
FHLMC Certificates will be backed, directly or indirectly, by the full faith and
credit of the United States.
Each Agency Security will evidence an interest in a pool of mortgage
loans and/or cooperative loans, and/or in principal distributions and interest
distributions thereon. The Prospectus Supplement for each Series will specify
the aggregate approximate principal balance of GNMA, FNMA and FHLMC Certificates
included in a Trust Fund and will describe the principal characteristics of the
underlying mortgage loans or cooperative loans and any insurance, guaranty or
other credit support applicable to such loans, the Agency Securities or both. In
addition, the related Prospectus Supplement will describe the terms upon which
distributions will be made to the Trustee as holder of the Agency Securities.
The Agency Securities included in any Trust Fund will be registered in the name
of the Trustee or its nominee or in the case of book-entry Agency Securities in
the name of a financial intermediary with a Federal Reserve Bank or a clearing
corporation and will be held by the Trustee only for the benefit of the related
Series of Certificates.
CERTIFICATE ACCOUNT
All distributions on any Mortgage Certificates, and all payments
(including prepayments, liquidation proceeds and insurance proceeds) received
from the Servicer on any Mortgage Loans, included in the Pool for a Series will
be remitted to an account (the "Certificate Account"), and, together with any
amounts available pursuant to the terms of any applicable credit support and any
other amounts described in the related Supplement, will be available for
distribution on the Certificates of such Series as described in the related
Supplement. Such Certificate Account shall be an Eligible Account or Accounts
established and maintained by the Servicer for the benefit of the holders of a
Series of Certificates.
EARLY TERMINATION OF POOLS
The Servicer or, for a Series of REMIC Certificates, the holders of the
Residual Certificates of such Series or the REMIC Administrator may have the
option to repurchase the Mortgage Loans and/or Mortgage Certificates included in
the related Pool and thereby terminate the related Pooling Agreement. Any such
option will be exercisable at the times and upon satisfaction of the conditions
specified in the related Supplement.
SUBSTITUTION OF MORTGAGE LOANS AND/OR MORTGAGE CERTIFICATES
Substitution of Mortgage Loans and/or Mortgage Certificates will be
permitted for a period specified in the related Supplement following notice of
breaches of representations and warranties with respect to any original Mortgage
Loan or notice that the documentation with respect to any Mortgage Loan is
determined by the Trustee to be incomplete. Other circumstances under which
substitutions may be permitted will be described in the related Supplement.
(3) MORTGAGE LOANS
Mortgage Assets for a Series may consist, in whole or in part, of
Mortgage Loans or participation interests therein. Participation interests in
Mortgage Loans will be purchased pursuant to participation
7
agreements. See "THE TRUST FUNDS--General" herein. Payments on Mortgage Loans
will be collected by the Master Servicer (or by a Servicer), as specified in the
related Prospectus Supplement, and such payments (net of servicing fees and
certain other amounts) will be available to make distributions on the
Certificates of that Series. See "SERVICING OF LOANS" herein. Mortgage Loans
may, as specified in the related Prospectus Supplement, include Conventional
Loans, FHA Loans or VA Loans and may have various payment characteristics and
may include growing equity mortgage loans ("GEM Loans"), graduated payment
mortgage loans ("GPM Loans"), buy-down mortgage loans ("Buy-Down Loans"),
bi-weekly payment loans ("Bi-Weekly Loans") or Loans having balloon or other
special payment features. The Mortgage Loans may have fixed or adjustable
interest rates (Mortgage Loans having such adjustable rates hereinafter
sometimes referred to herein as "Adjustable Rate Mortgages," or "ARMs"). ARMs
will, as described in the related Prospectus Supplement, permit or require
periodic changes in the mortgage rate, and in the scheduled payments of
principal and interest due from the obligor on the related mortgage note. The
Mortgage Loans may include Mortgage Loans secured by mortgages, deeds of trust
or other security instruments creating a first lien on related Mortgaged
Properties. The Mortgage Loans may include Cooperative Loans secured by an
assignment by the borrower (the "tenant-stockholder") of a security interest in
shares issued by a private, non-profit, cooperative housing association (a
"Cooperative") and related proprietary lease or occupancy agreement on a
cooperative dwelling (the "Cooperative Dwelling"). The Mortgage Loans may also
include Condominium Loans secured by a Mortgage on the Condominium Unit,
together with such Condominium Unit's appurtenant interest in the common
elements. The Mortgaged Properties may consist of one-to four-family attached or
detached residential housing (including shares in a Cooperative and the related
proprietary lease or occupancy agreement) ("Single Family Property") or
multifamily residential rental property or cooperatively owned multifamily
property consisting of five or more dwelling units ("Multifamily Property").
Single Family Property may be owner occupied and may include vacation or second
homes or may consist in whole or in part of non-owner occupied investment
properties, as specified in the related Prospectus Supplement.
To the extent described herein or in the related Prospectus Supplement,
all Mortgaged Property will be covered by standard hazard insurance policies
(which may be a blanket policy) insuring against losses due to various causes,
including fire, lightning and windstorm. Mortgaged Property located in a
federally designated special hazard flood zone will be required to be covered by
flood insurance. With respect to a Cooperative Dwelling, the Cooperative is
responsible for maintaining standard hazard insurance on the real property owned
by the Cooperative, and standard hazard insurance on the Cooperative Dwelling
securing a Mortgage Loan will not generally be required. With respect to a
Condominium Unit, the Condominium Association is responsible for maintaining
standard hazard insurance insuring the entire Condominium Building (including
each individual Condominium Unit) and separate hazard insurance on the
Condominium Unit securing a Mortgage Loan will not generally be required.
Mortgage Loans that are Conventional Loans secured by Single Family Property
will be required to be covered by primary mortgage insurance policies to the
extent described herein or in the related Prospectus Supplement. See
"DESCRIPTION OF MORTGAGE AND OTHER INSURANCE" herein.
The related Prospectus Supplement will describe the principal
characteristics of the Mortgage Loans included in the Trust Fund, including,
without limitation, (a) the aggregate outstanding principal balance of the
Mortgage Loans as of the related Cut-off Date, (b) the geographical distribution
of the Mortgaged Properties by state or other specified geographical area, (c)
the weighted average original and remaining scheduled term-to-stated maturity of
the Mortgage Loans, (d) the relative percentages (by aggregate outstanding
principal balance) of Mortgage Loans that have fixed interest rates or are ARMs,
Buy-Down Loans, GEM Loans, Bi-Weekly Loans, GPM Loans or Mortgage Loans having
other special
8
payment characteristics, (e) the relative percentages of Mortgage Loans secured
by Cooperative Dwellings, (f) the relative percentages of Mortgage Loans that
are secured by Mortgaged Properties which are owner-occupied or are investment
properties or vacation and second homes, (g) the range of Loan-to-Value Ratios
for the Mortgage Loans, (h) the weighted average outstanding principal balance
of the Mortgage Loans as of the Cut-off Date, and (i) any primary or pool
insurance policies, guarantees or other credit support for such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, each Mortgage
Loan will have a 10-to-40 year term at origination and a Loan-to-Value Ratio at
origination not exceeding 95%. Unless otherwise described in the related
Prospectus Supplement, each Mortgage Loan that is a Conventional Loan secured by
a Single Family Property having a Loan-to-Value Ratio exceeding 80% will be
required to be covered by a primary mortgage insurance policy as described
herein or in the related Prospectus Supplement.
Mortgage Loans that constitute Mortgage Assets will be purchased by the
Depositor in the open market or in privately negotiated transactions, including
transactions with entities affiliated with the Depositor or with the Master
Servicer.
(4) MANUFACTURED HOME LOANS
Mortgage Assets may consist, in whole or in part, of manufactured housing
conditional sales contracts and installment loan agreements with respect to
Manufactured Homes (the "Manufactured Home Loans") or participation interests
therein. Unless otherwise stated in the Prospectus Supplement, participation
interests in Manufactured Home Loans will be purchased pursuant to a
participation agreement. See "THE TRUST FUNDS--General."
Each Manufactured Home Loan will be secured by a new or used Manufactured
Home. Manufactured Home Loans may be a Conventional Loan, FHA Loan or VA Loan.
Unless otherwise specified in the related Prospectus Supplement, Manufactured
Home Loans that are Conventional Loans will not be covered by primary mortgage
insurance policies. Each Manufactured Home which secures a Manufactured Home
Loan will be covered by a standard hazard insurance policy (which may be a
blanket policy) to the extent described therein or in the related Prospectus
Supplement insuring against hazard losses due to various causes, including fire,
lightning and windstorm. A Manufactured Home located in a federally designated
special hazard flood zone will be required to be covered by flood insurance. See
"DESCRIPTION OF MORTGAGE AND OTHER INSURANCE" herein.
Unless otherwise specified in a related Prospectus Supplement, each
Manufactured Home Loan will have a 3-to-25 year term at origination and a
Loan-to-Value Ratio at origination not in excess of 95%.
The Prospectus Supplement for each Series will describe the principal
characteristics of the Manufactured Home Loans included in the Trust Fund for
the related Series, including, without limitation, the (a) aggregate outstanding
principal balance of the Manufactured Home Loans, as of the related Cut-off
Date; (b) weighted average interest rate on the Manufactured Home Loans; (c)
weighted average term-to-maturity at origination; (d) weighted average remaining
scheduled term-to-maturity as of the Cut-off Date and the range of
terms-to-maturity; (e) respective percentages of Manufactured Home Loans
relating to new versus used Manufactured Homes; (f) average outstanding
principal balance of the Manufactured Home Loans as of the Cut-off Date; (g)
range of Loan-to-Value Ratios of the Manufactured Home Loans; (h) hazard
insurance required to be maintained with respect to each Manufactured Home; (i)
amounts, if any, and terms of any form of credit support to be provided with
respect to all or any
9
Manufactured Home Loan; and (j) geographical distribution of the Manufactured
Homes by state or other specified geographic region.
The Manufactured Home Loans which constitute Mortgage Assets will be
purchased by the Depositor in the open market or in privately negotiated
transactions, including transactions with entities affiliated with the
Depositor. None of the Manufactured Home Loans will have been originated by the
Depositor or any of its affiliates.
b. COLLECTION ACCOUNT AND CERTIFICATE ACCOUNT
Payments or distributions with respect to the Mortgage Assets for a
Series will initially be remitted for deposit in a Collection Account maintained
by the Master Servicer and then transferred to a Certificate Account to be
established with or in the name of the Trustee for such Series. The amounts
remitted may be net of servicing fees, Retained Interests and other amounts
specified in the related Prospectus Supplement. Amounts so deposited will be
used to make distributions on the Certificates of such Series on the applicable
Distribution Date. See "THE TRUST FUNDS--Collection Account and Certificate
Account."
c. DETERMINATION OF ASSET VALUE
With respect to a Series of Certificates as to which the Distribution
Dates are less frequent than monthly, each Mortgage Asset will be assigned an
Asset Value. The aggregate of the Asset Values of the Mortgage Assets included
in the Trust Fund for a Multiple Class Series will equal not less than the
initial aggregate principal balances of the Certificates of such Series. The
related Prospectus Supplement for a Multiple Class Series will summarize the
method or methods and related assumptions used to determine Asset Value for the
Mortgage Assets for the related Multiple Class Series. See "DESCRIPTION OF THE
CERTIFICATES--Valuation of Trust Assets."
d. GUARANTEED INVESTMENT CONTRACTS AND OTHER AGREEMENTS
The Depositor may obtain and deliver to the Trustee guaranteed investment
contracts or reinvestment agreements ("Guaranteed Investment Contracts")
pursuant to which moneys held in one or more of the funds and accounts
established for such Series will be invested at a specified rate which, if so
specified in the related Prospectus Supplement, may constitute the "Assumed
Reinvestment Rate" for the Series. With respect to any Multiple Class Series
which includes a Class of Floating Interest Certificates, the Depositor may
obtain and deliver to the Trustee an interest rate swap contract, interest rate
cap agreement or similar contract issued by a bank, insurance company, savings
bank or savings and loan association to provide limited protection against
interest rate risks. The principal terms of any such Guaranteed Investment
Contract or such other agreement, including, without limitation, provisions
relating to the timing, manner and amount of payments thereunder and provisions
relating to the termination thereof, together with information relating to the
issuer thereof, will be described in the related Prospectus Supplement.
CREDIT SUPPORT
Credit support in the form of reserve funds, subordination, insurance
policies, letters of credit or other types of credit support may be provided
with respect to the Mortgage Assets or with respect to one or more Classes of
Certificates of a Series. If the Mortgage Assets are divided into separate Asset
10
Groups, the beneficial ownership of which is evidenced by a separate Class or
Classes of a Series, credit support may be provided by a cross-support feature
which requires that distributions be made with respect to Certificates
evidencing beneficial ownership of one Asset Group prior to distributions to
Subordinate Certificates evidencing a beneficial ownership interest in another
Asset Group within the Trust Fund.
The type, characteristics and amount of credit support will be determined
based on the characteristics of the Loans underlying or comprising the Mortgage
Assets and other factors and will be established on the basis of requirements of
each Rating Agency rating the Certificates of such Series. The protection
against losses provided by such credit support will be limited. See "CREDIT
SUPPORT" and "SPECIAL CONSIDERATIONS" herein.
a. SUBORDINATE CERTIFICATES; SUBORDINATION RESERVE FUND
A Series of Certificates may include one or more Classes of Subordinate
Certificates. The rights of Holders of such Subordinate Certificates to receive
distributions on any Distribution Date will be subordinate in right and priority
to the rights of Holders of Senior Certificates of the Series, but only to the
extent described in the related Prospectus Supplement. If so specified in the
related Prospectus Supplement, subordination may apply only in the event of
certain types of losses not covered by other credit support, such as hazard
losses not covered by the standard hazard insurance policies, losses resulting
from the bankruptcy of a borrower due to application of provisions of the
Bankruptcy Code, or losses resulting from the denial of insurance coverage due
to fraud or misrepresentation in connection with the origination of a Loan.
Unless otherwise specified in the related Prospectus Supplement, such
subordination will be in lieu of providing insurance policies or other credit
support with respect to losses arising from such events.
A Subordination Reserve Fund may be established at the level specified in
the related Prospectus Supplement. The related Prospectus Supplement will also
set forth information concerning the amount of subordination of a Class or
Classes of Subordinate Certificates in a series, the circumstances in which such
subordination will be applicable, the manner, if any, in which the amount of
subordination will decrease over time, the manner of funding the related
Subordination Reserve Fund, if any, and the conditions under which amounts in
any Subordination Reserve Fund will be used to make distributions to Holders of
Senior Certificates or be released from the related Trust Fund. If cash flows
otherwise distributable to Holders of Subordinate Certificates evidencing a
beneficial ownership interest in an Asset Group will be used as credit support
for Senior Certificates evidencing a beneficial ownership interest in another
Asset Group within the Trust Fund, the related Prospectus Supplement will
specify the manner and conditions for applying such a cross-support feature. See
"CREDIT SUPPORT--Subordinate Certificates; Subordination Reserve Fund."
b. INSURANCE
If so specified in the related Prospectus Supplement, certain insurance
policies in addition to any primary mortgage insurance policies or standard
hazard insurance policies described above under "Mortgage Assets" will be
required to be maintained with respect to the Loans included in the Trust Fund
for a Series. Such insurance policies may include, but are not limited to, (i) a
pool insurance policy insuring against losses due to defaults or delinquencies
in payment, (ii) a special hazard insurance policy insuring against losses which
are not covered by the standard hazard insurance policies, (iii) bankruptcy
bonds or insurance policies insuring losses due to bankruptcy of a borrower and
application of certain provisions of the Bankruptcy Code and (iv) repurchase
bonds insuring the repurchase of Loans by the
11
originator of such Loan in the event of the loss of other insurance coverage due
to certain misrepresentations in the origination or sale of any such Loans or in
other circumstances specified in the related Prospectus Supplement. See "CREDIT
SUPPORT" and "DESCRIPTION OF MORTGAGE AND OTHER INSURANCE" herein. The
Prospectus Supplement for a Series will provide information concerning any such
insurance policies, including (a) the types of coverage provided by each, (b)
the amount of such coverage, (c) conditions to payment under each and (d)
certain information relating to the issuers of such insurance policies. To the
extent described in the related Prospectus Supplement, certain insurance
policies to be maintained with respect to the Loans may be terminated, reduced
or replaced following the occurrence of certain events affecting the authority
of creditworthiness of the insurer. Additionally, such insurance policies may be
terminated, reduced or replaced by the Master Servicer, provided that no rating
assigned to Certificates of the related Series offered hereby and by the related
Prospectus Supplement is adversely affected.
c. LETTER OF CREDIT
If so specified in the related Prospectus Supplement, credit support may
be provided by one or more letters of credit. A letter of credit may provide
limited protection against certain losses in addition to or in lieu of other
credit support, such as losses resulting from delinquent payments on the Loans
in the Trust Fund, losses from risks not covered by standard hazard insurance
policies, losses due to bankruptcy of a borrower and application of certain
provisions of the Bankruptcy Code, and losses due to denial of insurance
coverage due to misrepresentations made in connection with the origination or
sale of a Loan. The issuer of the letter of credit (the "L/C Bank") will be
obligated to honor demands with respect to such letter of credit, to the extent
of the amount available thereunder, to provide funds under the circumstances and
subject to such conditions as are specified in the related Prospectus
Supplement. The liability of the L/C Bank under its letter of credit will be
reduced by the amount of unreimbursed payments thereunder.
The maximum liability of an L/C Bank under its letter of credit will be
an amount equal to a percentage specified in the related Prospectus Supplement
of the initial aggregate outstanding principal balance of the Loans in the Trust
Fund or one or more Classes of Certificates of the related Series (the "L/C
Percentage"). The maximum amount available at any time to be paid under a letter
of credit will be determined in the manner specified therein and in the related
Prospectus Supplement.
d. CERTIFICATE GUARANTEE INSURANCE
If so specified in the related Prospectus Supplement, credit support for
a Series may be provided by an insurance policy (the "Certificate Guarantee
Insurance") issued by one or more insurance companies. Such Certificate
Guarantee Insurance may guarantee timely distributions of interest and full
distributions of principal on the basis of a schedule of principal distributions
set forth in or determined in the manner specified in the related Prospectus
Supplement.
e. RESERVE FUNDS
The Depositor may deposit in one or more reserve funds (collectively, the
"Reserve Funds") for any Series cash, Eligible Reserve Fund Investments, demand
notes or a combination thereof in the aggregate amount, if any, specified in the
related Prospectus Supplement. Any Reserve Funds for a Series may also be funded
over time through application of a specified amount of cash flow, to the extent
described in the related Prospectus Supplement. Such a Reserve Fund may be
established to increase the
12
likelihood of the timely distributions on the Certificates of such Series or to
reduce the likelihood of a Special Distribution with respect to any Multiple
Class Series. Reserve Funds may be established to provide protection against
certain losses in addition to or in lieu of other credit support, including,
without limitation, as losses resulting from delinquent payments on Loans,
losses from risks not covered by standard hazard insurance policies, losses due
to bankruptcy of a borrower and application of certain provisions of the
Bankruptcy Code, and losses due to denial of insurance coverage due to
misrepresentations made in connection with the origination of a Loan. Amounts on
deposit in the Reserve Funds for a Series, together with (unless otherwise
specified in the related Prospectus Supplement) the reinvestment income thereon,
will be applied for the purposes, in the manner and to the extent provided by
the related Prospectus Supplement.
On each Distribution Date for a Series, all amounts on deposit in any
Reserve Funds for the Series in excess of the amounts required to be maintained
therein by the related Pooling and Servicing Agreement and specified in the
related Prospectus Supplement may be released from the Reserve Funds and will
not be available for future distributions on the Certificates of such Series.
Additional information concerning any Reserve Funds, including whether
the Reserve Fund is a part of the Trust Fund, the circumstances under which
moneys therein will be applied to make distributions to Certificateholders, the
required balance to be maintained in such Reserve Funds, the manner in which
such required balance will decrease over time and the manner of funding the
Reserve Fund will be set forth in the related Prospectus Supplement. See "CREDIT
SUPPORT--Reserve Funds."
SERVICING OF LOANS
The Master Servicer identified in the related Prospectus Supplement will
service the Loans directly or administer and supervise the performance by
Servicers of their duties and responsibilities under separate servicing
agreements (the "Servicing Agreements") entered into between the Master Servicer
and such Servicers. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer and each Servicer must be approved by either
FNMA or FHLMC as a seller/servicer of Mortgage Loans and, in the case of FHA
Loans, approved by HUD as an FHA mortgagee. Each Servicer will be obligated
under its Servicing Agreement to perform customary servicing functions. Advances
with respect to delinquent payments of principal or interest on a Loan will be
made by the Master Servicer or the Servicers only to the extent described in the
related Prospectus Supplement. Such advances will be intended to provide
liquidity only and, unless otherwise specified in the related Prospectus
Supplement, will be reimbursable to the Master Servicer or the Servicer, as the
case may be, from scheduled payments of principal and interest, late
collections, or from the proceeds of liquidation of the related Loans, from
other recoveries relating to such Loans (including any insurance proceeds or
payments from other credit supports). Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer or the Servicers will be obligated to
repurchase Mortgage Loans for which insurance coverage has been denied on the
grounds of fraud or misrepresentation only to the extent specified in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Depositor may (i) obtain and assign to the Trustee an agreement
with an independent standby servicer acceptable to each Rating Agency rating
such Certificates, which will provide that such standby servicer will assume a
Servicer's or the Master Servicer's obligations in the event of a default by the
Servicer or Master Servicer or (ii) obtain a performance bond acceptable to each
Rating Agency rating such Certificates that will guarantee certain of the
Servicer's or Master Servicer's obligations. See "SERVICING OF LOANS."
13
FEDERAL INCOME TAX CONSIDERATIONS
If an election is made for treatment as a REMIC under the Internal
Revenue Code of 1986 (the "Code"), one or more Classes of Certificates will be
treated as REMIC "Regular Interests." The Holder of such a Regular Interest will
be treated as holding a debt obligation for federal income tax purposes and will
be required to report stated interest income on the accrual method.
Compound Interest Certificates will be, and certain other Classes of
Certificates constituting Regular Interests may be, issued with original issue
discount that is not de minimis. In such cases, the Certificateholder will be
required to include the original issue discount in gross income as it accrues,
which inclusion may occur prior to the receipt of cash attributable to such
income. If a Regular Interest Certificate is issued at a premium, the holder
thereof will be entitled to make an election to amortize such premium on a
constant yield method as an offset to interest income on such Certificate (and
not as a separate deduction item). Certificates constituting Regular Interests
will represent "qualifying real property loans" for mutual savings banks and
domestic building and loan associations," loans secured by an interest in real
property" for domestic building and loan associations and "real estate assets"
for real estate investment trusts to the extent that the underlying Loans
qualify for such treatment.
In the case of a REMIC election, a Class of Certificates may be treated
as REMIC "Residual Interests." Certificates classified as REMIC Residual
Interests will generally be treated as representing "qualifying real property
loans" for mutual savings banks and domestic building and loan associations,
"loans secured by an interest in real property" for domestic building and loan
associations and "real estate assets" for real estate investment trusts to the
same extent as REMIC Regular Interests.
The holder of a REMIC Residual Interest Certificate must include in
income its pro rata share of the REMIC's taxable income. Accordingly, in certain
circumstances, the holder of a REMIC Residual Interest might (i) have REMIC
taxable income or tax liability attributable to REMIC taxable income for a
particular period or periods in excess of cash distributions for such period or
periods or (ii) have an after-tax return on its investment that is less than the
after-tax return on comparable debt instruments or stripped bonds. In addition,
a portion (or, in some cases, all) of the income from a REMIC Residual Interest:
(i) except, in certain circumstances, with respect to a holder classified as a
thrift institution under the Code, may not be subject to offset by losses from
other activities, (ii) for a holder that is subject to tax under the Code on
unrelated business taxable income, may be treated as unrelated business taxable
income and (iii) for a foreign holder, may not qualify for exemption from
withholding under any treaty. Further, individual trust or estate holders are
subject to limitations on the deductibility of expenses of the REMIC.
If no REMIC election is made, the Trust Fund will be treated as a grantor
trust and will not be classified as an association taxable as a corporation for
federal income tax purposes. The treatment of a particular Series of
Certificates will depend on the characteristics of such Series of Certificates.
The holders of Certificates will either be treated as owners of undivided pro
rata interests in the underlying Loans ("Pass-Through Certificates"), or as
owners of stripped bonds or stripped coupons ("Stripped Certificates") under the
Code. All income with respect to a Stripped Certificate will be accounted for as
original issue discount and, unless otherwise specified in the related
Prospectus Supplement, will be reported by the Trustee on an accrual basis,
which may be prior to the receipt of cash associated with such income.
14
The holder of a Pass-Through Certificate must include in income its
allocable share of all interest and other income of the Trust and may, subject
to certain limitations for individual trust or estate Certificateholders, deduct
its allocable share of all expenses of the Trust. Pass-Through Certificates will
be considered to represent "qualifying real property loans" for mutual savings
banks and domestic building and loan associations, "loans secured by an interest
in real property" for domestic building and loan associations and "real estate
assets" for real estate investment trusts to the extent that the Loans qualify
for such treatment. Although there is no direct authority and the matter is not
free from doubt, Stripped Certificates should also qualify for such treatment to
the extent that the underlying loans qualify for such treatment. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS."
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or the Code should
carefully review with its own legal advisors whether the purchase or holding of
Certificates could give rise to a transaction prohibited or otherwise
impermissible under ERISA or the Code. See "ERISA CONSIDERATIONS."
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement,
Certificates of each Series offered by this Prospectus and such Prospectus
Supplement will constitute "mortgage related securities" under the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA") so long as they are rated by
at least one Rating Agency in one of its two highest categories and, as such,
will be legal investments for certain types of institutional investors to the
extent provided in SMMEA, subject, in any case, to any other regulations which
may govern investments by such institutional investors. See "LEGAL INVESTMENT."
USE OF PROCEEDS
The Depositor will use the net proceeds from the sale of each Series for
one or more of the following purposes: (i) to purchase the related Mortgage
Assets, (ii) to repay indebtedness which has been incurred to obtain funds to
acquire such Mortgage Assets, (iii) to establish any reserve funds described in
the related Prospectus Supplement and (iv) to pay costs of structuring,
guaranteeing and issuing such Certificates. If so specified in the related
Prospectus Supplement, the purchase of the Mortgage Assets for a Series may be
effected by an exchange of Certificates with the Depositor of such Mortgage
Assets. See "USE OF PROCEEDS."
RATINGS
Unless otherwise specified in the related Prospectus Supplement, it will
be a requirement for issuance of any Series that the Certificates offered by
this Prospectus and such Prospectus Supplement be rated by at least one Rating
Agency in one of its two highest applicable rating categories. The rating or
ratings applicable to Certificates of each Series offered hereby and by the
related Prospectus Supplement will be as set forth in the related Prospectus
Supplement. A securities rating should be evaluated independently of similar
ratings on different types of securities. A security rating does not address the
effect that the rate of prepayments on Loans comprising or underlying the
Mortgage Assets may have on the yield to investors in the Certificates. See
"SPECIAL CONSIDERATIONS."
15
SPECIAL CONSIDERATIONS
Investors should consider, among other things, the following factors in
connection with an investment in the Certificates.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates of
any Series will develop or, if it does develop, that it will provide
Certificateholders with liquidity of investment or will continue for the life of
the Certificates. Donaldson, Lufkin & Jenrette Securities Corporation (through
one or more of its affiliates) intends to make a secondary market in the
Certificates, but has no obligation to do so. In addition, the market value of
Certificates of each Series will fluctuate with changes in prevailing rates of
interest. Consequently, sale of the Certificates by a Holder in any secondary
market which may develop may be at a discount from par value or from their
purchase price. Certificateholders have no optional redemption rights.
YIELD, PREPAYMENT AND MATURITY
The rate at which prepayments (which include both voluntary prepayments
by the obligors on the Loans and liquidations due to defaults and foreclosures)
occur on the Loans underlying or comprising the Mortgage Assets for a Series
will be affected by a variety of factors, including, without limitation, the
level of prevailing interest rates and economic, demographic, tax, social, legal
and other factors. Prepayments on the Loans comprising or underlying the
Mortgage Assets for a Series generally will result in a faster rate of
distributions of principal on the Certificates. Thus, the prepayment experience
on the Loans comprising or underlying the Mortgage Assets will affect the
average life and yield to investors of each Class and the extent to which each
such Class is paid prior to its Final Scheduled Distribution Date. A Series may
include an Interest Weighted Class offered at a significant premium or a
Principal Weighted Class offered at a substantial discount. Yields on such
Classes of Certificates will be extremely sensitive to prepayments on the Loans
comprising or underlying the Mortgage Assets for such Series. In general if a
Certificate, including a Certificate of an Interest Weighted Class, is purchased
at a premium and principal distributions on the Loans occur at a rate faster
than anticipated at the time of purchase, the investor's actual yield to
maturity could be significantly lower than that assumed at the time of purchase.
Where the amount of interest allocated with respect to an Interest Weighted
Class is extremely disproportionate to principal, a Certificateholder could,
under some such prepayment scenarios, fail to recoup its original investment.
Conversely, if a Certificate, including a Certificate of a Principal Weighted
Class, is purchased at a discount and principal distributions thereon occur at a
rate slower than assumed at the time of purchase, the investor's actual yield to
maturity could be significantly lower than that originally anticipated. Any
rating assigned to the Certificates by a Rating Agency will reflect only such
Rating Agency's assessment of the likelihood that timely distributions will be
made with respect to such Certificates in accordance with the related Pooling
and Servicing Agreement. Such rating will not constitute an assessment of the
likelihood that principal prepayments on the Loans underlying or comprising the
Mortgage Assets will be made by borrowers or of the degree to which the rate of
such prepayments might differ from that originally anticipated. As a result,
such rating will not address the possibility that prepayment rates higher or
lower than anticipated by an investor may cause such investor to experience a
lower than anticipated yield, or that an investor purchasing an Interest
Weighted Certificate at a significant premium might fail to recoup its initial
investment. See "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS."
16
CREDIT SUPPORT LIMITATIONS
The amount, type and nature of insurance policies, subordination,
Certificate Guarantee Insurance, letters of credit and other credit support, if
any, required with respect to a Series will be determined on the basis of
criteria established by each Rating Agency rating such Series. Such criteria are
necessarily based upon an actuarial analysis of the behavior of Loans in a
larger group. Such actuarial analysis is the basis upon which each Rating Agency
determines (a) required amounts and types of pool insurance, special hazard
insurance, reserve funds, subordination or other credit support and (b) limits
on the number and amount of Loans which have various special payment
characteristics, have various Loan-to-Value Ratios and/or were made for various
purposes (e.g., primary residence, second home, refinancing). There can be no
assurance that the historical data supporting such actuarial analysis will
accurately reflect future experience nor any assurance that the data derived
from a large pool of housing loans accurately predicts the delinquency,
foreclosure or loss experience of any particular pool of Loans.
In addition, if distributions in reduction of the principal balance of
Certificates of a Series of Multiple Class Certificates are made in order of the
respective Final Scheduled Distribution Dates of the Class, any limits with
respect to the aggregate amount of claims under any related pool insurance
policy and the special hazard insurance policy may be exhausted before the
principal of the later-maturing Classes has been repaid. As a result, the impact
of significant losses on the Mortgage Loans may bear primarily upon the
Certificates of the later-maturing Classes.
The Prospectus Supplement for a Series will describe any reserve funds,
insurance policies, letter of credit or other third-party credit support
relating to the Mortgage Assets or to the Certificates of such Series. Use of
such reserve funds and payments under such insurance policies, letter of credit
or other third-party credit support will be subject to the conditions and
limitations described herein and in the related Prospectus Supplement. Moreover,
such reserve funds, insurance policies, letter of credit or other credit support
will not cover all potential losses or risks. The obligations of the issuers of
any credit support such as a pool insurance policy, special hazard insurance
policy, bankruptcy bond, letter of credit, Certificate Guarantee Insurance,
repurchase bond or other third-party credit support will not be guaranteed or
insured by the United States, or by any agency or instrumentality thereof. A
Series of Certificates may include a Class or multiple Classes of Subordinate
Certificates to the extent described in the related Prospectus Supplement.
Although such subordination is intended to reduce the risk of delinquent
distributions or ultimate losses to Holders of Senior Certificates, the
Subordinated Amount will be limited and will decline under certain circumstances
and the related Subordination Reserve Fund, if any, could be depleted in certain
circumstances. See "DESCRIPTION OF THE CERTIFICATES," "THE TRUST FUNDS" and
"CREDIT SUPPORT."
CERTAIN LOANS AND MORTGAGED PROPERTY
Loans such as GPM Loans, GEM Loans, ARMs, Bi-Weekly Loans and Buy-Down
Loans are of recent origin. As a result, reliable prepayment, loss and
foreclosure statistics relating to such housing loans are not available. Such
Loans may be underwritten on the basis of an assessment that the borrower will
have the ability to make payments in higher amounts in later years and, in the
case of Loans with adjustable mortgage rates, after relatively short periods of
time. See "LOAN UNDERWRITING PROCEDURES AND STANDARDS" and "CREDIT SUPPORT."
Other loans may be underwritten principally on the basis of the initial
Loan-to-Value Ratio of the Loans. To the extent losses on Loans exceed levels
estimated by the Rating Agency rating the Series in determining required levels
of overcollateralization or other credit support, the Trust Fund may experience
a loss. Furthermore, Loans made with respect to Multifamily Property,
Manufactured Homes or Cooperative Dwellings may entail risks of loss in the
event of delinquency and foreclosure or repossession that are greater than
similar risks
17
associated with traditional single-family property. To the extent losses on such
Loans exceed levels estimated by the Rating Agency in determining required
levels of overcollateralization or other credit support, the Trust Fund may
experience a loss. See "SERVICING OF LOANS--Maintenance of Insurance Policies
and Other Servicing Procedures" and "CREDIT SUPPORT."
LIMITED OBLIGATIONS AND ASSETS OF DEPOSITOR
Unless otherwise set forth in the Prospectus Supplement for a Series of
Certificates, the Trust Fund for a Series will be the only available source of
funds to make distributions on the Certificates of such Series. The only
obligations of the Depositor with respect to the Certificates of any Series will
be pursuant to certain representations and warranties. See "THE POOLING AND
SERVICING AGREEMENTS--Assignment of Mortgage Assets" herein. The Depositor
does not have, and is not expected in the future to have, any significant assets
with which to meet any obligation to repurchase Mortgage Assets with respect to
which there has been a breach of any representation or warranty. If, for
example, the Depositor were required to repurchase a Loan which constitutes a
Mortgage Asset, its only sources of funds to make such repurchase would be from
funds obtained from the enforcement of a corresponding obligation, if any, on
the part of the originator of the Loans, Servicer or Master Servicer, as the
case may be, or from a reserve fund established to provide funds for such
repurchases. See "THE DEPOSITOR."
ERISA CONSIDERATIONS
Generally, ERISA applies to investments made by employee benefit plans
and transactions involving the assets of such plans. Due to the complexity of
regulations which govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of the Certificates of any Series. See
"ERISA CONSIDERATIONS."
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL INTERESTS
Holders of REMIC Residual Interests will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC regardless of the amount or timing of their receipt
of cash payments as described in "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS--Residual Interests in a REMIC." Accordingly, under certain
circumstances, holders of Certificates which constitute REMIC Residual Interests
might have taxable income and tax liabilities arising from such investment
during a taxable year in excess of the cash received during such period. The
requirement that Holders of Residual Interest Certificates report their pro rata
share of the taxable income and net loss of the REMIC will continue until the
principal balances of all Classes of Certificates of the related Series have
been reduced to zero, even though holders of Residual Interests have received
full payment of their stated interest and principal. A portion (or, in certain
circumstances, all) of a Residual Interest Certificateholder's share of the
REMIC taxable income may be treated as "excess inclusion" income to such holder
which (i) except in the case of certain thrift institutions, will not be subject
to offset by losses from other activities, (ii) for a tax-exempt Holder, will be
treated as unrelated business taxable income and (iii) for a foreign holder,
will not qualify for exemption from withholding tax. Individual Holders of
Certificates constituting Residual Interests may be limited in their ability to
deduct servicing fees and other expenses of the REMIC. Because of the special
tax treatment of REMIC residual interests, the taxable income arising in a given
year on a REMIC residual interest will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pre-tax yield. Therefore, the after-tax
yield on the Residual
18
Interest Certificates may be significantly less than that of a corporate bond or
stripped instrument having similar cash flow characteristics.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued in Series pursuant to separate Pooling
and Servicing Agreements between the Depositor and the Trustee for the related
Series identified in the related Prospectus Supplement. The following summaries
describe certain provisions common to each Series. The 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 and the
Prospectus Supplement relating to each Series. When particular provisions or
terms used in the Pooling and Servicing Agreement are referred to, such
provisions or terms shall be as specified in the Pooling and Servicing
Agreement.
Each Series will consist of one or more Classes, one or more of which may
consist of Compound Interest Certificates, Floating Interest Certificates,
Interest Weighted Certificates, Principal Weighted Certificates or Reduced
Volatility Certificates ("RV's" or "RV Certificates"). A Series may also include
one or more Classes of Subordinate Certificates. Unless otherwise specified in
the related Prospectus Supplement, a Class of Subordinate Certificates will be
offered hereby or by such Prospectus Supplement only if rated by a Rating Agency
in at least its second highest applicable rating category. If so specified in
the related Prospectus Supplement, the Mortgage Assets in a Trust Fund may be
divided into multiple Asset Groups and the Certificates of each separate Class
will evidence beneficial ownership of each corresponding Asset Group.
Each Series will be issued in fully registered form, in the minimum
original principal amount or notional amount for Certificates of each Class
specified in the related Prospectus Supplement. The transfer of the Certificates
may be registered, and the Certificates may be exchanged, without the payment of
any service charge payable in connection with such registration of transfer or
exchange. If specified in the related Prospectus Supplement, one or more Classes
of a Series may be available in book-entry form only.
VALUATION OF TRUST ASSETS
Each Mortgage Asset included in the Trust Fund for a Multiple Class
Series will be assigned an initial Asset Value determined in the manner and
subject to the assumptions summarized in the related Prospectus Supplement. The
Asset Value of the Mortgage Assets will not be less than the initial aggregate
principal amount of the Certificates of the related Multiple Class Series at the
date of issuance thereof.
The Asset Value of Mortgage Assets represents the principal amount of
Certificates of a Multiple Class Series that, based on certain assumptions, can
be supported by the scheduled principal and interest due on the Mortgage Assets
irrespective of prepayments thereon, the reinvestment income thereon at the
Assumed Reinvestment Rate (which may be zero) and the moneys available to be
withdrawn from related Reserve Funds, if any, as specified in the related
Prospectus Supplement. Individual Mortgage Assets for a Series which share
similar characteristics may be aggregated into one or more groups (each an
"Asset Group"), each of which will be assigned a single aggregate Asset Value.
If so specified in the related Prospectus Supplement, the Mortgage Assets in a
Trust Fund may be divided into multiple Asset Groups and the Certificates of
separate Classes will evidence beneficial ownership of each corresponding Asset
Group. Unless the related Prospectus Supplement provides otherwise, the
aggregate Asset Value of an
19
Asset Group will be calculated as though the underlying Mortgage Assets
constitute a single Loan having such of the characteristics of the Mortgage
Assets included in the Asset Group that would result in the lowest Asset Value
being assigned to each Mortgage Asset included in such Asset Group.
There are a number of alternative means of determining Asset Value of a
Mortgage Asset, including determinations based on the discounted present value
of the remaining scheduled payments on such Mortgage Asset, determinations based
on the relationship between the interest rate borne by such Mortgage Asset and
the Certificate Rate or Rates for the related Classes of Certificates, or based
upon the aggregate outstanding principal balances of the Mortgage Assets. The
Prospectus Supplement for a Multiple Class Series will specify the method or
methods and summarize the related assumptions used to determine the Asset Values
of the Mortgage Assets in the related Trust Fund.
The Assumed Reinvestment Rate, if any, for a Multiple Class Series will
be the highest rate permitted by each Rating Agency rating such Series or a rate
insured, guaranteed or otherwise provided for by means of a surety bond,
interest rate swap agreement, interest rate cap agreement, Guaranteed Investment
Contract, or other arrangement satisfactory to each such Rating Agency. See "THE
POOLING AND SERVICING AGREEMENTS--Investment of Funds."
DISTRIBUTIONS ON THE CERTIFICATES
GENERAL. Commencing on the date specified in the related Prospectus
Supplement, distributions of principal and interest on the Certificates will be
made on each Distribution Date to the extent of the "Available Distribution
Amount" as set forth in the related Prospectus Supplement.
Distributions of interest on Certificates which receive interest will be
made periodically at the intervals and at the Pass-Through Rate or Certificate
Rate specified or, with respect to Floating Interest Certificates, determined in
the manner described in the related Prospectus Supplement. Interest on the
Certificates will be calculated on the basis of a 360-day year consisting of
twelve 30-day months unless otherwise specified in the related Prospectus
Supplement.
If funds in the Certificate Account (together with any amounts
transferred from any reserve fund or applicable credit support) are insufficient
to make the full distribution to Certificateholders described above on any
Distribution Date, the funds available for distribution to the
Certificateholders of each Class will be distributed in accordance with their
respective interests therein, except that Subordinate Certificateholders, if
any, will not, subject to the limitations described in the related Prospectus
Supplement, receive any distributions until Senior Certificateholders receive
the amount of present distributions due them and the amount of distributions
owed them which were not timely distributed thereon and to which they are
entitled (in each case calculated as described in the related Prospectus
Supplement). If specified in the related Prospectus Supplement, the difference
between the amount which the Certificateholders would have received if there had
been sufficient eligible funds available for distribution and the amount
actually distributed, plus interest at the applicable Pass-Through Rate or
Certificate Rate will be included in the calculation of the amount which the
Certificateholders are entitled to receive on the next Distribution Date. See
"THE POOLING AND SERVICING AGREEMENTS--Deficiency Events."
Distributions of principal of and interest on Certificates of a Series
will be made by check mailed to Certificateholders of such Series registered as
such on the close of business on the record date specified in the related
Prospectus Supplement at their addresses appearing on the Certificate Register,
except that (a) distributions may be made by wire transfer (at the expense of
the Certificateholder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b) the final
20
distribution in retirement of a Certificate will be made only upon presentation
and surrender of such Certificate at the corporate trust office of the Trustee
for such Series or such other office of the Trustee as specified in the
Prospectus Supplement. Notice of the final distribution on a Certificate will be
mailed to the Holder of such Certificate before the Distribution Date on which
such final distribution in retirement of the Certificate is expected to be made.
If specified in the related Prospectus Supplement, the Certificates of a Series
or certain Classes of a Series may be available only in book-entry form. See
"Book-Entry Registration" herein.
With respect to reports to be furnished to Certificateholders concerning
a distribution, see "THE POOLING AND SERVICING AGREEMENTS--Reports to
Certificateholders."
PASS-THROUGH CERTIFICATES GENERALLY. With respect to a Series other than
a Multiple Class Series, distributions on the Certificates on each Distribution
Date will generally be allocated to each Certificate entitled thereto on the
basis of the undivided percentage interest (the "Percentage Interest") evidenced
by such Certificate in the Trust Fund or on the basis of their outstanding
principal amounts or notional amounts (subject to any subordination of the
rights of any Subordinate Classes to receive current distributions as specified
in the related Prospectus Supplement). See "Subordinate Certificates" below. If
the Mortgage Assets for a Series have adjustable or variable interest or
pass-through rates, then the Pass-Through Rate of the Certificates of such
Series may also vary, due to changes in such rates and due to prepayments with
respect to Loans comprising or underlying the related Mortgage Assets. If the
Mortgage Assets for a Series have fixed interest or pass-through rates, then the
Pass-Through Rate on Certificates of the related Series may be fixed, or may
vary, to the extent prepayments cause changes in the weighted average interest
rate or pass-through rate of the Mortgage Assets. If the Mortgage Assets have
lifetime or periodic adjustment caps on the respective pass-through rates, then
the Pass-Through Rate on the Certificates of the related Series may also reflect
such caps.
If so specified in the related Prospectus Supplement, a Series may
include a Class of Interest Weighted Certificates, a Class of Principal Weighted
Certificates, or both. Unless otherwise specified in the Prospectus Supplement,
payments received from the Mortgage Assets will be allocated on the basis of the
Percentage Interest of each Class in the principal component of such
distributions, the interest component of such distributions, or both, and will
be further allocated on a pro rata basis among the Certificates within each
Class. The method or formula for determining the Percentage Interest of a
Certificate will be set forth in the related Prospectus Supplement.
MULTIPLE CLASS SERIES. Each Certificate of a Multiple Class Series will
have a principal amount or a notional amount and a specified Certificate Rate
(which may be zero). Interest distributions on a Multiple Class Series will be
made on each Certificate entitled to an interest distribution on each
Distribution Date at the Certificate Rate specified or, with respect to Floating
Interest Certificates, determined as described in the related Prospectus
Supplement, to the extent funds are available in the Certificate Account,
subject to any subordination of the rights of any Subordinate Class to receive
current distributions. See "Subordinate and Other Certificates" below and
"CREDIT SUPPORT."
Interest on all Multiple Class Certificates currently entitled to receive
interest will be distributed on the Distribution Dates specified in the related
Prospectus Supplement, to the extent funds are available in the Certificate
Account, subject to any subordination of the rights of any Subordinate Class to
receive current distributions. See "Subordinate Certificates" below and "CREDIT
SUPPORT." Distributions of interest on a Class of Compound Interest Certificates
will commence only after the related Accrual Termination Date specified in the
related Prospectus Supplement. On each Distribution Date prior to and including
the Accrual Termination Date, interest on such Class of Compound Interest
Certificates will accrue and the amount of interest accrued on such Distribution
Date (the "Accrual Distribution Amount")
21
will be added to the principal balance thereof on the related Distribution Date.
On each Distribution Date after the Accrual Termination Date, interest
distributions will be made on Classes of Compound Interest Certificates on the
basis of the current Compound Value of such Class. The Compound Value of a Class
of Compound Interest Certificates equals the initial aggregate principal balance
of the Class, plus accrued and undistributed interest added to such Class
through the immediately preceding Distribution Date, less any principal
distributions previously made in reduction of the aggregate outstanding
principal balance of such Class.
To the extent provided in the related Prospectus Supplement, a Series of
Multiple Class Certificates may include one or more Classes of Floating Interest
Certificates. The Certificate Rate of a Floating Interest Certificate will be a
variable or adjustable rate, subject to a Maximum Floating Rate, Minimum
Floating Rate, or both. For each Class of Floating Interest Certificates, the
related Prospectus Supplement will set forth the initial Floating Rate (or the
method of determining it), the Floating Interest Period, and the formula, index,
or other method by which the Floating Rate for each Floating Interest Period
will be determined.
To the extent provided in the related Prospectus Supplement, a series of
Multiple Class Certificates may include one or more classes of Reduced
Volatility Certificates.
Distributions of principal will be allocated among the Classes of a
Multiple Class Series in the order of priority and amount specified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, the Principal Distribution Amount for a Multiple Class
Series on each Distribution Date will be an amount equal to the sum of (a) the
Accrual Distribution Amount, if any, (b) the Minimum Principal Distribution
Amount and (c) the percentage, if any, of Excess Cash Flow specified in the
related Prospectus Supplement.
SUBORDINATE CERTIFICATES. One or more Classes of a Series may consist of
Subordinate Certificates. Subordinate Certificates may be included in a Series
to provide credit support as described herein under "CREDIT SUPPORT" in lieu of
or in addition to other forms of credit support. The extent of subordination of
a Class of Subordinate Certificates may be limited as described in the related
Prospectus Supplement. See "CREDIT SUPPORT." If the Mortgage Assets are divided
into separate Asset Groups, beneficial ownership of which is evidenced by
separate Classes of a Series, credit support may be provided by a cross-support
feature which requires that distributions be made to Senior Certificates
evidencing beneficial ownership of one Asset Group prior to making distributions
on Subordinate Certificates evidencing a beneficial ownership interest in
another Asset Group within the Trust Fund. Except as otherwise specified in the
related Prospectus Supplement, Subordinate Certificates will not be offered
hereby or by such related Prospectus Supplement unless they are rated in one of
the two highest rating categories by at least one Rating Agency.
SPECIAL DISTRIBUTIONS AND OTHER DISTRIBUTIONS
SPECIAL DISTRIBUTIONS. To the extent specified in the related Prospectus
Supplement, Special Distributions in reduction of Certificate principal amount
may be made with respect to the Certificates of a Multiple Class Series on the
day or days of any month specified therein if, as a result of the prepayment
experience on the Mortgage Assets for such Series or the low yields available
for reinvestment, or both, it is determined (based on assumptions specified in
the Pooling and Servicing Agreement and after giving effect to the amounts, if
any, available to be withdrawn from any reserve fund for such Series) that the
amount anticipated to be available in the Certificate Account on the date
specified in the related Prospectus Supplement for such Series, will be
insufficient to make scheduled distributions of principal and interest on the
Certificates of such Series on the next Distribution Date. The
22
amount distributed in reduction of principal amount will not exceed the
Principal Distribution Amount otherwise required to be paid on the next
Distribution Date.
Therefore, the result of such a Special Distribution with respect to the
Certificates of a Multiple Class Series will be to reduce their aggregate
principal amount prior to the next scheduled Distribution Date.
All distributions in reduction of the Certificate principal amount
pursuant to any Special Distribution will be made in the order of priority and
in the manner specified in the related Prospectus Supplement. Notice of any
Special Distribution will be mailed by the Trustee to the Certificateholders of
the related Series prior to the Special Distribution Date.
OTHER DISTRIBUTIONS. If so specified in the related Prospectus Supplement
for a Series, in the event that Mortgage Assets having an aggregate Asset Value
at least equal to the initial aggregate principal balance of the Certificates of
a Multiple Class Series are not delivered to the Trustee on the related Closing
Date, the Depositor will deposit cash or Eligible Investments on an interim
basis with the Trustee on such Closing Date in lieu of such undelivered Mortgage
Assets. If Mortgage Assets are not delivered by the date specified in the
related Prospectus Supplement, the Trustee will make a distribution from the
interim deposit and any reinvestment income thereon in reduction of principal
balance of the Certificates on the next succeeding Distribution Date. Such a
distribution would affect weighted average life and yield to maturity of the
affected Certificates. See "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS."
OPTIONAL TERMINATION
If so specified in the related Prospectus Supplement for a Series, the
Depositor, the Master Servicer, or another entity designated in the related
Prospectus Supplement may, at its option, cause an early termination of a Trust
Fund by repurchasing all of the Mortgage Assets from such Trust Fund on or after
a date specified in the related Prospectus Supplement, or on or after such time
as the aggregate outstanding principal amount of the Mortgage Assets is less
than a specified percentage of their initial aggregate principal amount. In the
case of a Trust Fund for which a REMIC election has been made, the Trustee shall
receive a satisfactory opinion of counsel that the repurchase price will not
jeopardize the status of the REMIC and that the optional termination will be
conducted so as to constitute a "qualified liquidation" under Section 860F of
the Code. Such optional termination will be in addition to terminations which
may result from other events. See "THE POOLING AND SERVICING
AGREEMENTS--Deficiency Event" and "--Termination."
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, the Certificates
will be issued in book-entry form in the minimum denominations specified in such
Prospectus Supplement and integral multiples thereof, and each Class will be
represented by a single Certificate registered in the name of the nominee of the
depository, The Depository Trust Company ("DTC"), a limited-purpose trust
company organized under the laws of the State of New York. If so specified in
the related Prospectus Supplement, no person acquiring an interest in the
Certificates (a "Certificateowner") will be entitled to receive a Certificate
issued in fully registered, certificated form (a "Definitive Certificate")
representing such person's interest in the Certificates except in the event that
the book-entry system for the Certificates is discontinued (as described below).
Unless and until Definitive Certificates are issued, it is anticipated that the
only Certificateholder of the Certificates will be Cede & Co., as nominee of
DTC. Certificateowners will not be registered "Certificateholders" or registered
"Holders" under the Pooling and Servicing Agreement, and Certificateowners will
only be permitted to exercise the rights of Certificateholders indirectly
through DTC Participants.
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DTC was created to hold securities for its participating organizations
("Participants") and facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry changes in
accounts of its Participants. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system also is available
to entities that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("indirect participants").
Certificateowners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of Certificates may do
so only though Participants and Indirect Participants. Because DTC can only act
on behalf of Participants and Indirect Participants, the ability of a
Certificateowner to pledge such owner's Certificate to persons or entities that
do not participate in the DTC system, or otherwise take actions in respect of
such Certificate, may be limited. In addition, under a book-entry format,
Certificateowners may experience some delay in their receipt of principal and
interest distributions with respect to the Certificates since such distributions
will be forwarded to DTC and DTC will then forward such distributions to its
Participants which in turn will forward them to Indirect Participants or
Certificateowners.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC Participants may make book-entry transfers
among Participants through DTC facilities with respect to the Certificates and
DTC, as registered holder, is required to receive and transmit principal and
interest distributions and distributions with respect to the Certificates.
Participants and Indirect Participants with which Certificateowners have
accounts with respect to Certificates similarly are required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Certificateowners. Accordingly, although Certificateowners will not
possess certificates, the Rules provide a mechanism by which Certificateowners
will receive distributions and will be able to transfer their interests.
The Depositor understands that DTC will take any action permitted to be
taken by a Certificateholder under the Pooling and Servicing Agreement only at
the direction of one or more Participants to whose account with DTC the
Certificates are credited. Additionally, the Depositor understands that DTC will
take such actions with respect to holders of a certain specified interest in the
certificates or holders having a certain specified voting interest only at the
direction of and on behalf of Participants whose holdings represent that
specified interest or voting interest. DTC may take conflicting actions with
respect to other Holders of Certificates to the extent that such actions are
taken on behalf of Participants whose holdings represent that specified interest
or voting interest.
DTC may discontinue providing its services as securities depository with
respect to the Certificates at any time by giving reasonable notice to the
Depositor or the Trustee. Under such circumstances, in the event that a
successor securities depository is not obtained, Definitive Certificates will be
printed and delivered. In addition, the Depositor may at its option elect to
discontinue use of the book-entry system through DTC. In that event, too,
Definitive Certificates will be printed and delivered.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
PAYMENT DELAYS
With respect to any Series, a period of time will elapse between receipt
of payments or distributions on the Mortgage Assets and the Distribution Date on
which such payments or distributions are passed through to Certificateholders.
Such a delay will effectively reduce the yield that would
24
otherwise be obtained if payments or distributions were distributed on or near
the date of receipt. The related Prospectus Supplement may set forth an example
of the timing of receipts and the distribution thereof to Certificateholders.
PRINCIPAL PREPAYMENTS
With respect to a Series for which the Mortgage Assets consist of Loans
or participation interests therein, when a Loan prepays in full, the borrower
will generally be required to pay interest on the amount of prepayment only to
the prepayment date. In addition, the prepayment may not be required to be
passed through to Certificateholders until the month following receipt. The
effect of these provisions is to reduce the aggregate amount of interest which
would otherwise be available for distributions on the Certificates, thus
effectively reducing the yield that would be obtained if interest continued to
accrue on the Loan until the date on which the principal prepayment was
scheduled to be paid. To the extent specified in the related Prospectus
Supplement, this effect on yield may be mitigated by, among other things, an
adjustment to the servicing fee otherwise payable to the Master Servicer or
Servicer with respect to any such prepaid Loans. See "SERVICING OF
LOANS--Advances and Limitations Thereon."
TIMING OF REDUCTION OF PRINCIPAL BALANCE
A Multiple Class Series may provide that, for purposes of calculating
interest distributions, the principal amount of the Certificates is deemed
reduced as of a date prior to the Distribution Date on which principal thereon
is actually distributed. Consequently, the amount of interest accrued during any
Interest Accrual Period will be less than the amount that would have accrued on
the actual principal balance of the Certificate outstanding. The effect of such
provisions is to produce a lower yield on the Certificates than would be
obtained if interest were to accrue on the Certificates on the actual unpaid
principal amount of such Certificates to each Distribution Date. The related
Prospectus Supplement will specify the time at which the principal amounts of
the Certificates are determined or are deemed to reduce for purposes of
calculating interest distributions on Certificates of a Multiple Class Series.
INTEREST OR PRINCIPAL WEIGHTED CERTIFICATES
If a Class of Certificates consists of Interest Weighted Certificates or
Principal Weighted Certificates, a lower rate of principal prepayments than
anticipated will negatively affect the yield to investors in Principal Weighted
Certificates, and a higher rate of principal prepayments than anticipated will
negatively affect the yield to investors in Interest Weighted Certificates. The
Prospectus Supplement for a Series including such Certificates will include a
table showing the effect of various levels of prepayment on yields on such
Certificates. Such tables will be intended to illustrate the sensitivity of
yields to various prepayment rates and will not be intended to predict, or
provide information which will enable investors to predict, yields or prepayment
rates.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date of each Class of any Series other
than a Multiple Class Series will be the Distribution Date following the latest
stated maturity of any Mortgage Asset in the related Trust Fund. The Final
Scheduled Distribution Date of each Class of any Multiple Class Series will be
specified in the related Prospectus Supplement and will be the date (calculated
on the basis of the assumptions applicable to such Series described therein) on
which the entire aggregate principal balance of such Class will be reduced to
zero. Since prepayments on the Loans underlying or comprising the Mortgage
Assets will be used to make distributions in reduction of the outstanding
principal amount of
25
the Certificates, it is likely that the actual maturity of any Class will occur
earlier, and may occur substantially earlier, than its Final Scheduled
Distribution Date.
PREPAYMENTS AND WEIGHTED AVERAGE LIFE
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of the principal
of such security will be repaid to the investor. The weighted average life of
the Certificates of a Series will be influenced by the rate at which principal
on the Loans comprising or underlying the Mortgage Assets for such Certificates
is paid, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes prepayments, in whole or in part,
and liquidations due to default).
The rate of principal prepayments on pools of housing loans is influenced
by a variety of economic, demographic, geographic, legal, tax, social and other
factors. The rate of prepayments of conventional housing loans has fluctuated
significantly in recent years. In general, however, if prevailing interest rates
fall significantly below the interest rates on the Loans comprising or
underlying the Mortgage Assets for a Series, such Loans are likely to prepay at
rates higher than if prevailing interest rates remain at or above the interest
rates borne by such Loans. In this regard, it should be noted that the Loans
comprising or underlying the Mortgage Assets of a Series may have different
interest rates, and the stated pass-through or interest rate of certain Mortgage
Assets or the Certificate Rate or Pass-Through Rate on the Certificates may be a
number of percentage points less than interest rates on such Loans. In addition,
the weighted average life of the Certificates may be affected by the varying
maturities of the Loans comprising or underlying the Mortgage Assets. If any
Loans comprising or underlying the Mortgage Assets for a Series have actual
terms-to-stated maturity of less than those assumed in calculating the Final
Scheduled Distribution Date of the related Certificates, one or more Class of
the Series may be fully paid prior to its Final Scheduled Distribution Date,
even in the absence of prepayments and a reinvestment return higher than the
Assumed Reinvestment Rate.
It is customary in the mortgage industry to compute the yield on a pool
of 30-year, fixed rate, level payment mortgages as if the pool were a single
loan amortized according to the 30-year schedule and then prepaid in full at the
end of the twelfth year, and to compute the yield on a pool of 15-year, fixed
rate, level payment mortgages as if the pool were a single loan that is
amortized according to a 15-year schedule and then prepaid in full at the end of
the seventh year. Prepayments on loans are also commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment model
or the FHA Prepayment Experience, each as described below.
CPR represents a constant assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of loans for the life of
such loans. SPA represents an assumed rate of prepayment each month relative to
the then outstanding principal balance of a pool of loans. A prepayment
assumption of 100% of SPA assumes prepayment rates of 0.2% per annum of the then
outstanding principal balance of such loans in the first month of the life of
the loans and an additional 0.2% per annum in each month thereafter until the
thirtieth month. Beginning in the thirtieth month and in each month thereafter
during the life of the loans, 100% of SPA assumes a constant prepayment rate of
6% per annum.
The FHA, a division of HUD, has compiled statistics relating to fixed
rate, level-payment mortgage loans secured by Single Family Property and insured
by the FHA under the National Housing Act of 1934, as amended (the "Housing
Act"), at various interest rates, all of which permit assumption by the new
buyer if the home is sold. Such statistics indicate that while some of such
mortgage loans
26
remain outstanding until their scheduled maturities, a substantial number are
paid prior to their respective stated maturities. The Actuarial Division of HUD
has prepared tables which, assuming full mortgage prepayments at the rates
experienced by the FHA, set forth the percentages of the original number of FHA
Loans in pools of fixed rate, level payment mortgage loans of varying maturities
that will remain outstanding on each anniversary of the original date of such
mortgage loans (assuming they all have the same origination date). Data relating
to fixed-rate mortgage loans with original maturities of 15 to 30 years for the
period 1970 to 1983, as compiled by HUD, indicate, for example, that, for a pool
of 30-year mortgage loans having a mortgage rate of 12% per annum, the aggregate
principal balance of the loans outstanding 12 years after origination is
expected to be approximately 46% of the original principal balance. By
comparison, 90.87% of the aggregate principal balance of such mortgage loans
would have been outstanding if such mortgage loans had amortized in accordance
with the applicable repayment schedule, without prepayments. The HUD data also
indicate, that for a pool of 15-year mortgage loans having a mortgage rate of
12% per annum, the aggregate principal balance of the loans outstanding seven
years after origination is expected to be approximately 40% of the original
principal balance. By comparison, 73.84% of the aggregate principal balance of
such mortgage loans would have been outstanding if such mortgage loans had
amortized in accordance with the applicable repayment schedule, without
prepayments. The percentage of loans in a pool that remains outstanding, as
indicated by the HUD data, is referred to herein as the "FHA Prepayment
Experience."
There may be substantial differences between the portfolio on which the
FHA statistics were based and the Loans comprising or underlying the Mortgage
Assets for a Series. To the extent that the Loans comprising or underlying the
Mortgage Assets for such Series have scheduled maturities differing from those
of the mortgage loans in the FHA statistics, the probability of prepayment of
the Loans comprising or underlying the Mortgage Assets may differ from that of
mortgage loans included in the FHA statistics. There is also no assurance that
the economic and other factors existing during the period covered by the FHA
statistics are applicable today or will be applicable in the future.
Neither CPR, SPA, or the FHA Prepayment Experience 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 loans, including the Loans underlying or comprising the Mortgage
Assets. Thus, it is likely that prepayment of any Loans comprising or underlying
the Mortgage Assets for any Series will not conform to the FHA Prepayment
Experience or to any level of CPR or SPA.
The Prospectus Supplement for each Multi-Class Series will describe the
prepayment standard or model used to prepare the illustrative tables setting
forth the weighted average life of each Class of such Series under a given set
of prepayment assumptions. The related Prospectus Supplement will also describe
the percentage of the initial principal balance of each Class of such Series
that would be outstanding on specified Distribution Dates for such Series based
on the assumptions stated in such Prospectus Supplement, including assumptions
that prepayments on the Loans comprising or underlying the related Mortgage
Assets are made at rates corresponding to various percentages of the FHA
Prepayment Experience, CPR, SPA or at such other rates specified in such
Prospectus Supplement. Such tables and assumptions are intended to illustrate
the sensitivity of weighted average life of the Certificates to various
prepayment rates and will not be intended to predict or to provide information
which will enable investors to predict the actual weighted average life of the
Certificates or prepayment rates of the Loans comprising or underlying the
related Mortgage Assets.
27
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF LOAN. Mortgage Loans made with respect to Multi-family Properties
may have provisions which prevent prepayment for a number of years and may
provide for payments of interest only during a certain period followed by
amortization of principal on the basis of a schedule extending beyond the
maturity of the related mortgage loan. ARMs, Bi-weekly Loans, GEM Loans, GPM
Loans or Buy-Down Loans comprising or underlying the Mortgage Assets may
experience a rate of principal prepayments which is different from the principal
prepayment rate for ARMs, Bi-weekly Loans, GEM Loans and GPM Loans included in
any other mortgage pool or from Conventional fixed rate Loans or from other
adjustable rate or graduated equity mortgages having different characteristics.
Because ARMs, Bi-weekly Loans, GEM Loans and GPM Loans have not been originated
in large quantities until recently, there can be no certainty as to their
respective rates of prepayment in either stable or changing interest rate
environments.
In the case of Negatively Amortizing ARMs, if interest rates rise without
a simultaneous increase in the related Scheduled Payment, Deferred Interest and
Negative Amortization may result. However, borrowers may pay amounts in addition
to their Scheduled Payments in order to avoid such Negative Amortization and to
increase tax deductible interest payments. To the extent that any of such
Mortgage Loans negatively amortize over their respective terms, future interest
accruals are computed on the higher outstanding principal balance of such
mortgage loan and a smaller portion of the Scheduled Payment is applied to
principal than would be required to amortize the unpaid principal over its
remaining term. Accordingly, the weighted average life of such Loans will
increase. During a period of declining interest rates, the portion of each
Scheduled Payment in excess of the scheduled interest and principal due will be
applied to reduce the outstanding principal balance of the related Loan, thereby
resulting in accelerated amortization of such Negatively Amortizing ARM. Any
such acceleration in amortization of the principal balance of any Negatively
Amortizing ARM will shorten the weighted average life of such Mortgage Loan. The
application of partial prepayments to reduce the outstanding principal balance
of a Negatively Amortizing ARM will tend to reduce the weighted average life of
the mortgage loan and will adversely affect the yield to Holders who purchased
their Certificates at a premium, if any, and Holders of an Interest Weighted
Class. The pooling of Negatively Amortizing ARMs having Rate Adjustment Dates in
different months, together with different initial Mortgage Rates, Lifetime
Mortgage Rate Caps, Minimum Mortgage Rates and stated maturity dates, could
result in some Negatively Amortizing ARMs which comprise or underlie the
Mortgage Assets experiencing negative amortization while the amortization of
other Negatively Amortizing ARMs may be accelerated.
If the Loans comprising or underlying the Mortgage Assets for a Series
include ARMs that permit the borrower to convert to a long-term fixed interest
rate loan, the Master Servicer, Servicer, or PMBS Servicer, as applicable, may,
if specified in the related Prospectus Supplement, be obligated to repurchase
any Loan so converted. Any such conversion and repurchase would reduce the
average weighted life of the Certificates of the related Series.
A GEM Loan provides for scheduled annual increases in the borrower's
Scheduled Payment. Because the additional portion of the Scheduled Payment is
applied to reduce the unpaid principal balance of the GEM Loan, the stated
maturity of a GEM Loan will be significantly shorter than the 25 to 30 year term
used as the basis for calculating the installments of principal and interest
applicable until the first adjustment date.
The prepayment experience with respect to Manufactured Home Loans will
generally not correspond to the prepayment experience on other types of housing
loans. Even though some
28
Manufactured Home Loans may be FHA Loans, no statistics similar to those
describing the FHA experience above are available with respect to Manufactured
Home Loans.
FORECLOSURES AND PAYMENT PLANS. The number of foreclosures and the
principal amount of the Loans comprising or underlying the Mortgage Assets which
are foreclosed in relation to the number of Loans which are repaid in accordance
with their terms will affect the weighted average life of the Loans comprising
or underlying the Mortgage Assets and that of the related Series of
Certificates. Servicing decisions made with respect to the Loans, including the
use of payment plans prior to a demand for acceleration and the restructuring of
Loans in bankruptcy proceedings, may also have an impact upon the payment
patterns of particular Loans. In particular, the return to Holders of
Certificates who purchased their Certificates at a premium, if any, and the
yield on an Interest Weighted Class may be adversely affected by servicing
policies and decisions relating to foreclosures.
DUE ON SALE CLAUSES. The acceleration of prepayment as a result of
certain transfers of the Mortgaged Property securing a Loan is another factor
affecting prepayment rates, and is a factor that is not reflected in the FHA
experience. While each of the Mortgage Loans included in the FHA statistics is
assumable by a purchaser of the underlying mortgaged property, the Loans
constituting or underlying the Mortgage Assets may include "due-on-sale"
clauses. Except as otherwise described in the Prospectus Supplement for a
Series, the PMBS Servicer of Loans underlying Private Mortgage-Backed Securities
and the Master Servicer or the Servicer of Loans constituting or underlying the
Mortgage Assets for a Series will be required, to the extent it knows of any
conveyance or prospective conveyance of the related residence by any borrower,
to enforce any "due-on-sale" clause applicable to the related Loan under the
circumstances and in the manner it enforces such clauses with respect to other
similar loans in its portfolio. FHA Loans and VA Loans are not permitted to
contain "due-on-sale" clauses and are freely assumable by qualified persons.
However, as homeowners move or default on their housing loans, the Mortgaged
Property is generally sold and the loans prepaid, even though, by their terms,
the loans are not "due-on-sale" and could have been assumed by new buyers.
OPTIONAL TERMINATION. If so specified in the related Prospectus
Supplement, the entity specified therein may cause an early termination of the
related Trust Fund by its repurchase of the remaining Mortgage Assets therein.
See "DESCRIPTION OF THE CERTIFICATES--Optional Termination."
THE TRUST FUNDS
GENERAL
The Trust Fund for each Series will be held by the Trustee for the
benefit of the related Certificateholders. Each Trust Fund will consist of (a)
the Mortgage Assets; (b) amounts held from time to time in the Collection
Account and the Certificate Account established for such Series; (c) Mortgaged
Property which secured a Loan and which is acquired on behalf of the
Certificateholders by foreclosure, deed in lieu of foreclosure or repossession;
(d) any reserve fund for such Series, if specified in the related Prospectus
Supplement; (e) the Servicing Agreements, if any, relating to Loans in the Trust
Fund; (f) any primary mortgage insurance policies relating to Loans in the Trust
Fund; (g) any pool insurance policy, any special hazard insurance policy, any
bankruptcy bond or other credit support relating to the Series; (h) investments
held in any fund or account or any Guaranteed Investment Contract and, if so
specified in the Prospectus Supplement, income from the reinvestment of such
funds; and (i) any other instrument or agreement relating to the Trust Fund and
specified in the related Prospectus Supplement (which may include an interest
rate swap agreement or an interest rate cap agreement or similar agreement
issued by a bank, insurance company or savings and loan association).
29
To the extent specified in the related Prospectus Supplement, certain amounts
("Retained Interests") which are received with respect to a Private
Mortgage-Backed Security or Loan comprising the Mortgage Assets for a Series
will not be included in the Trust Fund for such Series, but will be retained by
or payable to the originator, Servicer or seller of such Private Mortgage-Backed
Security or Loan, free and clear of the interest of Certificateholders under the
related Pooling and Servicing Agreement.
Mortgage Assets in the Trust Fund for a Series may consist of any
combination of the following to the extent and as specified in the related
Prospectus Supplement: (a) Private Mortgage-Backed Securities, (b) Mortgage
Loans or participation interests therein and Manufactured Home Loans or
participation interests therein or (c) Agency Securities. Loans which comprise
the Mortgage Assets will be purchased by the Depositor directly or through an
affiliate in the open market or in privately negotiated transactions. Some of
the Loans may have been originated by the Depositor or an affiliate.
Participation interests in Loans may be purchased by the Depositor, or an
affiliate, pursuant to a participation agreement. See "THE POOLING AND SERVICING
AGREEMENTS--Assignment of Mortgage Assets."
PRIVATE MORTGAGE-BACKED SECURITIES
GENERAL. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates, evidencing an undivided interest in a pool of Loans,
(b) collateralized mortgage obligations secured by Loans or (c) pass-through
certificates representing beneficial interests in Agency Securities. Private
Mortgage-Backed Securities will have been issued pursuant to a pooling and
servicing agreement, an indenture or similar agreement (a "PMBS Agreement"). The
seller/servicer of the underlying 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 Loans underlying
such Private Mortgage-Backed Security. Loans underlying a Private
Mortgage-Backed Security will be serviced by a servicer (the "PMBS Servicer")
directly or by one or more subservicers who may be subject to the supervision of
the PMBS Servicer. The PMBS Servicer will be an 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 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 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
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assets underlying the Private Mortgage-Backed Securities after a certain date or
under other circumstances specified in the related Prospectus Supplement.
UNDERLYING LOANS. The Loans underlying the Private Mortgage-Backed
Securities may consist of fixed rate, level payment, fully amortizing Loans or
GEM Loans, GPM Loans, Buy-Down Loans, Bi-Weekly Loans, ARMs, or Loans having
balloon or other special payment features. Loans may be secured by Single Family
Property, Multifamily Property, Manufactured Homes, or, in the case of
Cooperative Loans, by an assignment of the proprietary lease or occupancy
agreement relating to a Cooperative Dwelling and the shares issued by the
related cooperative. Except as otherwise specified in the related Prospectus
Supplement, (i) no Loan will have had a Loan-to-Value Ratio at origination in
excess of 95%, (ii) each Mortgage Loan secured by Single Family Property and
having a Loan-to-Value Ratio in excess of 80% at origination will be covered by
a primary mortgage insurance policy, (iii) each Loan will have had an original
term to stated maturity of not less than 10 years and not more than 40 years,
(iv) no 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 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 Loan (other than a Cooperative Loan or a Loan
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, insurance
policies or other types of credit support may be provided with respect to the
Loans underlying the Private Mortgage-Backed Securities or with respect to the
Private Mortgage-Backed Securities themselves. The type, characteristics and
amount of credit support, if any, will be a function of certain characteristics
of the Loans and other factors and will have been established for the Private
Mortgage-Backed Securities on the basis of requirements of the rating agency
which assigned a rating to the Private Mortgage-Backed Securities.
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
Loans which comprise the underlying assets for the Private Mortgage-Backed
Securities including (A) the payment features of such Loans (i.e., whether they
are fixed rate or adjustable rate and whether they provide for fixed level
payments or other payment features), (B) the approximate aggregate principal
balance, if known, of underlying Loans insured or guaranteed by a governmental
entity, (C) the servicing fee or range of servicing fees with respect to the
Loans, and (D) the minimum and maximum stated maturities of the underlying Loans
at origination, (iii) the maximum original term-to-stated maturity of the
Private Mortgage-Backed Securities, (iv) the weighted average term-to-stated
maturity of the Private Mortgage-Backed Securities, (v) the pass-through or
certificate rate or ranges thereof for the Private Mortgage-Backed Securities,
(vi) the weighted average pass-through or certificate rate of the Private
Mortgage-Backed Securities, (vii) the 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, letters of credit or guarantees relating to
the Loans underlying the Private Mortgage-Backed Securities or to such Private
Mortgage-Backed Securities themselves, (ix) the terms on which the underlying
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 Loans may be substituted
for those originally underlying the Private Mortgage-Backed Securities.
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THE AGENCY SECURITIES
All of the Agency Securities will be registered in the name of the
Trustee or its nominee or, in the case of Agency Securities issued only in
book-entry form, a financial intermediary (which may be the Trustee) that is a
member of the Federal Reserve System or of a clearing corporation on the books
of which the security is held. Each Agency Security will evidence an interest in
a pool of mortgage loans and/or cooperative loans and/or in principal
distributions and interest distributions thereon.
The descriptions of GNMA, FHLMC and FNMA Certificates that are set forth
below are descriptions of certificates representing proportionate interests in a
pool of mortgage loans and in the payments of principal and interest thereon.
GNMA, FHLMC or FNMA may also issue mortgage-backed securities representing a
right to receive distributions of interest only or principal only or
disproportionate distributions of principal or interest or to receive
distributions of principal and/or interest prior or subsequent to distributions
on other certificates representing interests in the same pool of mortgage loans.
In addition, any of such issuers may issue certificates representing interests
in mortgage loans having characteristics that are different from the types of
mortgage loans described below. The terms of any such certificates to be
included in a Pool (and of the underlying mortgage loans) will be described in
the related Supplement, and the descriptions that follow are subject to
modification as appropriate to reflect the terms of any such certificates that
are actually included in a Pool.
GNMA. GNMA is a wholly owned corporate instrumentality of the United
States within the Department of Housing and Urban Development ("HUD"). Section
306(g) of Title III 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 that are based on and backed by a pool of loans
("FHA Loans") insured by the United States Federal Housing Administration (the
"FHA") under the Housing Act or Title V of the Housing Act of 1949, or
guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as
amended, or Chapter 37 of Title 38, United States Code or by pools of other
eligible mortgage 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 such guaranty, GNMA is authorized, under Section
306(d) of the Housing Act, to borrow from the United States Treasury with no
limitations as to amount.
GNMA CERTIFICATES. All of the GNMA Certificates (the "GNMA Certificates")
will be mortgage-backed certificates issued and serviced by GNMA- or
FNMA-approved mortgage servicers. The mortgage loans underlying GNMA
Certificates may consist of FHA Loans secured by mortgages on one-to four-family
residential properties or multifamily residential properties, loans secured by
mortgages on one-to four-family residential properties or multifamily
residential properties, mortgage loans which are partially guaranteed by the
United States Department of Veteran Affairs (the "VA") and other mortgage loans
eligible for inclusion in mortgage pools underlying GNMA Certificates. Unless
otherwise specified in the related Supplement, at least 90 percent by original
principal amount of the mortgage loans underlying a GNMA Certificate will be
mortgage loans having maturities of 20 years or more.
Each GNMA Certificate provides for the payment by or on behalf of the
issuer of the GNMA Certificate to the registered holder of such GNMA Certificate
of monthly payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of the monthly scheduled
principal and interest payments on each underlying eligible mortgage loan, less
servicing and guaranty fees aggregating the excess of the interest on each such
mortgage loan over the GNMA Certificate pass-through rate. In addition, each
payment to a GNMA Certificateholder will include
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proportionate pass-through payments to such holder of any prepayments of
principal of the mortgage loan underlying the GNMA Certificate, and the holder's
proportionate interest in the remaining principal balance in the event of a
foreclosure or other disposition of any such mortgage loan.
Unless otherwise specified in the related Supplement, the GNMA
Certificates included in a Trust Fund may be issued under either or both of the
GNMA I program ("GNMA I Certificates") and the GNMA II program ("GNMA II
Certificates"). All mortgages underlying a particular GNMA I Certificate must
have the same annual interest rate (except for pools of mortgages secured by
mobile homes). The annual interest rate on each GNMA I Certificate is one-half
percentage point less than the annual interest rate on the mortgage loans
included in the pool of mortgages backing such GNMA I Certificate. Mortgages
underlying a particular GNMA II Certificate may have annual interest rates that
vary from each other by up to one percentage point. The annual interest rate on
each GNMA II Certificate will be between one-half percentage point and one and
one-half percentage points less than the highest annual interest rate on the
mortgage loans included in the pool of mortgages backing such GNMA II
Certificate.
GNMA will have approved the issuance of each of the GNMA Certificates in
accordance with a guaranty agreement between GNMA and the servicer of the
mortgage loans underlying such GNMA Certificate. Pursuant to such agreement, the
servicer is required to advance its own funds in order to make timely payments
of all amounts due on the GNMA Certificate, even if the payments received by
such servicer on the mortgage loans backing the GNMA Certificate are less than
the amounts due on such GNMA Certificate. If a servicer is unable to make
payments on a GNMA Certificate as it becomes due, it must promptly notify GNMA
and request GNMA to make such payment. Upon such notification and request, GNMA
will make such payments directly to the registered holder of the GNMA
Certificate. In the event no payment is made by such servicer and such servicer
fails to notify and request GNMA to make such payment, the registered holder of
the GNMA Certificate has recourse only against GNMA to obtain such payment. The
registered holder of the GNMA Certificates included in a Pool is entitled to
proceed directly against GNMA under the terms of each GNMA Certificate or the
guaranty agreement or contract relating to such GNMA Certificate for any amounts
that are not paid when due under each GNMA Certificate.
As described above, the GNMA Certificates included in a Trust Fund, and
the related underlying mortgage loans, may have characteristics and terms
different from those described above. Any such different characteristics and
terms will be described in the related Prospectus Supplement.
FHLMC. FHLMC is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the
"FHLMC Act"). FHLMC's common stock is owned by the Federal Home Loan Banks, and
its preferred stock is owned by the stockholders of such Federal Home Loan
Banks. FHLMC was established primarily for the purpose of increasing the
availability of mortgage credit for the financing of urgently needed housing. It
seeks to provide an enhanced degree of liquidity for residential mortgage
investments primarily by assisting in the development of secondary markets for
conventional mortgages. The principal activity of FHLMC currently consists of
the purchase of first lien conventional residential mortgage loans or
participation interests in such mortgage loans and the resale of the mortgage
loans so purchased in the form of mortgage securities. FHLMC is confined to
purchasing, so far as practicable, conventional mortgage loans and participation
interests therein which 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. FHLMC Certificates (the "FHLMC Certificates")
represent an undivided interest in a group of mortgage loans purchased by FHLMC.
Mortgage loans underlying the FHLMC Certificates included in a Trust Fund will
consist of fixed- or adjustable-rate mortgage loans with original
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terms to maturity of from 10 to 30 years, all of which are secured by first
liens on one- to four-family residential properties or properties containing
five or more units and designed primarily for residential use.
FHLMC Certificates are issued and maintained and may be transferred only
on the book-entry system of a Federal Reserve Bank and may only be held of
record by entities eligible to maintain book-entry accounts at a Federal Reserve
Bank. Beneficial owners will hold FHLMC Certificates ordinarily through one or
more financial intermediaries. The rights of a beneficial owner of a FHLMC
Certificate against FHLMC or a Federal Reserve Bank may be exercised only
through the Federal Reserve Bank on whose book-entry system such Certificate is
held.
Under its Cash and Guarantor programs, FHLMC guarantees to each
registered holder of a FHLMC Certificate the timely payment of interest at the
rate provided for by such FHLMC Certificate on the registered holder's pro rata
share of the unpaid principal balance outstanding of the related mortgage loans,
whether or not received. FHLMC also guarantees to each registered holder of a
FHLMC Certificate ultimate collection of all principal of the related mortgage
loans, without any offset or deduction, to the extent of such holder's pro rata
share thereof, but does not guarantee the timely payment of scheduled principal.
Pursuant to its guarantees, FHLMC indemnifies holders of FHLMC Certificates
against any diminution of principal by reason of charges for property repairs,
maintenance and foreclosure. FHLMC may remit the amount due on account of its
guarantee of ultimate collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following (i) foreclosure
sale, (ii) payment of the claim by any mortgage insurer, or (iii) 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
servicing judgment with respect to the mortgages in the same manner as for
mortgages that it has purchased but not sold. In lieu of guaranteeing only the
ultimate collection of principal payments in the manner described above, FHLMC
may, but will not be obligated to, enter into one or more agreements with the
Issuer and the Trustee pursuant to which FHLMC will agree to guarantee the
timely receipt of scheduled principal payments. If such an agreement is entered
into and is applicable to all or any part of the FHLMC Certificates included in
a Trust Fund, its existence will be disclosed in the related Prospectus
Supplement.
Under its Gold PC Program, FHLMC guarantees to each registered holder of
a FHLMC Certificate the timely payment of interest calculated in the same manner
as described above, as well as timely installments of scheduled principal
calculated on the basis of the weighted average remaining term to maturity of
the mortgage loans in the pool underlying the related FHLMC Certificate.
As described above, the FHLMC Certificates included in a Trust Fund, and
the related underlying mortgage loans, may have characteristics and terms
different from those described above. Any such different characteristics and
terms will be described in the related Prospectus Supplement.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States.
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 interest rate on the FHLMC Certificate. For FHLMC Pools formed under FHLMC's
Guarantor Program having pool numbers
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beginning with 18-012, the range between the lowest and highest annual interest
rates on the mortgage loans does not exceed two percentage points. See
"Additional Information" for the availability of further information respecting
FHLMC and FHLMC Certificates.
FNMA. FNMA is a federally chartered and stockholder owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended. 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 home
mortgage loans from local lenders, thereby replenishing their funds for
additional lending. FNMA acquires funds to purchase home 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. In addition, FNMA issues mortgage-backed securities
primarily in exchange for pools of mortgage loans from lenders.
FNMA CERTIFICATES. FNMA Certificates represent fractional interests in a
pool of mortgage loans formed by FNMA.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing scheduled principal and interest at the
applicable pass-through rate 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. If FNMA were unable to perform such
obligations, distributions on FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly,
delinquencies and defaults would affect monthly distributions to holders of FNMA
Certificates. The obligations of FNMA under its guarantees are obligations
solely of FNMA and are not backed by, nor entitled to, the full faith and credit
of the United States.
As described above, the FNMA Certificates included in a Trust Fund, and
the related underlying mortgage loans, may have characteristics and terms
different from those described above. Any such different characteristics and
terms will be described in the related Prospectus Supplement.
THE MORTGAGE LOANS
GENERAL. The Trust Fund for a Series may consist of Mortgage Loans or
participation interests therein. Mortgage Loans comprising the Mortgage Assets
and Mortgage Loans in which participation interests are conveyed to the Trustee
are both referred to herein as the "Mortgage Loans." If so specified in the
related Prospectus Supplement, the Mortgage Loans will have been originated by
mortgage lenders which are FNMA- or FHLMC-approved seller/servicers or by their
wholly-owned subsidiaries, and, in the case of FHA Loans, approved by HUD as an
FHA mortgagee. Some of the Mortgage Loans may have been originated by the
Depositor or any of its affiliates. The Mortgage Loans may include Conventional
Loans, FHA Loans or VA Loans. The Mortgage Loans may have fixed interest rates
or adjustable interest rates and may provide for fixed level payments or may be
GPM Loans, GEM Loans, Buy-Down Loans, Bi-Weekly Loans or Mortgage Loans with
other payment characteristics as described below and under "YIELD, PREPAYMENT
AND MATURITY CONSIDERATIONS" herein or in the related Prospectus Supplement.
ARMs may have a feature which permits the borrower to convert the rate thereon
to a long-term fixed rate. The Mortgage Loans may be secured by mortgages or
deeds of trust or other similar security instruments creating a first lien on
Mortgaged Property. The Mortgage Loans may also include Cooperative Loans
evidenced by promissory notes secured by a lien on the shares issued by private,
non-profit, cooperative housing corporations and on the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
Cooperative Dwellings. The Mortgage Loans
35
may also include Condominium Loans secured by a Mortgage on a Condominium Unit
together with such Condominium Unit's appurtenant interest in the common
elements.
COOPERATIVE DWELLINGS. The Mortgage Loans may also include Condominium
Loans secured by a Mortgage on a Condominium Unit together with such Condominium
Unit's appurtenant interest in the common elements.
The Mortgaged Properties may include Single Family Property (i.e., one-to
four-family residential housing, including Condominium Units, and Cooperative
Dwellings) or Multifamily Property (i.e., multifamily residential rental
properties or cooperatively-owned properties consisting of five or more dwelling
units). The Mortgaged Properties may consist of detached individual dwellings,
individual condominiums, townhouses, duplexes, row houses, individual units in
planned unit developments and other attached dwelling units. Multifamily
Property may include mixed commercial and residential structures. Each Single
Family Property and Multifamily Property will be located on land owned in fee
simple by the borrower or on land leased by the borrower for a term at least two
years greater than the term of the related Mortgage Loan. The fee interest in
any leased land will be subject to the lien securing the related Mortgage Loan.
Attached dwellings may include owner-occupied structures where each borrower
owns the land upon which the unit is built, with the remaining adjacent land
owned in common or dwelling units subject to a proprietary lease or occupancy
agreement in a cooperatively owned apartment building. The proprietary lease or
occupancy agreement securing a Cooperative Loan is generally subordinate to any
blanket mortgage on the related cooperative apartment building and/or on the
underlying land. Additionally, in the case of a Cooperative Loan, the
proprietary lease or occupancy agreement is subject to termination and the
cooperative shares are subject to cancellation by the cooperative if the
tenant-stockholder fails to pay maintenance or other obligations or charges owed
by such tenant-stockholder. See "CERTAIN LEGAL ASPECTS OF LOANS."
The aggregate principal balance of Mortgage Loans which are
owner-occupied will be disclosed in the related Prospectus Supplement. Unless
otherwise specified in the Prospectus Supplement, the sole basis for a
representation that a given percentage of the Mortgage Loans are secured by
Single-Family Property that is owner-occupied will be either (i) the making of a
representation by the Mortgagor at origination of the Mortgage Loan either that
the underlying Mortgaged Property will be used by the borrower for a period of
at least six months every year or that the borrower intends to use the Mortgaged
Property as a primary residence, or (ii) a finding that the address of the
underlying Mortgaged Property is the borrower's mailing address as reflected in
the Servicer's records. To the extent specified in the related Prospectus
Supplement, the Mortgaged Properties may include non-owner occupied investment
properties and vacation and second homes. Mortgage Loans secured by investment
properties and Multifamily Property may also be secured by an assignment of
leases and rents and operating or other cash flow guarantees relating to the
Loans to the extent specified in the related Prospectus Supplement.
The characteristics of the Mortgage Loans comprising or underlying the
Mortgage Assets for a Series may vary to the extent that credit support is
provided in levels satisfactory to the Rating Agency which assigns a rating to a
Series of Certificates. Unless otherwise specified in the related Prospectus
Supplement for a Series, the following selection criteria shall apply with
respect to the Mortgage Loans comprising the Mortgage Assets:
(a) no Mortgage Loan will have had a Loan-to-Value Ratio at
origination in excess of 95%;
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(b) no Mortgage Loan that is a Conventional Loan secured by a
Single Family Property may have a Loan-to-Value Ratio in excess of 80%,
unless covered by a primary mortgage insurance policy as described
herein;
(c) each Mortgage Loan must have an original term to maturity of
not less than 10 years and not more than 40 years;
(d) no Mortgage Loan may be included which, as of the Cut-off
Date, is more than 30 days delinquent as to payment of principal or
interest;
(e) no Mortgage Loan (other than a Cooperative Loan) may be
included unless a title insurance policy or, in lieu thereof, an
attorney's opinion of title, and a standard hazard insurance policy
(which may be a blanket policy) is in effect with respect to the
Mortgaged Property securing such Mortgage Loan.
The Depositor will not require that a standard hazard or flood insurance
policy be maintained for 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, a cooperative and
the related borrower on a Cooperative Note do not maintain such insurance or do
not maintain adequate coverage or any insurance proceeds are not applied to the
restoration of the damaged property, damage to such borrower's Cooperative
Dwelling or such cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Note.
The initial Loan-to-Value Ratio of any Mortgage Loan represents the ratio
of the principal amount of the Mortgage Loan outstanding at the origination of
such loan divided by the fair market value of the mortgaged property, as shown
in the appraisal prepared in connection with origination of the Mortgage Loan
(the "Appraised Value"). The fair market value of the Mortgaged Property
securing any Mortgage Loan is the lesser of the purchase price paid by the
borrower or the Appraised Value of such Mortgaged Property.
Unless otherwise specified in the related Prospectus Supplement, with
respect to Buy-Down Loans, during the period (the "Buy-Down Period") when the
borrower is not obligated to pay the full Scheduled Payment otherwise due on
such loan, each of the Buy-Down Loans will provide for Scheduled Payments based
on a hypothetical reduced interest rate (the "Buy-Down Mortgage Rate") that will
not have been more than 3% below the mortgage rate at origination, and for
annual increases in the Buy-Down Mortgage Rate during the Buy-Down Period that
will not exceed 1%. The Buy-Down Period will not exceed three years. The maximum
amount of the Buy-Down Amounts that may be contributed with respect to a
Mortgaged Property having a Loan-to-Value Ratio (i) of 90% or less at
origination is limited to 10% of the Appraised Value of the Mortgaged Property,
and (ii) in excess of 90% at origination is limited to 6% of the Appraised Value
of the Mortgaged Property, unless otherwise indicated in the applicable
Prospectus Supplement. Unless specified otherwise in the related Prospectus
Supplement, the maximum amount of Funds ("Buy-Down Amounts") that may be
contributed by the Servicer of the related Mortgaged Loan is limited to 6% of
the Appraised Value of the Mortgaged Property. This limitation does not apply to
contributions from immediate relatives or the employer of the mortgagor. Except
as may be otherwise indicated in the related Prospectus Supplement, the borrower
under each Buy-Down Loan will have been qualified at a mortgage rate which is
not more than 3% per annum below the current mortgage rate at origination.
Accordingly, the repayment of a Buy-Down Loan is dependent on the ability of the
borrower to make larger Scheduled Payments after the Buy-Down Amounts have been
depleted and, for certain Buy-Down Loans, while such Buy-Down Amounts are being
depleted.
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Unless otherwise specified in the related Prospectus Supplement, with
respect to Multifamily Property, (a) no Mortgage Loan will have been delinquent
for more than 30 days within the 12-month period ending with the Cut-off Date,
(b) no more than two payments will have been 30 days or more delinquent during a
three-year period ending on the Cut-off Date, (c) Mortgage Loans with respect to
any single borrower will not exceed 5% of the aggregate principal balance of the
Loans comprising the Mortgage Assets as of the Cut-off Date, and (d) the debt
service coverage ratio with respect to each Mortgage Loan (calculated as
described in the related Prospectus Supplement) will not be less than 11:1.
Unless otherwise specified in the related Prospectus Supplement, the
Bi-Weekly Loans will consist of fixed-rate, bi-weekly payment, conventional,
fully-amortizing Mortgage Loans payable on every other Friday during the term
thereof and secured by first mortgages on one-to four-family residential
properties.
Unless otherwise specified in the related Prospectus Supplement, the ARMs
will provide for a fixed initial mortgage rate for either the first six or
twelve Scheduled Payments. Thereafter, the Mortgage Rates are subject to
periodic adjustment based, subject to the applicable limitations, on changes in
the relevant Index described in the applicable Prospectus Supplement, to a rate
equal to the Index plus the Gross Margin, which is a fixed percentage spread
over the Index established contractually for each ARM, at the time of its
origination. An ARM may be convertible into a fixed-rate Mortgage Loan. To the
extent specified in the related Prospectus Supplement, any ARM so converted may
be subject to repurchase by the Servicer or Master Servicer.
ARMs have features that are relatively new for the residential lending
market in the United States. In particular, adjustable mortgage rates can cause
payment increases that some borrowers may find difficult to make. However, each
of the ARMs provides that its mortgage rate may not be adjusted to a rate above
the applicable lifetime mortgage rate cap (the "Lifetime Mortgage Rate Cap") or
below the applicable lifetime minimum mortgage rate (the "Minimum Mortgage
Rate"), if any, for such ARM. In addition, certain of the ARMs provide for
limitations on the maximum amount by which their mortgage rates may adjust for
any single adjustment period (the "Maximum Mortgage Rate Adjustment"). Some ARMs
are payable in self-amortizing payments of principal and interest. Other ARMs
("Negatively Amortizing ARMs") instead provide for limitations on changes in the
Scheduled Payment on such ARMs to protect borrowers from payment increases due
to rising interest rates. Such limitations can result in Scheduled Payments
which are greater or less than the amount necessary to amortize a Negatively
Amortizing ARM by its original maturity at the mortgage rate in effect during
any particular adjustment period. In the event that the Scheduled Payment is not
sufficient to pay the interest accruing on a Negatively Amortizing ARM, then the
Deferred Interest is added to the principal balance of such ARM causing the
negative amortization thereof, and will be repaid through future Scheduled
Payments. If specified in the related Prospectus Supplement, Negatively
Amortizing ARMs may provide for the extension of their original stated maturity
to accommodate changes in their mortgage rate. The relevant Prospectus
Supplement will specify whether the ARMs comprising or underlying the Mortgage
Assets are Negatively Amortizing ARMs.
Unless otherwise specified in the related Prospectus Supplement, the
index applicable to any ARMs comprising the Mortgage Assets (the "Index") will
be the three-year Treasury Index, the one-year Treasury Index, the Six Month
Treasury Index or the Eleventh District Costs of Funds Index. If applicable, the
Prospectus Supplement for each Series will specify the Index to be used with
respect to any Mortgage Loans underlying such Series.
The related Prospectus Supplement for each Series will provide
information with respect to the Mortgage Loans as of the Cut-off Date,
including, among other things, (a) the aggregate outstanding principal balance
of the Mortgage Loans; (b) the weighted average mortgage rate on the Mortgage
Loans,
38
and, in the case of ARMs, the weighted average of the current mortgage rates and
the Lifetime Mortgage Rate Caps, if any; (c) the average outstanding principal
balance of the Mortgage Loans; (d) the weighted average remaining term-to-stated
maturity of the Mortgage Loans and the range of remaining terms-to-stated
maturity; (e) the range of Loan-to-Value Ratios of the Mortgage Loans; (f) the
relative percentage (by outstanding principal balance as of the Cut-off Date) of
Mortgage Loans that are ARMs, Buy-Down Loans, GEM Loans, GPM Loans, Cooperative
Loans, Conventional Loans, Bi-Weekly Loans, FHA Loans and VA Loans, (g) the
percentage of Mortgage Loans (by outstanding principal balance as of the Cut-off
Date) that are covered by primary mortgage insurance policies; (h) any pool
insurance policy, special hazard insurance policy or bankruptcy bond or other
credit support relating to the Mortgage Loans; (i) the geographic distribution
of the Mortgaged Properties securing the Mortgage Loans and (j) the percentage
of Mortgage Loans (by principal balance as of the Cut-off Date) that are secured
by Single Family Property, Multifamily Property, Cooperative Dwellings,
investment property and vacation or second homes. The related Prospectus
Supplement will also specify any other limitations on the types or
characteristics of Mortgage Loans which may comprise or underlie the Mortgage
Assets for a Series.
If information of the nature described above respecting the Mortgage
Loans is not known to the Depositor at the time the Certificates are initially
offered, more general information of the nature described above will be provided
in the Prospectus Supplement and the final specific information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Certificates.
THE MANUFACTURED HOME LOANS
The Manufactured Home Loans comprising or underlying the Mortgage Assets
for a Series of Certificates will consist of manufactured housing conditional
sales contracts and installment loan agreements originated by a manufactured
housing dealer in the ordinary course of business and purchased by the
Depositor. Each Manufactured Home Loan will have been originated by a bank or
savings institution which is a FNMA- or FHLMC-approved seller/servicer or by any
financial institution approved for insurance by the Secretary of Housing and
Urban Development pursuant to Section 2 of the National Housing Act.
The Manufactured Home Loans may be Conventional Loans, FHA Loans or VA
Loans. Each Manufactured Home Loan will be secured by a Manufactured Home.
Unless otherwise specified in the related Prospectus Supplement, the
Manufactured Home Loans will be fully amortizing and will bear interest at a
fixed interest rate.
Unless otherwise specified in the related Prospectus Supplement for a
Series, the Manufactured Homes securing the Manufactured Home Loans consist of
manufactured homes within the meaning of 42 United States Code, Section 5402(6),
which defines a "manufactured home" as "a structure, transportable in one or
more sections, which in the traveling mode, is eight body feet or more in width
or forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating,
air-conditioning, and electrical systems contained therein; except that such
term shall include any structure which meets all the requirements of
[this]paragraph except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the Secretary of
Housing and Urban Development and complies with the standards established under
[this] chapter."
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Unless otherwise specified in the related Prospectus Supplement for a
Series, the following restrictions apply with respect to Manufactured Home Loans
comprising or underlying the Mortgage Assets for a Series:
(a) no Manufactured Home Loan will have had a Loan-to-Value
Ratio at origination in excess of 95%;
(b) each Manufactured Home Loan must have an original term to
maturity of not less than three years and not more than 25 years;
(c) no Manufactured Home Loan may be more than 30 days
delinquent as to payment of principal or interest as of the Cut-off Date;
and
(d) each Manufactured Home Loan must have, as of the Cut-off Date,
a standard hazard insurance policy (which may be a blanket policy) in
effect with respect thereto.
The initial Loan-to-Value Ratio of any Manufactured Home Loan represents
the ratio of the principal amount of the Manufactured Home Loan outstanding at
the origination of such loan divided by the fair market value of the
Manufactured Home, as shown in the appraisal prepared in connection with
origination of the Manufactured Home Loan (the "Appraised Value"). The fair
market value of the Manufactured Home securing any Manufactured Home Loan is the
lesser of the purchase price paid by the borrower or the Appraised Value of such
Manufactured Home. With respect to underwriting of Manufactured Home Loans, see
"LOAN UNDERWRITING PROCEDURES AND STANDARDS." With respect to servicing of
Manufactured Home Loans, see "SERVICING OF LOANS."
The related Prospectus Supplement for each Series will provide
information with respect to the Manufactured Home Loans comprising the Mortgage
Assets as of the Cut-off Date, including, among other things, (a) the aggregate
outstanding principal balance of the Manufactured Home Loans comprising or
underlying the Mortgage Assets; (b) the weighted average interest rate on the
Manufactured Home Loans; (c) the average outstanding principal balance of the
Manufactured Home Loans; (d) the weighted average remaining scheduled term to
maturity of the Manufactured Home Loans and the range of remaining scheduled
terms to maturity; (e) the range of Loan-to-Value Ratios of the Manufactured
Home Loans; (f) the relative percentages (by principal balance as of the Cut-off
Date) of Manufactured Home Loans that were made on new Manufactured Homes and on
used Manufactured Homes; (g) any pool insurance policy, special hazard insurance
policy or bankruptcy bond or other credit support relating to the Manufactured
Home Loans; and (h) the distribution by state of Manufactured Homes securing the
Loans. The related Prospectus Supplement will also specify any other limitations
on the types or characteristics of Manufactured Home Loans which may be included
in the Mortgage Assets for a Series.
If information of the nature specified above respecting the Manufactured
Home Loans is not known to the Depositor at the time the Certificates are
initially offered, more general information of the nature described above will
be provided in the Prospectus Supplement and the final specific information will
be set forth in a Current Report on Form 8-K to be available to investors on the
date of issuance of the related Series and to be filed with the Commission
within 15 days after the initial issuance of such Certificates.
40
COLLECTION ACCOUNT AND CERTIFICATE ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, a
separate Collection Account for each Series will be established by the Master
Servicer in the name of the Trustee for deposit of all distributions received
with respect to the Mortgage Assets for such Series, all Advances, the amount of
cash to be initially deposited therein, if any, reinvestment income thereon and
certain other amounts required to be deposited therein pursuant to the Pooling
and Servicing Agreement. Unless otherwise specified in the related Prospectus
Supplement or Pooling and Servicing Agreement, any reinvestment income or other
gain from investments of funds in the Collection Account will be credited to
such Collection Account, and any loss resulting from such investments will be
charged to such Collection Account. Such reinvestment income may, however, be
payable to the Master Servicer or to a Servicer as additional servicing
compensation. See "SERVICING OF LOANS" and "THE POOLING AND SERVICING
AGREEMENTS--Investment of Funds." In such a case, such reinvestment income
would not be included in calculation of the Available Distribution Amount. See
"DESCRIPTION OF THE CERTIFICATES--Distributions on the Certificates."
Funds on deposit in the Collection Account will be available for deposit
into the Certificate Account for certain payments provided for in the Pooling
and Servicing Agreement. Unless otherwise specified in the Prospectus Supplement
or the Pooling and Servicing Agreement, amounts in the Collection Account
constituting reinvestment income which is payable to the Master Servicer as
additional servicing compensation or for the reimbursement of advances or
expenses, amounts in respect of any Servicing Fee, Retained Interest, and
amounts to be deposited into any reserve fund will not be included in
determining amounts to be remitted to the Trustee for deposit into the
Certificate Account.
A separate Certificate Account will be established by the Trustee or, if
so specified in the related Prospectus Supplement, by the Master Servicer, in
either case in the name of the Trustee for the benefit of the Certificateholders
into which all funds received from the Master Servicer and all required
withdrawals from any reserve funds for such Series will be deposited, pending
distribution to the Certificateholders. Unless otherwise specified in the
related Prospectus Supplement, any reinvestment income or other gain from
investments of funds in the Certificate Account will be credited to the
Certificate Account and any loss resulting from such investments will be charged
to such Certificate Account. Such reinvestment income, may, however, be payable
to the Master Servicer as additional servicing compensation. On each
Distribution Date, all funds on deposit in the Certificate Account, subject to
certain permitted withdrawals by the Trustee as set forth in the Pooling and
Servicing Agreement, will be available for remittance to the Certificateholders;
provided that, if it is specified in the related Prospectus Supplement that the
Certificate Account will be maintained by the Master Servicer in the name of the
Trustee, then, prior to each Distribution Date, funds in the Certificate Account
will be transferred to a separate account established by and in the name of the
Trustee from which the funds on deposit therein will, subject to permitted
withdrawals by the Trustee as specified above, be available for remittance to
the Certificateholders. See also "THE POOLING AND SERVICING
AGREEMENTS--Certificate Account" herein.
OTHER FUNDS OR ACCOUNTS
A Trust Fund may include certain other funds and accounts or a security
interest in certain funds and accounts for the purpose of, among other things,
paying certain administrative fees and expenses of the Trust Fund and
accumulating funds pending their distribution. If so specified in the related
Prospectus Supplement, certain funds may be established with the Trustee with
respect to Buy-Down Loans, GPM Loans, or other Loans having special payment
features included in the Trust Fund in addition to or in lieu of any such
similar funds to be held by the Servicer. See "SERVICING OF LOANS--Payments
on
41
Loans; Deposits to Collection Accounts." If Private Mortgage-Backed Securities
are backed by GPM Loans and the Asset Value with respect to a Multiple-Class
Series is determined on the basis of the scheduled maximum principal balance of
the GPM Loans, a GPM Fund will be established which will be similar to that
which would be established if GPM Loans constituted the Mortgage Assets. See
"SERVICING OF LOANS--Payments on Loans; Deposits to Collection Accounts" herein.
Other similar accounts may be established as specified in the related Prospectus
Supplement.
LOAN UNDERWRITING PROCEDURES AND STANDARDS
UNDERWRITING STANDARDS
The Depositor expects that all Loans comprising the Mortgage Assets for a
Series will have been originated in accordance with the underwriting procedures
and standards described herein, except as otherwise set forth in the related
Prospectus Supplement.
The originator of the Loans (or another entity specified in the related
Prospectus Supplement) will make representations and warranties concerning
compliance with such underwriting procedures and standards. Additionally, unless
otherwise specified in the related Prospectus Supplement, all or a sample of the
Loans comprising Mortgage Assets for a Series will be reviewed by or on behalf
of the Depositor to determine compliance with such underwriting standards and
procedures and compliance with other requirements for inclusion in the Trust
Fund.
Mortgage Loans will have been originated by a savings and loan
association, savings bank, commercial bank, credit union, insurance company or
similar institution which is supervised and examined by a federal or state
authority or by a mortgagee approved by the Secretary of Housing and Urban
Development pursuant to Sections 203 and 211 of the National Housing Act or a
wholly-owned subsidiary thereof. Manufactured Home Loans may have been
originated by such institutions or by a financial institution approved for
insurance by the Secretary of Housing and Urban Development pursuant to Section
2 of the National Housing Act. Except as otherwise set forth in the related
Prospectus Supplement for a Series of Certificates, the originator of a Loan
will have applied underwriting procedures intended to evaluate the borrower's
credit standing and repayment ability and the value and adequacy of the related
property as collateral. FHA Loans and VA Loans will have been originated in
compliance with the underwriting policies of FHA and VA, respectively.
Each borrower will have been required to complete an application designed
to provide to the original lender pertinent credit information about the
borrower. As part of the description of the borrower's financial condition, the
borrower will have furnished information with respect to its assets,
liabilities, income, credit history, employment history and personal
information, and 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. If the borrower was self-employed, the borrower will have been
required to submit copies of recent tax returns. The borrower may also have been
required to authorize verifications of deposits at financial institutions where
the borrower had demand or savings accounts. With respect to Multifamily
Property, information concerning operating income and expenses will have been
obtained from the borrower showing operating income and expenses during the
preceding three calendar years. Certain considerations may cause an originator
of Loans to depart from these guidelines. For example, when two individuals
co-sign the loan documents, the incomes and expenses of both individuals may be
included in the computation.
42
The adequacy of the property financed by the related Loan as security for
repayment of such Loan will generally have been determined by appraisal in
accordance with pre-established appraisal procedure guidelines for appraisals
established by or acceptable to the originator. Appraisers may be staff
appraisers employed by the Loan originator or independent appraisers selected in
accordance with pre-established guidelines established by the Loan originator.
The appraisal procedure guidelines will have required that the appraiser or an
agent on its behalf to personally inspect the property and to verify that it was
in good condition and that construction, if new, had been completed. The
appraisal will have been based upon a market data analysis of recent sales of
comparable properties and, when deemed applicable, a replacement cost analysis
based on the current cost of constructing or purchasing a similar property.
Based on the data provided, certain verifications and the appraisal, a
determination will have been made by the original lender that the borrower's
monthly income would be sufficient to enable the borrower to meet its monthly
obligations on the Loan and other expenses related to the property (such as
property taxes, utility costs, standard hazard and primary mortgage insurance
and, if applicable, maintenance fees and other levies assessed by a Cooperative)
and certain other fixed obligations other than housing expenses. The originating
lender's guidelines for Loans secured by Single Family Property generally will
specify that Scheduled Payments plus taxes and insurance and all Scheduled
Payments extending beyond one year (including those mentioned above and other
fixed obligations, such as car payments) would equal no more than specified
percentages of the prospective borrower's gross income. These guidelines will
generally be applied only to the payments to be made during the first year of
the Loan. Except as otherwise specified in the related Prospectus Supplement,
with respect to Mortgage Loans that are Conventional Loans, underwriting
guidelines used to establish the relevant percentages of gross income will be
similar to underwriting guidelines used by FNMA and FHLMC at the time of
origination of the Loan, except that the ratio of Scheduled Payments and certain
other fixed obligations to monthly gross income may exceed the comparable FNMA
or FHLMC limits as specified in the related Prospectus Supplement.
With respect to FHA Loans and VA Loans, traditional underwriting
guidelines used by the FHA and the VA, as the case may be, which were in effect
at the time of origination of each Loan will generally have been applied. With
respect to Manufactured Home Loans that are Conventional Loans, the related
Prospectus Supplement will specify the required minimum downpayment, the maximum
amount of purchase price eligible for financing, the maximum original principal
amount that may be financed, and the limitations on ratios of borrower's
Scheduled Payment to gross monthly income and monthly income net of other fixed
payment obligations. With respect to Multifamily Property, the Loan originator
will have made an assessment of the capabilities of the management of the
project, including a review of management's past performance record, its
management reporting and control procedures (to determine its ability to
recognize and respond to problems) and its accounting procedures to determine
cash management ability. Income derived from the Mortgaged Property constituting
investment property may have been considered for underwriting purposes, rather
than the income of the borrower from other sources. With respect to Mortgaged
Property consisting of vacation or second homes, no income derived from the
property will have been considered for underwriting purposes.
Certain types of Loans that may be included in the Mortgage Assets for a
Series are recently developed and may involve additional uncertainties not
present in traditional types of loans. For example, Buy-Down Loans, GEM Loans
and GPM Loans provide for escalating or variable payments by the borrower. These
types of Loans are underwritten on the basis of a judgment that the borrower
will have the ability to make larger Scheduled Payments in subsequent years.
ARMs may involve similar assessments.
43
To the extent specified in the related Prospectus Supplement, the
Depositor may purchase Loans (or participation interests therein) for inclusion
in a Trust Fund that are underwritten under standards and procedures which vary
from and are less stringent than those described herein. For instance, Loans may
be underwritten under a "limited documentation program," if specified in the
Prospectus Supplement. With respect to such Loans, minimal investigation into
the borrowers' credit history and income profile is undertaken by the originator
and such Loans may be underwritten primarily on the basis of an appraisal of the
Mortgaged Property and Loan-to-Value Ratio on origination. Thus, if the
Loan-to-Value Ratio is less than a percentage specified in the related
Prospectus Supplement, the originator may forego certain aspects of the review
relating to monthly income, and traditional ratios of monthly or total expenses
to gross income may not be applied.
In addition, Mortgage Loans may have been originated in connection with a
governmental program under which underwriting standards were significantly less
stringent and designed to promote home ownership or the availability of
affordable residential rental property notwithstanding higher risks of default
and losses. The related Prospectus Supplement will specify the underwriting
standards applicable to such Mortgage Loans.
The underwriting standards applied by the Loan originator require that
the underwriting officers be satisfied that the value of the property being
financed, as indicated by an appraisal, currently supports and is anticipated to
support in the future the outstanding loan balance, and provides sufficient
value to mitigate the effects of adverse shifts in real estate values. Certain
states where the Mortgaged Properties may be located have "antideficiency" laws
requiring, in general, that lenders providing credit on Single Family Property
look solely to the property for repayment in the event of foreclosure. See
"CERTAIN LEGAL ASPECTS OF LOANS" herein.
LOSS EXPERIENCE
The general appreciation of real estate values experienced in the past
has been a factor in limiting the general loss experience on Conventional Loans.
However, there can be no assurance that the past pattern of appreciation in
value of the real property securing such Loans will continue. Further, there is
no assurance that appreciation of real estate values generally will limit loss
experiences on non-traditional housing such as Multifamily Property,
Manufactured Homes or Cooperative Dwellings. Similarly, no assurance can be
given that the value of the Mortgaged Property (including Cooperative Dwellings)
securing a Loan has remained or will remain at the level existing on the date of
origination of such Loan. If the residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the Loans and any secondary financing on the Mortgaged Properties
securing such Loans become equal to or greater than the value of such Mortgaged
Properties, then the actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. In addition, the value of property securing Cooperative Loans and the
delinquency rates with respect to Cooperative Loans, could be adversely affected
if the current favorable tax treatment of cooperative tenant stockholders were
to become less favorable. See "CERTAIN LEGAL ASPECTS OF LOANS" herein.
No assurance can be given that values of Manufactured Homes have or will
remain at the levels existing on the dates of origination of the related Loan.
Manufactured Homes are less likely to experience appreciation in value and more
likely to experience depreciation in value over time than other types of
Mortgaged Property. Additionally, delinquency, loss and foreclosure experience
on Manufactured Home Loans may be adversely affected to a greater degree by
regional and local economic conditions than more traditional Mortgaged Property.
Loans secured by Multifamily Property may also be more susceptible to losses due
to changes in local and regional economic conditions than Loans secured by
Single Family
44
Property. For example, unemployment resulting from an economic downturn in local
industry may sharply affect occupancy rates. Also, interest rate fluctuations
can make home ownership a more attractive alternative to renting, causing
occupancy rates and market rents to decline. New construction can create an
oversupply, particularly in a market that has experienced high vacancy rates.
To the extent that losses resulting from delinquencies, losses and
foreclosures or repossession of Mortgaged Property with respect to Loans
included in the Mortgage Assets for a Series of Certificates are not covered by
the methods of credit support or the insurance policies described herein or in
the related Prospectus Supplement, such losses will be borne by Holders of the
Certificates of such Series. Even where credit support covers all losses
resulting from delinquency and foreclosure or repossession, the effect of
foreclosures and repossessions may be to increase prepayment experience on the
Mortgage Assets, thus reducing average weighted life and affecting yield to
maturity. See "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS."
REPRESENTATIONS AND WARRANTIES
Unless otherwise specified in the related Prospectus Supplement or in the
Pooling and Servicing Agreement, the Master Servicer will represent and warrant
to the Depositor and the Trustee with respect to the Mortgage Loans comprising
the Mortgage Assets in a Trust Fund, upon delivery of the Mortgage Loans to the
Trustee hereunder, among other things, that based upon representations of the
originator of the Loans: (i) to the best of its knowledge the information set
forth in the Final Mortgage Loan Schedule is complete, true and correct as of
the Cut-off Date; (ii) it had good and marketable title to the Mortgage Note and
the Mortgage and it was the sole owner of each of the Mortgage Loans free and
clear of any and all liens, claims, pledges, participation interests, equities,
charges or security interests of any nature and has full right and authority,
subject to no interest or participation of, or agreement with, any other party,
to sell and assign the same; (iii) each Mortgage evidences a valid subsisting
and enforceable first lien on the property therein described, and such Mortgaged
Property is free and clear of all encumbrances and liens having priority over
the first lien of the related Mortgage, except for Liens for real estate taxes
and special assessments not yet due and payable and, covenants, conditions and
restrictions, rights of way, easements and other matters of the public record as
of the date of recording which are acceptable to mortgage lending institutions
generally, or which are specifically referred to in the lender's title insurance
policy delivered to the originator of the Mortgage Loan and either which are
referred to or otherwise considered in the appraisal made for the originator of
the Mortgage Loan, or which do not adversely affect the appraised value of the
Mortgaged Property as set forth in such appraisal, and other matters to which
like properties are commonly subject which do not materially interfere with the
benefits of the security intended to be provided by the Mortgage or the use,
enjoyment, value or marketability of the related Mortgaged Property; (iv) the
terms of Mortgage Note and the Mortgage have not been impaired, altered or
modified in any respect, except by a written instrument which has been recorded,
if necessary, to protect the interest of Certificateholders and which has been
delivered to the Trustee and the substance of which has been approved by the
primary mortgage guaranty insurer, if any; (v) no instrument of release or
waiver has been executed in connection with the Mortgage Loan, and no Mortgagor
has been released, in whole or in part, except in connection with an assumption
agreement which has been approved by the primary mortgage guaranty insurer, if
any, and which has been delivered to the Trustee; (vi) to the best of the Master
Servicer's knowledge, there are no defaults in complying with the terms of the
Mortgage, and all taxes, governmental assessments, insurance premiums, water,
sewer and municipal charges, leasehold payments or ground rents which previously
became due and owing with respect to the Mortgage have been paid, or an escrow
of funds has been established in an amount sufficient to pay for every such item
which remains unpaid and which has been assessed but is not yet due and payable.
The Master Servicer, and to the best of its knowledge, the Servicer, has not
advanced funds, or induced, solicited or knowingly received any advance of funds
by a party other than
45
the Mortgagor, directly or indirectly, for the payment of any amount required by
the Mortgage, except for interest accruing from the date of the Mortgage Note or
date of disbursement of the Mortgage proceeds, whichever is greater, to the day
which precedes by one month the Due Date of the first installment of principal
and interest; (vii) to the best of the Master Servicer's knowledge, there is no
proceeding pending or threatened for the total or partial condemnation of the
Mortgaged Property, nor is such a proceeding currently occurring, and as of the
Closing Date such property to the best of the Master Servicer's knowledge, is
undamaged by waste, fire, earthquake or earth movement, windstorm, flood,
tornado or other casualty, so as to materially, adversely affect the value of
the Mortgaged Property as security for the Mortgage Loan; (viii) to the best of
the Master Servicer's knowledge, there are no mechanics' or similar liens or
claims which have been filed for work, labor or material (and, to the best of
the Master Servicer's knowledge, no rights are outstanding that under law could
give rise to such lien) affecting the Mortgaged Property which are, or may be,
liens prior or equal to, or coordinate with, the lien of the Mortgage; (ix) to
the best of the Master Servicer's knowledge, all of the improvements which were
included for the purpose of determining the appraised value of the Mortgaged
Property lie wholly within the boundaries and building restriction lines of such
property or are insured against, and no improvements on adjoining properties
encroach upon the Mortgaged Property; (x) the Master Servicer has no knowledge
of any circumstances or conditions with respect to the Mortgage, the Mortgaged
Property, the Mortgagor or the Mortgagor's credit standing which would cause
investors to regard the Mortgage Loan as an unacceptable investment, cause the
Mortgage Loan to become delinquent, or materially and adversely affect the value
or marketability of the Mortgage Loan; (xi) to the best of the Master Servicer's
knowledge, no improvement located on or being part of the Mortgaged Property is
in violation of any applicable zoning law or regulation. All inspections,
licenses and certificates required to be made or issued with respect to all
occupied portions of the Mortgaged Property and, with respect to the use and
occupancy of the same, including but not limited to certificates of occupancy
and fire underwriting certificates, have been made or obtained from the
appropriate authorities and the Mortgaged Property is lawfully occupied under
applicable law; (xii) to the best of the Master Servicer's knowledge, no person
other than the Master Servicer has any interest in any Mortgage Loan, whether as
mortgagee, assignee, pledgee or otherwise; (xiii) all payments required to be
made up to the Cut-off Date for each Mortgage Loan under the terms of the
related Mortgage Note have been made. No payment required under any Mortgage
Loan is delinquent more than 30 days or has been delinquent more than 30 days
more than once during the twelve-month period immediately preceding the Cut-off
Date; (xiv) the Mortgage file contains each of the documents and instruments
specified to be included therein duly executed and in due and proper form,
enforceable in accordance with their terms. The Mortgage Note and the Mortgage
are on forms substantially similar to forms acceptable to the Depositor. Each
appraisal is on a form acceptable to FNMA or FHLMC with such riders as are
acceptable to FNMA and FHLMC, as the case may be; (xv) the Mortgage Note and the
related Mortgage are genuine, and, to the best of the Master Servicer's
knowledge, each is the legal, valid and binding obligation of the maker thereof,
enforceable in accordance with its terms, such enforceability being subject to
bankruptcy, insolvency, moratorium or other laws affecting the rights of
creditors generally, and to general principles of equity. To the best of the
Master Servicer's knowledge, all parties to the Mortgage Note and the Mortgage
had legal capacity to execute the Mortgage Note and the Mortgage and each
Mortgage Note and Mortgage have been duly and properly executed by such parties;
(xvi) any and all requirements of any federal, state or local law including,
without limitation, usury, truth-in-lending, real estate settlement procedures,
consumer credit protection, equal credit opportunity or disclosure laws
applicable to the Mortgage Loan have been complied with in all material
respects, and the Master Servicer shall maintain in its possession, available
for each Certificateholder's inspection, evidence of compliance in accordance
with its generally accepted business practices; (xvii) the proceeds of the
Mortgage Loan have been fully disbursed, there is no requirement for future
advances thereunder and any and all requirements as to completion of any on-site
or off-site improvements and as to disbursements of any escrow funds therefor
have been complied with. All costs, fees and expenses incurred in making, or
closing or recording the Mortgage Loans were
46
paid; (xviii) each Mortgage Loan is covered by an ALTA or CLTA mortgage title
insurance policy with an adjustable rate mortgage endorsement and an extended
coverage endorsement, if applicable, such endorsements substantially in the form
of ALTA Form 6.0, 6.1 or 6.2 and CLTA Form 100 or another California equivalent
of such ALTA Forms, respectively, or such other generally acceptable form of
policy or insurance acceptable to FNMA or FHLMC, issued by and the valid and
binding obligation of a title insurer acceptable to FNMA or FHLMC and, at the
time of issuance thereof, qualified to do business in the jurisdiction where the
property subject to the Mortgage is located, insuring the Master Servicer or the
originating mortgagee, and successor owners of indebtedness secured by the
insured Mortgage, as to the first priority lien of the Mortgage in an amount at
least equal to 125% of the original principal amount of the Mortgage Loan. The
Master Servicer is the sole insured of such mortgage title insurance policy, the
assignment to the Trust Fund of such mortgage title insurance policy does not
require the consent of or notification to the insurer, such mortgage title
insurance policy is in full force and effect and will be in full force and
effect and inure to the benefit of Certificateholders upon the consummation of
the transactions contemplated by the Pooling and Servicing Agreement. To the
best of the Master Servicer's knowledge, no claims have been made under such
mortgage title insurance policy and no prior holder of the related Mortgage,
including the Master Servicer, has done, by act or omission, anything which
would impair the coverage of such mortgage title insurance policy; (xix) all
improvements upon the Mortgaged Property are insured by a generally acceptable
insurer against loss by fire, hazards of extended coverage and such other
hazards as are customary in the area where the Mortgaged Property is located,
pursuant to insurance policies conforming to the requirements of the related
Pooling and Servicing Agreement. All individual insurance policies
(collectively, the "hazard insurance policy") contain a standard mortgagee
clause naming the Master Servicer or the original mortgagee and, its successors
in interest, as mortgagee and the Master Servicer has received no notice that
any premiums due and payable thereon have not been paid. The Mortgage obligates
the Mortgagor thereunder to maintain all such insurance at the Mortgagor's cost
and expense, and upon the Mortgagor's failure to do so, authorizes the holder of
the Mortgage to obtain and maintain such insurance at the Mortgagor's cost and
expense and to seek reimbursement therefor from the Mortgagor; (xx) to the best
of the Master Servicer's knowledge, there is no material default, breach,
violation or event of acceleration existing under the Mortgage or the related
Mortgage Note and no event which, with the passage of time or with notice and
the expiration of any grace or cure period, would constitute such a default,
breach, violation or event of acceleration; and the Master Servicer has not
waived any such default, breach, violation or event of acceleration; (xxi) the
Mortgage Loan is not subject to any right of rescission, set-off, counterclaim
or defense, including the defense of usury, nor will the operation of any of the
terms of the Mortgage Note or the Mortgage, or the exercise of any right
thereunder, render either the Mortgage Note or the Mortgage unenforceable, in
whole or in part, or subject to any right of rescission, set-off, counterclaim
or defense, including the defense of usury, and, to the best of the Master
Servicer's knowledge, no such right of rescission, set-off, counterclaim or
defense has been asserted with respect thereto; (xxii) the Mortgage Loan was
originated by the Master Servicer or by a savings and loan association, savings
bank, commercial bank, credit union, insurance company, or similar institution
which is supervised and examined by a Federal or State authority, or by a
mortgagee approved by the Secretary of HUD or subsequently acquired by the
Master Servicer from such originator; (xxiii) the Mortgage contains an
enforceable provision for the acceleration of the payment of the unpaid
principal balance of the Mortgage Loan in the event the related Mortgaged
Property is sold to a Mortgagor who does not meet the credit standards of the
Master Servicer, such enforceability being subject to bankruptcy, insolvency,
moratorium or other laws affecting the rights of creditors generally, and to
general principles of equity; (xxiv) the related Mortgage Note is not and has
not been secured by any collateral except the lien of the corresponding
Mortgage; (xxv) the related Mortgage contains customary and enforceable
provisions which render the rights and remedies of the holder thereof adequate
for the realization against the Mortgaged Property of the benefits of the
security, including, (y) in the case of a Mortgage designated as a deed of
trust, by trustee's sale, and (z) otherwise by judicial foreclosure. The Master
Servicer has no knowledge
47
of any homestead or other exemption available to the Mortgagor which would
interfere with the right to sell the Mortgaged Property at a trustee's sale or
the right to foreclose the Mortgage; (xxvi) with respect to each Mortgage
constituting a deed of trust, a trustee, duly qualified if required under
applicable law to serve as such, has been properly designated and currently so
serves and is named in such Mortgage, and no fees or expenses are or will become
payable by the Certificateholders to the trustee under the deed of trust, except
in connection with a trustee's sale after default by the Mortgagor; (xxvii) the
Mortgage Loan files contain an appraisal of the related Mortgaged Property
signed prior to the approval of the Mortgage Loan application by a qualified
appraiser, approved by the mortgage originator, who to the best of the Master
Servicer's knowledge, had no interest,direct or indirect, in the Mortgaged
Property or in any loan made on the security thereof, and whose compensation was
not affected by the approval or disapproval of the Mortgage Loan. The appraisal
is in a form acceptable to FNMA and FHLMC and meets the requirements of the
Office of Thrift Supervision or its predecessor as they existed at the time of
origination; and (xxviii) any other representations and warranties respecting
the Mortgage Loans specified in the related Prospectus Supplement or the related
Pooling and Servicing Agreement.
If the Mortgage Loans include Cooperative Loans, no representations or
warranties with respect to title insurance or hazard insurance will be given. In
addition, if the Mortgage Loans include Condominium Loans, no representation
regarding hazard insurance will be given. Generally, the Cooperative or
Condominium Association itself is responsible for the maintenance of hazard
insurance for property owned by the Cooperative and the Condominium Association
is responsible for maintaining standard hazard insurance, insuring the entire
Condominium Building (including each individual Condominium Unit), and the
borrowers of that Cooperative or Condominium do not maintain separate hazard
insurance on their individual Cooperative Dwellings or Condominium Units. See
"SERVICING OF LOANS--Maintenance of Insurance Policies and Other Servicing
Procedures" herein. With respect to a Cooperative Loan, the Depositor will
represent and warrant based, in part, upon representations and warranties of the
originator of such Cooperative Loan that (i) the security interest created by
the cooperative security agreements is a valid first lien on the collateral
securing the Cooperative Loan (subject to the right of the related Cooperative
to cancel shares and terminate the proprietary lease for unpaid assessments) and
(ii) the related Cooperative Dwelling is free of material damage and in good
repair.
Unless otherwise specified in the related Prospectus Supplement, with
respect to each Manufactured Home Loan, the Depositor based upon representations
and warranties of the originator of such Manufactured Home Loan will represent
and warrant, among other things that (i) immediately prior to the transfer and
assignment of the Manufactured Home Loans to the Trustee, the Depositor had good
title to, and was the sole owner of, each Manufactured Home Loan; (ii) as of the
date of such transfer and assignment, the Manufactured Home Loans are subject to
no offsets, defenses or counterclaims; (iii) each Manufactured Home Loan at the
time it was made complied in all material respects with applicable state and
federal laws, including usury, equal credit opportunity and truth-in-lending or
similar disclosure laws; (iv) as of the date of such transfer and assignment,
each Manufactured Home Loan constitutes a valid first lien on the related
Manufactured Home and such Manufactured Home is free of material damage and is
in good repair; (v) as of the date of such representation and warranty, no
Manufactured Home Loan is more than 30 days delinquent and there are no
delinquent tax or assessment liens against the related Manufactured Home; and
(vi) with respect to each Manufactured Home Loan, any required hazard insurance
policy was effective at the origination of each Manufactured Home Loan and
remained in effect on the date of the transfer and assignment of the
Manufactured Home Loan from the Depositor and that all premiums due on such
insurance have been paid in full.
Upon the discovery of the breach of any representation or warranty made
by the Master Servicer in respect of a Loan that adversely affects the payments
of principal and interest on the Loan or otherwise
48
adversely and materially affects the value of such Loan, the Master Servicer
will be obligated to cure such breach in all material respects, repurchase such
Loan from the Trustee, or deliver a Qualified Substitute Mortgage Loan as
described below under "THE POOLING AND SERVICING AGREEMENTS--Assignment of
Mortgage Assets." See "SPECIAL CONSIDERATIONS--Limited Obligations and Assets of
the Depositor." The PMBS Trustee (in the case of Private Mortgage-Backed
Securities) or the Trustee, as applicable, will be required to enforce this
obligation following the practices it would employ in its good faith business
judgment were it the owner of such Loan. If so specified in the related
Prospectus Supplement, the Master Servicer may be obligated to enforce such
obligations rather than the Trustee or PMBS Trustee.
SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans constituting the
Mortgage Assets in the Trust Fund will be provided by the Master Servicer
directly or through one or more servicers (the "Servicers") subject to
supervision by the Master Servicer. If the Master Servicer is not directly
servicing the Loans, then the Master Servicer will (i) administer and supervise
the performance by the Servicers of their servicing responsibilities under their
servicing agreements ("Servicing Agreements") with the Master Servicer, (ii)
maintain any standard or special hazard insurance policy, primary mortgage
insurance bankruptcy bond or pool insurance policy required for the related
Loans and (iii) advance funds as described below under "Advances." If the Master
Servicer services the Loans through Servicers as its agents, the Master Servicer
will be ultimately responsible for the performance of all servicing activities,
including those performed by the Servicers, notwithstanding its delegation of
certain responsibilities to such Servicer.
The Master Servicer will be a party to the Pooling and Servicing
Agreement for any Series for which Loans comprise the Mortgage Assets and may be
a party to a Participation Agreement executed with respect to any Participation
Certificates which constitute the Mortgage Assets. The Master Servicer may be an
affiliate of the Depositor. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer and each Servicer will be required to be a FNMA-
or FHLMC-approved seller/servicer and, in the case of FHA Loans, approved by HUD
as an FHA mortgagee.
The Master Servicer will be paid a Servicing Fee for the performance of
its services and duties under each Pooling and Servicing Agreement as specified
in the related Prospectus Supplement. Each Servicer, if any, will be entitled to
receive a portion of the Servicing Fee. In addition, the Master Servicer or
Servicer may be entitled to retain late charges, assumption fees and similar
charges to the extent collected from mortgagors. If a Servicer is terminated by
the Master Servicer, the servicing function of the Servicer will be either
transferred to a substitute Servicer or performed by the Master Servicer. The
Master Servicer will be entitled to retain the portion of the Servicing Fee paid
to the Servicer under a terminated Servicing Agreement if the Master Servicer
elects to perform such servicing functions itself.
The Master Servicer, at its election, may pay itself the Servicing Fee
for a Series with respect to each Mortgage Loan either by (a) withholding the
Servicing Fee from any scheduled payment of interest prior to the deposit of
such payment in the Collection Account for such Series, (b) withdrawing the
Servicing Fee from the Collection Account after the entire Scheduled Payment has
been deposited in the Collection Account, or (c) requesting that the Trustee pay
the Servicing Fee out of amounts in the Certificate Account.
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COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Master Servicer will make reasonable efforts to collect all payments
required to be made under the Mortgage Loans and will, consistent with the
Pooling and Servicing Agreement for a Series and any applicable insurance
policies and other credit supports, follow such collection procedures as it
follows with respect to comparable loans held in its own portfolio. Consistent
with the above, the Master Servicer may, in its discretion, (i) waive any
assumption fee, late payment charge, or other charge in connection with a Loan
and (ii) arrange with a mortgagor a schedule for the liquidation of
delinquencies by extending the Due Dates for Scheduled Payments on such Loan.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer, to the extent permitted by law, will establish and maintain
escrow accounts ("Escrow Accounts") in which payments by borrowers to pay taxes,
assessments, mortgage and hazard insurance premiums, and other comparable items
that are required to be paid to the mortgagee will be deposited. Mortgage Loans
and Manufactured Home Loans may not require such payments under the loan related
documents, in which case the Master Servicer would not be required to establish
any Escrow Account with respect to such Loans. Withdrawals from the Escrow
Accounts are to be made to effect timely payment of taxes, assessments, mortgage
and hazard insurance, to refund to borrowers amounts determined to be overages,
to pay interest to borrowers on balances in the Escrow Account to the extent
required by law, to repair or otherwise protect the property securing the
related Loan and to clear and terminate such Escrow Account. The Master Servicer
will be responsible for the administration of the Escrow Accounts and generally
will make advances to such account when a deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless otherwise indicated in the related Prospectus Supplement, the
Collection Account will be a non-interest bearing account maintained (i) at a
depository institution or trust company, the long-term unsecured debt
obligations of which at the time of any deposit therein are rated within the two
highest rating categories by each Rating Agency rating the Certificates of such
Series or (ii) in an account or accounts the deposits in which are insured to
the maximum extent available by the FDIC or which are secured in a manner
meeting requirements established by each Rating Agency, or (iii) in which such
accounts are insured by the FDIC (to the limits established by the FDIC), the
uninsured deposits in which are otherwise secured that, as evidenced by an
opinion of counsel delivered to the Trustee, the Certificateholders have a claim
with respect to the funds in such account or a perfected first security interest
against any 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 or trust company with which such account is
maintained, so long as such account shall not adversely affect the rating on the
Certificates or (iv) any other account acceptable to each Rating Agency rating
the Certificates of the related Series.
If so specified in the related Prospectus Supplement, the Collection
Account may be maintained as an interest-bearing account, or the funds held
therein may be invested, pending remittance to the Trustee, in Eligible
Investments. Unless otherwise specified in the related Prospectus Supplement,
the Master Servicer will be entitled to receive as additional compensation any
interest or other income earned on funds in the Collection Account.
The Master Servicer will deposit into the Collection Account for each
Series on the Business Day following the Closing Date any amounts representing
Scheduled Payments due after the related Cut-off Date but received by the Master
Servicer on or before the related Cut-off Date, and thereafter, after the
50
date of receipt thereof, the following payments and collections received or made
by it (other than in respect of principal of and interest on the related Loans
due on or before such Cut-off Date):
(i) All payments on account of principal, including
prepayments, on such Loans net of any portion of such payments that
represent recoveries of nonrecoverable Advances;
(ii) All payments on account of interest on such Loans net of any
portion thereof retained by the related Servicer (including the Master
Servicer), if any, as servicing compensation on the Loans in accordance
with the related Pooling and Servicing Agreement;
(iii) All Insurance Proceeds and all amounts received by the
Master Servicer in connection with the liquidation of defaulted Loans or
property acquired in respect thereof, whether through foreclosure sale or
otherwise, including payments in connection with such Loans received from
the mortgagor, other than amounts required to be paid to the mortgagor
pursuant to the terms of the applicable Mortgage or otherwise pursuant to
law ("Liquidation Proceeds"), exclusive of proceeds to be applied to the
restoration or repair of the Mortgaged Property or released to the
Mortgagor in accordance with the Master Servicer's normal servicing
procedures, net of expenses incurred by the Master Servicer (or the
related Servicer) in connection with the liquidation of any defaulted
Mortgage Loan and not recovered under a primary mortgage insurance policy
("Liquidation Expenses"); unpaid servicing compensation and
nonrecoverable Advances in accordance with the related Pooling and
Servicing Agreement;
(iv) All proceeds received of any Loans pursuant to the
related Pooling and Servicing Agreement;
(v) All amounts required to be deposited therein in
connection with any losses on Eligible Investments pursuant to the
related Pooling and Servicing Agreement;
(vi) All Advances for such Series made by the Master
Servicer or a Servicer pursuant to the related Pooling and Servicing
Agreement; and
(vii) All other amounts required to be deposited therein
pursuant to the related Pooling and Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it
pursuant to the related Pooling and Servicing Agreement; the Master
Servicer's right to reimburse itself being limited to amounts received on
or in respect of particular Loans (including, for this purpose,
Liquidation Proceeds and amounts representing proceeds of insurance
policies covering the related Mortgaged Property) which represent late
recoveries of Scheduled Payments respecting which any such Advance was
made;
(ii) to reimburse itself for any Advances for such Series that the
Master Servicer determines in good faith it will be unable to recover
from amounts representing late recoveries of Scheduled Payments
respecting which such Advance was made or from Liquidation Proceeds or
the proceeds of insurance policies;
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(iii) to reimburse itself from Liquidation Proceeds for
Liquidation Expenses and for amounts expended by it in good faith in
connection with the restoration of damaged Mortgaged Property and, to the
extent that Liquidation Proceeds after such reimbursement are in excess
of the outstanding principal balance of the related Loan, together with
accrued and unpaid interest thereon at the applicable Pass-Through Rate
to the Due Date next succeeding the date of its receipt of such
Liquidation Proceeds, to pay to itself out of such excess the amount of
any unpaid servicing compensation with respect to the related Mortgage
Loan and to pay any unpaid servicing compensation to the Servicer;
(iv) to pay to itself as servicing compensation that portion of
any payment as to interest that equals the Servicing Fee with respect to
such Mortgage Loan for the period with respect to which such interest
payment was made, and, as additional servicing compensation, earnings on
or investment income with respect to funds credited to the Collection
Account;
(v) to reimburse itself from Insurance Proceeds for insurance
expenses and to pay any unpaid servicing compensation to itself, such
payment of servicing compensation to be made in accordance with the
related Pooling and Servicing Agreement and being limited to the amount,
if any, by which the aggregate of Liquidation Proceeds and Insurance
Proceeds received in connection with the liquidation of a defaulted
Mortgage Loan is, after the deduction of insurance expenses, and
servicing compensation payable to the Servicer of such Mortgage Loan, if
any, in excess of the outstanding principal balance of such Mortgage
Loan, together with accrued and unpaid interest thereon at the applicable
Pass-Through Rate;
(vi) to pay to itself, a Servicer or the Depositor, as the case
may be, with respect to each Mortgage Loan or property acquired in
respect thereof that has been repurchased pursuant to the Pooling and
Servicing Agreement, all amounts received thereon and not taken into
account in determining the related outstanding principal balance of such
repurchased Mortgage Loan;
(vii) to reimburse itself or the Depositor for expenses
incurred by and reimbursable to it or the Depositor with respect to
indemnification;
(viii) to make payments to certain Certificateholders in the
manner specified in the Pooling and Servicing Agreement;
(ix) to withdraw any amount deposited in the Collection
Account and not required to be deposited therein; and
(x) to clear and terminate the Collection Account pursuant
to the related Pooling and Servicing Agreement.
SERVICING ACCOUNTS
In those cases where a Servicer is servicing a Mortgage Loan, the
Servicer will establish and maintain an account (a "Servicing Account") that
will comply with the standards set forth above, and which is otherwise
acceptable to the Master Servicer. The Servicer is required to deposit into the
Servicing Account all proceeds of Mortgage Loans received by the Servicer,
subject to withdrawal to the extent permitted by the applicable servicing
agreement. On the date specified in the related Prospectus Supplement, the
Servicer will remit to the Master Servicer all funds held in the Servicing
Account with respect to each Mortgage Loan consisting of an amount equal to the
sum of (i) all amounts received by
52
the Servicer with respect to the Mortgage Loans serviced by it as of the
Servicer Remittance Date, except (a) any monthly payment prepaid for a Due Date
subsequent to the month in which the Servicer Remittance Date occurs, (b) any
amounts received by such Servicer with respect to such Mortgage Loans that
constitute a late recovery with respect to an advance previously made by such
Servicer with respect to such Mortgage Loans, and (c) any Retained Interest
payable to such Servicer under the terms of such servicing agreement; (ii) all
partial principal Prepayments received in the calendar month prior to the month
of the Servicer Remittance Date or applied as of the Due Date in the month of
the Servicer Remittance Date; (iii) all principal Prepayments in full received
in the calendar month prior to the month of the Servicer Remittance Date, in
each case together with interest received thereon through the date of prepayment
at the applicable Mortgage Rate (net of the related servicing compensation and
any Retained Interest payable to such Servicer under the terms of such servicing
agreement) whether or not received from the Mortgagor; and (iv) all Insurance
Proceeds and Liquidation Proceeds (net of Liquidation Expenses) received in the
calendar month prior to the month of the Servicer Remittance Date. The Servicer
may deduct from each remittance, as provided above, an amount equal to the
servicing fee to which it is then entitled pursuant to the applicable servicing
agreement, to the extent not previously paid to or retained by it. The Servicer
may, to the extent described in the related Prospectus Supplement, be required
to advance any monthly installment of principal and interest that was not
received, less its servicing fee, by the date specified in the related
Prospectus Supplement.
BUY-DOWN LOANS, GPM LOANS AND OTHER SUBSIDIZED LOANS
With respect to each Buy-Down Loan, if any, included in a Trust Fund the
Master Servicer will deposit all Buy-Down Amounts in a custodial account (which
may be interest-bearing) complying with the requirements set forth above for the
Collection Account (the "Buy-Down Fund"). The amount of such deposit, together
with investment earnings thereon at the rate specified in the related Prospectus
Supplement, will provide sufficient funds to support the payments on such
Buy-Down Loan on a level debt service basis. The Master Servicer will not be
obligated to add to the Buy-Down Account should amounts therein and investment
earnings prove insufficient to maintain the scheduled level of payments on the
Buy-Down Loans, in which event distributions to the Certificateholders may be
affected. Unless otherwise provided in the related Prospectus Supplement, a Buy-
Down Fund will not be included in or deemed to be a part of the Trust Fund.
The terms of certain of the Loans may provide for the contribution of
subsidy funds by the seller of the related Mortgaged Property or by another
entity. With respect to each such Loan, the Master Servicer will deposit the
subsidy funds in a custodial account (which may be interest bearing) complying
with the requirements set forth above for the Collection Account set forth above
(a "Subsidy Fund"). Unless otherwise specified in the related Prospectus
Supplement, the terms of each such Loan will provide for the contribution of the
entire undiscounted amount of subsidy amounts necessary to maintain the
scheduled level of payments due during the early years of such Loan. Neither the
Master Servicer, any Servicer nor the Depositor will be obligated to add to such
Subsidy Fund any of its own funds. Unless otherwise provided in the related
Prospectus Supplement, such Subsidy Fund will not be included in or deemed to be
a part of the Trust Fund.
If the Depositor values any GPM Loans deposited into the Trust Fund for a
Multiple Class Series on the basis of such GPM Loan's scheduled maximum
principal balance, the Master Servicer will, if and to the extent provided in
the related Prospectus Supplement, deposit in a custodial account (which may be
interest bearing) (the "GPM Fund") complying with the requirements set forth
above for the Collection Account an amount which, together with reinvestment
income thereon at the rate set forth in the related Prospectus Supplement, will
be sufficient to cover the amount by which payments of principal and interest on
such GPM Loans assumed in calculating payments due on the Certificates of
53
such Multiple Class Series exceed the scheduled payments on such GPM Loans. The
Trustee will withdraw amounts from the GPM Fund for a Series upon a prepayment
of such GPM Loan as necessary and apply such amounts to the payment of principal
and interest on the Certificates of such Series. Neither the Depositor, the
Master Servicer nor any Servicer will be obligated to supplement the GPM Fund
should amounts therein and investment earnings thereon prove insufficient to
maintain the scheduled level of payments, in which event, distributions to the
Certificateholders may be affected. Unless otherwise specified in the related
Prospectus Supplement, such GPM Fund will not be included in or deemed to be
part of the Trust Fund.
With respect to any other type of Loan which provides for payments other
than on the basis of level payments, an account may be established as described
in the related Prospectus Supplement on terms similar to those relating to the
Buy-Down Fund, Subsidiary Fund or the GPM Fund.
ADVANCES AND LIMITATIONS THEREON
GENERAL. The related Prospectus Supplement will describe the
circumstances under which the Master Servicer or Servicer will make Advances
with respect to delinquent payments on Loans. Unless otherwise specified in the
related Prospectus Supplement, neither the Master Servicer nor any Servicer will
be obligated to make Advances, and such obligation may be limited in amount, may
be limited to advances received from the Servicers, if any, or may not be
activated until a certain portion of a specified reserve fund is depleted. If
the Master Servicer is obligated to make Advances, a surety bond or other credit
support may be provided with respect to such obligation as described in the
related Prospectus Supplement. Advances are intended to provide liquidity and
not to guarantee or insure against losses. Accordingly, any funds advanced are
recoverable by the Servicer or the Master Servicer, as the case may be, out of
amounts received on particular Loans which represent late recoveries of
principal or interest, proceeds of insurance polices or Liquidation Proceeds
respecting which any such Advance was made. If an Advance is made and
subsequently determined to be nonrecoverable from late collections, proceeds of
insurance polices or Liquidation Proceeds from the related Loan, the Servicer or
Master Servicer will be entitled to reimbursement from other funds in the
Certificate Account, Collection Account or Servicing Account, as the case may
be, or from a specified reserve fund as applicable, to the extent specified in
the related Prospectus Supplement.
ADVANCES IN CONNECTION WITH PREPAID LOANS. In addition when a borrower
makes a principal prepayment in full between Due Dates on the related Loan, the
borrower will generally be required to pay interest on the principal amount
prepaid only to the date of such prepayment. If and to the extent provided in
the related Prospectus Supplement, in order that one or more Classes of the
Certificateholders of a Series will not be adversely affected by any resulting
shortfall in interest, the Master Servicer may be obligated to advance moneys
from its own funds to the extent necessary to include in its remittance to the
Trustee for deposit into the Certificate Account an amount equal to a full
Scheduled Payment of interest on the related Loan (adjusted to the applicable
Pass-Through Rate). Any such principal prepayment, together with a full
Scheduled Payment of interest thereon at the applicable Pass-Through Rate (to
the extent of such adjustment or advance), will be distributed to
Certificateholders on the related Distribution Date. If the amount necessary to
include a full Scheduled Payment of interest as described above exceeds the
amount which the Master Servicer is obligated to advance, as applicable, a
shortfall may occur as a result of a prepayment in full. See "YIELD, PREPAYMENT
AND MATURITY CONSIDERATIONS."
54
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
STANDARD HAZARD INSURANCE; FLOOD INSURANCE. Except as otherwise specified
in the related Prospectus Supplement, the Master Servicer will be required to
maintain or to cause the borrower on each Loan to maintain or will use its best
reasonable efforts to cause each Servicer of a Loan to maintain a standard
hazard insurance policy providing coverage of the standard form of fire
insurance with extended coverage for certain other hazards as is customary in
the state in which the property securing the related Loan is located. See
"DESCRIPTION OF MORTGAGE AND OTHER INSURANCE" herein. Unless otherwise specified
in the related Prospectus Supplement, coverage will be in an amount at least
equal to the greater of (i) the amount necessary to avoid the enforcement of any
co-insurance clause contained in the policy or (ii) the outstanding principal
balance of the related Loan. The Master Servicer will also maintain on REO
Property that secured a defaulted Loan and that has been acquired upon
foreclosure, deed in lieu of foreclosure, or repossession, a standard hazard
insurance policy in an amount that is at least equal to the maximum insurable
value of such REO Property. No earthquake or other additional insurance will be
required of any borrower or will be maintained on REO Property acquired in
respect of a defaulted Loan, other than pursuant to such applicable laws and
regulations as shall at any time be in force and shall require such additional
insurance. When, at the time of origination of a Loan, the property securing
that Loan is located in a federally designated special flood hazard area, the
Master Servicer will cause to be maintained or use its best reasonable efforts
to cause the Servicer to maintain with respect to such property flood insurance
as required under the Flood Disaster Protection Act of 1973, to the extent
available, or as described in the related Prospectus Supplement.
Any amounts collected by the Master Servicer or the Servicer, as the case
may be, under any such policies of insurance (other than amounts to be applied
to the restoration or repair of the Mortgaged Property, released to the borrower
in accordance with normal servicing procedures or used to reimburse the Master
Servicer for amounts to which it is entitled to reimbursement) will be deposited
in the Collection Account. In the event that the Master Servicer obtains and
maintains a blanket policy insuring against hazard losses on all of the Loans,
written by an insurer then acceptable to each Rating Agency which assigns a
rating to such Series, it will conclusively be deemed to have satisfied its
obligations to cause to be maintained a standard hazard insurance policy for
each Loan or related REO Property. This blanket policy may contain a deductible
clause, in which case the Master Servicer will, in the event that there has been
a loss that would have been covered by such policy absent such deductible
clause, deposit in the Collection Account the amount not otherwise payable under
the blanket policy because of the application of such deductible clause.
The Depositor 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. Similarly, the Depositor will not require that a standard
hazard or flood insurance policy be maintained on a Condominium Unit relating
to any Condominium Loan. Generally, the Condominium Association is responsible
for maintenance of hazard insurance insuring the entire Condominium building
(including each individual Condominium Unit), and the owner(s) of an individual
Condominium Unit do not maintain separate hazard insurance policies. To the
extent, however, that a Condominium Association and the related borrower on a
Condominium Loan do not maintain such insurance or do not maintain adequate
coverage or any insurance proceeds are not
55
applied to the restoration of damaged property, any damage to such borrower's
Condominium Unit or the related Condominium Building could significantly reduce
the value of the collateral securing such Condominium Loan to the extent not
covered by other credit support.
SPECIAL HAZARD INSURANCE POLICY. If, and to the extent specified in the
related Prospectus Supplement, the Master Servicer will maintain a special
hazard insurance policy, in the amount set forth in the related Prospectus
Supplement, in full force and effect with respect to the Loans. Unless otherwise
specified in the related Prospectus Supplement, the special hazard insurance
policy will provide for a fixed premium rate based on the declining aggregate
outstanding principal balance of the Loans. The Master Servicer will agree to
pay the premium for any special hazard insurance policy on a timely basis. If
the special hazard insurance policy is canceled or terminated for any reason
(other than the exhaustion of total policy coverage), the Master Servicer will
exercise its best reasonable efforts to obtain from another insurer a
replacement policy comparable to the special hazard insurance policy with a
total coverage which is equal to the then existing coverage of the terminated
special hazard insurance policy; provided that if the cost of any such
replacement policy is greater than the cost of the terminated special hazard
insurance policy, the amount of coverage under the replacement policy will,
unless otherwise specified in the related Prospectus Supplement, be reduced to a
level such that the applicable premium does not exceed 150% of the cost of the
special hazard insurance policy that was replaced. Any amounts collected by the
Master Servicer under the special hazard insurance policy in the nature of
insurance proceeds will be deposited in the Collection Account (net of amounts
to be used to repair, restore or replace the related property securing the Loan
or to reimburse the Master Servicer (or a Servicer) for related amounts owed to
it). Certain characteristics of the special hazard insurance policy are
described under "DESCRIPTION OF MORTGAGE AND OTHER INSURANCE--Hazard
Insurance on the Loans."
PRIMARY MORTGAGE INSURANCE. To the extent described in the related
Prospectus Supplement, the Master Servicer will be required to use its best
reasonable efforts to keep, or to cause each Servicer to keep, in full force and
effect, a primary mortgage insurance policy with respect to each Conventional
Loan secured by Single Family Property for which such coverage is required for
as long as the related mortgagor is obligated to maintain such primary mortgage
insurance under the terms of the related Loan. The Master Servicer will not
cancel or refuse to renew any such primary mortgage insurance policy in effect
at the date of the initial issuance of the Certificates that is required to be
kept in force unless a replacement primary mortgage insurance policy for such
cancelled or nonrenewed policy is maintained with a Qualified Insurer.
Primary insurance policies will be required with respect to Manufactured
Home Loans only to the extent described in the related Prospectus Supplement. If
primary mortgage insurance is to be maintained with respect to Manufactured Home
Loans, the Master Servicer will be required to maintain such insurance as
described above. For further information regarding the extent of coverage under
a primary mortgage insurance policy, see "DESCRIPTION OF MORTGAGE AND OTHER
INSURANCE--Mortgage Insurance on the Loans."
FHA INSURANCE AND VA GUARANTEES. To the extent specified in the related
Prospectus Supplement, all or a portion of the Loans may be insured by the FHA
or guaranteed by the VA. The Master Servicer will be required to take such steps
as are reasonably necessary to keep such insurance and guarantees in full force
and effect. See "DESCRIPTION OF MORTGAGE AND OTHER INSURANCE--Mortgage
Insurance on the Loans."
POOL INSURANCE POLICY. If so specified in the related Prospectus
Supplement, the Master Servicer will be obligated to use its best reasonable
efforts to maintain a pool insurance policy with respect to the Loans in the
amount and with the coverage described in the related Prospectus Supplement.
Unless
56
otherwise specified in the related Prospectus Supplement, the pool insurance
policy will provide for a fixed premium rate on the declining aggregate
outstanding principal balance of the Loans. The Master Servicer will be
obligated to pay the premiums for such pool insurance policy on a timely basis.
The Prospectus Supplement will identify the pool insurer for the related
Series of Certificates. If the pool insurer ceases to be a Qualified Insurer
because it is not approved as an insurer by FHLMC or FNMA or because its
claims-paying ability is no longer rated in the category required by the related
Prospectus Supplement, the Master Servicer will be obligated to review, no less
often than monthly, the financial condition of the pool insurer to determine
whether recoveries under the pool insurance policy are jeopardized by reason of
the financial condition of the pool insurer. If the Master Servicer determines
that recoveries may be so jeopardized or if the pool insurer ceases to be
qualified under applicable law to transact a mortgage guaranty insurance
business, the Master Servicer will exercise its best reasonable efforts to
obtain from another Qualified Insurer a comparable replacement pool insurance
policy with a total coverage equal to the then outstanding coverage of the pool
insurance policy to be replaced; provided that, if the premium rate on the
replacement policy is greater than that of the existing pool insurance policy,
then the coverage of the replacement policy will, unless otherwise specified in
the related Prospectus Supplement, be reduced to a level such that its premium
rate does not exceed 150% of the premium rate on the pool insurance policy to be
replaced. Payments made under a pool insurance policy will be deposited into the
Collection Account (net of expenses of the Master Servicer or any related
unreimbursed Advances or unpaid Servicing Fee). Certain characteristics of the
pool insurance policy are described under "DESCRIPTION OF MORTGAGE AND OTHER
INSURANCE--Mortgage Insurance on the Loans."
BANKRUPTCY BOND. If so specified in the related Prospectus Supplement,
the Master Servicer will be obligated to use its best reasonable efforts to
obtain and thereafter maintain a bankruptcy bond or similar insurance or
guaranty in full force and effect throughout the term of the related Pooling and
Servicing Agreement, unless coverage thereunder has been exhausted through
payment of claims. If so specified in the Prospectus Supplement, the Master
Servicer will be required to pay from its servicing compensation the premiums
for the bankruptcy bond on a timely basis. Coverage under the bankruptcy bond
may be cancelled or reduced by the Master Servicer at any time, provided that
such cancellation or reduction does not adversely affect the then current rating
of the related Series of Certificates. See "DESCRIPTION OF MORTGAGE AND OTHER
INSURANCE--Bankruptcy Bond" herein.
PRESENTATION OF CLAIMS; REALIZATION UPON DEFAULTED LOANS
The Master Servicer, on behalf of the Trustee and the Certificateholders,
will be required to present or cause to be presented, claims with respect to any
standard hazard insurance policy, pool insurance policy, special hazard
insurance policy, bankruptcy bond, or primary mortgage insurance policy, and to
the FHA and the VA, if applicable in respect of any FHA insurance or VA
guarantee respecting defaulted Mortgage Loans.
The Master Servicer will use its reasonable best efforts to foreclose
upon, repossess or otherwise comparably convert the ownership of the real
properties securing such of the related Loans as come into and continue in
default and as to which no satisfactory arrangements can be made for collection
of delinquent payments. In connection with such foreclosure or other conversion,
the Master Servicer will follow such practices and procedures as it deems
necessary or advisable and as are normal and usual in its servicing activities
with respect to comparable loans serviced by it. However, the Master Servicer
will not be required to expend its own funds in connection with any foreclosure
or towards the restoration of the property unless it determines: (i) that such
restoration or foreclosure will increase the Liquidation Proceeds in respect of
the related Mortgage Loan available to the Certificateholders after
reimbursement
57
to itself for such expenses and (ii) that such expenses will be recoverable by
it either through Liquidation Proceeds or the proceeds of insurance.
Notwithstanding anything to the contrary herein, in the case of a Trust Fund for
which a REMIC election has been made, the Master Servicer shall not liquidate
any collateral acquired through foreclosure later than one year after the
acquisition of such collateral. While the holder of Mortgaged Property acquired
through foreclosure can often maximize its recovery by providing financing to a
new purchaser, the Trust Fund will have no ability to do so and neither the
Master Servicer nor any Servicer will be required to do so.
Similarly, if any property securing a defaulted Loan is damaged and
proceeds, if any, from the related standard hazard insurance policy or the
applicable special hazard insurance policy, if any, are insufficient to restore
the damaged property to a condition sufficient to permit recovery under any pool
insurance policy or any primary mortgage insurance policy, FHA insurance, or VA
guarantee, neither the Master Servicer nor any Servicer will be required to
expend its own funds to restore the damaged property unless it determines (i)
that such restoration will increase the Liquidation Proceeds in respect of the
Loan after reimbursement of the expenses incurred by such Servicer or the Master
Servicer and (ii) that such expenses will be recoverable by it through proceeds
of the sale of the property or proceeds of the related pool insurance policy or
any related primary mortgage insurance policy, FHA insurance, or VA guarantee.
As to collateral securing a Cooperative Loan, 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
proprietary lease or occupancy agreement securing that Cooperative Loan. See
"CERTAIN LEGAL ASPECTS OF LOANS--Foreclosure on Shares of Cooperatives"
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.
With respect to a Loan secured by a Multifamily Property, the market
value of any property obtained in foreclosure or by deed in lieu of foreclosure
will be based substantially on the operating income obtained by renting the
dwelling units. As a default on a Loan secured by Multifamily Property is likely
to have occurred because operating income, net of expenses, is insufficient to
make debt service payments on the related Loan, it can be anticipated that the
market value of such property will be less than anticipated when such Loan was
originated. To the extent that equity does not cushion the loss in market value
and such loss is not covered by other credit support, a loss may be experienced
by the related Trust Fund. With respect to a defaulted Manufactured Home Loan,
the value of the related Manufactured Home can be expected to be less on resale
than a new Manufactured Home. To the extent equity does not cushion the loss in
market value, and such loss is not covered by other credit support, a loss may
be experienced by the Trust Fund.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Mortgaged Property is about to be conveyed by the borrower, the
Master Servicer will, to the extent it has knowledge of such prospective
conveyance and prior to the time of the consummation of such conveyance,
exercise the Trustee's right to accelerate the maturity of such Loan under the
applicable "due-on-sale" clause, if any, unless the Master Servicer reasonably
believes that such clause is not enforceable under applicable law or if the
enforcement of such clause would result in loss of coverage under any primary
mortgage insurance policy. If such conditions are not met or the Master Servicer
reasonably believes that enforcement of a due-on-sale clause will not be
enforceable, the Master Servicer
58
is authorized to accept from or enter into an assumption agreement, on behalf of
the Trustee, with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Loan and
pursuant to which the original borrower is released from liability and such
person is substituted as the borrower and becomes liable under the Loan. Any fee
collected in connection with an assumption will be retained by the Master
Servicer as additional servicing compensation. The terms of a Loan may not be
changed in connection with an assumption except that, if the terms of the Loan
so permit, and subject to certain other conditions, the interest rate may be
increased (but not decreased) to a prevailing market rate. Unless otherwise
specified in the related Prospectus Supplement, Certificateholders would not
benefit from any such increase.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related Prospectus Supplement, the
Master Servicer or any Servicer will be entitled to a servicing fee in an amount
to be determined as specified in the related Prospectus Supplement. The
servicing fee may be fixed or variable, as specified in the related Prospectus
Supplement. The Master Servicer or any Servicer will be entitled to servicing
compensation, unless otherwise specified in the related Prospectus Supplement,
in the form of assumption fees, late payment charges, or excess proceeds
following disposition of property in connection with defaulted Loans.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will pay the fees of the Servicers, if any, and certain expenses
incurred in connection with the servicing of the Loans, including, without
limitation, the payment of the fees and expenses of the Trustee and independent
accountants, payment of insurance policy premiums and the cost of credit
support, if any, payment of expenses incurred in enforcing the obligations of
Servicers and in preparation of reports to Certificateholders. Certain of these
expenses may be reimbursable pursuant to the terms of the Pooling and Servicing
Agreement from Liquidation Proceeds and the proceeds of insurance policies and,
in the case of enforcement of the obligations of Servicers, from any recoveries
in excess of amounts due with respect to the related Loans or from specific
recoveries of costs.
The Master Servicer will be entitled to reimbursement for certain
expenses incurred by it in connection with the liquidation of defaulted Loans.
The related Trust Fund will suffer no loss by reason of such expenses to the
extent claims are paid under related insurance policies or from the Liquidation
Proceeds. If claims are either not made or paid under the applicable insurance
policies or if coverage thereunder has been exhausted, the related Trust Fund
will suffer a loss to the extent that Liquidation Proceeds, after reimbursement
of the Master Servicer's expenses, are less than the outstanding principal
balance of and unpaid interest on the related Loan which would be distributable
to Certificateholders. In addition, the Master Servicer will be entitled to
reimbursement of expenditures incurred by it in connection with the restoration
of property securing a defaulted Loan, such right of reimbursement being prior
to the rights of the Certificateholders to receive any related proceeds of
insurance policies, Liquidation Proceeds or amounts derived from other credit
supports. The Master Servicer is also entitled to reimbursement from the
Collection Account and the Certificate Account for Advances.
When a borrower makes a principal prepayment in full between Due Dates on
the related Loan, the borrower will generally be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the related Prospectus Supplement, in order that one or more Classes of the
Certificateholders of a Series will not be adversely affected by any resulting
shortfall in interest, the amount of the Servicing Fee may be reduced, to the
extent necessary to include in the Master Servicer's remittance to the Trustee
for deposit into the Certificate Account, an amount equal to a full scheduled
payment of interest on the related Loan (adjusted to the applicable Pass-Through
Rate). Any such principal prepayment, together with a full Scheduled Payment of
interest thereon at the applicable
59
Pass-Through Rate (to the extent of such adjustment or advance), will be
distributed to Certificateholders on the related Distribution Date. If the
amount necessary to include a full Scheduled Payment of interest as described
above exceeds the amount of Servicing Fee, a shortfall to Certificateholders may
occur as a result of a prepayment in full. See "YIELD, PREPAYMENT AND MATURITY
CONSIDERATIONS."
The rights of the Master Servicer to receive funds from the Collection
Account or the Certificate Account for a Series, whether as the Servicing Fee or
other compensation, or for the reimbursement of Advances, expenses or otherwise,
are not subordinate to the rights of Certificateholders of such Series.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement for each Series will provide that
each year, a firm of independent public accountants will furnish a statement to
the Trustee to the effect that such firm has examined certain documents and
records relating to the servicing of the Loans by the Master Servicer and that,
on the basis of such examination, such firm is of the opinion that the servicing
has been conducted in compliance with the Pooling and Servicing Agreement except
for (i) such exceptions as such firm believes to be immaterial and (ii) such
other exceptions as are set forth in such statement.
The Pooling and Servicing Agreement for each Series will also provide for
delivery to the Trustee for such Series of an annual Statement signed by an
officer of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Pooling and Servicing Agreement throughout
the preceding calendar year.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Master Servicer for each Series will be identified in the related
Prospectus Supplement. The Master Servicer may be an affiliate of the Depositor
and may have other business relationships with the Depositor and its affiliates.
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer may not resign from its obligations and duties under the Pooling
and Servicing Agreement except upon its determination that its duties thereunder
are no longer permissible under applicable law. No such resignation will become
effective until the Trustee or a successor Master Servicer has assumed the
Master Servicer's obligations and duties under the Pooling and Servicing
Agreement.
In the event of an Event of Default under the Pooling and Servicing
Agreement, the Master Servicer may be replaced by the Trustee or a successor
Master Servicer. See "THE POOLING AND SERVICING AGREEMENTS--Rights upon Events
of Default" herein.
Unless otherwise provided in the Prospectus Supplement, the Master
Servicer has the right, with the consent of the Trustee, which consent shall not
be unreasonably withheld, to assign its rights and delegate its duties and
obligations under the Pooling and Servicing Agreement for each Series; provided
that the purchaser or transferee accepting such assignment or delegation (i) is
qualified to service mortgage loans for FNMA or FHLMC, (ii) has a net worth of
not less than $15,000,000, (iii) will not cause any Rating Agency rating the
Certificates of such Series to qualify, downgrade or withdraw its rating in
effect immediately prior to such assignment, sale or transfer as a result of
such assignment, sale or transfer; and (iv) executes and delivers to the
Depositor and the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such purchaser or
transferee of the due and punctual performance and performed or observed by the
Master Servicer under
60
the Pooling and Servicing Agreement from and after the date of such agreement.
To the extent that the Master Servicer transfers its obligations to a
wholly-owned subsidiary or affiliate, such subsidiary or affiliate need not
satisfy the criteria set forth above. However, in such instance the assigning
Master Servicer will remain liable for the servicing obligations under the
Pooling and Servicing Agreement. Any entity into which the Master Servicer is
merged or consolidated or any successor corporation resulting from any merger,
conversion or consolidation will succeed to the Master Servicer's obligations
under the related Pooling and Servicing Agreement, provided that such successor
or surviving entity meets the requirements for a successor Master Servicer set
forth above.
Each Pooling and Servicing Agreement will also provide that neither the
Master Servicer, nor any director, officer, employee or agent of the Master
Servicer, will be under any liability to the related Trust Fund or the
Certificateholders for any action taken or for failing to take any action in
good faith pursuant to the Pooling and Servicing Agreement or for errors in
judgment; provided, however, that neither the Master Servicer nor any such
person will be protected against any breach of warranty or representations made
under the Pooling and Servicing Agreement or the failure to perform its
obligations in compliance with any standard of care set forth in the Pooling and
Servicing Agreement or liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence in the performance of their duties
or by reason of reckless disregard of their obligations and duties thereunder.
Each Pooling and Servicing Agreement will further provide that the Master
Servicer and any director, officer, employee or agent of the Master Servicer is
entitled to indemnification from 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 Pooling and Servicing Agreement or the
Certificates, other than 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, the Pooling and Servicing Agreement provides that the
Master Servicer is not under any obligation to appear in, prosecute or defend
any legal action which is not incidental to its servicing responsibilities under
the Pooling and Servicing Agreement which, in its opinion, may involve it in any
expense or liability. The Master Servicer may, in its discretion, undertake any
such action which it may deem necessary or desirable with respect to the Pooling
and Servicing Agreement and the rights and duties of the parties thereto and the
interests of the Certificateholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
expenses, costs, and liabilities of the Trust Fund and the Master Servicer will
be entitled to be reimbursed therefor out of the Collection Account (or the
Certificate Account, if applicable).
CREDIT SUPPORT
GENERAL
For any Series, credit support may be provided with respect to one or
more Classes thereof or the related Mortgage Assets. Credit support may be in
the form of a letter of credit, the subordination of one or more Classes of the
Certificates of such Series, the establishment of one or more reserve funds, use
of a pool insurance policy, bankruptcy bond, repurchase bond or special hazard
insurance policy, certificate guarantee insurance, the use of cross-support
features or another method of credit support described in the related Prospectus
Supplement, or any combination of the foregoing, in any case, in such amounts
and having such terms and conditions as are acceptable to each Rating Agency
which assigns a rating to the Certificates of the related Series.
Unless otherwise specified in the related Prospectus Supplement for a
Series, the credit support will not provide protection against all risks of loss
and will not guarantee repayment of the entire
61
principal balance of the Certificates and interest thereon at the Pass-Through
Rate or Certificate Rate, as applicable. If losses occur which exceed the amount
covered by credit support or which are not covered by the credit support,
Certificateholders will bear their allocable share of deficiencies. See "THE
POOLING AND SERVICING AGREEMENTS--Deficiency Event." If credit support is
provided with respect to a Series, or the related Mortgage Assets, the related
Prospectus Supplement will include a description of (a) the amount payable under
such credit support, (b) any conditions to payment thereunder not otherwise
described herein, (c) the conditions under which the amount payable under such
credit support may be reduced and under which such credit support may be
terminated or replaced and (d) the material provisions of any agreement relating
to such credit support. Additionally, the related Prospectus Supplement will set
forth certain information with respect to the issuer of any third-party credit
support, including (a) a brief description of its principal business activities,
(b) its principal place of business, place of incorporation and the jurisdiction
under which it is chartered or licensed to do business, (c) if applicable, the
identity of regulatory agencies which exercise primary jurisdiction over the
conduct of its business and (d) its total assets, and its stockholders' or
policyholders' surplus, if applicable, as of the date specified in the
Prospectus Supplement.
SUBORDINATE CERTIFICATES; SUBORDINATION RESERVE FUND
If so specified in the related Prospectus Supplement, one or more Classes
of a Series may be Subordinate Certificates. If so specified in the related
Prospectus Supplement, the rights of the Subordinate Certificateholders to
receive distributions of principal and interest from the Certificate Account on
any Distribution Date will be subordinated to such rights of the Senior
Certificateholders to the extent of the then applicable Subordinated Amount as
defined in the related Prospectus Supplement. The Subordinated Amount will
decrease whenever amounts otherwise payable to the Subordinate
Certificateholders are paid to the Senior Certificateholders (including amounts
withdrawn from the Subordination Reserve Fund, if any, and paid to the Senior
Certificateholders), and will (unless otherwise specified in the related
Prospectus Supplement) increase whenever there is distributed to the Subordinate
Certificateholders amounts in respect of which subordination payments have
previously been paid to the Senior Certificateholders (which will occur when
subordination payments in respect of delinquencies and certain other
deficiencies have been recovered).
A Series may include a Class or Subordinate Certificates entitled to
receive cash flows remaining after distributions made to all other Classes. Such
right will effectively be subordinate to the rights of other Certificateholders,
but will not be limited to the Subordinated Amount. If so specified in the
related Prospectus Supplement, the subordination of a Class may apply only in
the event of certain types of losses not covered by insurance policies or other
credit support, such as losses arising from damage to property securing a Loan
not covered by standard hazard insurance policies, losses resulting from the
bankruptcy of a borrower and application of certain provisions of the Bankruptcy
Code, or losses resulting from the denial of insurance coverage due to fraud or
misrepresentation in connection with the origination of a Loan.
With respect to any Series which includes one or more Classes of
Subordinate Certificates, a Subordination Reserve Fund may be established if so
specified in the related Prospectus Supplement. The Subordination Reserve Fund,
if any, will be funded with cash, a letter of credit, a demand note or Eligible
Reserve Fund Investments, or by the retention of amounts of principal or
interest otherwise payable to Holders of Subordinate Certificates, or both, as
specified in the related Prospectus Supplement. The Subordination Reserve Fund
will not be a part of the Trust Fund, unless otherwise specified in the related
Prospectus Supplement. If the Subordination Reserve Fund is not a part of the
Trust Fund, the Trustee will have a security interest therein on behalf of the
Senior Certificateholders. Moneys will be
62
withdrawn from the Subordination Reserve Fund to make distributions of principal
of or interest on Senior Certificates under the circumstances set forth in the
related Prospectus Supplement.
Moneys deposited in any Subordination Reserve Fund will be invested in
Eligible Reserve Fund Investments. Unless otherwise specified in the related
Prospectus Supplement, any reinvestment income or other gain from such
investments will be credited to the Subordination Reserve Fund for such Series,
and any loss resulting from such investments will be charged to such
Subordination Reserve Fund. Amounts in any Subordination Reserve Fund in excess
of the Required Reserve Fund Balance may be periodically released to the
Subordinate Certificateholders under the conditions and to the extent specified
in the related Prospectus Supplement. Additional information concerning any
Subordination Reserve Fund will be set forth in the related Prospectus
Supplement, including the amount of any initial deposit to such Subordination
Reserve Fund, the Required Reserve Fund Balance to be maintained therein, the
purposes for which funds in the Subordination Reserve Fund may be applied to
make distributions to Senior Certificateholders and the employment of
reinvestment earnings on amounts in the Subordination Reserve Fund, if any.
CROSS-SUPPORT FEATURES
If the Mortgage Assets for a Series are divided into separate Asset
Groups, the beneficial ownership of which is evidenced by a separate Class or
Classes of a Series, credit support may be provided by a cross-support feature
which requires that distributions be made on Senior Certificates evidencing the
beneficial ownership of one Asset Group prior to distributions on Subordinate
Certificates evidencing the beneficial ownership interest in another Asset Group
within the 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.
INSURANCE
Credit support with respect to a Series may be provided by various forms
of insurance policies, subject to limits on the aggregate dollar amount of
claims that will be payable under each such insurance policy, with respect to
all Loans comprising or underlying the Mortgage Assets for a Series, or such of
the Loans as have certain characteristics. Such insurance policies include
primary mortgage insurance and standard hazard insurance and may, if specified
in the related Prospectus Supplement, include a pool insurance policy covering
losses in amounts in excess of coverage of any primary insurance policy, a
special hazard insurance policy covering certain risks not covered by standard
hazard insurance policies, a bankruptcy bond covering certain losses resulting
from the bankruptcy of a borrower and application of certain provisions of the
Bankruptcy Code, a repurchase bond covering the repurchase of a Loan for which
mortgage insurance or hazard insurance coverage has been denied due to
misrepresentations in connection with the organization of the related Loan, or
other insurance covering other risks associated with the particular type of
Loan. See "DESCRIPTION OF MORTGAGE AND OTHER INSURANCE." Copies of the actual
pool insurance policy, special hazard insurance policy, bankruptcy bond or
repurchase bond, if any, relating to the Loans comprising the Mortgage Assets
for a Series will be filed with the Commission as an exhibit to a Current Report
on Form 8-K to be filed within 15 days of issuance of the Certificates of the
related Series.
LETTER OF CREDIT
The letter of credit, if any, with respect to a Series of Certificates
will be issued by the bank or financial institution specified in the related
Prospectus Supplement (the "L/C Bank"). Under the letter of credit, the L/C Bank
will be obligated to honor drawings thereunder in an aggregate fixed dollar
amount,
63
net of unreimbursed payments thereunder, equal to the percentage specified in
the related Prospectus Supplement of the aggregate principal balance of the
Loans on the related Cut-off Date or of one or more Classes of Certificates (the
"L/C Percentage"). If so specified in the related Prospectus Supplement, the
letter of credit may permit drawings in the event of losses not covered by
insurance policies or other credit support, such as losses arising from damage
not covered by standard hazard insurance policies, losses resulting from the
bankruptcy of a borrower and the application of certain provisions of the
Bankruptcy Code, or losses resulting from denial of insurance coverage due to
misrepresentations in connection with the origination of a Loan. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder. The obligations of the L/C Bank
under the letter of credit for each Series of Certificates will expire at the
earlier of the date specified in the related Prospectus Supplement or the
termination of the Trust Fund. See "DESCRIPTION OF THE CERTIFICATES--Optional
Termination" and "THE POOLING AND SERVICING AGREEMENTS--Termination." A copy of
the letter of credit for a Series, if any, will be filed with the Commission as
an exhibit to a Current Report on Form 8-K to be filed within 15 days of
issuance of the Certificates of the related Series.
CERTIFICATE GUARANTEE INSURANCE
Certificate Guarantee Insurance, if any, with respect to a Series of
Certificates will be provided by one or more insurance companies. Such
Certificate Guarantee Insurance will guarantee, with respect to one or more
Classes of Certificates of the related Series, timely distributions of interest
and full distributions of principal on the basis of a schedule of principal
distributions set forth in or determined in the manner specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement, the
Certificate Guarantee Insurance will also guarantee against any payment made to
a Certificateholder which is subsequently recovered as a "voidable preference"
payment under the Bankruptcy Code. A copy of the certificate guarantee insurance
for a Series, if any, will be filed with the Commission as an exhibit to a
Current Report on Form 8-K to be filed with the Commission within 15 days of
issuance of the Certificates of the related Series.
RESERVE FUNDS
One or more Reserve Funds may be established with respect to a Series, in
which cash, a letter of credit, Eligible Reserve Fund Investments, a demand note
or a combination thereof, in the amounts, if any, so specified in the related
Prospectus Supplement will be deposited. The Reserve Funds for a Series may also
be funded over time by depositing therein a specified amount of the
distributions received on the related Mortgage Assets as specified in the
related Prospectus Supplement.
Amounts on deposit in any reserve fund for a Series, together with the
reinvestment income thereon, will be applied by the Trustee for the purposes, in
the manner, and to the extent specified in the related Prospectus Supplement. A
Reserve Fund may be provided to increase the likelihood of timely payments of
principal of and interest on the Certificates, if required as a condition to the
rating of such Series by each Rating Agency rating such Series, or to reduce the
likelihood of Special Distributions with respect to any Multiple-Class Series.
If so specified in the related Prospectus Supplement, Reserve Funds may be
established to provide limited protection, in an amount satisfactory to each
Rating Agency which assigns a rating to the Certificates, against certain types
of losses not covered by insurance policies or other credit support, such as
losses arising from damage not covered by standard hazard insurance policies,
losses resulting from the bankruptcy of a borrower and the application of
certain provisions of the Bankruptcy Code or losses resulting from denial of
insurance coverage due to fraud or misrepresentation in connection with the
origination of a Loan. Following each Distribution Date amounts in such Reserve
Fund in excess of any required reserve fund balance may be released from the
Reserve
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Fund under the conditions and to the extent specified in the related Prospectus
Supplement and will not be available for further application by the Trustee.
Moneys deposited in any Reserve Funds will be invested in Eligible
Reserve Fund Investments, except as otherwise specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, any reinvestment income or other gain from such investments will be
credited to the related Reserve Fund for such Series, and any loss resulting
from such investments will be charged to such Reserve Fund. However, such income
may be payable to the Master Servicer or a Servicer as additional servicing
compensation. See "SERVICING OF LOANS" and "THE POOLING AND SERVICING
AGREEMENTS--Investment of Funds." The Reserve Fund, if any, for a Series will
not be a part of the Trust Fund unless otherwise specified in the related
Prospectus Supplement.
Additional information concerning any Reserve Fund will be set forth in
the related Prospectus Supplement, including the initial balance of such Reserve
Fund, the required Reserve Fund balance to be maintained, the purposes for which
funds in the Reserve Fund may be applied to make distributions to
Certificateholders and use of investment earnings from the Reserve Fund, if any.
DESCRIPTION OF MORTGAGE AND OTHER INSURANCE
The following descriptions of primary mortgage insurance policies, pool
insurance policies, special hazard insurance policies, standard hazard insurance
policies, bankruptcy bonds, repurchase bonds and other insurance and the
respective coverages thereunder are general descriptions only and do not purport
to be complete.
MORTGAGE INSURANCE ON THE LOANS
GENERAL. Unless otherwise specified in the related Prospectus Supplement,
all Mortgage Loans that are Conventional Loans secured by Single Family Property
and which had initial Loan-to-Value Ratios of greater than 80% will be covered
by primary mortgage insurance policies providing coverage on the amount of each
such Mortgage Loan in excess of 75% of the original Appraised Value of the
related Mortgaged Property and remaining in force until the principal balance of
such Mortgage Loan is reduced to 80% of such original Appraised Value. In
addition, each Mortgage Loan that is a Conventional Loan secured by a vacation
or second home and which had a Loan-to-Value Ratio of more than 70% at
origination will be covered by a primary mortgage insurance policy until the
principal balance of such Mortgage Loan is reduced to below 70% of Appraised
Value.
A pool insurance policy will be obtained if so specified in the related
Prospectus Supplement to cover any loss (subject to limitations described
herein) occurring as a result of default by the borrowers to the extent not
covered by any primary mortgage insurance policy, FHA Insurance or VA Guarantee.
See "Pool Insurance Policy" below. Neither the primary mortgage insurance
policies nor any pool insurance policy will insure against certain losses
sustained in the event of a personal bankruptcy of the borrower under a Mortgage
Loan. See "CERTAIN LEGAL ASPECTS OF LOANS" herein. Such losses will be covered
to the extent described in the related Prospectus Supplement by the bankruptcy
bond or other credit support, if any.
To the extent that the primary mortgage insurance policies do not cover
all losses on a defaulted or foreclosed Mortgage Loan, and to the extent such
losses are not covered by the pool insurance policy or other credit support for
such Series, such losses, if any, would affect payments to Certificateholders.
In addition, the pool insurance policy and primary mortgage insurance policies
do not provide coverage
65
against hazard losses. See "Hazard Insurance on the Loans" below. Certain hazard
risks will not be insured and the occurrence of such hazards could adversely
affect payments to the Certificateholders.
PRIMARY MORTGAGE INSURANCE. 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 (herein referred to as the
"Insured Loss") will consist of the insured percentage (typically ranging from
12% to 25%) 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
mortgage insurer, (iv) claim payments previously made by the mortgage insurer
and (v) unpaid premiums.
Primary mortgage insurance policies reimburse certain losses sustained by
reason of defaults in payments by borrowers. Primary mortgage insurance policies
will not insure against, and exclude from coverage, a loss sustained by reason
of a default arising from or involving certain matters, including (i) fraud or
negligence in origination or servicing of the Mortgage Loans, including
misrepresentation by the originator, borrower or other persons involved in the
origination of the Mortgage Loan; (ii) failure to construct the Mortgaged
Property subject to the Mortgage Loan in accordance with specified plans; (iii)
physical damage to the Mortgaged Property; and (d) the related Servicer not
being approved as a servicer by the mortgage insurer.
Primary mortgage insurance policies generally contain provisions
substantially as follows: (i) under the policy, a claim includes unpaid
principal, accrued interest at the applicable loan interest rate to the date of
filing of a claim thereunder and certain advances (with a limitation on
attorneys' fees for foreclosures of 3% of the unpaid principal balance and
accumulated delinquent interest) described below; (ii) when a claim is
presented, the mortgage insurer will have the option of (a) paying the claim in
full and taking title to the property and arranging for the sale thereof or (b)
paying the insured percentage of the claim and allowing the insured to retain
title to the property; (iii) unless earlier directed by the mortgage insurer,
claims must be made within a specified period of time (typically, 60 days) after
the insured has acquired good and merchantable title to the property; and (iv) a
claim must be paid within a specific period of time (typically, 60 days) after
the claim is accepted by the mortgage insurer.
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 mortgage 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, have
restored and repaired the Mortgaged Property 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 mortgage insurer good
and merchantable title to and possession of the Mortgaged Property.
Other provisions and conditions of each primary mortgage insurance policy
covering a Mortgage Loan will generally include that: (a) no change may be made
in the terms of such Mortgage Loan without the consent of the mortgage insurer;
(b) written notice must be given to the mortgage insurer within 10
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days after the insured becomes aware that a borrower is delinquent in the
payment of a sum equal to the aggregate of two Scheduled Payments due under such
Mortgage Loan or that any proceedings affecting the borrower's interest in the
Mortgaged Property securing such Mortgage Loan have been commenced, and
thereafter the insured must report monthly to the mortgage insurer the status of
any such Mortgage Loan until such Mortgage Loan is brought current, such
proceedings are terminated or a claim is filed; (c) the mortgage insurer will
have the right to purchase such Mortgage Loan, at any time subsequent to the 10
days' notice described in (b) above and prior to the commencement of foreclosure
proceedings, at a price equal to the unpaid principal amount of the Mortgage
Loan plus accrued and unpaid interest thereon at the applicable Mortgage Rate
and reimbursable amounts expended by the insured for the real estate taxes and
fire and extended coverage insurance on the Mortgaged Property for a period not
exceeding 12 months and less the sum of any claim previously paid under the
policy with respect to such Mortgage Loan and any due and unpaid premium with
respect to such policy; (d) the insured must commence proceedings at certain
times specified in the policy and diligently proceed to obtain good and
merchantable title to and possession of the Mortgaged Property; (e) the insured
must notify the mortgage insurer of the institution of such proceedings, provide
it with copies of documents relating thereto, notify the mortgage insurer of the
price amounts specified in (c) above at least 15 days prior to the sale of the
Mortgaged Property by foreclosure, and bid such amount unless the mortgage
insurer specifies a lower or higher amount; and (f) the insured may accept a
conveyance of the Mortgaged Property in lieu of foreclosure with written
approval of the mortgage insurer, provided the ability of the insured to assign
specified rights to the mortgage insurer are not thereby impaired or the
specified rights of the mortgage insurer are not thereby adversely affected.
The mortgage insurer will be required to pay to the insured either: (i)
the insured percentage of the loss; or (ii) at its option under certain of the
primary mortgage insurance policies, the sum of the delinquent Scheduled
Payments plus any advances made by the insured, both to the date of the claim
payment, and thereafter, Scheduled Payments in the amount that would have become
due under the Mortgage Loan if it had not been discharged plus any advances made
by the insured until the earlier of (a) the date the Mortgage Loan would have
been discharged in full if the default had not occurred, or (b) an approved
sale. Any rents or other payments collected or received by the insured which are
derived from or are in any way related to the Mortgaged Property will be
deducted from any claim payment.
FHA INSURANCE AND VA GUARANTEES. The FHA is responsible for administering
various federal programs, including mortgage insurance, authorized under the
Housing Act, as amended, and the United States Housing Act of 1937, as amended.
The insurance premiums for FHA Loans will be collected by HUD-approved
lenders or by the Master Servicer or Servicer and 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 Loan, the
Master Servicer or Servicer is limited in its ability to initiate foreclosure
proceedings. When it is determined, by the Master Servicer or Servicer or HUD,
that default was caused by circumstances beyond the mortgagor's control, the
Master Servicer or 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
Scheduled Payments for a specified period, with such payments to be made upon or
before the maturity date of the Mortgage Note, or the recasting of payments due
under the Mortgage Note up to or beyond the scheduled 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 the Servicer in partial or full satisfaction of amounts due under the
Mortgage Loan (which payments are to be repaid by the borrower to HUD) or by
accepting assignment of the Mortgage
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Loan from the Master Servicer or the Servicer. With certain exceptions, at least
three full 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 the Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Presently, 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
debenture interest rate. The Master Servicer or the Servicer of each FHA Loan
will be obligated to purchase any such debenture issued in satisfaction of a
defaulted FHA Loan serviced by it for an amount equal to the unpaid principal
balance of the FHA Loan.
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 the Servicer for certain costs and expenses and
to deduct certain amounts received or retained by the Master Servicer or the
Servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
Master Servicer or the Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits results
from assignment of the Mortgage Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA Loan, bears interest from a
date 30 days after the borrower's first uncorrected failure to perform any
obligation or make any payment due under the Mortgage Loan and, upon assignment,
from the date of assignment, to the date of payment of the claim, in each case
at the same mortgage rate as the applicable HUD debenture interest rate as
described above.
With respect to a defaulted VA Loan, the Master Servicer or the 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
Loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation as specified in the VA regulations. Payments
under the guarantee will equal the unpaid principal amount of the VA Loan,
interest accrued on the unpaid balance of the VA 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.
The maximum guarantee that may be issued by the VA under a VA Loan as of
January 1, 1986 is the lesser of 60% of the original principal amount of the VA
Loan or $27,500. 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 mortgagee of unsatisfied indebtedness on a mortgage upon its
assignment to the VA.
POOL INSURANCE POLICY. If so specified in the related Prospectus
Supplement, the Master Servicer will be required to maintain the pool insurance
policy and to present or cause the Servicers, if any, to present claims
thereunder on behalf of the Trustee and the Certificateholders. See "SERVICING
OF LOANS--Maintenance of Insurance Policies and Other Servicing Procedures."
Although the terms and
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conditions of pool insurance policies vary to some degree, the following
describes material aspects of such policies generally. The related Prospectus
Supplement will describe any provisions of a pool insurance policy which are
materially different from those described below.
The responsibilities of the Master Servicer, the amount of claim for
benefits, the conditions precedent to the filing or payment of a claim, the
policy provisions and the payment of claims under a pool insurance policy are
generally similar to those described above for primary mortgage insurance
policies, subject to the aggregate limit on the amount of coverage. It may also
be a condition precedent to the payment of any claim under the pool insurance
policy that the insured maintain a primary mortgage insurance policy that is
acceptable to the pool insurer on all Mortgage Loans in the related Trust Fund
that have Loan-to-Value Ratios at the time of origination in excess of 80% and
that a claim under such primary mortgage insurance policy has been submitted and
settled. FHA Insurance and VA Guarantees will be deemed to be acceptable primary
insurance policies under the pool insurance policy. Assuming satisfaction of
these conditions, the pool insurer will pay to the insured the amount of the
loss which will generally be: (i) the amount of the unpaid principal balance of
the defaulted Mortgage Loan immediately prior to the sale of the Mortgaged
Property, (ii) the amount of the accumulated unpaid interest on such Mortgage
Loan to the date of claim settlement at the contractual rate of interest and
(iii) advances made by the insured as described above less certain payments. An
"approved sale" is (i) a sale of the Mortgaged Property acquired by the insured
because of a default by the borrower to which the pool insurer has given prior
approval, (ii) a foreclosure or trustee's sale of the Mortgaged Property at a
price exceeding the maximum amount specified by the pool insurer, (iii) the
acquisition of the Mortgaged Property under the primary mortgage insurance
policy by the mortgage insurer or (iv) the acquisition of the Mortgaged Property
by the pool insurer.
As a condition precedent to the payment of any loss, the insured must
provide the pool insurer with good and merchantable title to the Mortgaged
Property. If any Mortgaged Property securing a defaulted Mortgage Loan is
damaged and the proceeds, if any, from the related standard hazard insurance
policy or the applicable special hazard insurance policy, if any, are
insufficient to restore the damaged Mortgaged Property to a condition sufficient
to permit recovery under the pool insurance policy, the Master Servicer will not
be required to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds to the
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 through liquidation proceeds or insurance proceeds.
The original amount of coverage under the pool insurance policy will be
reduced over the life of the Certificates by the aggregate net dollar amount of
claims paid less the aggregate net dollar amount realized by the pool insurer
upon disposition of all foreclosed Mortgaged Properties covered thereby. The
amount of claims paid includes certain expenses incurred by the Master Servicer
as well as accrued interest at the applicable interest rate on delinquent
Mortgage Loans to the date of payment of the claim. See "CERTAIN LEGAL ASPECTS
OF LOANS" herein. Accordingly, if aggregate net claims paid under a pool
insurance policy reach the original policy limit, coverage under the pool
insurance policy will lapse and any further losses will be borne by the Trust
Fund, and thus will affect adversely payments on the Certificates. In addition,
the exhaustion of coverage under any pool insurance policy may affect the Master
Servicer's or Servicer's willingness or obligation to make Advances. If the
Master Servicer or a Servicer determines that an Advance in respect of a
delinquent Loan would not be recoverable from the proceeds of the liquidation of
such Loan or otherwise, it will not be obligated to make an advance respecting
any such delinquency since the Advance would not be ultimately recoverable by
it. See "SERVICING OF LOANS--Advances and Limitations Thereon."
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MORTGAGE INSURANCE WITH RESPECT TO MANUFACTURED HOME LOANS. A
Manufactured Home Loan may be an FHA Loan or a VA Loan. Any primary mortgage or
similar insurance and any pool insurance policy with respect to Manufactured
Home Loans will be described in the related Prospectus Supplement.
HAZARD INSURANCE ON THE LOANS
STANDARD HAZARD INSURANCE POLICIES. The standard hazard insurance
policies will provide for coverage at least equal to the applicable state
standard form of fire insurance policy with extended coverage for property of
the type securing the related Loans. In general, the standard form of fire and
extended coverage policy will cover physical damage to or destruction of, the
improvements on the property caused by fire, lightning, explosion, smoke,
windstorm, hail, riot, strike and civil commotion, subject to the conditions and
exclusions particularized in each policy. Because the standard hazard insurance
policies relating to the Loans will be underwritten by different hazard insurers
and will cover properties located in various states, such policies will not
contain identical terms and conditions. The basic terms, however, generally will
be determined by state law and generally will be similar. Most such policies
typically will not cover any physical damage resulting from war, revolution,
governmental actions, floods and other water-related causes, earth movement
(including earthquakes, landslides, and mud-flows), nuclear reaction, 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. Uninsured risks not covered by a
special hazard insurance policy or other form of credit support will adversely
affect distributions to Certificateholders. When a property securing a Loan is
located in a flood area identified by HUD pursuant to the Flood Disaster
Protection Act of 1973, as amended, the Master Servicer will be required to
cause flood insurance to be maintained with respect to such property, to the
extent available.
The standard hazard insurance policies covering properties securing Loans
typically will contain a "coinsurance" clause which, in effect, will require the
insured at all times to carry hazard insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the dwellings,
structures and other improvements on the Mortgaged Property in order to recover
the full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause will provide that the hazard insurer's
liability in the event of partial loss will not exceed the greater of (i) the
actual cash value (the replacement cost less physical depreciation) of the
dwellings, structures and other improvements damaged or destroyed or (ii) such
proportion of the loss, without deduction for depreciation, as the amount of
insurance carried bears to the specified percentage of the full replacement cost
of such dwellings, structures and other improvements on the Mortgaged Property.
Since the amount of hazard insurance to be maintained on the improvements
securing the Loans declines as the principal balances owing thereon decrease,
and since the value of residential real estate in the areas which the Mortgaged
Property is located fluctuates in value over time, the effect of this
requirement in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damage to the Mortgaged Property.
The Depositor will not require that a standard hazard or flood insurance
policy be maintained for any Cooperative Loan. Generally, the Cooperative 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 either the
Cooperative or the related borrower do not maintain such insurance, or do not
maintain adequate coverage, or do not apply any insurance proceeds to the
restoration of damaged property, then damage to such borrower's Cooperative
Dwelling or such Cooperative's building could significantly reduce the value of
the Mortgaged Property securing such Cooperative Loan. Similarly, the Depositor
will not require that a standard hazard or flood insurance policy be maintained
for any Condominium Loan. Generally, the Condominium Association
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is responsible for maintenance of hazard insurance for the Condominium Building
(including the individual Condominium Units) and the owner(s) of an individual
Condominium Unit do not maintain separate hazard insurance policies. To the
extent, however, that either the Condominium Association or the related borrower
do not maintain such insurance, or do not maintain adequate coverage, or do not
apply any insurance proceeds to the restoration of damaged property, then damage
to such borrower's Condominium Unit or such Condominium Building could
significantly reduce the value of the Mortgaged Property securing such
Condominium Loan.
SPECIAL HAZARD INSURANCE POLICY. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that, where
there has been damage to property securing a defaulted or foreclosed Loan (title
to which has been acquired by the insured) and to the extent such damage is not
covered by the standard hazard insurance policy or any flood insurance policy,
if applicable, required to be maintained with respect to such property, or in
connection with partial loss resulting from the application of the coinsurance
clause in a standard hazard insurance policy, 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 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 or the
Servicer with respect to such property. If the unpaid principal balance plus
accrued interest and certain expenses is paid by the special hazard insurer, the
amount of further coverage under the special hazard insurance policy will be
reduced by such amount less any net proceeds from the sale of the property. Any
amount paid as the cost of repair of the property will reduce coverage by such
amount. Special hazard insurance policies typically do not cover losses
occasioned by war, civil insurrection, certain governmental actions, errors in
design, faulty workmanship or materials (except under certain circumstances),
nuclear reaction, flood (if the mortgaged property is in a federally designated
flood area), chemical contamination and certain other risks.
Restoration of the property with the proceeds described under (i) above
is expected to satisfy the condition under the pool insurance policy that the
property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Loan secured by such property.
The payment described under (ii) above will render unnecessary presentation of a
claim in respect of such Loan under the pool insurance policy. Therefore, so
long as the 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 Loan plus accrued interest and certain expenses will not affect the
total insurance proceeds paid to holders of the Certificates, but will affect
the relative amounts of coverage remaining under the special hazard insurance
policy and pool insurance policy.
OTHER HAZARD-RELATED INSURANCE; LIABILITY INSURANCE. With respect to
Loans secured by Multifamily Property, certain additional insurance policies may
be required with respect to the Multifamily Property; for example, general
liability insurance for bodily injury and property damage, steam boiler coverage
where a steam boiler or other pressure vessel is in operation, and rent loss
insurance to cover operating income losses following damage or destruction of
the Mortgaged Property. With respect to a Series for which Loans secured by
Multifamily Property are included in the Trust Fund, the related Prospectus
Supplement will specify the required types and amounts of additional insurance
and describe the general terms of such insurance and conditions to payment
thereunder.
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BANKRUPTCY BOND
In the event of a bankruptcy of a borrower, the bankruptcy court may
establish the value of the property securing the related Loan at an amount less
than the then outstanding principal balance of such Loan. The amount of the
secured debt could be reduced to such value, and the holder of such Loan thus
would become an unsecured creditor to the extent the outstanding principal
balance of such Loan exceeds the value so assigned to the property by the
bankruptcy court. In addition, certain other modifications of the terms of a
Loan can result from a bankruptcy proceeding. See "CERTAIN LEGAL ASPECTS OF
LOANS" herein. If so provided in the related Prospectus Supplement, the Master
Servicer will obtain a bankruptcy bond or similar insurance contract (the
"bankruptcy bond") for proceedings with respect to borrowers under the
Bankruptcy Code. The bankruptcy bond will cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of principal of and
interest on a Loan or a reduction by such court of the principal amount of a
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 bankruptcy bond will provide coverage in the aggregate amount
specified in the related Prospectus Supplement for all Loans in the Trust Fund
secured by single unit primary residences. Such amount will be reduced by
payments made under such bankruptcy bond in respect of such Loans, unless
otherwise specified in the related Prospectus Supplement, and will not be
restored.
REPURCHASE BOND
If so specified in the related Prospectus Supplement, the Depositor or
Master Servicer will be obligated to repurchase any Loan (up to an aggregate
dollar amount specified in the related Prospectus Supplement) for which
insurance coverage is denied due to dishonesty, misrepresentation or fraud in
connection with the origination or sale of such Loan. Such obligation may be
secured by a surety bond guaranteeing payment of the amount to be paid by the
Depositor or the Master Servicer.
THE POOLING AND SERVICING AGREEMENTS
The following summaries describe certain provisions of the Pooling and
Servicing Agreements. The summaries do not purport to be complete and are
subject to, and qualified in their entirety by reference to, the provisions of
the Pooling and Servicing Agreements. Where particular provisions or terms used
in the Pooling and Servicing Agreements are referred to, such provisions or
terms are as specified in the Pooling and Servicing Agreements.
ASSIGNMENT OF MORTGAGE ASSETS
GENERAL. The Depositor will transfer, convey and assign to the Trustee
all right, title and interest of the Depositor in the Mortgage Assets and other
property to be included in the Trust Fund for a Series. Such assignment will
include all principal and interest due on or with respect to the Mortgage Assets
after the Cut-off Date specified in the related Prospectus Supplement (except
for any Retained Interests). The Trustee will, concurrently with such
assignment, execute and deliver the Certificates.
ASSIGNMENT OF PRIVATE MORTGAGE-BACKED SECURITIES. The Depositor will
cause Private Mortgage-Backed Securities to be registered in the name of the
Trustee (or its nominee or correspondent). The Trustee (or its agent or
correspondent) 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
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Mortgage-Backed Security. See "THE TRUST FUNDS--Private Mortgage-Backed
Securities" herein. Each Private Mortgage-Backed Security will be identified in
a schedule appearing as an exhibit to the related Pooling and Servicing
Agreement (the "Mortgage Certificate Schedule"), which will specify the original
principal amount, outstanding principal balance as of the Cut-off Date, annual
pass-through rate or interest rate and maturity date for each Private
Mortgage-Backed Security conveyed to the Trustee. In the Pooling and Servicing
Agreement, the Depositor will represent and warrant to the Trustee regarding the
Private Mortgage-Backed Securities: (i) that the information contained in the
Mortgage Certificate Schedule is true and correct in all material respects; (ii)
that, immediately prior to the conveyance of the Private Mortgage-Backed
Securities, the Depositor had good title thereto, and was the sole owner thereof
(subject to any Retained Interests); (iii) that there has been no other sale by
it of such Private Mortgage-Backed Securities and (iv) that there is no existing
lien, charge, security interest or other encumbrance (other than any Retained
Interest) on such Private Mortgage-Backed Securities.
ASSIGNMENT OF AGENCY SECURITIES. The Depositor will cause the Agency
Securities to be registered in the name of the Trustee (or its nominee or
correspondent). The Trustee (or its agent or correspondent) will have possession
of any certificated Agency Security.
ASSIGNMENT OF MORTGAGE LOANS. In addition, the Depositor will, as to each
Mortgage Loan, deliver or cause to be delivered to the Trustee, or, as specified
in the related Prospectus Supplement, the Custodian, the Mortgage Note endorsed
without recourse to the order of the Trustee or in blank, the original Mortgage
with evidence of recording indicated thereon (except for any Mortgage not
returned from the public recording office, in which case a copy of such Mortgage
will be delivered, together with a certificate that the original of such
mortgage was delivered to such recording office) and an assignment of the
Mortgage in recordable form. The Trustee, or, if so specified in the related
Prospectus Supplement, the Custodian, will hold such documents in trust for the
benefit of the Certificateholders.
If so specified in the related Prospectus Supplement, the Depositor will,
at the time of delivery of the Certificates, cause assignments to the Trustee of
the Mortgage Loans to be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the Trustee, such recording is not required to protect the Trustee's interest
in the Mortgage Loan. If specified in the related Prospectus Supplement, the
Depositor will cause such assignments to be so recorded within the time after
delivery of the Certificates as is specified in the related Prospectus
Supplement, in which event, the Pooling and Servicing Agreement may, as
specified in the related Prospectus Supplement, require the Depositor to
repurchase from the Trustee any Mortgage Loan required to be recorded but not
recorded within such time, at the price described above with respect to
repurchase by reason of defective documentation. Unless otherwise provided in
the related Prospectus Supplement, the enforcement of the repurchase obligation
would constitute the sole remedy available to the Certificateholders or the
Trustee for the failure of a Mortgage Loan to be recorded.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, its agent, or a custodian,
the related original cooperative note endorsed 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 and related blank stock powers. The Depositor will file in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the Trust Agreement (the "Mortgage Loan Schedule"). Such Mortgage
Loan Schedule will specify the number of Mortgage Loans which are Cooperative
Loans and, with respect to each Mortgage Loan: the original principal amount and
unpaid principal balance as of the Cut-off Date; the current interest rate; the
current
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Scheduled Payment of principal and interest; the maturity date of the related
mortgage note; if the Mortgage Loan is an ARM, the Lifetime Mortgage Rate Cap,
if any, and the current Index; and, if the Mortgage Loan is a GPM Loan, a CEM
Loan, a Buy-Down Loan or a Mortgage Loan with other than fixed Scheduled
Payments and level amortization, the terms thereof.
ASSIGNMENT OF MANUFACTURED HOME LOANS. The Depositor will cause any
Manufactured Home Loans included in the Mortgage Assets for a Series of
Certificates to be assigned to the Trustee, together with principal and interest
due on or with respect to the Manufactured Home Loans after the Cut-off Date
specified in the related Prospectus Supplement. Each Manufactured Home Loan will
be identified in a loan schedule (the "Loan Schedule") appearing as an exhibit
to the related Pooling and Servicing Agreement. Such Loan Schedule will specify,
with respect to each Manufactured Home Loan, among other things: the original
principal balance and the outstanding principal balance as of the close of
business on the Cut-off Date; the interest rate; the current Scheduled Payment
of principal and interest; and the maturity date of the Manufactured Home Loan.
In addition, with respect to each Manufactured Home Loan, the Depositor
will deliver or cause to be delivered to the Trustee, or, as specified in the
related Prospectus Supplement, the custodian, the original Manufactured Home
Loan and copies of documents and instruments related to each Manufactured Home
Loan and the security interest in the Manufactured Home securing each
Manufactured Home Loan. To give notice of the right, title and interest of the
Certificateholders to the Manufactured Home Loans, the Depositor will cause a
UCC-1 financing statement to be filed identifying the Trustee as the secured
party and identifying all Manufactured Home Loans as collateral. Unless
otherwise specified in the related Prospectus Supplement, the Manufactured Home
Loans will not be stamped or otherwise marked to reflect their assignment from
the Depositor to the Trustee. Therefore, if a subsequent purchaser were able to
take physical possession of the Manufactured Home Loans without notice of such
assignment, the interest of the Certificateholders in the Manufactured Home
Loans could be defeated. See "CERTAIN LEGAL ASPECTS OF LOANS--Manufactured
Home Loans."
The Depositor will provide limited representations and warranties to the
Trustee concerning the Manufactured Home Loans. Such representations and
warranties will include: (i) that the information contained in the Loan Schedule
provides an accurate listing of the Manufactured Home Loans and that the
information respecting such Manufactured Home Loans set forth in such Loan
Schedule is true and correct in all material respects at the date or dates
respecting which such information is furnished; (ii) that, immediately prior to
the conveyance of the Manufactured Home Loans, the Depositor had good title to,
and was sole owner of, each such Manufactured Home Loan (subject to any Retained
Interests); (iii) that there has been no other sale by it of such Manufactured
Home Loans and that the Manufactured Home Loan is not subject to any lien,
charge, security interest or other encumbrance; (iv) if the Master Servicer will
not directly service the Manufactured Home Loans, each Servicing Agreement
entered into with a Servicer with respect to Manufactured Home Loans comprising
the Mortgage Assets has been assigned and conveyed to the Trustee and is not
subject to any offset, counterclaim, encumbrance or other charge; and (v) the
Depositor has obtained from each of the Master Servicer, the Servicer, the
originator of the Manufactured Home Loans or such other entity that is the
seller of the related Manufactured Home Loan representations and warranties
relating to certain information respecting the origination of and current status
of the Manufactured Home Loans, and has no knowledge of any fact which would
cause it to believe that such representations and warranties are inaccurate in
any material respect. See "LOAN UNDERWRITING PROCEDURES AND STANDARDS" herein.
ASSIGNMENT OF PARTICIPATION CERTIFICATES. The Depositor will cause any
Participation Certificates obtained under a participation agreement to be
assigned to the Trustee by delivering to the Trustee the Participation
Certificate, which will be reregistered in the name of the Trustee. Unless
otherwise specified
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in the related Prospectus Supplement, the Trustee will not be in possession of
or be assignee of record with respect to the Loans represented by the
Participation Certificate. Each Participation Certificate will be identified in
a "Participation Certificate Schedule" which will specify the original principal
balance, outstanding principal balance as of the Cut-off Date, pass-through rate
and maturity date for each Participation Certificate. In the Pooling and
Servicing Agreement, the Depositor will represent and warrant to the Trustee
regarding the Participation Certificate: (i) that the information contained in
the Participation Certificate Schedule is true and correct in all material
respects; (ii) that, immediately prior to the conveyance of the Participation
Certificates, the Depositor had good title to and was sole owner of the
Participation Certificate; (iii) that there has been no other sale by it of such
Participation Certificate and (iv) that such Participation Certificate is not
subject to any existing lien, charge, security interest or other encumbrance
(other than any Retained Interests).
REPURCHASE AND SUBSTITUTION OF NON-CONFORMING LOANS
Unless otherwise provided in the related Prospectus Supplement, if any
document in the Loan file delivered by the Depositor to the Trustee is found by
the Trustee within 90 days of the execution of the related Pooling and Servicing
Agreement (or promptly after the Trustee's receipt of any document permitted to
be delivered after the Closing Date) to be defective in any material respect and
the related Servicer does not cure such defect within 60 days from the date the
Master Servicer was notified of the defect by the Trustee, or within such other
period specified in the related Prospectus Supplement, the related Servicer if,
and to the extent it is obligated to do so under the related servicing agreement
will, not later than 90 days or within such other period specified in the
related Prospectus Supplement, from the date the Master Servicer was notified of
the defect by the Trustee, repurchase the related Mortgage Loan or any property
acquired in respect thereof from the Trustee at a price equal to the outstanding
principal balance of such Mortgage Loan (or, in the case of a foreclosed
Mortgage Loan, the outstanding principal balance of such Mortgage Loan
immediately prior to foreclosure), plus accrued and unpaid interest to the date
of the next scheduled payment on such Mortgage Loan at the related Pass-Through
Rate or Certificate Rate.
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer may, rather than repurchase the Loan as described above, remove
such Loan from the Trust Fund (the "Deleted Loan") and substitute in its place
one or more other Loans (each, a "Qualified Substitute Mortgage Loan") provided,
however, that (i) with respect to a Trust Fund for which no REMIC election is
made, such substitution must be effected within 90 days of the date of initial
issuance of the Certificates and (ii) with respect to a Trust Fund for which a
REMIC election is made, the Trustee must have received a satisfactory opinion of
counsel that such substitution will not cause the Trust Fund to lose its status
as a REMIC.
Any Qualified Substitute Mortgage Loan will have, on the date of
substitution, (i) an outstanding principal balance, after deduction of all
Scheduled Payments due in the month of substitution, not in excess of the
outstanding principal balance of the Deleted Loan (the amount of any shortfall
to be deposited to the Certificate Account in the month of substitution for
distribution to Certificateholders), (ii) an interest rate not less than (and
not more than 2% greater than) the interest rate of the Deleted Loan, (iii) a
remaining term-to-stated maturity not greater than (and not more than one year
less than) that of the Deleted Loan, and will (iv) comply with all of the
representations and warranties set forth in the applicable agreement as of the
date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Certificateholders or the Trustee for a material
defect in a Loan document.
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Unless otherwise specified in the related Prospectus Supplement, the
Depositor will make representations and warranties with respect to Loans which
comprise the Mortgage Assets for a Series. See "LOAN UNDERWRITING PROCEDURES AND
STANDARDS--Representations and Warranties" above. If the related Servicer cannot
cure a breach of any such representations and warranties in all material
respects within 60 days after notification by the Master Servicer of such
breach, and if such breach is of a nature that adversely affects the payments of
principal and interest on the Loan or otherwise adversely and materially affects
the value of such Loan, the Servicer is obligated to substitute or repurchase
the affected Mortgage Loan if such Servicer is required to do so under the
applicable servicing agreement.
REPORTS TO CERTIFICATEHOLDERS
The Master Servicer will prepare and will forward or will provide to the
Trustee for forwarding to each Certificateholder on each Distribution Date, or
as soon thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series as specified in the related Pooling and Servicing
Agreement, among other things:
(i) as applicable, either (A) the amount of such distribution
allocable to principal on the Mortgage Assets, separately identifying the
aggregate amount of any principal prepayments included therein and the
amount, if any, advanced by the Master Servicer or by a Servicer or (B)
the amount of the principal distribution in reduction of stated principal
amount (or Compound Value) of each Class and the aggregate unpaid
principal amount (or Compound Value) of each Class following such
distribution;
(ii) as applicable, either (A) the amount of such distribution
allocable to interest on the Mortgage Assets and the amount, if any,
advanced by the Master Servicer or a Servicer or (B) the amount of the
interest distribution;
(iii) the amount of servicing compensation with respect to the
Mortgage Assets paid during the Due Period commencing on the Due Date to
which such distribution relates and the amount of servicing compensation
during such period attributable to penalties and fees;
(iv) with respect to Compound Interest Certificates, prior to the
Accrual Termination Date in addition to the information specified in
(i)(B) above, the amount of interest accrued on such Certificates during
the related Interest Accrual Period and added to the Compound Value
thereof;
(v) in the case of Floating Interest Certificates, the Floating
Rate applicable to the distribution being made;
(vi) if applicable, the amount of any shortfall (i.e., the
difference between the aggregate amounts of principal and interest which
Certificateholders would have received if there were sufficient eligible
funds in the Certificate Account and the amounts actually distributed);
(vii) if applicable, the number and aggregate principal balances
of Loans delinquent for (A) two consecutive payments and (B) three or
more consecutive payments, as of the close of business on the
Determination Date to which such distribution relates;
(viii) if applicable, the book value of any REO Property acquired
on behalf of Certificateholders through foreclosure, grant of a deed in
lieu of foreclosure or repossession as
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of the close of business on the Business Day preceding the Distribution
Date to which such distribution relates;
(ix) if applicable, the amount of coverage under any pool
insurance policy as of the close of business on the applicable
Distribution Date;
(x) if applicable, the amount of coverage under any special
hazard insurance policy as of the close of business on the applicable
Distribution Date;
(xi) if applicable, the amount of coverage under any bankruptcy
bond as of the close of business on the applicable Distribution Date;
(xii) in the case of any other credit support described in the
related Prospectus Supplement, the amount of coverage of such credit
support as of the close of business on the applicable Distribution Date;
(xiii) in the case of any Series which includes a Subordinate
Class, the Subordinated Amount, if any, determined as of the related
Determination Date and if the distribution to the Senior
Certificateholders is less than their required distribution, the amount
of the shortfall;
(xiv) the amount of any withdrawal from any applicable Reserve
Fund included in amounts actually distributed to Certificateholders and
the remaining balance of each Reserve Fund (including any Subordination
Reserve Fund), if any, on such Distribution Date, after giving effect to
distributions made on such date; and
(xv) such other information as specified in the related
Pooling and Servicing Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Master Servicer, unless otherwise specified in the related
Prospectus Supplement, will furnish to each Certificateholder of record at any
time during such calendar year a report summarizing the items provided to
Certificateholders as specified in the Pooling and Servicing Agreement to enable
Certificateholders to prepare their tax returns including, without limitation,
the amount of original issue discount accrued on the Certificates, if
applicable. Information in the Distribution Date and annual reports provided to
the Certificateholders will not have been examined and reported upon by an
independent public accountant. However, the Master Servicer will provide to the
Trustee a report by independent public accountants with respect to the Master
Servicer's servicing of the Loans. See "SERVICING OF LOANS--Evidence as to
Compliance" herein.
INVESTMENT OF FUNDS
The Certificate Account, Collection Account or Custodial Account, if any,
and any other funds and accounts for a Series that may be invested by the
Trustee or by the Master Servicer or by the Servicer, if any, can be invested
only in Eligible Investments acceptable to each Rating Agency rating such
Series, which may include, without limitation, (i) direct obligations of, and
obligations fully guaranteed by, the United States of America, or any agency of
the United States of America, the obligations of which are backed by the full
faith and credit of the United States of America; (ii) general obligations of or
obligations guaranteed by any state of the United States of America or the
District of Columbia receiving one of the two highest long-term ratings of each
Rating Agency, or such lower
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ratings as will not result in the downgrading or withdrawal of the ratings then
assigned to the Certificates by each Rating Agency; (iii) commercial paper which
is then rated in the highest commercial paper rating categories of each Rating
Agency, or such lower category as will not result in the downgrading or
withdrawal of the ratings then assigned to the Certificates by each Rating
Agency; (iv) certificates of deposit, demand or time deposits, federal funds or
bankers' acceptances issued by any depository institution or trust company
incorporated under the laws of the United States of America or of any state
thereof and subject to supervision and examination by federal and/or state
banking authorities, provided that the commercial paper and/or long-term debt
obligations of such depository institution or trust company (or in the case of
the principal depository institution in a holding company system, the commercial
paper or long-term debt obligations of such holding company) are then rated in
the highest rating category of each Rating Agency, in the case of commercial
paper, or in the second highest category in the case of long term debt
obligations; (v) demand or time deposits or certificates of deposit issued by
any bank or trust company or savings and loan association and fully insured by
the FDIC; (vi) guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation which do not adversely affect the rating on the
Certificates of such Series at the time of the issuance of or investing in such
guaranteed reinvestment agreements; (vii) repurchase obligations with respect to
any security described in (i) and (ii) above or any other security issued or
guaranteed by an agency or instrumentality of the United States of America, in
either case entered into with a depository institution or trust company (acting
as principal) described in (iv) above; (viii) securities bearing interest or
sold at a discount issued by any corporation incorporated under the laws of the
United States of America or any state thereof which, at the time of such
investment or contractual commitment providing for such investments are then
rated in one of the two highest categories of each Rating Agency, or in such
lower rating category as will not result in the downgrading or withdrawal of the
ratings then assigned to the Certificates of such Series by each Rating Agency;
and (ix) such other investments which do not adversely affect the rating on the
Certificates of such Series as confirmed in writing by each Rating Agency.
Funds held in a Reserve Fund or Subordinated Reserve Fund may be invested
in certain Eligible Reserve Fund Investments which may include Eligible
Investments, mortgage loans, mortgage pass-through or participation securities,
mortgage-backed bonds or notes or other investments to the extent specified in
the related Prospectus Supplement.
Eligible Investments or Eligible Reserve Fund Investments with respect to
a Series will include only obligations or securities that mature on or before
the date on which the amounts in the Collection Account are required to be
remitted to the Trustee and amounts in the Certificate Account, any Reserve Fund
or the Subordinated Reserve Fund for such Series are required or may be
anticipated to be required to be applied for the benefit of Certificateholders
of such Series.
If so provided in the related Prospectus Supplement, the reinvestment
income from the Subordination Reserve Fund, other Reserve Fund, Servicer
Account, Collection Account or the Certificate Account may be property of the
Master Servicer or a Servicer and not available for distributions to
Certificateholders. See "SERVICING OF LOANS" herein.
EVENT OF DEFAULT
Events of Default under the Pooling and Servicing Agreement for each
Series include (i) any failure by the Master Servicer to distribute to
Certificateholders of such Series any required payment which continues
unremedied for five business days, or one business day for certain other
required payments, after the giving of written notice of such failure to the
Master Servicer by the Trustee or the Depositor for such Series, or to the
Master Servicer and the Trustee by the Holders of Certificates of such Series
evidencing not less than 25% of the aggregate outstanding principal amount of
the Certificates
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for such Series, (ii) any failure by the Master Servicer duly to observe or
perform in any material respect any other of its covenants or agreements in the
Pooling and Servicing Agreement which continues unremedied for 60 days (or 15
days in the case of a failure to maintain any insurance policy required to be
maintained pursuant to the Pooling and Servicing Agreement) after the giving of
written notice of such failure to the Master Servicer by the Trustee or the
Depositor, or to the Master Servicer and the Trustee by the Holders of
Certificates of such Series evidencing not less than 25% of the aggregate
outstanding principal amount of the Certificates and (iii) certain events in
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings and certain actions by the Master Servicer indicating its
insolvency, reorganization or inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied under the Pooling and
Servicing Agreement for a Series, the Trustee for such Series or Holders of
Certificates of such Series evidencing not less than 25% of the aggregate
outstanding principal amount of the Certificates for such Series (the first 25%
who provide such notice) or the Depositor may terminate all of the rights and
obligations of the Master Servicer as servicer under the Pooling and Servicing
Agreement and in and to the Mortgage Loans (other than its right as a
Certificateholder under the Pooling and Servicing Agreement which rights the
Master Servicer will retain under all circumstances), whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Master
Servicer under the Pooling and Servicing Agreement and will be entitled to
reasonable servicing compensation not to exceed the applicable servicing fee,
together with other servicing compensation in the form of assumption fees, late
payment charges or otherwise as provided in the Pooling and Servicing Agreement.
If, however, the RTC or the FDIC is appointed as the receiver for the Master
Servicer, and no Event of Default other than such receivership or insolvency
exists, the RTC or the FDIC may have the power to prevent either the Trustee or
the Certificateholders from effecting a transfer of servicing.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, any
established mortgage loan servicing institution the appointment of which does
not adversely affect the then current rating of the Certificates of the related
Series to act as successor Master Servicer under the provisions of such Pooling
and Servicing Agreement relating to the servicing of the Mortgage Loans. The
successor Master Servicer would be entitled to reasonable servicing compensation
in an amount not to exceed the Servicing Fee as set forth in the related
Prospectus Supplement, together with the other servicing compensation in the
form of assumption fees, late payment charges or otherwise, as provided in the
Pooling and Servicing Agreement.
During the continuance of any Event of Default under the Pooling and
Servicing Agreement for a Series, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Certificateholders of such Series, and
Holders of Certificates evidencing not less than 25% of the aggregate
outstanding principal amount of the Certificates for such Series may direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred upon that Trustee.
However, the Trustee will not be under any obligation to pursue any such remedy
or to exercise any of such trusts or powers unless such Certificateholders have
offered the Trustee reasonable security or indemnity against the cost, expenses
and liabilities which may be incurred by the Trustee therein or thereby. Also,
the Trustee may decline to follow any such direction if the Trustee determines
that the action or proceeding so directed may not lawfully be taken or would
involve it in personal liability or be unjustly prejudicial to the non-assenting
Certificateholders.
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No Certificateholder of a Series, solely by virtue of such Holder's
status as a Certificateholder, will have any right under the Pooling and
Servicing Agreement for such Series to institute any proceeding with respect to
the Trust Agreement, unless such Holder previously has given to the Trustee for
such Series written notice of default and unless the Holders of Certificates
evidencing not less than 25% of the aggregate outstanding principal amount of
the Certificates for such Series have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have offered
to the Trustee reasonable indemnity, and the Trustee for 60 days has neglected
or refused to institute any such proceeding.
DEFICIENCY EVENT
A "Deficiency Event" with respect to the Certificates of a Multiple-Class
Series is defined in the Pooling and Servicing Agreement as being the inability
of the Trustee to distribute to Holders of one or more Classes of Certificates
of such Series (other than any Class of Subordinate Certificates prior to the
time that the Available Distribution Amount is reduced to zero), in accordance
with the terms thereof and the Pooling and Servicing Agreement, any distribution
of principal or interest thereon when and as distributable, in each case because
of the insufficiency for such purpose of the funds then held in the related
Trust Fund.
Upon the occurrence of a Deficiency Event, the Trustee (unless otherwise
specified in the related Prospectus Supplement) is required to determine whether
or not the application on a monthly basis (regardless of the frequency of
regular Distribution Dates) of all future Scheduled Payments on the Mortgage
Assets included in the related Trust Fund and other amounts receivable with
respect to such Trust Fund towards payments on such Certificates in accordance
with the priorities as to distributions of principal and interest set forth in
such Certificates will be sufficient to make distributions of interest at the
applicable Certificate Rates and to distribute in full the principal amount of
each such outstanding Certificate on or before its respective Stated Maturity.
The Trustee (unless otherwise specified in the related Prospectus
Supplement) will obtain and rely upon an opinion or report of a firm of
independent accountants of recognized national reputation as to the sufficiency
of the amounts receivable with respect to such Trust Fund to make such
distributions on the Certificates, which opinion or report will be conclusive
evidence as to such sufficiency. Pending the making of any such determination,
distributions on the Certificates will continue to be made in accordance with
their terms.
In the event that the Trustee (unless otherwise specified in the related
Prospectus Supplement) makes a determination of sufficiency, the Trustee will
apply all amounts received in respect of the related Trust Fund (after payment
of fees and expenses of the Trustee and accountants for the Trust Fund) to
distributions on the Certificates of such Series in accordance with their terms,
except that such distributions will be made monthly and without regard to the
amount of principal that would otherwise be distributable on any Distribution
Date. Under certain circumstances following such positive determination, the
Trustee may resume making distributions on such Certificates expressly in
accordance with their terms.
If the Trustee (unless otherwise specified in the related Prospectus
Supplement) is unable to make the positive determination described above, the
Trustee will apply all amounts received in respect of the related Trust Fund
(after payment of Trustee and accountants' fees and expenses) to monthly
distributions on the Certificates of such Series pro rata, without regard to the
priorities as to distribution of principal set forth in such Certificates, and
such Certificates will, to the extent permitted by applicable law, accrue
interest at the highest Certificate Rate borne by any Certificate of such Series
(excluding any Interest
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Weighted Class or any Class with a Floating Rate that varies inversely with a
current Index) or, with respect to each Class of Floating Interest Certificates,
at the weighted average Certificate Rate, calculated on the basis of the maximum
interest rate applicable to such Class on the original principal amount of the
Certificates of that Class (excluding any Interest Weighted Class or any Class
with a Floating Rate that varies inversely with a current Index). In such event,
the Holders evidencing not less than at least 66% or more of the aggregate
outstanding principal amount of the Certificates of such Series may direct the
Trustee to sell the related Trust Fund, any such direction being irrevocable and
binding upon the Holders of all Certificates of such Series and upon the owners
of the residual interests in such Trust Fund. In the absence of such a
direction, the Trustee may not sell all or any portion of such Trust Fund.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or
trust company named as the Trustee for each Series of Certificates will be set
forth in the related Prospectus Supplement. The entity serving as Trustee may
have normal banking relationships with the Depositor or the Master Servicer. In
addition, for the purpose of meeting the legal requirements of certain local
jurisdictions, the Trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the Trust Fund relating to a Series of
Certificates. In the event of such appointment, all rights, powers, duties and
obligations conferred or imposed upon the Trustee by the Pooling and Servicing
Agreement relating to such Series will be conferred or imposed upon the Trustee
and each such separate trustee or co-trustee jointly, or, in any jurisdiction in
which the Trustee shall be incompetent or unqualified to perform certain acts,
singly upon such separate trustee or co-trustee who shall exercise and perform
such rights, powers, duties and obligations solely at the direction of the
Trustee. The Trustee may also appoint agents to perform any of the
responsibilities of the Trustee, which agents shall have any or all of the
rights, powers, duties and obligations of the Trustee conferred on them by such
appointment; provided that the Trustee shall continue to be responsible for its
duties and obligations under the Pooling and Servicing Agreement.
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
the Pooling and Servicing Agreement, the Certificates or of any Mortgage Asset
or related documents. If no Event of Default (as defined in the related Pooling
and Servicing Agreement) has occurred, the Trustee is required to perform only
those duties specifically required of it under the Pooling and Servicing
Agreement. Upon receipt of the various certificates, statements, reports or
other instruments required to be furnished to it, the Trustee is required to
examine them to determine whether they are in the form required by the related
Pooling and Servicing Agreement. However, the Trustee will not be responsible
for the accuracy or content of any such documents furnished by it or the
Certificateholders to the Master Servicer under the Pooling and Servicing
Agreement.
The Trustee may be held liable for its own grossly negligent action or
failure to act, or for its own willful misconduct; provided, however, that the
Trustee will not be personally liable with respect to any action taken, suffered
or omitted to be taken by it in good faith in accordance with the direction of
the Certificateholders in an Event of Default, see "Rights Upon Event of
Default" above. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under a Pooling and Servicing Agreement, or in the exercise of any of its rights
or powers, if it has reasonable grounds for believing that repayment of such
funds or adequate indemnity against such risk or liability is not reasonably
assured to it.
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RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any
time, in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after giving such notice of resignation,
the resigning Trustee may petition any court of competent jurisdiction for
appointment of a successor Trustee. The Trustee may also be removed at any time
(i) by the Depositor, if the Trustee ceases to be eligible to continue as such
under the Pooling and Servicing Agreement, (ii) if the Trustee becomes
insolvent, (iii) if a tax is imposed or threatened with respect to the Trust
Fund by any state in which the Trustee or the Trust Fund held by the Trustee
pursuant to the Pooling and Servicing Agreement is located, or (iv) by the
Holders of Certificates evidencing over 50% of the aggregate outstanding
principal amount of the Certificates in the Trust Fund upon 30 days' advance
written notice to the Trustee and to the Depositor. Any resignation or removal
of the Trustee and appointment of a successor Trustee will not become effective
until acceptance of the appointment by the successor Trustee.
CERTIFICATE ACCOUNT
The Trustee will establish a separate account (the "Certificate Account")
in its name as Trustee for the Certificateholders, or if it is so specified in
the related Prospectus Supplement, the Certificate Account may be established by
the Master Servicer in the name of the Trustee. If specified in the related
Prospectus Supplement, the Certificate Account may be maintained as an interest
bearing account or the funds held therein may be invested, pending disbursement
to Certificateholders of the related Series, pursuant to the terms of the
Pooling and Servicing Agreement, in Eligible Investments. If so specified in the
related Prospectus Supplement, the Master Servicer will be entitled to receive
as additional compensation, any interest or other income earned on funds in the
Certificate Account. There will be deposited into the Certificate Account
monthly all funds received from the Master Servicer and required withdrawals
from any reserve funds. Unless otherwise specified in the related Prospectus
Supplement, the Trustee is permitted from time to time to make withdrawals from
the Certificate Account for each Series to remove amounts deposited therein in
error, to pay to the Master Servicer any reinvestment income on funds held in
the Certificate Account to the extent it is entitled, to remit to the Master
Servicer its Servicing Fee, assumption or substitution fees, late payment
charges and other mortgagor charges, reimbursement of Advances and expenses, to
make deposits to any reserve fund, to make regular distributions to the
Certificateholders, to clear and terminate the Certificate Account and to make
other withdrawals as required or permitted by the related Pooling and Servicing
Agreement.
EXPENSE RESERVE FUND
If specified in the Prospectus Supplement relating to a Series, the
Depositor may deposit on the related Closing Date in an account to be
established with the Trustee (the "Expense Reserve Fund") cash or Eligible
Investments which will be available to pay anticipated fees and expenses of the
Trustee or other agents. The Expense Reserve Fund for a Series may also be
funded over time through the deposit therein of all or a portion of cash flow,
to the extent described in the related Prospectus Supplement. The Expense
Reserve Fund, if any, will not be part of the Trust Fund held for the benefit of
the Holders. Amounts on deposit in any Expense Reserve Fund will be invested in
one or more Eligible Investments.
AMENDMENT OF POOLING AND SERVICING AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Pooling and
Servicing Agreement for each Series of Certificates may be amended by the
Depositor, the Master Servicer, and the Trustee with respect to such Series,
without notice to or consent of the Certificateholders (i) to cure any
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ambiguity, (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein, (iii) to make any
other provisions with respect to matters or questions arising under such Pooling
and Servicing Agreement which are not inconsistent with any other provisions of
such Pooling and Servicing Agreement or (iv) to comply with any requirements
imposed by the Code; provided that such amendment (other than pursuant to clause
(iv) above) will not adversely affect in any material respect the interests of
any Certificateholders of such Series. The Pooling and Servicing Agreement for
each Series may also be amended by the Trustee, the Master Servicer and the
Depositor with respect to such Series with the consent of the Holders possessing
not less than 66 2/3% of the aggregate outstanding principal amount of the
Certificates of each Class of such Series affected thereby, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of such Pooling and Servicing Agreement or modifying in any manner
the rights of Certificateholders of such Series; provided, however, that no such
amendment may (i) reduce the amount or delay the timing of payments on any
Certificate without the consent of the Holder of such Certificate; (ii)
adversely affect the REMIC status, if a REMIC election has been made, for the
related Trust Fund of a Series; or (iii) reduce the aforesaid percentage of
aggregate outstanding principal amount of Certificates of each Class, the
Holders of which are required to consent to any such amendment without the
consent of the Holders of 100% of the aggregate outstanding principal amount of
each Class of Certificates affected thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of
determining allocation of voting rights with respect to a Series, if other than
as set forth herein.
LIST OF CERTIFICATEHOLDERS
Upon written request of three or more Certificateholders of record of a
Series for purposes of communicating with other Certificateholders with respect
to their rights under the Pooling and Servicing Agreement or under the
Certificates for such Series, which request is accompanied by a copy of the
communication which such Certificateholders propose to transmit, the Trustee
will afford such Certificateholders access during business hours to the most
recent list of Certificateholders of that Series held by the Trustee.
No Pooling and Servicing Agreement will provide for the holding of any
annual or other meeting of Certificateholders.
REMIC ADMINISTRATOR
With respect to any Multiple-Class Series, preparation of certain reports
and certain other administrative duties with respect to the Trust Fund may be
performed by a REMIC administrator, who may be an affiliate of the Depositor.
TERMINATION
The obligations created by the Pooling and Servicing Agreement for a
Series will terminate upon the distribution to Certificateholders of all amounts
distributable to them pursuant to such Pooling and Servicing Agreement after (i)
the later of the final payment or other liquidation of the last Mortgage Loan
remaining in the Trust Fund for such Series or the disposition of all property
acquired upon foreclosure or deed in lieu of foreclosure in respect of any
Mortgage Loan or (ii) the repurchase by the Master Servicer from the Trustee for
such Series of all Mortgage Loans at that time subject to the Pooling and
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Servicing Agreement and all property acquired in respect of any Mortgage Loan,
as described below. The Pooling and Servicing Agreement for each Series permits,
but does not require, the Master Servicer to repurchase from the Trust Fund for
such Series all remaining Mortgage Loans at a price equal to 100% of the
aggregate principal balances of such Mortgage Loans, plus accrued interest at
the related Pass-Through Rate through the last day of the Due Period in which
repurchase occurs plus the lesser of (A) the appraised value of any such
property and (B) the Stated Principal Balance of the Mortgage Loan relating to
such property. The exercise of such right will effect early retirement of the
Certificates of such Series, but the Master Servicer's right to so purchase is
subject to the aggregate principal balances of the Mortgage Loans at the time of
repurchase being less than a fixed percentage, to be set forth in the related
Prospectus Supplement, of the Cut-off Date Aggregate Principal Balance. In no
event, however, will the trust created by the Pooling and Servicing Agreement
continue beyond the expiration of 21 years from the death of the last survivor
of certain persons identified therein. For each Series, the Master Servicer or
the Trustee, as applicable, will give written notice of termination of the
Pooling and Servicing Agreement to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency specified in the notice of termination. If
so provided in the related Prospectus Supplement for a Series, the Depositor or
another entity may effect an optional termination of the Trust Fund under the
circumstances described in such Prospectus Supplement. See "DESCRIPTION OF THE
CERTIFICATES--Optional Termination" herein.
CERTAIN LEGAL ASPECTS OF LOANS
The following discussion contains summaries of certain legal aspects of
housing loans which are general in nature. Because such legal aspects are
governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the
properties securing the housing loans are situated. The summaries are qualified
in their entirety by reference to the applicable federal and state laws
governing the Loans.
MORTGAGES
The Mortgage Loans comprising or underlying the Mortgage Assets for a
Series will be secured by either mortgages or deeds of trust or deeds to secure
debt, depending upon the prevailing practice in the state in which the property
subject to a Mortgage Loan is located. The filing of a mortgage, deed of trust
or deed to secure debt creates a lien or title interest upon the real property
covered by such instrument and represents the security for the repayment of an
obligation that is customarily evidenced by a promissory note. It is not prior
to the lien for real estate taxes and assessments or other charges imposed under
governmental police powers. Priority with respect to such instruments depends on
their terms and in some cases the term of separate subordination or
intercreditor agreements, the knowledge of the parties to the mortgage and
generally on the order of recording with the applicable state, county or
municipal office. There are two parties to a mortgage, the mortgagor, who is the
borrower/homeowner or the land trustee (as described below), and the mortgagee,
who is the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. In the case of a land trust, there
are three parties because title to the property is held by a land trustee under
a land trust agreement of which the borrower/homeowner is the beneficiary. At
origination of a mortgage loan, the borrower executes a separate undertaking to
make payments on the mortgage note. A deed of trust transaction normally has
three parties, the trustor, who is the borrower/homeowner, the beneficiary, who
is the lender, and the trustee, a third-party grantee. Under a deed of trust,
the trustor 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. The mortgagee's authority under a mortgage and the trustee's
authority under a deed
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of trust are governed by the law of the state in which the real property is
located, the express provisions of the mortgage or deed of trust, and, in some
cases, in deed of trust transactions, the directions of the beneficiary.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of
Certificates, the Mortgage Loans may also contain Cooperative Loans evidenced by
promissory notes secured by security interests in shares issued by private
corporations which are entitled to be treated as housing cooperatives under the
Code and in the related proprietary leases or occupancy agreements granting
exclusive rights to occupy specific dwelling units in the corporations'
buildings. The security agreement will create a lien upon, or grant a title
interest in, the property which it covers, the priority of which will depend on
the terms of the particular security agreement as well as the order of
recordation of the agreement in the appropriate recording office. Such a lien or
title interest is not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers.
Unless otherwise specified in the related Prospectus Supplement, all
cooperative apartments relating to the Cooperative Loans are located in the
State of New York. A corporation which is entitled to be treated as a housing
cooperative under the Code owns all the real property or some interest therein
sufficient to permit it to own the building and all separate dwelling units
therein. The Cooperative is directly responsible for property management and, in
most cases, payment of real estate taxes and hazard and liability insurance. If
there is a blanket mortgage or mortgages on the cooperative apartment building
and/or underlying land, as is generally the case, or an underlying lease of the
land, as is the case in some instances, the Cooperative, as property mortgagor,
is also responsible for meeting these mortgage or rental obligations. The
interest of the occupant under proprietary leases or occupancy agreements as to
which that Cooperative is the landlord are generally subordinate to the interest
of the holder of a blanket mortgage and to the interest of the holder of a land
lease. If the Cooperative is unable to meet the payment obligations (i) arising
under a blanket mortgage, the mortgagee holding a blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements or (ii) arising under its land lease, the holder of the
land lease could terminate it and all subordinate proprietary leases and
occupancy agreements. Also, a 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 final payment at maturity. The
inability of the Cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee.
Similarly, a land lease has an expiration date and the inability of the
Cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. A foreclosure by
the holder of a blanket mortgage could eliminate or significantly diminish the
value of any collateral held by the lender who financed an individual
tenant-stockholder of Cooperative shares or, in the case of the Mortgage Loans,
the collateral securing the Cooperative Loans. Similarly, the termination of the
land lease by its holder could eliminate or significantly diminish the value of
any collateral held by the lender who financed an individual tenant-stockholder
of the Cooperative shares or, in the case of the Mortgage Loans, the collateral
securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary leases or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing such tenant-stockholder's pro rata share of the
Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights are financed
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through a Cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related Cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement and a
financing statement covering the proprietary lease or occupancy agreement and
the Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares. See "Realizing on Cooperative Loan Security" below.
TAX ASPECTS OF COOPERATIVE OWNERSHIP. In general, a "tenant-stockholder"
(as defined in Section 216(b)(2) of the Code) of a corporation that qualifies as
a "cooperative housing corporation" within the meaning of Section 216(b)(1) of
the Code is allowed a deduction for amounts paid or accrued within his taxable
year to the corporation representing his proportionate share of certain interest
expenses and certain real estate taxes allowable as a deduction under Section
216(a) of the Code to the corporation under Sections 163 and 164 of the Code. In
order for a corporation to qualify under Section 216(b)(1) of the Code for its
taxable year in which such items are allowable as a deduction to the
corporation, such section requires, among other things, that at least 80% of the
gross income of the corporation be derived from its tenant-stockholders. 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.
FORECLOSURE ON MORTGAGES
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust
which authorizes the trustee to sell the property upon any default by the
borrower under the terms of the note or deed of trust. In some states, the
trustee must record a notice of default and send a copy to the borrower-trustor
and to any person who has recorded a request for a copy of a notice of default
and notice of sale. In addition, the trustee in some states must provide notice
to any other individual having an interest in the real property, including any
junior lienholders. The trustor, borrower, or any person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Generally, state law controls the amount
of foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. 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, recorded and sent
to all parties having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the mortgage note and the
mortgage as made and cannot be relieved from his default if the mortgagee has
exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature,
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the court may exercise equitable powers to relieve a mortgagor of a default and
deny the mortgagee foreclosure on proof that either the mortgagor's default was
neither willful nor in bad faith or the mortgagee's action established a waiver,
fraud, bad faith, or oppressive or unconscionable conduct such as to warrant a
court of equity to refuse affirmative relief to the mortgagee. Under certain
circumstances a court of equity may relieve the mortgagor from an entirely
technical default where such default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the mortgage note
may take several years and, generally, is a remedy alternative to foreclosure,
the mortgagee being precluded from pursuing both at the same time.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. In some states, potential buyers may further be unwilling to
purchase a property at a foreclosure sale as a result of the 1980 decision of
the United States Court of Appeals for the Fifth Circuit in Durrett v.
Washington National Insurance Company. The Court in Durrett held that even a
non-collusive, regularly conducted foreclosure sale was a fraudulent transfer
under section 67d of the former Bankruptcy Act (section 548 of the current
United States Bankruptcy Code) and, therefore, could be rescinded in favor of
the bankrupt's estate, if (i) the foreclosure sale was held while the debtor was
insolvent and not more than one year prior to the filing of the bankruptcy
petition, and (ii) the price paid for the foreclosed property did not represent
"fair consideration" ("reasonably equivalent value" under the United States
Bankruptcy Code). However, on May 23, 1994, Durrett was effectively overruled by
the United States Supreme Court in BFP v. Resolution Trust Corporation, as
Receiver for Imperial Federal Savings and Loan Association, et al., in which the
Court held that "`reasonably equivalent value,' for foreclosed property, is the
price in fact received at the foreclosure sale, so long as all the requirements
of the State's foreclosure law have been complied with." It is common for the
lender to purchase the property from the trustee or referee for an amount which
may be equal to the principal amount of the mortgage or deed of trust plus
accrued and unpaid interest and the expenses of foreclosure, in which event the
mortgagor's debt will be extinguished or the lender may purchase for a lesser
amount in order to preserve its right against a borrower to seek a deficiency
judgment in states where such a judgment is available. Thereafter, the lender
will assume the burdens of ownership, including obtaining casualty insurance,
paying taxes 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. Any loss may be reduced by the receipt of any mortgage guaranty
insurance proceeds.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not
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the borrower is in default. Any additional proceeds are generally payable to the
mortgagor or trustor. The payment of the proceeds to the holders of junior
mortgages may occur in the foreclosure action of the senior mortgagee or may
require the institution of separate legal proceedings.
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the foreclosing mortgagee, from
their "equity of redemption." The doctrine of equity of redemption provides
that, until the property covered by a mortgage has been sold in accordance with
a properly conducted foreclosure and foreclosure sale, those having an interest
which is subordinate to that of the foreclosing mortgagee have an equity of
redemption and may redeem the property by paying the entire debt with interest.
In addition, in some states, when a foreclosure action has been commenced, the
redeeming party must pay certain costs of such action. Those having an equity of
redemption must be made parties and duly summoned to the foreclosure action in
order for their equity of redemption to be barred.
REALIZING UPON COOPERATIVE LOAN SECURITY
The Cooperative shares and proprietary lease or occupancy agreement
owned by the tenant-stockholder and pledged to the lender are, in almost all
cases, subject to restrictions on transfer as set forth in the Cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease
or occupancy agreement. The proprietary lease or occupancy agreement, even
while pledged, may be cancelled by the Cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the Cooperative
apartment building incurred by such tenant-stockholder. Commonly, rent and
other obligations and charges arising under a proprietary lease or occupancy
agreement which are owed to the Cooperative are made liens upon the shares to
which the proprietary lease or occupancy agreement relates. In addition, the
proprietary lease or occupancy agreement generally permits the Cooperative to
terminate such lease or agreement in the event the borrower defaults in the
performance of covenants 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 a sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement or which have become liens on the shares relating
to the 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 the lender succeeds
to the tenant-shareholder's shares and proprietary lease or occupancy agreement
as the result of realizing upon its collateral for a Cooperative Loan, the
lender must obtain the approval or consent of the Cooperative as required by the
proprietary lease before transferring the Cooperative shares or assigning the
proprietary lease. Generally, the lender is not limited in any rights it may
have to dispossess the tenant-stockholder.
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In New York, lenders generally have realized upon the pledged shares and
proprietary lease or occupancy agreement given to secure a Cooperative Loan by
public sale in accordance with the provisions of Article 9 of the New York
Uniform Commercial Code (the "UCC") and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a 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 sale. Generally, a
sale conducted according to the usual practice of banks selling similar
collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of
a mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a nonstatutory right that must be exercised prior to the foreclosure sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The 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
a right of redemption is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run. In some states, there
is no right to redeem property after a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or sale
under a deed of trust. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security; however
in some of these states, the lender, following judgment on such personal action,
may be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. Consequently, the practical effect of the
election requirement, in those states permitting such election, is that lenders
will usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former
89
borrower following a judicial sale to the excess of the outstanding debt over
the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale. Certain state laws also place a
limitation on the mortgagee with respect to late payment charges.
FOR COOPERATIVE LOANS. Generally, lenders realize on cooperative shares
and the accompanying proprietary lease given to secure a Cooperative Loan under
Article 9 of the UCC. 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.
FEDERAL BANKRUPTCY AND OTHER LAWS AFFECTING CREDITORS' RIGHTS. In
addition to laws limiting or prohibiting deficiency judgments, numerous other
statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Relief Act, and state laws affording relief to debtors,
may interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a deficiency judgment. For example, with respect to
federal bankruptcy law, the filing of a petition acts as a stay against the
enforcement of remedies for collection of a debt. Moreover, a court with federal
bankruptcy jurisdiction may permit a debtor through a Chapter 13 under the
Bankruptcy Code rehabilitative plan to cure a monetary default with respect to a
loan on a debtor's residence by paying arrearages within a reasonable time
period and reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's Chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a loan secured by property of the debtor may be modified if the
borrower has filed a petition under Chapter 13. These courts have suggested that
such modifications may include reducing the amount of each monthly payment,
changing the rate of interest, altering the repayment schedule and reducing the
lender's security interest to the value of the residence, thus leaving the
lender a general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan. Federal bankruptcy law and
limited case law indicate that the foregoing modifications could not be applied
to the terms of a loan secured by property that is the principal residence of
the debtor. In all cases, the secured creditor is entitled to the value of its
security plus post-petition interest, attorney's fees and costs to the extent
the value of the security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted Loan. In addition, substantive requirements are imposed
upon lenders in connection with the origination and the servicing of mortgage
loans by numerous federal and some state consumer protection laws. The laws
include the federal
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Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal Credit
Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and related
statutes and regulations. These federal laws impose specific statutory
liabilities upon lenders who originate loans and who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
loans.
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 Trust Fund to collect full amounts of
interest on certain of the Mortgage Loans. Unless otherwise provided in the
applicable Prospectus Supplement, any shortfall in interest collections
resulting from the application of the Relief Act could result in losses to the
holders of the Certificates. In addition, the Relief Act imposes limitations
which would impair the ability of the Trust Fund to foreclose on an affected
Mortgage Loan during the borrower's period of active duty status. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned by the inability to realize upon the Mortgaged Property in a
timely fashion.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers all or part of the real property
securing the loan without the lender's prior written consent. The enforceability
of these clauses has been impaired in various ways in certain states by
statutory or decisional law. The ability of lenders and their assignees and
transferees to enforce due-on-sale clauses was addressed by Congress when it
enacted the Garn-St Germain Depository Institutions Act of 1982 (the "Garn-St
Germain Act"). The legislation, subject to certain exceptions, provides for
federal preemption of all state restrictions on the enforceability of
due-on-sale clauses. The Garn-St Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate. Excluded from the
preemption are loans originated or assumed during a "window period" ("Window
Period Loans"). The window period runs from the date the state restricted the
enforcement of the clauses, either by constitution, statute, or statewide
judicial proclamation, to October 15, 1982. All Window Period Loans are governed
by the restrictive state law until October 15, 1985, unless the state acted to
extend the effect of the window period by further regulating such loans. The
Garn-St Germain Act further provides that loans originated by a federal savings
bank or a federally chartered savings and loan association shall be governed by
the regulations of the Office of Thrift Supervision (the "OTS"), as successor to
the Federal Home Loan Bank Board. These regulations preempt any state law
restrictions and expressly allow these federal lenders to enforce due-on-sale
clauses. Loans originated by such institutions are not subject to the window
period and therefore due-on-sale clauses in such loans are enforceable
regardless of the date the loans originated.
Although neither the Garn-St Germain Act nor the Federal Home Loan Bank
Board regulations promulgated thereunder actually lists the states with window
periods ("Window Period States"), FHLMC has taken the position, in prescribing
mortgage loan servicing standards with respect to loans which it has purchased,
that the Window Period States are Arizona, Arkansas, California, Colorado,
Florida, Georgia, Iowa, Michigan, Minnesota, New Mexico, Utah and Washington.
(Despite Florida's status as a Window Period State, Florida case law indicates
that courts no longer require a lender to show an impairment of security before
enforcing a due-on-sale clause.) In regulations issued on November 8, 1983, as
amended on December 9, 1983, the Comptroller of the Currency indicated that
certain loans
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which were originated by national banks prior to October 15, 1982 and which were
secured by property located in the states listed above were Window Period Loans.
These regulations limit the effect of state law restrictions on the enforcement
of due-on-sale clauses, with respect to Window Period Loans originated by
national banks, by shortening the window period. On December 3, 1982, the
National Credit Union Administration issued final regulations allowing federal
credit unions to enforce due-on-sale clauses in long term first mortgage loans
for transfers occurring on or after November 18, 1982, notwithstanding state law
restrictions.
Under the Garn-St Germain Act, unless a Window Period State took action
by October 15, 1985 to further regulate enforcement of due-on-sale clauses, such
clauses would become enforceable even in Window Period Loans. Five of the Window
Period States (Arizona, Minnesota, Michigan, Washington and Utah) have acted to
restrict the enforceability of due-on-sale clauses in Window Period Loans beyond
October 15, 1985. The actions taken vary among such states. The Garn-St Germain
Act also sets forth nine specific instances in which no lender covered by the
Garn-St Germain Act may exercise its option pursuant to a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, certain transfers by operation of law,
leases of fewer than three years and the creation of a junior encumbrance.
Regulations promulgated under the Garn-St Germain Act also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to a
due-on-sale clause. The inability to enforce a due-on-sale clause may result in
a loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, which may have an impact upon the
average life of the loans related to a Series and the number of such loans which
may be outstanding until maturity.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes for the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving
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the sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
The Mortgage Loans may include a debt-acceleration clause, which permits
the lender to accelerate the debt upon a monetary default of the borrower, after
the applicable cure period. The courts of all states will enforce clauses
providing for acceleration in the event of a material payment default. However,
courts of any state, exercising equity jurisdiction, may refuse to allow a
lender to foreclose a mortgage or deed of trust when an acceleration of the
indebtedness would be inequitable or unjust and the circumstances would render
the acceleration unconscionable.
Most conventional single-family mortgage loans may be prepaid in full or
in part without penalty. The regulations of the Federal Home Loan Bank Board, as
succeeded by the OTS, prohibit the imposition of a prepayment penalty or
equivalent fee for or in connection with the acceleration of a loan by exercise
of a due-on-sale clause. A mortgagee to whom a prepayment in full has been
tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of a restraint on
prepayment, particularly with respect to Mortgage Loans having higher mortgage
rates, may increase the likelihood of refinancing or other early retirements of
the Mortgage Loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. Similar federal statutes
were in effect with respect to mortgage loans made during the first three months
of 1980. The OTS, 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. Title V authorizes any state to reimpose
interest rate limits by adopting, before April 1, 1983, a state law, or by
certifying that the voters of such state have voted in favor of any provision,
constitutional or otherwise, which expressly rejects an application of the
federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V.
In any state in which application of Title V has been expressly rejected
or a provision limiting discount points or other charges is adopted, no Mortgage
Loans originated after the date of such state action will be eligible as
Mortgage Assets if such Mortgage Loans bear interest or provide for discount
points or charges in excess of permitted levels. No Mortgage Loan originated
prior to January 1, 1980 will bear interest or provide for discount points or
charges in excess of permitted levels.
ADJUSTABLE INTEREST RATE LOANS
ARMs originated by non-federally chartered lenders have historically been
subject to a variety of restrictions. Such restrictions differed from state to
state, resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender complied with
applicable law. These difficulties were alleviated substantially as a result of
the enactment of Title VIII of the Garn-St Germain Act ("Title VIII"). Title
VIII provides that, notwithstanding any state law to the contrary,
state-chartered banks may originate "alternative mortgage instruments"
(including ARMs) in accordance with regulations promulgated by the Comptroller
of the Currency with respect to origination of alternative mortgage instruments
by national banks; state chartered credit unions may originate alternative
mortgage instruments in accordance with regulations promulgated by the National
Credit Union Administration with respect to origination of alternative mortgage
instruments by federal credit
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unions and all other non-federally chartered housing creditors, including
state-chartered savings and loan associations; and state-chartered savings banks
and mortgage banking companies may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
as succeeded by the OTS, with respect to origination of alternative mortgage
instruments by federal savings and loan associations. Title VIII provides that
any state may reject applicability of the provisions of Title VIII by adopting,
prior to October 15, 1985, a law or constitutional provision expressly rejecting
the applicability of such provisions. Certain states have taken such action.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien will generally have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In addition, under federal environmental
legislation and possibly under state law in a number of states, a secured party
which takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or otherwise is deemed an "owner" or "operator" of the property
may be liable for the costs of cleaning up a contaminated site. Although such
costs could be substantial, it is unclear whether they would be imposed on a
secured lender.
MANUFACTURED HOME LOANS
SECURITY INTERESTS IN THE MANUFACTURED HOMES. Law governing perfection of
a security interest in a Manufactured Home varies from state to state. Security
interests in Manufactured Homes may be perfected either by notation of the
secured party's lien on the certificate of title or by delivery of the required
documents and payment of a fee to the state motor vehicle authority, depending
on state law. In some nontitle states, perfection pursuant to the provisions of
the UCC is required. The lender of a servicer may effect such notation or
delivery of the required documents and fees, and obtain possession of the
certificate of title, as appropriate under the laws of the state in which any
manufactured home securing a Manufactured Home Loan is registered. In the event
such notation or delivery is not effected or the security interest is not filed
in accordance with the applicable law (for example, is filed under a motor
vehicle title statute rather than under the UCC, in a few states), a first
priority security interest in the Manufactured Home securing a Manufactured Home
Loan may not be obtained.
As Manufactured Homes have become larger and often have been attached to
their sites without any apparent intention to move them, courts in many states
have held that Manufactured Homes, under certain circumstances, may 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 Manufactured 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 or the UCC or a real estate
mortgage under the real estate laws of the state where the home is located.
These filings must be made in the real estate records office of the county where
the home is located. Manufactured Home Loans typically contain provisions
prohibiting the borrower from permanently attaching the Manufactured Home to its
site. So long as the borrower 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 lender or its assignee.
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With respect to a Series of Certificates evidencing interests in a Trust
Fund that includes Manufactured Home Loans and as described in the related
Prospectus Supplement, the Master Servicer may be required to perfect a security
interest in the Manufactured Home under applicable real estate laws. If such
real estate filings are not made and if any of the foregoing events were to
occur, the only recourse of the Certificateholders would be against the Master
Servicer pursuant to its repurchase obligation for breach of warranties. A PMBS
Agreement pursuant to which Private Mortgage-Backed Securities backed by
Manufactured Home Loans are issued will, unless otherwise specified in the
related Prospectus Supplement, have substantially similar requirements for
perfection of a security interest.
In general, upon an assignment of a Manufactured Home Loan, the
certificate of title relating to the Manufactured Home will not be amended to
identify the assignee as the new secured party. In most states, an 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 assignor'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 assignor.
RELOCATION OF A MANUFACTURED HOME. In the event that the owner of a
Manufactured Home moves the home 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 only if and after the owner
reregisters the Manufactured Home in such state. If the owner were to relocate a
Manufactured Home to another state and not reregister the Manufactured Home in
such state, and if steps are not taken to reperfect 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 reregister a Manufactured Home; accordingly, possession
of the certificate of title to such Manufactured Home must be surrendered or, in
the case of Manufactured Homes registered in states which provide for notation
of lien, the notice of surrender must be given to any person whose security
interest in the Manufactured Home is noted on the certificate of title.
Accordingly, the owner of the Manufactured Home Loan would have the opportunity
to reperfect 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, reregistration could defeat perfection. In
the ordinary course of servicing the Manufactured Home Loans, the Master
Servicer will be required to take steps to effect reperfection upon receipt of
notice of reregistration or information from the borrower as to relocation.
Similarly, when a borrower under a Manufactured Home Loan sells the related
Manufactured Home, the Trustee must surrender possession of the certificate of
title or the Trustee will receive notice as a result of its lien noted thereon
and accordingly will be an opportunity to require satisfaction of the related
Manufactured Home Loan before release of the lien. Under the Pooling and
Servicing Agreement, the Master Servicer is obligated to take such steps, at the
Master Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes. PMBS Agreements pursuant to which Private
Mortgage-Backed Securities backed by Manufactured Home Loans are issued will
impose substantially similar requirements.
INTERVENING LIENS. Under the laws of most states, liens for repairs
performed on a Manufactured Home take priority even over a perfected security
interest. The Master Servicer or the originator of such Loans will represent
that it has no knowledge of any such liens with respect to any Manufactured Home
securing payment on any Manufactured Home Loan. However, such liens could arise
at any time during the term of a Manufactured Home Loan. No notice will be given
to the Trustee or Certificateholders in the event such a lien arises. PMBS
Agreements pursuant to which Private Mortgage-Backed Securities backed by
Manufactured Home Loans are issued will contain substantially similar
requirements.
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ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES. So long as the
Manufactured Home has not become subject to the real estate law, a creditor can
repossess a Manufactured Home securing a Manufactured Home Loan 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
Manufactured Home Loan must give the debtor a number of days notice, which
varies from 10 to 30 days depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states place
restrictions on repossession sales, including requiring prior notice to the
debtor and commercial reasonableness in effecting such a sale. The law in most
states also requires that the debtor be given notice of any sale prior to resale
of the unit so that the debtor may redeem at or before such resale. In the event
of such repossession and resale of a Manufactured Home, the holder of a
Manufactured Home Loan 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 or subsequently perfected interests or, thereafter, to
the borrower.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a borrower for any deficiency on repossession
and resale of the Manufactured Home securing such borrower's loan. However, some
states impose prohibitions or limitations on deficiency judgments. See
"Anti-deficiency Legislation and Other Limitations on Lenders" above.
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. See "Federal Bankruptcy and Other Laws Affecting Creditors'
Rights" and "Equitable Limitations on Remedies" above.
CONSUMER PROTECTION LAWS. The so-called "Holder-In-Due-Course" rule of
the Federal Trade Commission is intended to defeat the ability of the transferor
of a consumer credit contract who is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the borrower thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the borrower could assert against the seller of goods. Liability under
this rule is limited to amounts paid under a Manufactured Home Loan; however,
the borrower also may be able to assert the rule to set off remaining amounts
due as a defense against a claim brought against such borrower. Numerous other
federal and state consumer protection laws impose requirements applicable to the
origination and lending pursuant to the Manufactured Home Loan, including the
Truth-in-Lending Act, the Federal Trade Commission Act, the Fair Credit Billing
Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair
Debt Collection Practices Act and the Uniform Consumer Credit Code. In the case
of some of these laws, the failure to comply with their provisions may affect
the enforceability of the related Manufactured Home Loan.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES.
Loans and installment sale contracts relating to a Manufactured Home Loan
typically prohibit the sale or transfer of the related Manufactured Homes
without the consent of the lender and permit the acceleration of the maturity of
the Manufactured Home Loans by the lender upon any such sale or transfer for
which no such consent is granted.
In the case of a transfer of a Manufactured Home, the lender's ability to
accelerate the maturity of the related Manufactured Home Loan will depend on the
enforceability under state law of the "due-on-sale" clause. The Garn-St Germain
Depository Institutions Act of 1982 preempts, subject to certain exceptions and
conditions, state laws prohibiting enforcement of "due-on-sale" clauses
applicable to the Manufactured Homes. See "Due-on-Sale Clauses in Mortgage
Loans" above. With respect to any
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Manufactured Home Loan secured by a Manufactured Home occupied by the borrower,
the ability to accelerate will not apply to those types of transfers discussed
in "Due-on-Sale Clauses in Mortgage Loans" above. FHA Loans and VA Loans are not
permitted to contain "due-on-sale" clauses, and so are freely assumable.
APPLICABILITY OF USURY LAWS. Title V provides that, subject to the
following conditions, state usury limitations shall not apply to any loan which
is secured by a first lien on certain kinds of Manufactured Homes. The
Manufactured Home Loans would be covered if they satisfy certain conditions,
among other things, governing the terms of any prepayments, 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. See "Applicability of Usury Laws" above.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT. Generally, under the terms of
the Relief Act, a borrower who enters military service after the origination of
such borrower's Manufactured Home 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
Manufactured Home 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 Trust Fund to collect full
amounts of interest on certain of the Manufactured Home Loans. Unless otherwise
provided in the applicable Prospectus Supplement, any shortfall in interest
collections resulting from the application of the Relief Act could result in
losses to the holders of the Certificates. In addition, the Relief Act imposes
limitations which would impair the ability of the Trust Fund to enforce the lien
with respect to an affected Manufactured Home Loan during the borrower's period
of active duty status. Thus, in the event that such a Manufactured Home Loan
goes into default, there may be delays and losses occasioned by the inability to
enforce the lien with respect to the Manufactured Home in a timely fashion.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
Certificates offered hereunder where Brown & Wood or Thacher Proffitt & Wood is
identified in the applicable Prospectus Supplement as counsel to the Depositor
(hereinafter "Counsel to the Depositor"). For a general discussion of the
anticipated material federal income tax consequences of the purchase, ownership
and disposition of the Certificates where Skadden, Arps, Slate, Meagher & Flom
is identified in the applicable Prospectus Supplement as counsel to the
Depositor, see "Certain Federal Income Tax Considerations" in the related
Prospectus Supplement. This discussion is directed solely to Certificateholders
that hold the Certificates as capital assets within the meaning of Section 1221
of the Internal Revenue Code of 1986 (the "Code") and does not purport to
discuss all federal income tax consequences that may be applicable to particular
categories of investors, some of which (such as banks, insurance companies and
foreign investors) may be subject to special rules. Further, the authorities on
which this discussion, and the opinion referred to below, are based are subject
to change or differing interpretations, which could apply retroactively.
Taxpayers should consult their own tax advisors and tax return preparers
regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein. In addition to the federal
income tax consequences described herein, potential investors should consider
the state and local tax consequences, if any, of the purchase, ownership and
disposition of the Certificates. See "State and Other Tax Consequences."
Certificateholders are advised to consult their own tax advisors concerning the
federal,
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state, local or other tax consequences to them of the purchase, ownership and
disposition of the Certificates offered hereunder.
The following discussion addresses securities of two general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, which the Trustee will covenant to elect to have treated as a
real estate mortgage investment conduit ("REMIC") under Sections 860A through
860G (the "REMIC Provisions") of the Code and (ii) certificates ("Grantor Trust
Certificates") representing certain interests in a Trust Fund ("Grantor Trust
Fund") which the Master Servicer or the Trustee will covenant not to elect to
have treated as a REMIC. The Prospectus Supplement for each series of
Certificates will indicate whether a REMIC election (or elections) will be made
for the related Trust Fund and, if such an election is to be made, will identify
all "regular interests" and the "residual interests" in the REMIC. For purposes
of this tax discussion, references to a "Certificateholder" or a "holder" are to
the beneficial owner of a Certificate.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271-1273 and 1275 of the
Code and in the Treasury regulations issued thereunder (the "OID Regulations"),
and in part upon the REMIC Provisions and the Treasury regulations issued
thereunder (the "REMIC Regulations"). The OID Regulations do not adequately
address certain issues relevant to, and in some instances provide that they are
not applicable to, securities such as the Certificates.
REMICs
CLASSIFICATION OF REMICS
Upon the issuance of each series of REMIC Certificates, Counsel to the
Depositor will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the related Pooling and Servicing Agreement,
the related Trust Fund (or each applicable portion thereof) will qualify as a
REMIC and the REMIC Certificates offered with respect thereto will be considered
to evidence ownership of "regular interests" ("REMIC Regular Certificates") or
"residual interests" ("REMIC Residual Certificates") in that REMIC within the
meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Code for such status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for such year or thereafter. In that event, such entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status or given the tax treatment described below. Although
the Code authorizes the Treasury Department to issue regulations providing
relief in the event of an inadvertent termination of REMIC status, no such
regulations have been issued. Any such relief, moreover, may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
Trust Fund's income for the period in which the requirements for such status are
not satisfied. The Pooling and Servicing Agreement with respect to each REMIC
will include provisions designed to maintain the Trust Fund's status as a REMIC
under the REMIC Provisions. It is not anticipated that the status of any Trust
Fund as a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES
In general, the REMIC Certificates will be "qualifying real property
loans" within the meaning of Section 593(d) of the Code, "real estate assets"
within the meaning of Section 856(c)(5)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code in the same proportion that the assets of the
REMIC underlying such Certificates would be so treated. Moreover, if 95% or more
of the assets of the
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REMIC qualify for any of the foregoing treatments at all times during a calendar
year, the REMIC Certificates will qualify for the corresponding status in their
entirety for that calendar year. Interest (including original issue discount) on
the REMIC Regular Certificates and income allocated to the class of REMIC
Residual Certificates will be interest described in Section 856(c)(3)(B) of the
Code to the extent that such Certificates are treated as "real estate assets"
within the meaning of Section 856(c)(5)(A) of the Code. In addition, the REMIC
Regular Certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code if transferred to another REMIC on its startup day in
exchange for a regular or residual interest therein. The determination as to the
percentage of the REMIC's assets that constitute assets described in the
foregoing sections of the Code will be made with respect to each calendar
quarter based on the average adjusted basis of each category of the assets held
by the REMIC during such calendar quarter. The REMIC will report those
determinations to Certificateholders in the manner and at the times required by
applicable Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and may include property acquired by foreclosure held pending sale, and amounts
in reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale, or amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all the foregoing sections. In addition,
in some instances Mortgage Loans may not be treated entirely as assets described
in the foregoing sections. If so, the related Prospectus Supplement will
describe the Mortgage Loans that may not be so treated. The REMIC Regulations do
provide, however, that payments on Mortgage Loans held pending distribution are
considered part of the Mortgage Loans for purposes of Sections 593(d) and
856(c)(5)(A) of the Code.
TIERED REMIC STRUCTURES
For certain series of REMIC Certificates, two or more separate elections
may be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
series of REMIC Certificates, Counsel to the Depositor will deliver its opinion
generally to the effect that, assuming compliance with all provisions of the
related Pooling and Servicing Agreement, the Tiered REMICs will each qualify as
a REMIC and the REMIC Certificates issued by the Tiered REMICs will be
considered to evidence ownership of REMIC regular interests or REMIC residual
interests in the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
GENERAL
Except as otherwise stated in this discussion, REMIC 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 REMIC Regular Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to REMIC
Regular Certificates under an accrual method.
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ORIGINAL ISSUE DISCOUNT
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with the method described below, in advance of the receipt of the
cash attributable to such income. In addition, Section 1272(a)(6) of the Code
provides special rules applicable to REMIC Regular Certificates and certain
other debt instruments issued with original issue discount. Regulations have not
been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report (the "Committee Report") accompanying the Tax
Reform Act of 1986 indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series will be consistent with this
standard and will be disclosed in the related Prospectus Supplement. However,
neither the Depositor, any Master Servicer nor the Trustee will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will
be the excess of its stated redemption price over its issue price. The issue
price of a particular class of REMIC Regular Certificates will be the first cash
price at which a substantial amount of REMIC Regular Certificates of that class
is sold (excluding sales to bond houses, brokers and underwriters). If less than
a substantial amount of a particular class of REMIC 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 the fair market value of such class on
the Closing Date. Under the OID Regulations, the stated redemption price of a
REMIC Regular Certificate is equal to the total of all payments to be made on
such Certificate other than "qualified stated interest." "Qualified stated
interest" includes interest that is unconditionally payable at least annually at
a single fixed rate, at a "qualified floating rate," a combination of a single
fixed rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" or at an
"objective rate" that does not operate in a manner that accelerates or defers
interest payments on such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the Internal Revenue Service
(the "IRS").
Certain classes of the REMIC Regular Certificates may provide for the
first interest payment with respect to such Certificates to be made more than
one month after the date of issuance, a period which is longer than the
subsequent monthly intervals between interest payments. Assuming the "accrual
period" (as defined below) for original issue discount is each monthly period
that ends on a Distribution Date, in some cases, as a consequence of this "long
first accrual period," all interest payments may be required
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to be included in the stated redemption price of the REMIC Regular Certificate
and accounted for as original discount. Because interest on REMIC Regular
Certificates must in any event be accounted for under an accrual method,
applying this analysis would result in only a slight difference in the timing of
the inclusion in income of the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns to the
Certificateholders and the IRS will be based on the position that the portion of
the purchase price paid for the interest accrued with respect to periods prior
to the Closing Date is treated as part of the overall cost of such REMIC Regular
Certificate (and not as a separate asset the cost of which is recovered entirely
out of interest received on the next Distribution Date) and that the portion of
the interest paid on the first Distribution Date in excess of interest accrued
for a number of days corresponding to the number of days from the Closing Date
to the first Distribution Date should be included in the stated redemption price
of such REMIC Regular Certificate. However, the OID Regulations state that all
or some portion of such accrued interest may be treated as a separate asset the
cost of which is recovered entirely out of interest paid on the first
Distribution Date. It is unclear how an election to do so would be made under
the OID Regulations and whether such an election could be made unilaterally by a
Certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC Regular Certificate will be considered to be
de minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the amount
of payment, and the denominator of which is the stated redemption price at
maturity of such REMIC Regular Certificate. Under the OID Regulations, original
issue discount of only a de minimis amount (other than de minimis original issue
discount attributable to a so-called "teaser" interest rate or an initial
interest holiday) will be included in income as each payment of stated principal
is made, based on the product of the total amount of such de minimis original
issue discount and a fraction, the numerator of which is the amount of such
principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "Taxation
of Owners of REMIC Regular Certificates--Market Discount" for a description
of such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of
a de minimis amount, the holder of such Certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for each
day during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to a Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on the
Closing Date), a calculation will be made of the portion of the original issue
discount that accrued during such accrual period. The portion of original issue
discount that accrues in any accrual period will equal
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the excess, if any, of (i) the sum of (A) the present value, as of the end of
the accrual period, of all of the distributions remaining to be made on the
REMIC Regular Certificate, if any, in future periods and (B) the distributions
made on such REMIC Regular Certificate during the accrual period of amounts
included in the stated redemption price, over (ii) the adjusted issue price of
such REMIC Regular Certificate at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence will be calculated (i) assuming that distributions on the REMIC Regular
Certificate will be received in future periods based on the Mortgage Loans being
prepaid at a rate equal to the Prepayment Assumption and (ii) using a discount
rate equal to the original yield to maturity of the Certificate. For these
purposes, the original yield to maturity of the Certificate will be calculated
based on its issue price and assuming that distributions on the Certificate will
be made in all accrual periods based on the Mortgage Loans being prepaid at a
rate equal to the Prepayment Assumption. The adjusted issue price of a REMIC
Regular Certificate at the beginning of any accrual period will equal the issue
price of such Certificate, increased by the aggregate amount of original issue
discount that accrued with respect to such Certificate in prior accrual periods,
and reduced by the amount of any distributions made on such REMIC Regular
Certificate in prior accrual periods of amounts included in the stated
redemption price. The original issue discount accruing during any accrual
period, computed as described above, will be allocated ratably to each day
during the accrual period to determine the daily portion of original issue
discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of the REMIC Regular
Certificate's "adjusted issue price," in proportion to the ratio such excess
bears to the aggregate original issue discount remaining to be accrued on such
REMIC Regular Certificate. The adjusted issue price of a REMIC Regular
Certificate on any given day equals the sum of (i) the adjusted issue price (or,
in the case of the first accrual period, the issue price) of such Certificate at
the beginning of the accrual period which includes such day and (ii) the daily
portions of original issue discount for all days during such accrual period
prior to such day.
MARKET DISCOUNT
A Certificateholder that purchases a REMIC Regular Certificate at a
market discount, that is, in the case of a REMIC Regular Certificate issued
without original issue discount, at a purchase price less than its remaining
stated principal amount, or in the case of a REMIC Regular Certificate issued
with original issue discount, at a purchase price less than its adjusted issue
price will recognize gain upon receipt of each distribution representing stated
redemption price. In particular, under Section 1276 of the Code such a
Certificateholder generally will be required to allocate the portion of each
such distribution representing stated redemption price 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 to elect to accrue all interest, discount
(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield method. If such an election were made
with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
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acquired at a premium would 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 "Taxation of Owners of REMIC
Regular Certificates--Premium." Each of these elections to accrue interest,
discount and premium with respect to a Certificate on a constant yield method or
as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department certain
rules described in the Committee Report will apply. The Committee Report
indicates that in each accrual period market discount on REMIC Regular
Certificates should accrue, at the Certificateholder's option: (i) on the basis
of a constant yield method, (ii) in the case of a REMIC Regular Certificate
issued without original issue discount, in an amount that bears the same ratio
to the total remaining market discount as the stated interest paid in the
accrual period bears to the total amount of stated interest remaining to be paid
on the REMIC Regular Certificate as of the beginning of the accrual period, or
(iii) in the case of a REMIC Regular Certificate issued with original issue
discount, in an amount that bears the same ratio to the total remaining market
discount as the original issue discount accrued in the accrual period bears to
the total original issue discount remaining on the REMIC Regular Certificate at
the beginning of the accrual period. Moreover, the Prepayment Assumption used in
calculating the accrual of original issue discount is also used in calculating
the accrual of market discount. Because the regulations referred to in this
paragraph have not been issued, it is not possible to predict what effect such
regulations might have on the tax treatment of a REMIC Regular Certificate
purchased at a discount in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or
other periodic distributions throughout their term, the effect of these rules
may be to require market discount to be includible in income at a rate that is
not significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry such Regular Certificate. For these purposes, the de minimis
rule referred to above applies. Any such deferred interest expense would not
exceed the market discount that accrues during such taxable year and is, in
general, allowed as a deduction not later than the year
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in which such market discount is includible in income. If such holder elects to
include market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
PREMIUM
A REMIC Regular Certificate purchased at a cost (excluding any portion of
such cost attributable to accrued qualified stated interest) greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of such a REMIC Regular Certificate may elect under Section
171 of the Code to amortize such premium under the constant yield method over
the life of the Certificate. If made, such an election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related debt instrument rather than as a separate interest deduction. The
OID Regulations also permit Certificateholders to elect to account for all
interest, discount and premium based on a constant yield method, further
treating the Certificateholder as having made the election to amortize premium
generally. See "Taxation of Owners of REMIC Regular Certificates--Market
Discount." The Committee Report states that the same rules that apply to accrual
of market discount (which rules will require use of a prepayment assumption in
accruing market discount with respect to REMIC 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.
REALIZED LOSSES
Under Section 166 of the Code, both corporate holders of the REMIC
Regular Certificates and noncorporate holders of the REMIC Regular Certificates
that acquire such Certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their Certificates become wholly or partially worthless as the
result of one or more realized losses on the Mortgage Loans. However, it appears
that a noncorporate holder that does not acquire a REMIC Regular Certificate in
connection with a trade or business will not be entitled to deduct a loss under
Section 166 of the Code until such holder's Certificate becomes wholly worthless
(i.e., until its outstanding principal balance has been reduced to zero) and
that the loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificates, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans until it can be established that any such
reduction ultimately will not be recoverable. As a result, the amount of taxable
income reported in any period by the holder of a REMIC Regular Certificate could
exceed the amount of economic income actually realized by the holder in such
period. Although the holder of a REMIC Regular Certificate eventually will
recognize a loss or reduction in income attributable to previously accrued and
included income that as the result of a realized loss ultimately will not be
realized, the law is unclear with respect to the timing and character of such
loss or reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
GENERAL
As residual interests, the REMIC Residual Certificates will be subject to
tax rules that differ significantly from those that would apply if the REMIC
Residual Certificates were treated for federal
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income tax purposes as direct ownership interests in the Mortgage Loans or as
debt instruments issued by the REMIC.
An owner of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income of or
allowed as a loss to any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "Taxable Income of
the REMIC" and will be taxable to the REMIC Residual Certificateholders without
regard to the timing or amount of cash distributions by the REMIC. Ordinary
income derived from REMIC Residual Certificates will be "portfolio income" for
purposes of the taxation of taxpayers subject to limitations under Section 469
of the Code on the deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder also will be required to report on its federal income tax
return amounts representing its daily share of the taxable income (or net loss)
of the REMIC for each day that it holds such Certificate. Those daily amounts
generally will equal the amounts of taxable income or net loss determined as
described above. The Committee Report indicates that certain modifications of
the general rules may be made, by regulations, legislation or otherwise, to
reduce (or increase) the income of a REMIC Residual Certificateholder that
purchased such Certificate from a prior holder of such Certificate at a price
greater than (or less than) the adjusted basis (as defined below) such REMIC
Residual Certificate would have had in the hands of an original holder of such
Certificate. The REMIC Regulations, however, do not provide for any such
modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC 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, 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 REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required
to report (or the tax liability associated with such income) may exceed the
amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC Residual Certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC Residual Certificates or unrelated deductions against
which income may be offset, subject to the rules relating to "excess
inclusions," residual interests without "significant value" and "noneconomic"
residual interests discussed below. The fact that the tax liability associated
with the income allocated to REMIC Residual Certificateholders may exceed the
cash distributions received by such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such REMIC Residual
Certificateholders' after-tax rate of return.
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TAXABLE INCOME OF THE REMIC
The taxable income of the REMIC will equal the income from the Mortgage
Loans and other assets of the REMIC plus any cancellation of indebtedness income
due to the allocation of realized losses to REMIC Regular Certificates, less the
deductions allowed to the REMIC for interest (including original issue discount
and reduced by any premium on issuance) on the REMIC Regular Certificates (and
any other class of REMIC Certificates constituting "regular interests" in the
REMIC not offered hereby), amortization of any premium on the Mortgage Loans,
bad debt losses with respect to the Mortgage Loans and, except as described
below, servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount." The issue price of a REMIC Certificate received in exchange for an
interest in the Mortgage Loans or other property will equal the fair market
value of such interests in the Mortgage Loans or other property. Accordingly, if
one or more classes of REMIC Certificates are retained initially rather than
sold, the Trustee may be required to estimate the fair market value of such
interests in order to determine the basis of the REMIC in the Mortgage Loans and
other property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently as it accrues, on
a constant yield basis. See "--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount income
that is analogous to that required to be used by a REMIC as to Mortgage Loans
with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
above, is less than (or greater than) its stated redemption price. Any such
discount will be includible in the income of the REMIC as it accrues, in advance
of the cash attributable to such income, under a method similar to the method
described above for accruing original issue discount on the REMIC Regular
Certificates. It is anticipated that the REMIC will 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 may be amortized under a constant yield
method, presumably taking into account the Prepayment Assumption. Further, such
an election would not apply to any Mortgage Loan originated on or before
September 27, 1985. Instead, premium on such a Mortgage Loan should be allocated
among the principal payments thereon and be deductible by the REMIC as those
payments become due or upon the prepayment of such Mortgage Loan.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC Regular
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Certificates--Original Issue Discount," except that the de minimis rule and
the adjustments for subsequent holders of REMIC Regular Certificates (including
any other class of REMIC Certificates constituting "regular interests" in the
REMIC not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess
of the stated redemption price of such class (such excess "Issue Premium"), the
net amount of interest deductions that are allowed the REMIC in each taxable
year with respect to the REMIC Regular Certificates of such class will be
reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of a REMIC will be determined in
the same manner as if the REMIC were an individual having the calendar year as
its taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions and Other Possible REMIC
Taxes" below. Further, the limitation on miscellaneous itemized deductions
imposed on individuals by Section 67 of the Code (which allows such deductions
only to the extent they exceed in the aggregate two percent of the taxpayer's
adjusted gross income) will not be applied at the REMIC level so that the REMIC
will be allowed deductions for servicing, administrative and other non-interest
expenses in determining its taxable income. All such expenses will be allocated
as a separate item to the holders of REMIC Certificates, subject to the
limitation of Section 67 of the Code. See "--Possible Pass-Through of
Miscellaneous Itemized Deductions." If the deductions allowed to the REMIC
exceed its gross income for a calendar quarter, such excess will be the net loss
for the REMIC for that calendar quarter.
BASIS RULES, NET LOSSES AND DISTRIBUTIONS
The adjusted basis of a REMIC Residual Certificate will be equal to the
amount paid for such Certificate, increased by amounts included in the income of
the REMIC Residual Certificateholder and decreased (but not below zero) by
distributions made, and by net losses allocated, to such REMIC Residual
Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account
any net loss for any calendar quarter to the extent such net loss exceeds such
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of such calendar quarter (determined without regard
to such net loss). Any loss that is not currently deductible by reason of this
limitation may be carried forward indefinitely to future calendar quarters and,
subject to the same limitation, may be used only to offset income from the REMIC
Residual Certificate. The ability of REMIC Residual Certificateholders to deduct
net losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such Certificate. To the extent a distribution on a REMIC
Residual Certificate exceeds such adjusted basis, it will be treated as gain
from the sale of such Certificate. Holders of certain REMIC Residual
Certificates may be entitled to distributions early in the term of the related
REMIC under circumstances in which their bases in such REMIC Residual
Certificates will not be sufficiently large that such distributions will be
treated as nontaxable returns of capital. Their bases in such REMIC Residual
Certificates will initially equal the amount paid for such REMIC Residual
Certificates and will be increased by their allocable shares of the
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taxable income of the REMIC. However, such basis increases may not occur until
the end of the calendar quarter, or perhaps the end of the calendar year, with
respect to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may
not amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of
REMIC Certificates," below. For a discussion of possible modifications of these
rules that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have had in the hands of an original holder, see "--Taxation of Owners of
REMIC Residual Certificates--General."
EXCESS INCLUSIONS
Any "excess inclusions" with respect to a REMIC Residual Certificate
will, with an exception discussed below for certain REMIC Residual Certificates
held by thrift institutions, be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
the REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal 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.
For REMIC Residual Certificateholders, an excess inclusion (i) will not
be permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates," below.
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As an exception to the general rules described above, thrift institutions
are allowed to offset their excess inclusions with unrelated deductions, losses
or loss carryovers, but only if the REMIC Residual Certificates are considered
to have "significant value." The REMIC Regulations provide that in order to be
treated as having significant value, the REMIC Residual Certificates must have
an aggregate issue price at least equal to two percent of the aggregate issue
prices of all of the related REMIC's Regular and Residual Certificates. In
addition, based on the Prepayment Assumption, the anticipated weighted average
life of the REMIC Residual Certificates must equal or exceed 20 percent of the
anticipated weighted average life of the REMIC, based on the Prepayment
Assumption and on any required or permitted clean up calls or required qualified
liquidation provided for in the REMIC's organizational documents. Although it
has not done so, the Treasury also has authority to issue regulations that would
treat the entire amount of income accruing on a REMIC Residual Certificate as an
excess inclusion if the REMIC Residual Certificates are considered not to have
"significant value." The related Prospectus Supplement will disclose whether
offered REMIC Residual Certificates may be considered to have "significant
value" under the REMIC Regulations; provided, however, that any disclosure that
a REMIC Residual Certificate will have "significant value" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will have "significant value" for purposes of the
above-described rules. The above-described exception for thrift institutions
applies only to those residual interests held directly by, and deductions,
losses and loss carryovers incurred by, such institutions (and not by other
members of an affiliated group of corporations filing a consolidated income tax
return) or by certain wholly owned direct subsidiaries of such institutions
formed or operated exclusively in connection with the organization and operation
of one or more REMICs.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such
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
REMIC Residual Certificate as if held directly by such shareholder. Treasury
regulations yet to be issued could apply a similar rule to regulated investment
companies, common trust funds and certain cooperatives; the REMIC Regulations
currently do not address this subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES
Under the REMIC Regulations, a transfer of a "noneconomic" REMIC Residual
Certificate will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax." If such transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on such "noneconomic" REMIC Residual Certificate. The REMIC Regulations
provide that a REMIC Residual Certificate is noneconomic unless, based on the
Prepayment Assumption and on any required or permitted clean up calls or
required qualified liquidation provided for in the REMIC's organizational
documents, (1) the present value of the expected future distributions
(discounted using the "applicable Federal rate" for obligations whose term ends
on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) on the REMIC Residual Certificate equals at
least the present value of the expected tax on the anticipated excess
inclusions, and (2) the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC Residual Certificate at or after
the time the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. Accordingly, all transfers of REMIC
Residual Certificates that may constitute noneconomic residual interests will be
subject to certain restrictions under the terms of the related Pooling and
Servicing Agreement that are intended to reduce the possibility of any such
transfer being disregarded. Such restrictions will require
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each party to a transfer to provide an affidavit that no purpose of such
transfer is to impede the assessment or collection of tax, including certain
representations as to the financial condition of the prospective transferee, as
to which the transferor will also be required to make a reasonable investigation
to determine such transferee's historic payments of its debts and ability to
continue to pay its debts as they come due in the future. Prior to purchasing a
REMIC Residual Certificate, prospective purchasers should consider the
possibility that a purported transfer of such REMIC Residual Certificate by such
a purchaser to another purchaser at some future date might be disregarded in
accordance with the above-described rules, which would result in the retention
of tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors In REMIC
Certificates--REMIC Residual Certificates" below for additional restrictions
applicable to transfers of certain REMIC Residual Certificates to foreign
persons.
MARK-TO-MARKET RULES
On December 28, 1993, the IRS released temporary regulations (the
"Mark-to- Market Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities owned by a dealer, except to the extent
that the dealer has specifically identified a security as held for investment.
The Mark-to-Market Regulations provide that for purposes of this mark-to-market
requirement, a "negative value" REMIC Residual Certificate is not treated as a
security and thus generally may not be marked to market. This exclusion from the
mark-to-market requirement is expanded to include all REMIC Residual
Certificates under proposed Treasury regulations published January 4, 1995 which
provide that any REMIC Residual Certificate issued after January 4, 1995 will
not be treated as a security and therefore generally may not be marked to
market. Prospective purchasers of a REMIC Residual Certificate should consult
their tax advisors regarding the possible application of the mark-to-market
requirement to REMIC Residual Certificates.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS
Fees and expenses of a REMIC generally will be allocated to the holders
of the REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, all or a portion of such fees and expenses should be allocated to
the holders of the related REMIC Regular Certificates. Unless otherwise stated
in the related Prospectus Supplement, such fees and expenses will be allocated
to holders of the related REMIC Residual Certificates in their entirety and not
to the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (ii) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate two percent of a taxpayer's adjusted gross
income. In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose
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adjusted gross income exceeds a specified amount will be reduced by the lesser
of (i) 3% of the excess of the individual's adjusted gross income over such
amount or (ii) 80% of the amount of itemized deductions otherwise allowable for
the taxable year. The amount of additional taxable income reportable by holders
of such Certificates that are subject to the limitations of either Section 67 or
Section 68 of the Code may be substantial. Furthermore, in determining the
alternative minimum taxable income of such a holder of a REMIC Certificate that
is an individual, estate or trust, or a "pass-through entity" beneficially owned
by one or more individuals, estates or trusts, no deduction will be allowed for
such holder's allocable portion of servicing fees and other miscellaneous
itemized deductions of the REMIC, even though an amount equal to the amount of
such fees and other deductions will be included in such holder's gross income.
Accordingly, such REMIC Certificates may not be appropriate investments for
individuals, estates or trusts, or pass-through entities beneficially owned by
one or more individuals, estates or trusts. Such prospective investors should
carefully consult with their own tax advisors prior to making an investment in
such Certificates.
SALES OF REMIC CERTIFICATES
If a REMIC Certificate is sold, the selling Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC Regular Certificate. The adjusted
basis of a REMIC Regular Certificate generally will equal the cost of such REMIC
Regular Certificate to such Certificateholder, increased by income reported by
such Certificateholder with respect to such REMIC Regular Certificate (including
original issue discount and market discount income) and reduced (but not below
zero) by distributions on such REMIC Regular Certificate received by such
Certificateholder and by any amortized premium. The adjusted basis of a REMIC
Residual Certificate will be determined as described under "--Taxation of
Owners of REMIC Residual Certificates--Basis Rules, Net Losses and
Distributions." Except as provided in the following two paragraphs, any such
gain or loss will be capital gain or loss provided such REMIC Certificate is
held as a capital asset (generally property held for investment) within the
meaning of Section 1221 of the Code. The Code as of the date of this prospectus
provides for a top marginal tax rate of 39.6% for individuals and a maximum
marginal rate for long-term capital gains of individuals of 28%. No such rate
differential exists for corporations. In addition, the distinction between a
capital gain or loss and ordinary income or loss remains relevant for other
purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to 110% of the "applicable Federal
rate" (generally a rate based on an average of current yields on Treasury
securities having a maturity comparable to that of the Certificate based on the
application of the Prepayment Assumption to such Certificate, which rate is
computed and published monthly by the IRS), determined as of the date of
purchase of such Certificate, over (ii) the amount of ordinary income actually
includible in the seller's income prior to such sale. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
such Certificate at a market discount will be taxable as ordinary income in an
amount not exceeding the portion of such discount that accrued during the period
such REMIC Certificate was held by such holder, reduced by any market discount
included in income under the rules described above under "--Taxation of
Owners of REMIC Regular Certificates--Market Discount and--Premium."
REMIC 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 REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
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A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if
the seller of a REMIC Residual Certificate reacquires a REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any 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 be added
to such REMIC Residual Certificateholder's adjusted basis in the newly acquired
asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (a "Prohibited Transaction 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 REMIC Certificates. It is not anticipated that any REMIC
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would be
subject to such tax.
REMICs also are 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 that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
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Unless otherwise disclosed in the related Prospectus Supplement, it is
not anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer or Trustee, in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that such tax arises out of a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling and Servicing Agreement and in respect of
compliance with applicable laws and regulations. Any such tax not borne by the
Master Servicer or the Trustee will be charged against the related Trust Fund,
resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO
CERTAIN ORGANIZATIONS.
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) of the total anticipated excess inclusions
with respect to such REMIC Residual Certificate for periods after the transfer
and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be determined as of the
date that the REMIC Residual Certificate is transferred and must be based on
events that have occurred up to the time of such transfer, the Prepayment
Assumption and any required or permitted clean up calls or required qualified
liquidation provided for in the REMIC's organizational documents. Such a tax
would be generally imposed on the transferor of the REMIC Residual Certificate,
except that where such transfer is through an agent for a disqualified
organization, the tax would instead be imposed on such agent. However, a
transferor of a REMIC Residual Certificate would in no event be liable for such
tax with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a disqualified organization, and, as of the
time of the transfer, the transferor did not have actual knowledge that such
affidavit was false. Moreover, an entity will not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that (i) residual interests
in such entity are not held by disqualified organizations and (ii) information
necessary for the application of the tax described herein will be made
available. Restrictions on the transfer of REMIC Residual Certificates and
certain other provisions that are intended to meet this requirement will be
included in the related Pooling and Servicing Agreement, and will be discussed
more fully in any Prospectus Supplement relating to the offering of any REMIC
Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalty of perjury that such social security number is that of the record
holder or (ii) a statement under penalty of perjury that such record holder is
not a disqualified organization.
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For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(not including instrumentalities described in Section 168(h)(2)(D) of the Code
or the Federal Home Loan Mortgage Corporation), (ii) any organization (other
than a cooperative described in Section 521 of the Code) that is exempt from
federal income tax, unless it is subject to the tax imposed by Section 511 of
the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
TERMINATION AND LIQUIDATION
A REMIC will terminate immediately after the Distribution Date following
receipt by the REMIC of the final payment in respect of the Mortgage Loans or
upon a sale of the REMIC's assets following the adoption by the REMIC of a plan
of complete liquidation. The last distribution on a REMIC Regular Certificate
will be treated as a payment in retirement of a debt instrument. In the case of
a REMIC Residual Certificate, if the last distribution on such REMIC Residual
Certificate is less than the REMIC Residual Certificateholder's adjusted basis
in such Certificate, such REMIC Residual Certificateholder should (but may not)
be treated as realizing a loss equal to the amount of such difference, and such
loss may be treated as a capital loss. 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
subjected to any "prohibited transactions taxes" solely on account of such
qualified liquidation, 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.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
Solely for purposes of the administrative provisions of the Code, the
REMIC will be treated as a partnership and REMIC Residual Certificateholders
will be treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Trustee will file REMIC federal income tax returns on behalf of
the REMIC, will generally hold at least a nominal amount of REMIC Residual
Certificates, and will be designated as and will act as the "tax matters person"
with respect to the REMIC in all respects.
As the tax matters person, the Trustee will, subject to certain notice
requirements and various restrictions and limitations, generally have the
authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. REMIC Residual Certificateholders will generally be required to
report such REMIC items consistently with their treatment on the related REMIC's
tax return and may in some circumstances be bound by a settlement agreement
between the Trustee, as tax matters person, and the IRS concerning any such
REMIC item. Adjustments made to the REMIC tax return may require a REMIC
Residual Certificateholder to make corresponding adjustments on its return, and
an audit of the REMIC's tax return, or the adjustments resulting from such an
audit, could result in an audit of a REMIC Residual Certificateholder's return.
No REMIC will be registered as a tax shelter pursuant to Section 6111 of the
Code because it is not anticipated that any REMIC will have a net loss for any
of the first five taxable years of its existence. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to furnish
to the related
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REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and certain other non-individuals will be provided interest
and original issue discount income information and the information set forth in
the following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC Regular Certificate issued with original issue discount to
disclose on its face the amount of original issue discount and the issue date,
and requiring such information to be reported to the IRS. Reporting with respect
to the REMIC Residual Certificates, including income, excess inclusions,
investment expenses and relevant information regarding qualification of the
REMIC's assets, will be made as required under the Treasury regulations,
generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the Master Servicer will not have, such regulations only
require that information pertaining to the appropriate proportionate method of
accruing market discount be provided. See "--Taxation of Owners of REMIC
Regular Certificates--Market Discount."
The responsibility for complying with the foregoing reporting rules will
be borne by the Trustee.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES
Payments of interest and principal, as well as payments of proceeds from
the sale of REMIC Certificates, may be subject to the "backup withholding tax"
under Section 3406 of the Code at a rate of 31% if recipients of such payments
fail to furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against such recipient's federal income tax. Furthermore,
certain penalties may be imposed by the IRS on a recipient of payments that is
required to supply information but that does not do so in the proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES
A REMIC Regular Certificateholder that is not a "United States person"
(as defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a REMIC Regular Certificate will not, unless otherwise disclosed in the
related Prospectus Supplement, be subject to United States federal income or
withholding tax in respect of a distribution on a REMIC Regular Certificate,
provided that the holder complies to the extent necessary with certain
identification requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a United States person and providing the name and
address of such Certificateholder). For these purposes, "United States person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created
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or organized in, or under the laws of, the United States or any political
subdivision thereof, or an estate or trust whose income from sources without the
United States is includible in gross income for United States federal income tax
purposes regardless of its connection with the conduct of a trade or business
within the United States. It is possible that the IRS may assert that the
foregoing tax exemption should not apply with respect to a REMIC Regular
Certificate held by a REMIC Residual Certificateholder that owns directly or
indirectly a 10% or greater interest in the REMIC Residual Certificates. If the
holder does not qualify for exemption, distributions of interest, including
distributions in respect of accrued original issue discount, to such holder may
be subject to a tax rate of 30%, subject to reduction under any applicable tax
treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be
included in the estate of a non-resident 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. Unless otherwise stated in the related Prospectus Supplement,
transfers of REMIC Residual Certificates to investors that are not United States
persons will be prohibited under the related Pooling and Servicing Agreement.
Certain restrictions relating to transfers of REMIC Residual Certificates
to and by investors who are not "United States persons" (as defined above) are
also imposed by the REMIC Regulations. If such a transfer is disregarded, the
purported transferor of a REMIC Residual Certificate continues to remain liable
for any taxes due with respect to the income on such Certificate. Prior to
purchasing a REMIC Residual Certificate, prospective purchasers are advised to
review the transferor and transferee affidavits that are required to be
delivered upon a transfer of a REMIC Residual Certificate (forms of which are
attached to the Pooling and Servicing Agreement as exhibits thereto) and should
consider the possibility that a purported transfer of such REMIC Residual
Certificate by such purchaser to another purchaser at some future date might be
disregarded, which would result in the retention of tax liability by such
purchaser and the possibility that an amount equal to the total distributions on
such REMIC Residual Certificate might be withheld to satisfy the United States
federal income tax liability thereon.
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
With respect to each series of Grantor Trust Certificates, Counsel to the
Depositor will deliver its opinion to the effect that, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the related
Grantor Trust Fund will be classified as a grantor trust under subpart E, part I
of subchapter J of the Code and not as a partnership or an association taxable
as a corporation. Accordingly, each holder of a Grantor Trust Certificate
generally will be treated as the owner of an interest in the Mortgage Loans
included in the Grantor Trust Fund.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate." A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees and any Spread) and interest paid to the holders of Grantor
Trust
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Fractional Interest Certificates issued with respect to such Grantor Trust Fund
will be referred to as a "Grantor Trust Strip Certificate." A Grantor Trust
Strip Certificate may also evidence a nominal ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
In the case of Grantor Trust Fractional Interest Certificates, unless
otherwise disclosed in the related Prospectus Supplement and subject to the
discussion below with respect to Buydown Mortgage Loans, Counsel to the
Depositor will deliver an opinion, in general, that Grantor Trust Fractional
Interest Certificates will represent interests in (i) "qualifying real property
loans" within the meaning of Section 593(d) of the Code; (ii) "loans . . .
secured by an interest in real property" within the meaning of Section
7701(a)(19)(C) of the Code; (iii) "obligation[s] (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; and (iv) "real estate assets" within the meaning of Section 856(c)(5)(A)
of the Code. In addition, Counsel to the Depositor will deliver an opinion that
interest on Grantor Trust Fractional Interest Certificates will, to the same
extent, 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.
The assets constituting certain Grantor Trust Funds may include Buydown
Mortgage Loans. The characterization of an 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 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. No directly applicable precedents exist
with respect to the federal income tax treatment or the characterization of
investments in Buydown Mortgage Loans. Accordingly, holders of Grantor Trust
Certificates should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Grantor Trust Fund that includes Buydown Mortgage Loans.
GRANTOR TRUST STRIP CERTIFICATES
Even if Grantor Trust Strip Certificates evidence an interest in a
Grantor Trust Fund consisting of Mortgage Loans that are "loans . . . secured by
an interest in real property" within the meaning of Section 7701(a)(19)(C) of
the Code, "qualifying real property loans" within the meaning of Section 593(d)
of the Code, and "real estate assets" within the meaning of Section 856(c)(5)(A)
of the Code, and the interest on which is "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code, it is unclear whether the Grantor Trust Strip Certificates, and the income
therefrom, will be so characterized. However, the policies underlying such
sections (namely, to encourage or require investments in mortgage loans by
thrift institutions and real estate investment trusts) may suggest that such
characterization is appropriate. Counsel to the Depositor will not deliver any
opinion on these questions. Prospective purchasers to which such
characterization of an investment in Grantor Trust Strip Certificates is
material should consult their tax advisors regarding whether the Grantor Trust
Strip Certificates, and the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (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.
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TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
Holders of a particular series of Grantor Trust Fractional Interest
Certificates generally will be required to report on their federal income tax
returns their shares of the entire income from the Mortgage Loans (including
amounts used to pay reasonable servicing fees and other expenses) and will be
entitled to deduct their shares of any such reasonable servicing fees and other
expenses. Because of stripped interests, market or original issue discount, or
premium, the amount includible in income on account of a Grantor Trust
Fractional Interest Certificate may differ significantly from the amount
distributable thereon representing interest on the Mortgage Loans. Under Section
67 of the Code, an individual, estate or trust holding a Grantor Trust
Fractional Interest Certificate directly or through certain pass-through
entities will be allowed a deduction for such reasonable servicing fees and
expenses only to the extent that the aggregate of such holder's miscellaneous
itemized deductions exceeds two percent of such 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 specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by holders of Grantor Trust
Fractional Interest Certificates who are subject to the limitations of either
Section 67 or Section 68 of the Code may be substantial. Further,
Certificateholders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holders' alternative minimum taxable income. Although it is not entirely clear,
it appears that in transactions in which multiple classes of Grantor Trust
Certificates (including Grantor Trust Strip Certificates) are issued, such fees
and expenses should be allocated among the classes of Grantor Trust Certificates
using a method that recognizes that each such class benefits from the related
services. In the absence of statutory or administrative clarification as to the
method to be used, it currently is intended to base information returns or
reports to the IRS and Certificateholders on a method that allocates such
expenses among classes of Grantor Trust Certificates with respect to each period
based on the distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates or
(ii) the Depositor or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on the Mortgage Loans. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees for various
types of mortgages, the IRS has established certain "safe harbors." The
servicing fees paid with respect to the Mortgage Loans for certain series of
Grantor Trust Certificates may be higher than the "safe harbors" and,
accordingly, may not constitute reasonable servicing compensation. The related
Prospectus Supplement will include information regarding servicing fees paid to
the Master Servicer, any subservicer or their respective affiliates necessary to
determine whether the preceding "safe harbor" rules apply.
IF STRIPPED BOND RULES APPLY
If the stripped bond rules apply, each Grantor Trust Fractional Interest
Certificate will be treated as having been issued with "original issue discount"
within the meaning of Section 1273(a) of the Code, subject, however, to the
discussion below regarding the treatment of certain stripped bonds as market
discount bonds and the discussion regarding de minimis market discount. See
"--Taxation of Owners
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Grantor Trust Fractional Interest Certificates--Market Discount." Under the
stripped bond rules, the holder of a Grantor Trust Fractional Interest
Certificate (whether a cash or accrual method taxpayer) will be required to
report interest income from its Grantor Trust Fractional Interest Certificate
for each month in an amount equal to the income that accrues on such Certificate
in that month calculated under a constant yield method, in accordance with the
rules of the Code relating to original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser for the Certificate. The stated redemption price of a Grantor Trust
Fractional Interest Certificate will be the sum of all payments to be made on
such Certificate other than "qualified stated interest," if any, as well as such
Certificate's share of reasonable servicing fees and other expenses. See
"--Taxation of Owners Grantor Trust Fractional Interest Certificates--If
Stripped Bond Rules Do Not Apply" for a definition of "qualified stated
interest." In general, the amount of such income that accrues in any month would
equal the product of such holder's adjusted basis in such Grantor Trust
Fractional Interest Certificate at the beginning of such month (See "--Sales
of Grantor Trust Certificates") and the yield of such Certificate to such
holder. Such yield would be computed at the rate (compounded based on the
regular interval between payment dates) that, if used to discount the holder's
share of future payments on the Mortgage Loans, would cause the present value of
those future payments to equal the price at which the holder purchased such
Certificate. In computing yield under the stripped bond rules, a
Certificateholder's share of future payments on the Mortgage Loans will not
include any payments made in respect of any ownership interest in the Mortgage
Loans retained by the Depositor, the Master Servicer, any subservicer or their
respective affiliates, but will include such Certificateholder's share of any
reasonable servicing fees and other expenses.
Section 1272(a)(6) of the Code requires, (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption, with respect to certain categories of debt instruments,
and regulations could be adopted applying those provisions to the Grantor Trust
Fractional Interest Certificates. It is unclear whether those provisions would
be applicable to the Grantor Trust Fractional Interest Certificates or whether
use of a reasonable prepayment assumption may be required or permitted without
reliance on those rules. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Fractional
Interest Certificate or, with respect to any holder, at the time of purchase of
the Certificate by that holder. Certificateholders are advised to consult their
own tax advisors concerning reporting original issue discount in general and, in
particular, whether a prepayment assumption should be used in reporting original
issue discount with respect to Grantor Trust Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired
at a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan prepays
in full, the holder of a Grantor Trust Fractional Interest Certificate acquired
at a discount or a premium generally will recognize ordinary income or loss
equal to the difference between the portion of the prepaid principal
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amount of the Mortgage Loan that is allocable to such Certificate and the
portion of the adjusted basis of such Certificate that is allocable to such
Certificateholder's interest in the Mortgage Loan. If a prepayment assumption is
used, it appears that no separate item of income or loss should be recognized
upon a prepayment. Instead, a prepayment should be treated as a partial payment
of the stated redemption price of the Grantor Trust Fractional Interest
Certificate and accounted for under a method similar to that described for
taking account of original issue discount on REMIC Regular Certificates. (See
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount.") It is unclear whether any other adjustments would be required to
reflect differences between an assumed prepayment rate and the actual rate of
prepayments.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Depositor, the Master Servicer nor the Trustee will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to such Prepayment Assumption or any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders who bought at that price.
Under Treasury regulations Section 1.1286-1, certain stripped bonds are
to be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the stripped bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the Mortgage Loans, the related Prospectus Supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the Mortgage Loans, then such original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "--Taxation of Owners of
Grantor Trust Fractional Interest Certificates--If Stripped Bond Rules Do Not
Apply" and "--Market Discount."
IF STRIPPED BOND RULES DO NOT APPLY
Subject to the discussion below on original issue discount, if the
stripped bond rules do not apply to a Grantor Trust Fractional Interest
Certificate, the Certificateholder will be required to report its share of the
interest income on the Mortgage Loans in accordance with such
Certificateholder's normal method of accounting. The original issue discount
rules will apply to a Grantor Trust Fractional Interest Certificate to the
extent it evidences an interest in Mortgage Loans issued with original issue
discount.
The original issue discount, if any, on the Mortgage Loans will equal the
difference between the stated redemption price of such Mortgage Loans and their
issue price. Under the OID Regulations, the stated redemption price is equal to
the total of all payments to be made on such Mortgage Loan other than
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"qualified stated interest." "Qualified stated interest" includes interest that
is unconditionally payable at least annually at a single fixed rate, at a
"qualified floating rate," a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate," a
combination of "qualified floating rates" or an "objective rate" that does not
operate in a manner that accelerates or defers interest payments on such
Mortgage Loan. In general, the issue price of a Mortgage Loan will be the amount
received by the borrower from the lender under the terms of the Mortgage Loan,
less any "points" paid by the borrower, and the stated redemption price of a
Mortgage Loan will equal its principal amount, unless the Mortgage Loan provides
for an initial below market rate of interest or the acceleration or the deferral
of interest payments.
In the case of Mortgage Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Mortgage Loans by the Trustee in
preparing information returns to the Certificateholders and the IRS.
Notwithstanding the general definition of original issue discount,
original issue discount will be considered to be de minimis if such original
issue discount is less than 0.25% of the stated redemption price multiplied by
the weighted average maturity of the Mortgage Loan. For this purpose, the
weighted average maturity of the Mortgage Loan will be computed as the sum of
the amounts determined as to each payment included in the stated redemption
price of such Mortgage Loan, by multiplying (i) the number of complete years
(rounding down for partial years) from the issue date until such payment is
expected to be made by (ii) a fraction, the numerator of which is the amount of
payment and the denominator of which is the stated redemption price of the
Mortgage Loan. Under the OID Regulations, original issue discount of only a de
minimis amount (other than de minimis original issue discount attributable to a
so called "teaser" rate or initial interest holiday) will be included in income
as each payment of stated principal is made, based on the product of the total
amount of such de minimis original issue discount and a fraction, the numerator
of which is the amount of each such payment and the denominator of which is the
outstanding stated principal amount of the Mortgage Loan. The OID Regulations
also permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See
"--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--Market Discount" below.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. However, Section 1272(a)(6) of the Code may
require that a prepayment assumption be made in computing yield with respect to
all mortgage-backed securities. Certificateholders are advised to consult their
own tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related Prospectus
Supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to the Mortgage Loans held in the
related Grantor Trust Fund.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Certificate at a cost less than such Certificate's allocable
portion of the aggregate remaining stated redemption price of the Mortgage Loans
held in the related Grantor Trust Fund will also be required to include in gross
income such Certificate's daily portions of any original issue discount with
respect to such Mortgage Loans. However, each such daily portion will be
reduced, if the cost of such Grantor Trust Fractional Interest Certificate to
such purchaser is in excess of such Certificate's allocable portion of the
aggregate
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"adjusted issue prices" of the Mortgage Loans held in the related Grantor Trust
Fund, approximately in proportion to the ratio such excess bears to such
Certificate's allocable portion of the aggregate original issue discount
remaining to be accrued on such Mortgage Loans. The adjusted issue price of a
Mortgage Loan on any given day equals the sum of (i) the adjusted issue price
(or, in the case of the first accrual period, the issue price) of such Mortgage
Loan at the beginning of the accrual period that includes such day and (ii) the
daily portions of original issue discount for all days during such accrual
period prior to such day. The adjusted issue price of a Mortgage Loan at the
beginning of any accrual period will equal the issue price of such Mortgage
Loan, increased by the aggregate amount of original issue discount with respect
to such Mortgage Loan that accrued in prior accrual periods, and reduced by the
amount of any payments made on such Mortgage Loan in prior accrual periods of
amounts included in its stated redemption price.
The Trustee will provide to any holder of a Grantor Trust Fractional
Interest Certificate such information as such holder may reasonably request from
time to time with respect to original issue discount accruing on Grantor Trust
Fractional Interest Certificates. See "Grantor Trust Reporting" below.
MARKET DISCOUNT
If the stripped bond rules do not apply to the Grantor Trust Fractional
Interest Certificates, a Certificateholder may be subject to the market discount
rules of Sections 1276 through 1278 of the Code to the extent an interest in a
Mortgage Loan is considered to have been purchased at a "market discount," that
is, in the case of a Mortgage Loan issued without original issue discount, at a
purchase price less than its remaining stated redemption price (as defined
above), or in the case of a Mortgage Loan issued with original issue discount,
at a purchase price less than its adjusted issue price (as defined above). If
market discount is in excess of a de minimis amount (as described below), the
holder generally will be required to include in income in each month the amount
of such discount that has accrued (under the rules described in the next
paragraph) through such month that has not previously been included in income,
but limited, in the case of the portion of such discount that is allocable to
any Mortgage Loan, to the payment of stated redemption price on such Mortgage
Loan that is received by (or, in the case of accrual basis Certificateholders,
due to) the Trust Fund in that month. A Certificateholder may elect to include
market discount in income currently as it accrues (under a constant yield method
based on the yield of the Certificate to such holder) 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
during or after the first taxable year to which such election applies. In
addition, the OID Regulations would 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.
If such an election were made with respect to a Mortgage Loan with market
discount, the Certificateholder would be deemed to have made an election to
include currently market discount in income with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the taxable year of the election or thereafter, and possibly previously acquired
instruments. Similarly, a Certificateholder that made this election for a
Certificate acquired at a premium would 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 "--REMICs
Taxation of Owners of REMIC Regular Certificates--Premium." Each of these
elections to accrue interest, discount and premium with respect to a Certificate
on a constant yield method or as interest is irrevocable.
Section 1276(b)(3) of the Code authorized the Treasury Department to
issue regulations providing for the method for accruing 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 Department, certain
rules described in the Committee Report apply. Under those rules, in each
accrual period, market
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discount on the Mortgage Loans should accrue, at the Certificateholder's option:
(i) on the basis of a constant yield method, (ii) in the case of a Mortgage Loan
issued without original issue discount, in an amount that bears the same ratio
to the total remaining market discount as the stated interest paid in the
accrual period bears to the total stated interest remaining to be paid on the
Mortgage Loan as of the beginning of the accrual period, or (iii) in the case of
a Mortgage Loan issued with original issue discount, in an amount that bears the
same ratio to the total remaining market discount as the original issue discount
accrued in the accrual period bears to the total original issue discount
remaining at the beginning of the accrual period. The prepayment assumption, if
any, used in calculating the accrual of original issue discount is to be used in
calculating the accrual of market discount. The effect of using a prepayment
assumption could be to accelerate the reporting of such discount income. Because
the regulations referred to in this paragraph have not been issued, it is not
possible to predict what effect such regulations might have on the tax treatment
of a Mortgage Loan purchased at a discount in the secondary market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such market discount may be required to be included in income
at a rate that is not significantly slower than the rate at which such discount
would be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans generally will be
considered to exceed a de minimis amount if it is greater than 0.25% of the
stated redemption price of the Mortgage Loans multiplied by the number of
complete years to maturity remaining after the date of its purchase. In
interpreting a similar rule with respect to original issue discount on
obligations payable in installments, the OID Regulations refer to the weighted
average maturity of obligations, and it is likely that the same rule will be
applied with respect to market discount, presumably taking into account the
prepayment assumption used, if any. The effect of using a prepayment assumption
could be to accelerate the reporting of such discount income. If market discount
is treated as de minimis under the foregoing rule, it appears that actual
discount would be treated in a manner similar to original issue discount of a de
minimis amount. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Do Not Apply."
Further, under the rules described in "--REMICs--Taxation of Owners
of REMIC Regular Certificates--Market Discount" above, any discount that is
not original issue discount and exceeds a de minimis amount may require the
deferral of interest expense deductions attributable to accrued market discount
not yet includible in income, unless an election has been made to report market
discount currently as it accrues. This rule applies without regard to
origination dates of the Mortgage Loans.
PREMIUM
If a Certificateholder is treated as acquiring the underlying Mortgage
Loans at a premium, that is, at a price in excess of their remaining stated
redemption price, such Certificateholder may elect under Section 171 of the Code
to amortize using a constant yield method, the portion of such premium allocable
to Mortgage Loans originated after September 27, 1985. Amortizable premium is
treated as an offset to interest income on the related debt instrument, rather
than as a separate interest deduction. However, premiums allocable to Mortgage
Loans originated before September 28, 1985 or to Mortgage Loans for which an
amortization election is not made should be allocated among the payments of
stated redemption price on the Mortgage Loan and be allowed as a deduction as
such payments are made (or, for a Certificateholder using the accrual method of
accounting, when such payments of stated redemption price are due).
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It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss, equal to the difference between
the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a prepayment assumption
is used to amortize such premium, it appears that such a loss would be
unavailable. Instead, if a prepayment assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption used, if any, and the actual rate of prepayments.
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES
The "stripped coupon" rules of Section 1286 of the Code will apply to the
Grantor Trust Strip Certificates. Except as described above in "--Taxation of
Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond
Rules Apply," no regulations or published rulings under Section 1286 of the Code
have been issued and some uncertainty exists as to how it will be applied to
securities such as the Grantor Trust Strip Certificates. Accordingly, holders of
Grantor Trust Strip Certificates should consult their own tax advisors
concerning the method to be used in reporting income or loss with respect to
such Certificates.
The OID Regulations do not apply to "stripped coupons," although they
provide general guidance as to how the original issue discount sections of the
Code will generally be applied. In addition, the discussion below is subject to
the discussion under "--Possible Application of Proposed Contingent Payment
Rules" and assumes that the holder of a Grantor Trust Strip Certificate will not
own any Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of such holder's adjusted basis in such Certificate
at the beginning of such month and the yield of such Certificate to such holder.
Such yield would be calculated based on the price paid for that Grantor Trust
Strip Certificate by its holder and the payments remaining to be made thereon at
the time of the purchase, plus an allocable portion of the servicing fees and
expenses to be paid with respect to the Mortgage Loans. See "--Taxation of
Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond
Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments be made
in the amount and rate of accrual of such discount when prepayments do not
conform to such prepayment assumption. Regulations could be adopted applying
those provisions to the Grantor Trust Strip Certificates. It is unclear whether
those provisions would be applicable to the Grantor Trust Strip Certificates or
whether use of a prepayment assumption may be required or permitted in the
absence of such regulations. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Strip Certificate
or, with respect to any subsequent holder, at the time of purchase of the
Grantor Trust Strip Certificate by that holder.
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The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each class of
Certificates. However, neither the Depositor nor the Trustee will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders of each series who bought at that price. Prospective
purchasers of the Grantor Trust Strip Certificates should consult their own tax
advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
Mortgage Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip 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
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
Prepayment Assumption. However, if a Grantor Trust Strip Certificate is treated
as an interest in discrete Mortgage Loans, or if the Prepayment Assumption is
not used, then when a Mortgage Loan is prepaid, the holder of a Grantor Trust
Strip Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of the Grantor Trust Strip Certificate that is allocable to
such Mortgage Loan.
POSSIBLE APPLICATION OF PROPOSED CONTINGENT PAYMENT RULES
The coupon stripping rules' general treatment of stripped coupons is to
regard them as newly issued debt instruments in the hands of each purchaser. To
the extent that payments on the Grantor Trust Strip Certificates would cease if
the Mortgage Loans were prepaid in full, the Grantor Trust Strip Certificates
could be considered to be debt instruments providing for contingent payments.
Under the OID Regulations, debt instruments providing for contingent payments
are not subject to the same rules as debt instruments providing for
noncontingent payments, but no final regulations have been promulgated with
respect to contingent payment debt instruments. Proposed regulations were
promulgated on December 16, 1994 regarding contingent payment debt instruments.
As in the case of the OID Regulations, such proposed regulations do not
specifically address securities, such as the Grantor Trust Strip Certificates,
that are subject to the stripped bond rules of Section 1286 of the Code.
If the contingent payment rules under the proposed regulations were to
apply, the holder of a Grantor Trust Strip Certificate would be required to
apply a "noncontingent bond method." Under that method, the issuer of a Grantor
Trust Strip Certificate would determine a projected payment schedule with
respect to such Grantor Trust Strip Certificate. Holders of Grantor Trust Strip
Certificates would be bound by the issuer's projected payment schedule, which
would consist of all noncontingent payments and a projected amount for each
contingent payment based on the projected yield (as described below) of the
Grantor Trust Strip Certificate. The projected amount of each payment would be
determined so that the projected payment schedule reflected the projected yield
reasonably expected to be received by the holder of a Grantor Trust Strip
Certificate. The projected yield referred to above would be a reasonable rate,
not less than the "applicable Federal rate" that, as of the issue date,
reflected general market conditions, the credit quality of the issuer, and the
terms and conditions of the Mortgage Loans. The holder of a Grantor Trust Strip
Certificate would be required to include as interest income in each month the
adjusted issue price of the Grantor Trust Strip Certificate at the beginning of
the period multiplied by the projected yield, and would add to, or subtract
from, such income any variation between
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the payment actually received in such month and the payment originally projected
to be made in such month.
Certificateholders should consult their tax advisors concerning the
possible application of the contingent payment rules to the Grantor Trust Strip
Certificates.
SALES OF GRANTOR TRUST CERTIFICATES
Any gain or loss equal to the difference between the amount realized on
the sale or exchange of a Grantor Trust Certificate and its adjusted basis,
recognized on the sale or exchange of a Grantor Trust Certificate as a capital
asset, will be capital gain or loss, except to the extent of accrued and
unrecognized market discount, which will be treated as ordinary income, and (in
the case of banks and other financial institutions) except as provided in
Section 582(c) of the Code. The adjusted basis of a Grantor Trust Certificate
generally will equal its cost, increased by any income reported by the Seller
(including original issue discount and market discount income) and reduced (but
not below zero) by any previously reported losses, any amortized premium and by
any distributions with respect to such Grantor Trust Certificate. The Code as of
the date of this Prospectus provides a top marginal tax rate of 39.6% for
individuals and a maximum marginal rate for the long-term capital gains of
individuals of 28%. No such rate differential exists for corporations. In
addition, the distinction between a capital gain or loss and ordinary income or
loss remains relevant for other purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be
partially or wholly ordinary and not capital in certain circumstances. Gain
attributable to accrued and unrecognized market discount will be treated as
ordinary income, as will gain or loss recognized by banks and other financial
institutions subject to Section 582(c) of the Code. Furthermore, a portion of
any gain that might otherwise be capital gain may be treated as ordinary income
to the extent that the Grantor Trust Certificate is held as part of a
"conversion transaction" within the meaning of Section 1258 of the Code. A
conversion transaction generally is one in which the taxpayer has taken two or
more positions in the same or similar property that reduce or eliminate market
risk, if substantially all of the taxpayer's return is attributable to the time
value of the taxpayer's net investment in such transaction. The amount of gain
realized in a conversion transaction that is recharacterized as ordinary income
generally will not exceed the amount of interest that would have accrued on the
taxpayer's net investment at 120% of the appropriate "applicable Federal rate"
(which rate is computed and published monthly by the IRS) at the time the
taxpayer enters into the conversion transaction, subject to appropriate
reduction for prior inclusion of interest and other ordinary income items from
the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for that taxable year, for purposes
of the rule that limits on the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
GRANTOR TRUST REPORTING
The Trustee will furnish to each holder of a Grantor Trust Certificate
with each distribution a statement setting forth the amount of such distribution
allocable to principal on the underlying Mortgage Loans and to interest thereon
at the related Pass-Through Rate. In addition, within a reasonable time after
the end of each calendar year, based on information provided by the Master
Servicer, the Trustee will furnish to each Certificateholder during such year
such customary factual information as the Trustee deems necessary or desirable
to enable holders of Grantor Trust Certificates to prepare their tax returns and
will furnish comparable information to the IRS as and when required by law to do
so. Because the
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rules for accruing discount and amortizing premium with respect to the Grantor
Trust Certificates are uncertain in various respects, there is no assurance the
IRS will agree with the Trustee's information reports of such items of income
and expense. Moreover, such information reports, even if otherwise accepted as
accurate by the IRS, will in any event be accurate only as to the initial
Certificateholders that bought their Certificates at the representative initial
offering price used in preparing such reports.
BACKUP WITHHOLDING
In general, the rules described in "--REMICs--Backup Withholding"
will also apply to Grantor Trust Certificates.
FOREIGN INVESTORS
In general, the discussion with respect to REMIC Regular Certificates in
"--REMICs--Foreign Investors in REMIC Certificates" applies to Grantor
Trust Certificates except that Grantor Trust Certificates will, unless otherwise
disclosed in the related Prospectus Supplement, be eligible for exemption from
U.S. withholding tax, subject to the conditions described in such discussion,
only to the extent the related Mortgage Loans were originated after July 18,
1984.
To the extent that interest on a Grantor Trust Certificate would be
exempt from United States withholding tax under Section 871(h)(1) of the Code,
and the Grantor Trust Certificate is not held in connection with a
Certificateholder's trade or business in the United States, such Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of a
non-resident alien individual.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Certificates offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and this discussion does not purport to describe
any aspect of the tax laws of any state or other jurisdiction. Therefore,
prospective investors should consult their own tax advisors with respect to the
various tax consequences of investments in the Certificates offered hereunder.
ERISA CONSIDERATIONS
ERISA imposes certain fiduciary and prohibited transaction restrictions
on employee benefit plans subject to the fiduciary and prohibited transaction
restrictions under ERISA ("ERISA Plans"). The Code imposes essentially the same
prohibited transaction restrictions on tax-qualified retirement plans described
in Section 401(a) of the Code and on Individual Retirement Accounts described in
Section 408 of the Code (collectively, "Tax Favored Plans"). ERISA and the Code
prohibit a broad range of transactions involving assets of ERISA Plans and Tax
Qualified Plans (collectively, "Plans") and persons who have certain specified
relationships to such Plans (so-called "parties in interest" within the meaning
of ERISA or "disqualified persons" within the meaning of the Code) unless a
statutory or administrative exemption is available. Certain parties in interest
or disqualified persons that participate in a prohibited transaction may be
subject to a penalty or excise taxes, unless a statutory or administrative
exemption is available.
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Certain affiliates of the Depositor, including Donaldson, Lufkin &
Jenrette Securities Corporation, the Underwriter of the Certificates, and
Donaldson, Lufkin & Jenrette Inc., the parent of the Depositor, might be
considered or might become "parties in interest" or "disqualified persons" with
respect to a Plan. Moreover, the Trustee, the Master Servicer or any other
Servicer, any insurer, special hazard insurer, primary insurer or any other
issuer of a credit support instrument relating to the Mortgage Assets in a Trust
Fund or certain of their respective affiliates might be considered "parties in
interest." Prohibited transactions within the meaning of ERISA and the Code may
arise if Certificates are acquired by a Plan with respect to which Donaldson,
Lufkin & Jenrette Securities Corporation or Donaldson, Lufkin & Jenrette Inc. is
a party in interest or disqualified person. The acquisition or holding of
Certificates by or on behalf of a Plan could be considered to give rise to a
"prohibited transaction" within the meaning of ERISA and the Code unless a
statutory or administrative exemption is available. One or more exemptions may
be available, however, with respect to any such prohibited transaction,
including, but not limited to: Prohibited Transaction Exemption ("PTE") 78-19,
regarding investments by insurance company pooled separate accounts; PTE 80-51,
regarding investments by bank collective investment funds; PTE 83-1, regarding
mortgage pool investment trusts; or PTE 84-14, regarding transactions effected
by a "qualified professional asset manager."
A final regulation promulgated by the Department of Labor (the "DOL")
defining the term "plan assets" was published in the Federal Register (the "DOL
Regulation"). Under the DOL Regulation, generally, when a Plan makes an equity
investment in another entity (for example, the purchase of a Residual Interest
in a REMIC), the underlying assets of that entity may be considered Plan assets
unless certain exceptions apply. There can be no assurance that any of the
exceptions set forth in the DOL Regulation will apply to the purchase or holding
of Certificates.
Under ERISA, any person who exercises any authority or control respecting
the management or disposition of the assets of a Plan, and any person who
provides investment advice with respect to such assets for a fee, is a fiduciary
of such Plan. A Plan's investment in Certificates may cause the housing loans
comprising or underlying the Mortgage Assets to be deemed Plan assets. If the
housing loans constitute Plan assets, then any party exercising management or
discretionary control regarding those assets may be deemed to be a Plan
"fiduciary," and thus subject to the fiduciary requirements and prohibited
transaction provisions of ERISA and the Code with respect to the housing loans.
The U.S. Department of Labor has granted to Donaldson, Lufkin & Jenrette
Securities Corporation an administrative exemption (Prohibited Transaction
Exemption 90-83, as amended; Exemption Application No. D-8346, 55 Fed. Reg. 50,
250 (1990)) (the "Exemption") from certain of the prohibited transaction rules
of ERISA and the related excise tax provisions of Section 4975 of the Code with
respect to the initial purchase, the holding and the subsequent resale by Plans
of certificates in pass-through trusts that consist of certain receivables,
loans, and other obligations that meet the conditions and requirements of the
Exemption. The Exemption applies to mortgage loans such as the Mortgage Loans in
the Mortgage Trust.
Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable
to the Plan as they would be in an arm's length transaction with an
unrelated party;
(2) the rights and interest evidenced by the certificates acquired
by the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust fund;
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(3) the certificates acquired by the Plan have received a
rating at the time of such acquisition that is one of the three highest
generic rating categories from either Standard & Poor's Corporation
("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Inc.
("D&P") or Fitch Investors Service, Inc. ("Fitch");
(4) the Trustee must not be an affiliate of any other member of
the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the seller
pursuant to the assignment of the loans to the trust fund represents not
more than the fair market value of such loans; the sum of all payments
made to and retained by the servicer and any other servicer represents
not more than reasonable compensation for such person's services under
the agreement pursuant to which the loans are pooled and reimbursements
of such person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of
the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been
rated in one of the three highest rating categories of S&P, Moody's,
Fitch or D&P for at least one year prior to the Plan's acquisition of
certificates; and
(iii) certificates evidencing interests in such other investment
pools must have been purchased by investors other than Plans for at least
one year prior to any Plan's acquisition of certificates.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables held in the trust
provided that, among other requirements, (i) in the case of an acquisition in
connection with the initial issuance of certificates, at least fifty percent of
each class of certificates in which Plans have invested is acquired by persons
independent of the Restricted Group; (ii) such fiduciary (or its affiliate) is
an obligor with respect to five percent or less of the fair market value of the
obligations contained in the trust; (iii) the Plan's investment in certificates
of any Class does not exceed twenty-five percent of all of the certificates of
that Class outstanding at the time of the acquisition; and (iv) immediately
after the acquisition, no more than twenty-five percent of the assets of the
Plan with respect to which such person is a fiduciary are invested in
certificates representing an interest in one or more trusts containing assets
sold or served by the same entity. The Exemption does not apply to Plans
sponsored by the seller of a Certificate, the Underwriter, the Trustee, the
Servicer, any obligor with respect to Mortgage Loans included in the assets in
the Mortgage Trust, or any affiliate of such parties (the "Restricted Group").
129
Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm that (a) the Certificates constitute "certificates" for purposes of the
Exemption and (b) that the specific and general conditions set forth in the
Exemption would be satisfied. In addition to making its own determination as to
the availability of the exemptive relief provided in the Exemption, the Plan
fiduciary should consider its general fiduciary obligations under ERISA in
determining whether to purchase a Certificate on behalf of a Plan.
There can be no assurance that any DOL exemption will apply with respect
to any particular Plan that acquires Certificates or, even if all of the
conditions specified therein were satisfied, that the exemption would apply to
transactions involving the Trust Fund. Prospective ERISA Plan investors should
consult with their legal advisors concerning the impact of ERISA and the Code
and the potential consequences to their specific circumstances prior to making
an investment in the Certificates.
LEGAL INVESTMENT
Unless otherwise set forth in the related Prospectus Supplement,
Certificates of any Series will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so
long as they are rated by a Rating Agency in one of its two highest categories
and, as such, will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including,
but not limited to, state-chartered savings banks, commercial banks, savings and
loan associations and insurance companies, as well as trustees and state
government employee retirement systems) created pursuant to or existing under
the laws of the United States or of any State (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to State
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities.
Under SMMEA, if a State enacted legislation prior to October 4, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," the Certificates will constitute legal
investments for entities subject to such legislation only to the extent provided
in such legislation. Certain States have enacted legislation which overrides the
preemption provisions of SMMEA. 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 "mortgage related securities," or
require the sale or other disposition of such securities so long as such
contractual commitment was made or such securities 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 with
mortgage-related securities 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 mortgage-related securities 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 regulatory authority may
prescribe.
The Federal Financial Institution Examination Council has adopted a
supervisory policy statement (the "Policy Statement"), applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the Office of Thrift Supervision with
an effective date of February 10, 1992. The Policy Statement generally
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indicates that a mortgage derivative product will be deemed to be high risk if
it exhibits greater price volatility than a standard fixed rate thirty-year
mortgage security. According to the Policy Statement, prior to purchase, a
depository institution will be required to determine whether a mortgage
derivative product that it is considering acquiring is high-risk, and if so that
the proposed acquisition would reduce the institution's overall interest rate
risk. Reliance on analysis and documentation obtained from a securities dealer
or other outside party without internal analysis by the institution would be
unacceptable. There can be no assurance as to which Classes of the Certificates
of any Series will be treated as high-risk under the Policy Statement. In
addition, the National Credit Union Administration has issued regulations
governing federal credit union investments which prohibit investment in certain
specified types of securities, which may include certain Classes of
Certificates. Similar policy statements have been issued by regulators having
jurisdiction over other types of depository institutions.
There may be other restrictions on the ability of certain investors
either to purchase certain Classes of Certificates or to purchase any Class of
Certificates representing more than a specified percentage of the investors'
assets. The Depositor will make no representations as to the proper
characterization of any Class of Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase any Class of
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any Class of Certificates. Accordingly,
all investors whose investment activities are subject to legal investment laws
and regulations, regulatory capital requirements or review by regulatory
authorities should consult with their own legal advisors in determining whether
and to what extent the Certificates of any Class constitute legal investments
under SMMEA or are subject to investment, capital or other restrictions, and
whether SMMEA has been overridden in any jurisdiction applicable to such
investor.
LEGAL MATTERS
Certain legal matters in connection with the Certificates offered hereby
will be passed upon for the Depositor and for the Underwriters by Brown & Wood,
New York, New York, provided that if so specified in the related Prospectus
Supplement, certain legal matters in connection with the Certificates offered
hereby will be passed upon for the Depositor and for the Underwriters by
Skadden, Arps, Slate, Meagher & Flom, New York, New York, or by Thacher Proffitt
& Wood, New York, New York.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on April 14, 1988
and is a wholly-owned subsidiary of Donaldson, Lufkin & Jenrette Inc., a
Delaware corporation. The principal executive offices of the Depositor are
located at 140 Broadway, New York, New York 10005. Its telephone number is (212)
504-3000.
The Depositor was organized, among other things, for the purposes of
establishing trusts, selling beneficial interests therein and acquiring and
selling mortgage assets to such trusts. The Depositor has one class of common
stock, all of which is owned by Donaldson, Lufkin & Jenrette Inc.
Neither the Depositor, its parent nor any of the Depositor's affiliates
will ensure or guarantee distributions on the Certificates of any Series.
As described herein, the only obligations of the Depositor will be
pursuant to certain representations and warranties with respect to the Mortgage
Assets. See "LOAN UNDERWRITING
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STANDARDS--Representations and Warranties" and "THE POOLING AND SERVICING
AGREEMENTS--Assignment of Mortgage Assets" herein. The Depositor will have no
ongoing servicing responsibilities or other responsibilities with respect to any
Mortgage Asset. The Depositor does not have nor is it expected in the future to
have any significant assets with which to meet any obligations with respect to
any Trust Fund. If the Depositor were required to repurchase or substitute a
Loan, its only source of funds to make the required payment would be funds
obtained from the Originator of such Loan, or if applicable, the Master Servicer
or, the Servicer. See "SPECIAL CONSIDERATIONS" herein.
Mortgage Assets will be acquired by the Depositor directly or through one
or more affiliates.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds
from the sale of each Series offered hereby and by the related Prospectus
Supplement to purchase the Mortgage Assets, to repay indebtedness which has been
incurred to obtain funds to acquire the Mortgage Assets, to establish the
reserve funds, if any, for the Series and to pay costs of structuring,
guaranteeing and issuing the Certificates. If so specified in the related
Prospectus Supplement, Certificates may be exchanged by the Depositor for
Mortgage Assets. Unless otherwise specified in the related Prospectus
Supplement, the Mortgage Assets for each Series of Certificates will be acquired
by the Depositor either directly, or through one or more affiliates which will
have acquired such Mortgage Assets from time to time either in the open market
or in privately negotiated transactions.
PLAN OF DISTRIBUTION
Each Series of Certificates offered hereby and by means of the related
Prospectus Supplements may be sold directly by the Depositor or may be offered
through Donaldson, Lufkin & Jenrette Securities Corporation, an affiliate of the
Depositor, or through underwriting syndicates represented by Donaldson, Lufkin &
Jenrette Securities Corporation (the "Underwriters"). The Prospectus Supplement
with respect to each such Series of Certificates will set forth the terms of the
offering of such Series of Certificates and each Class within such Series,
including the name or names of the Underwriters, the proceeds to the Depositor,
and including either the initial public offering price, the discounts and
commissions to the Underwriters and any discounts or commissions allowed or
reallowed to certain dealers, or the method by which the prices at which the
Underwriters will sell the Certificates will be determined.
Unless otherwise specified in the Prospectus Supplement, the Underwriters
will be obligated to purchase all of the Certificates of a Series described in
the Prospectus Supplement with respect to such Series if any such Certificates
are purchased. The Certificates may be acquired by the Underwriters for their
own account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale.
If so indicated in the Prospectus Supplement, the Depositor will
authorize Underwriters or other persons acting as the Depositor's agents to
solicit offers by certain institutions to purchase the Certificates from the
Depositor pursuant to contracts providing for payment and delivery on a future
date. Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by the Depositor. The obligation of any purchaser
under any such contract will be subject to the condition that the purchase of
the offered Certificates shall not at the time of delivery be prohibited under
the laws of the jurisdiction to which such purchaser is subject. The
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Underwriters and such other agents will not have any responsibility in respect
of the validity or performance of such contracts.
The Depositor may also sell the Certificates offered hereby and by means
of the related Prospectus Supplements from time to time in negotiated
transactions or otherwise, at prices determined at the time of sale. The
Depositor may effect such transactions by selling Certificates to or through
dealers and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Depositor and any purchasers of
Certificates for whom they may act as agents.
The place and time for delivery of each Series of Certificates offered
hereby and by means of the related Prospectus Supplement will be set forth in
the Prospectus Supplement with respect to such Series.
GLOSSARY
The following are abbreviated definitions of certain capitalized terms
used in this Prospectus. Unless otherwise provided in a "Supplemental Glossary"
in the Prospectus Supplement for a Series, such definitions will apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the Pooling and Servicing Agreement and the Pooling and Servicing
Agreement generally provides a more complete definition of certain of the terms.
Reference should be made to the Pooling and Servicing Agreement for a more
complete definition of such terms.
"Accrual Date" means, with respect to any Multiple Class Series, the date
upon which interest begins accruing on the Certificates of the Series, as
specified in such Certificates and the related Prospectus Supplement.
"Accrual Distribution Amount" means, with respect to any Distribution
Date for a Multiple Class Series that occurs prior to or on the Accrual
Termination Date, the aggregate amount of interest which has accrued on the
Compound Interest Certificates of such Series during the Interest Accrual Period
ending on or prior to such Distribution Date but which is not then required to
be paid.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Certificates, the Distribution Date on which all Certificates of the
related Series with Stated Maturities earlier than that of such Class of
Compound Interest Certificates have been fully paid, or such other date or
period as may be specified in the related Prospectus Supplement.
"Advance" means a cash advance by the Master Servicer or a Servicer in
respect of delinquent payments of principal of and interest on a Loan, and for
the other purposes specified herein and in the related Prospectus Supplement.
"Agency Securities" means mortgage pass-through securities issued or
guaranteed by GNMA, FNMA, FHLMC or other government agencies or
government-sponsored agencies.
"Appraised Value" means, with respect to a property securing a Loan, the
lesser of the appraised value determined in an appraisal obtained at origination
of the Loan or the sales price of such mortgaged property.
"ARM" or "Adjustable Rate Mortgage" means a Mortgage Loan as to which the
related Mortgage Note provides for periodic adjustments in the interest rate
component of the Scheduled Payment pursuant to an Index as described in the
related Prospectus Supplement.
133
"Asset Group" means a group of individual Mortgage Assets which share
similar characteristics and are aggregated into one group for purposes of
assigning a single aggregate Asset Value.
"Asset Value" means, unless otherwise specified in the related Prospectus
Supplement for a Series, with respect to Mortgage Assets comprising the Trust
Fund for a Multiple Class Series, an amount equal to, as of the date of such
determination, the lesser of (a) the present value of the stream of remaining
regularly Scheduled Payments of principal and interest on the Mortgage Assets
(less any Retained Interest) through the earlier of (1) the Final Scheduled
Distribution Date of the Class of such Series having the latest Final Scheduled
Distribution Date or (2) the Distribution Date next succeeding the latest
maturity date of such Mortgage Assets (after taking into account applicable
withdrawals from any funds or accounts and charges for servicing, insurance and
related matters, as specified in the related Prospectus Supplement), together
with Reinvestment Income thereon at the Assumed Reinvestment Rate for such
Series, from the Assumed Deposit Date to the next succeeding Distribution Date,
discounted from such Distribution Date to the date for which such determination
is made with the same frequency as payments are made on the Certificates of such
Series at the weighted average Certificate Rate for such Series; provided that
if any Class pays more frequently than another Class, such determination shall
be made as provided in the related Series Supplement and (b) the maximum Asset
Value specified in the related Prospectus Supplement.
"Assumed Deposit Date" means the date specified therefor in the
Prospectus Supplement for a Series, upon which distributions on the Mortgage
Assets are assumed to be received for purposes of calculating Reinvestment
Income thereon.
"Assumed Reinvestment Rate" means, with respect to a Series, the per
annum rate or rates specified in the related Prospectus Supplement for a
particular period or periods as the "Assumed Reinvestment Rate" for funds held
in any fund or account for the Series.
"Available Distribution Amount" means the amount in the Certificate
Account (including amounts deposited therein from any reserve fund or other fund
or account) eligible for distribution to Certificateholders on a Distribution
Date.
"Bankruptcy Code" means the federal bankruptcy code, 11 United States
Code 101 et seq., and regulations promulgated thereunder.
"Bi-Weekly Loan" means a Mortgage Loan which provides for payments of
principal and interest by the borrower once every two weeks.
"Business Day" means a day that, in the City of New York or in the city
or cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulation or executive order to be closed.
"Buy-Down Fund" means a custodial account, established by the Master
Servicer or the Servicer for a Buy-Down Loan, that meets the requirements set
forth herein.
"Buy-Down Loan" means a level payment Mortgage Loan for which funds have
been provided by a Person other than the mortgagor to reduce the mortgagor's
Scheduled Payment during the early years of such Mortgage Loan.
134
"Certificate Account" means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Master Servicer in respect of the Mortgage Assets in a Trust Fund.
"Certificate Guarantee Insurance" means an insurance policy issued by one
or more insurance companies which will guarantee timely distributions of
interest and full distributions of principal of a Series on the basis of a
schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement for the Series.
"Certificateholder" or "Holder" means the Person in whose name a
Certificate is registered in the Certificate register.
"Certificate Rate" means, with respect to any Multiple Class Series, the
per annum rate at which interest accrues on the principal balance of the
Certificates of such Series or a Class of such Series, which rate may be fixed
or variable, as specified in the related Prospectus Supplement.
"Certificates" means the Mortgage Pass-Through Certificates.
"Class" means a Class of Certificates of a Series.
"Closing Date" means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Certificates of such Series
are first issued.
"Code" means the Internal Revenue Code of 1986, as amended, and
regulations promulgated thereunder.
"Collection Account" means, with respect to a Series, the account
established in the name of the Master Servicer for the deposit by the Master
Servicer of payments received from the Mortgage Assets in a Trust Fund (or from
the Servicers, if any).
"Compound Interest Certificate" means any Certificate of a Multiple Class
Series on which interest accrues and is added to the principal balance of such
Certificate periodically, but with respect to which no interest or principal
will be payable except during the period or periods specified in the related
Prospectus Supplement.
"Compound Value" means, with respect to a Class of Compound Interest
Certificates, as of any Determination Date, the original principal balance of
such Class, plus all accrued and unpaid interest, if any, previously added to
the principal balance thereof and reduced by any payments of principal
previously made on such Class of Compound Interest Certificates.
"Condominium" means a form of ownership of real property wherein each
owner is entitled to the exclusive ownership and possession of his or her
individual Condominium Unit and also owns a proportionate undivided interest in
all parts of the Condominium Building (other than the individual Condominium
Units) and all areas or facilities, if any, for the common use of the
Condominium Units.
"Condominium Association" means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
"Condominium Building" means a multi-unit building or buildings, or a
group of buildings whether or not attached to each other, located on property
subject to Condominium ownership.
135
"Condominium Loan" means a Loan secured by a Mortgage on a Condominium
Unit (together with its appurtenant interest in the common elements).
"Condominium Unit" means an individual housing unit in a Condominium
Building.
"Conventional Loan" means a Loan that is not insured or guaranteed by the
FHA or the VA.
"Cooperative" means a corporation owned by tenant-stockholders who,
through the ownership of stock, shares or membership certificates in the
corporation, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific units.
"Cooperative Dwelling" means an individual housing unit in a building
owned by a cooperative.
"Cooperative Loan" means a housing loan made with respect to a
Cooperative Dwelling and secured by an assignment by the borrower
(tenant-stockholder) of a security interest in shares issued by the applicable
Cooperative.
"Cut-Off Date" means the date designated in the Pooling and Servicing
Agreement for a Series on or before which amounts due and payable with respect
to a Mortgage Asset will not inure to the benefit of Certificateholders of the
Series.
"Deferred Interest" means excess interest resulting when the amount of
interest paid by a Mortgagor on a Negatively Amortizing ARM in any month is less
than the amount of interest accrued on the Stated Principal Balance thereof.
"Deficiency Event" means, with respect to a Multiple Class Series, the
inability of the Trustee to distribute to Holders of one or more Classes of
Certificates of the Series (other than any Class of Subordinate Certificates
prior to the time that the Available Subordination Amount is reduced to zero),
in accordance with the terms thereof and the related Pooling and Servicing
Agreement, any distribution of principal or interest thereon when and as
distributable due to insufficient funds for such purpose then held in the
related Trust Fund.
"Deleted Mortgage Loan" means a Mortgage Loan which is repurchased from
the Trust Fund by the Depositor or as to which a Qualifying Substitute Loan is
substituted therefor.
"Depositor" means DLJ Mortgage Acceptance Corp.
"Determination Date" means the day specified in the related Prospectus
Supplement as the day on which the Master Servicer calculates the amounts to be
distributed to Certificateholders on the next succeeding Distribution Date.
"Distribution Date" means, with respect to a Series or Class, each date
specified as a distribution date for such Series or Class in the related
Prospectus Supplement.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable to the Trustee or its nominee on any Mortgage Asset.
"Eligible Investments" means any one or more of the obligations or
securities described as such at "THE POOLING AND SERVICING
AGREEMENTS--Investment of Funds."
136
"Eligible Reserve Fund Investments" means Eligible Investments and any
other obligations or securities described as Eligible Reserve Fund Investments
in the Applicable Pooling and Servicing Agreement, as described in the related
Prospectus Supplement for a Series.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means an account, established and maintained by the
Master Servicer or the Servicer for a Loan, into which payments by borrowers to
pay taxes, assessments, mortgage and hazard insurance premium and other
comparable items that are required to be paid to the mortgagee are deposited.
"Excess Cash Flow" means, with respect to a Multiple Class Series, the
amount, if any, by which (a) the cash flow received from the Mortgage Assets in
the related Trust Fund and deposited in the related Certificate Account
(excluding any Retained Interest but including transfers from any applicable
Reserve Fund), net of applicable servicing fees, guarantee fees, insurance
premiums and other administrative expenses, on the relevant determination date
exceeds (b) the sum of (1) the Minimum Principal Distribution Amount for such
Series on such Distribution Date and (2) the Accrual Distribution Amount, if
any, on such Distribution Date.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHA" means the Federal Housing Administration, a division of HUD.
"FHA Loan" means a fixed-rate housing loan insured by the FHA.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"Final Scheduled Distribution Date" means, with respect to a Class of a
Series, the date after which no Certificates of such Class will remain
outstanding assuming timely payments or distributions are made on the Mortgage
Assets in the related Trust Fund.
"Floating Interest Certificate" means any Certificate of a Multiple Class
Series which accrues interest at a Floating Rate.
"Floating Interest Distribution Date" means the Distribution Date for a
Class of Floating Interest Certificates, which may be either more or less
frequent than the Distribution Date for other Classes of the Series.
"Floating Interest Period" means the period of time during which a given
Certificate Rate applies to a Class of Floating Interest Certificates.
"Floating Rate" means a Certificate Rate which is subject to change from
time to time.
"FNMA" means the Federal National Mortgage Association.
"GEM Loan" means, unless specified otherwise in the related Prospectus
Supplement for a Series, a fixed rate, fully amortizing mortgage loan providing
for monthly payments based on a 10- to 30-year amortization schedule, with
further provisions for scheduled annual payment increases for a number of years
with the full amount of such increases being applied to principal, and with
further provision for level payments thereafter.
137
"GNMA" means the Government National Mortgage Association.
"GPM Certificate" means a Certificate backed by GPM Loans.
"GPM Fund" means a trust account established by the Master Servicer or
the Servicer of a GPM Loan into which funds sufficient to cover the amount by
which payments of principal and interest on such GPM Loan assumed in calculating
payments due on the Certificates of the related Multiple Class Series exceed
scheduled payments on such GPM Loan.
"GPM Loan" means a mortgage loan providing for graduated payments, having
an amortization schedule (a) requiring the mortgagor's monthly installments of
principal and interest to increase at a predetermined rate annually for a
predetermined period of time after which the monthly installments became fixed
for the remainder of the mortgage term, (b) providing for deferred payment of a
portion of the interest due monthly during such period of time and (c) providing
for recoupment of the interest deferred through negative amortization whereby
the difference between the scheduled payment of interest on the mortgage note
and the amount of interest actually accrued is added monthly to the outstanding
principal balance of the mortgage note.
"Guaranteed Investment Contract" means a guaranteed investment contract
or reinvestment agreement providing for the investment of funds held in a fund
or account, guaranteeing a minimum or a fixed rate of return on the investment
of moneys deposited therein.
"HUD" means the United States Department of Housing and Urban
Development.
"Index" means the index applicable to any adjustments in the Mortgage
Rates of any ARMs included in the Mortgage Assets.
"Insurance Policies" means certain mortgage insurance, hazard insurance
and other insurance policies required to be maintained with respect to Loans.
"Insurance Proceeds" means amounts paid by the insurer under any of the
Insurance Policies covering any Loan or Mortgaged Property.
"Interest Accrual Period" means the period specified in the related
Prospectus Supplement for a Multiple Class Series, during which interest accrues
on the Certificates or a Class of Certificates of such Series with respect to
any Distribution Date or Special Distribution Date.
"Interest Weighted Certificates" means a Class of Certificates entitled
to a greater percentage of interest on the Loans underlying or comprising the
Mortgage Assets for the Series than the percentage of principal, if any, on such
Loans to which it is entitled.
"IRS" means the Internal Revenue Service.
"L/C Bank" means the issuer of a letter of credit.
"L/C Percentage" means the maximum liability of an L/C Bank under a
letter of credit, equal to the percentage specified in the related Prospectus
Supplement for a Series for which a letter of credit is issued of the initial
aggregate principal balance of the Loans in the related Trust Fund or one or
more Classes of Certificates of the Series.
138
"Letter of Credit" means an irrevocable letter of credit issued by the
L/C Bank to provide limited protection against certain losses relating to Loans,
as described in the related Prospectus Supplement for a Series.
"Lifetime Mortgage Rate Cap" means the maximum permissible Mortgage Rate
during the life of each ARM.
"Liquidation Proceeds" means amounts received by the Master Servicer or
Servicer in connection with the liquidation of a mortgage, net of liquidation
expenses.
"Loan" means a Mortgage Loan (including an interest therein) or a
Manufactured Home Loan (including an interest therein) that is deposited by the
Depositor into the Trust Fund for a Series.
"Loan-to-Value Ratio" means the ratio, expressed as a percentage, of the
principal amount of a Loan at the date of determination to the Appraised Value.
"Manufactured Home" means a manufactured home within the meaning of 42
United States Code, Section 5402(6), which defines a "manufactured home" as "a
structure, transportable in one or more sections, which in the traveling mode,
is eight body feet or more in width or forty body feet or more in length, or,
when erected on site, is three hundred twenty or more square feet, and which is
built on a permanent chassis and designed to be used as a dwelling with or
without a permanent foundation when connected to the required utilities, and
includes the plumbing, heating, air-conditioning, and electrical systems
contained therein; except that such term shall include any structure which meets
all the requirements of [this] paragraph except the size requirements and with
respect to which the manufacturer voluntarily files a certification required by
the Secretary of Housing and Urban Development and complies with the standards
established under [this] chapter."
"Manufactured Home Loan" means a loan secured by a Manufactured Home.
"Master Servicer" means, with respect to a Series secured by Loans, the
Person, if any, designated in the related Prospectus Supplement to manage and
supervise the administration and servicing by the Servicers of the Loans
comprising or underlying the Mortgage Assets for that Series, or the successors
or assigns of such Person.
"Maximum Floating Rate" means, as to any Multiple Class Series, the per
annum interest rate cap specified for any Floating Rate Certificates of such
Series in the related Prospectus Supplement.
"Minimum Floating Rate" means, as to any Multiple Class Series, the per
annum interest rate floor specified for any Floating Rate Certificate of such
Series in the related Prospectus Supplement.
"Minimum Principal Distribution Amount" means, with respect to a
Distribution Date for a Multi-Class Series, the amount, if any, by which (a) the
outstanding principal balance of the Certificates of such Series (before giving
effect to any payment of principal on that Distribution Date) exceeds (b) the
aggregate Asset Value of the Mortgage Assets for the Series as of that
Distribution Date.
"Minimum Mortgage Rate" means the lifetime minimum Mortgage Rate during
the life of each ARM.
"Mortgage" means the mortgage, deed of trust or other instrument securing
a Mortgage Note.
139
"Mortgage Assets" means the Private Mortgage-Backed Securities, Agency
Securities or Loans, as the case may be, which are included in the Trust Fund
for such Series. A Mortgage Asset refers to a specific Private Mortgage-Backed
Security, Agency Security or Loan, as the case may be.
"Mortgage Loan" means a mortgage loan (including an interest therein)
secured by Mortgaged Property including Cooperative Loans and Condominium Loans.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Mortgage Loan.
"Mortgage Rate" means, unless otherwise indicated herein or in the
Prospectus Supplement, the interest rate borne by each Loan.
"Mortgaged Property" means the real property securing a Mortgage.
"Multifamily Property" means any property securing a Loan consisting of
multifamily residential rental property or cooperatively owned multifamily
property consisting of five or more dwelling units.
"Multiple Class Series" means a Series of Certificates that may include
Floating Interest Certificates, Compound Interest Certificates and Planned
Amortization Certificates, and/or Subordinate and Senior Classes embodying a
subordination feature which protects the Senior Class or Classes in the event of
failure of timely payment of Mortgage Assets.
"1986 Act" means the Tax Reform Act of 1986.
"Negatively Amortizing ARMs" means ARMs which provide for limitations on
changes in the Scheduled Payment which can result in Scheduled Payments which
are greater or less than the amount necessary to amortize such ARM by its stated
maturity at the Mortgage Rate in effect in any particular month.
"Participation Certificate" means a certificate evidencing a
participation interest in a pool of Loans.
"Pass-Through Rate" means the rate of interest paid to the
Certificateholders in respect of the Mortgage Assets.
"Percentage Interest" means, with respect to a Certificate, the
proportion (expressed as a percentage) of the percentage amounts of all of the
Certificates in the related Class represented by such Certificate, as specified
in the related Prospectus Supplement.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
"PMBS Agreement" means the pooling and servicing agreement, indenture,
trust agreement or similar agreement pursuant to which a Private
Mortgaged-Backed Security is issued.
"PMBS Issuer" means, with respect to Private Mortgage-Backed Securities,
the depositor or seller/servicer under a PMBS Agreement.
140
"PMBS Servicer" means the servicer of the housing loans underlying a
Private Mortgage-Backed Security.
"PMBS Trustee" means the trustee designated under a PMBS Agreement.
"Pooling and Servicing Agreement" means the agreement relating to a
Series among the Depositor, the Master Servicer and the Trustee.
"Prepayment Period" means with respect to any Distribution Date, the
period specified in the related Prospectus Supplement for a Series.
"Principal Distribution Amount" means, unless specified otherwise in the
Prospectus Supplement for a Multiple Class Series, the sum of (a) the Accrual
Distribution Amount, if any, (b) the Minimum Principal Distribution Amount and
(c) the percentage, if any, of Excess Cash Flow specified in the related
Prospectus Supplement.
"Principal Weighted Certificates" means a Class of Certificates entitled
to a greater percentage of principal on the Loans underlying or comprising the
Mortgage Assets in the Trust Fund for the related Series than the percentage of
interest to which it is entitled.
"Private Mortgage-Backed Security" means a mortgage participation or
pass-through certificate representing a fractional, undivided interest in (i)
Loans, (ii) collateralized mortgage obligations secured by Loans or (iii) Agency
Securities.
"Proceeding" means any suit in equity, action at law or other judicial or
administrative proceeding.
"Proposed Regulations" means the proposed Treasury regulations issued
under Section 1271-1273 and 1275 of the Code.
"Qualified Insurer" means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged Properties
are located, duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
"Rating Agency" means a nationally recognized statistical rating
organization.
"RV Certificate" or "Reduced Volatility Certificates" means a Class of
Certificates on which minimum payments of principal are made in accordance with
a schedule specified in the Prospectus Supplement, the date specified in the
related Prospectus Supplement or the date on which the principal of all
Certificates of the Series having an earlier Final Scheduled Distribution Date
have been paid in full.
"Regular Interest" means a regular interest in a REMIC as described
herein under "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS--Tax Status as a
REMIC."
"Reinvestment Income" means any interest or other earnings on funds or
accounts that are part of the Trust Fund for a Series.
"REMIC" means a real estate mortgage investment conduit under Section
860D of the Code.
141
"REMIC Administrator" means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
"Remittance Date" means the calendar day or days of each month, as
specified in the related Prospectus Supplement for a Series, on which the
Servicer is required to withdraw funds from the related Servicer Account for
remittance to the Master Servicer.
"REO Property" means real property which secured a defaulted Loan which
has been acquired upon foreclosure, deed in lieu of foreclosure or repossession.
"Reserve Fund" means, with respect to a Series, any Reserve Fund
established pursuant to the Pooling and Servicing Agreement.
"Residual Interest" means a residual interest in a REMIC as described
herein under "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS--Tax Status as a
REMIC."
"Retained Interest" means, with respect to a Mortgage Asset, the amount
or percentage specified in the related Prospectus Supplement which is not sold
by the Depositor or seller of the Mortgage Asset and, therefore, is not included
in the Trust Fund for the related Series.
"Scheduled Payments" means the scheduled payments of principal and
interest to be made by the borrower on a Mortgage Loan in accordance with the
terms of the related Mortgage Note.
"Senior Certificateholder" means the Holder of a Senior Certificate.
"Senior Certificates" means a Class of Certificates as to which the
Holders' rights to receive distributions of principal and interest are senior to
the rights of Holders of Subordinate Certificates, to the extent specified in
the related Prospectus Supplement.
"Servicer" means the entity which has primary liability for servicing
Loans if other than the Master Servicer.
"Servicer Account" means an account established by a Servicer (other than
the Master Servicer) who is directly servicing Loans, into which such Servicer
will be required to deposit all receipts received by it with respect to the
Mortgage Assets serviced by such Servicer.
"Single Family Property" means property securing a Loan consisting of
one- to four-family attached or detached residential housing, including
Cooperative Dwellings.
"Special Distribution" means, with respect to a Multiple Class Series, a
distribution (other than a regular distribution on a Distribution Date) made on
account of particular circumstances specified herein.
"Special Distribution Date" means, with respect to Multiple Class Series,
the date each month (other than any month in which a Distribution Date occurs)
on which Special Distributions may be made on Certificates of that Series
pursuant to the related Pooling and Servicing Agreement; such date shall be the
same day of the month as the day on which Distribution Dates for the
Certificates of that Series occur.
"Subordinate Certificateholder" means a Holder of a Subordinate
Certificate.
142
"Subordinate Certificates" means a Class of Certificates as to which the
rights of Holders to receive distributions of principal and interest are
subordinated to the rights of Holders of Senior Certificates, to the extent and
under the circumstances specified in the related Prospectus Supplement.
"Subordinated Amount" means the amount, if any, specified in the related
Prospectus Supplement for a Series with a Class of Subordinated Certificates,
that the Subordinate Certificates are subordinated to the Senior Certificates of
the same Series.
"Subordination Reserve Fund" means the subordination reserve fund, if
any, for a Series with a Class of Subordinate Certificates, established pursuant
to the related Pooling and Servicing Agreement.
"Subsidy Account" means a custodial account established by the Master
Servicer or the Servicer for a Loan into which subsidy funds contributed by the
seller of the property securing the Loan (or by another party) necessary to
maintain the scheduled level of payments due on the Loan are deposited.
"Trustee" means the trustee under a Pooling and Servicing Agreement, and
its successors.
"Trust Fund" means all property and assets held for the benefit of the
Certificateholders by the Trustee under the Pooling and Servicing Agreement for
a Series of Certificates including, without limitation, the Mortgage Assets
(except any Retained Interest), all amounts in the Certificate Account,
Collection Account or Servicer Accounts, distributions on the Mortgage Assets
(net of servicing fees), and reinvestment earnings on such net distributions and
amounts deposited in any reserve fund and the proceeds of any insurance policies
required to be maintained with respect to the Loans.
"UCC" means the Uniform Commercial Code.
"VA" means the Department of Veterans Affairs.
"VA Loans" means housing loans partially guaranteed by the VA.
143
DLJ MORTGAGE ACCEPTANCE CORP.
DEPOSITOR
$34,853,754
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 1996-Q4
$ 0 CLASS SA CERTIFICATES, VARIABLE RATE*
$13,000,000 CLASS A-1 CERTIFICATES, 7.25%
$14,000,000 CLASS A-2 CERTIFICATES, 7.25%
$ 3,493,138 CLASS A-3 CERTIFICATES, 7.25%
$ 2,790,794 CLASS B-1 CERTIFICATES, 7.25%
$ 697,699 CLASS B-2 CERTIFICATES, 7.25%
$872,123.62 CLASS B-3 CERTIFICATES, 7.25%
*Based on the Notional Amount as described herein.
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PROSPECTUS SUPPLEMENT
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DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MARCH 4, 1996
