Registration No. __________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
DLJ MORTGAGE ACCEPTANCE CORP.
(Exact name of Registrant as specified in its Charter)
Delaware
(State of Incorporation)
13-3460894
(I.R.S. Employer Identification Number)
277 Park Avenue
New York, New York 10172
212-892-3000
(Address and telephone number of Registrant's principal executive offices)
Marjorie S. White
DLJ Mortgage Acceptance Corp.
277 Park Avenue
New York, New York 10172
212-892-3000
(Name, address and telephone number of agent for service)
----------------
Copies to:
Stephen S. Kudenholdt, Esq. Reed Auerbach, Esq. Michael P. Braun, Esq.
Thacher Proffitt & Wood Stroock & Stroock & Lavan Brown & Wood LLP
Two World Trade Center 180 Maiden Lane One World Trade Center
New York, New York 10048 New York, New York 10038 New York, New York 10048
================================================================================
Approximate date of commencement of proposed sale to the public: From
time to time on or after the effective date of this Registration Statement, as
determined by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.|_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
==========================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
AMOUNT PRICE OFFERING REGISTRATION
TITLE OF SECURITIES BEING REGISTERED TO BE REGISTERED(1) PER UNIT (2) PRICE (2) FEE(1)
------------------------------------ ------------------- ------------ --------- ------
Mortgage Pass-Through Certificates and
Mortgage-Backed Notes, issued in series $1,500,000,000 100% $1,500,000,000 $442,500
========================================= ====================== ================= ==================== ===============
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
(1)$2,105,405,966.33 aggregate principal amount of Mortgage Pass-Through
Certificates and Mortgage-Backed Notes registered by the Registrant under
Registration Statement No. 333-1241 and Registration Statement No. 333-51537
referred to below and not previously sold are proposed to be consolidated in
this Registration Statement concurrently with the effectiveness hereof pursuant
to Rule 429. All registration fees in connection with such unsold amount of
Mortgage Pass-Through Certificates and Mortgage-Backed Notes have been
previously paid by the Registrant under the foregoing Registration Statement.
Accordingly, the total amount proposed to be registered under the Registration
Statement as so consolidated as of the date of this filing is $3,605,405,966.33.
(2) Estimated solely for the purposes of calculating the registration fee on the
basis of the proposed maximum aggregate offering price.
--------------------------
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 of the Securities Act of 1933, the Prospectus and
Prospectus Supplements contained in this Registration Statement also relate to
the Registrant's Registration Statements on Form S-3 (Registration Statement No.
333-51537, Registration Statement No. 333-1241 and Registration Statement No.
333-39325). This Registration Statement, which is a new registration statement,
also constitutes a post-effective amendment to Registration Statements
333-51537, No. 333-1241 and No. 333-39325. Such post-effective amendments shall
hereafter become effective concurrently with the effectiveness of this
Registration Statement in accordance with Section 8(a) of the Securities Act of
1933.
================================================================================
<PAGE>
EXPLANATORY NOTE
This Registration Statement includes (i) a basic prospectus, (ii) an
illustrative form of prospectus supplement for use in an offering of Mortgage
Pass-Through Certificates consisting of senior and subordinate certificate
classes and (iii) an illustrative form of prospectus supplement for use in an
offering of Mortgage-Backed Notes.
CONTENTS OF REGISTRATION STATEMENT
PAGE
Forms of Prospectus Supplement:
Version 1: Form of Prospectus Supplement relating to
a typical Senior/Subordinate Series......................... S-1
Version 2: Form of Prospectus Supplement relating to
an offering of Mortgage-Backed Notes........................ S-1
Basic Prospectus ................................................... 1
<PAGE>
Subject to Completion Dated July 21, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
[Version 1]
PROSPECTUS SUPPLEMENT
(To Prospectus dated ______________ __, 199_)
$-------------------
DLJ MORTGAGE ACCEPTANCE CORP.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 199_-_
$__________ Class A Certificates Adjustable Rate
The Series 199_-_ Mortgage Pass-Through Certificates (the
"Certificates") will consist of the following five classes: (i) Class A
Certificates; (ii) Class B-1 Certificates, Class B-2 Certificates and Class B-3
Certificates (collectively, the "Subordinate Certificates") and (iii) Class R
Certificates. Only the Class A Certificates are offered hereby.
The Class A Certificates will initially evidence in the aggregate
approximately _____% of the entire beneficial ownership interest in a trust fund
(the "Trust Fund") consisting primarily of a pool of certain conventional,
adjustable rate, one- to four-family, first lien mortgage loans, with terms to
maturity of not more than 30 years (the "Mortgage Loans") to be deposited by DLJ
Mortgage Acceptance Corp. (the "Depositor") into the Trust Fund for the benefit
of the respective Certificateholders. The Mortgage Loans underlying the
Certificates were originated or acquired by ___________________________________
(the "Seller"). All of the Mortgage Loans will be serviced by the Seller in its
capacity as master servicer (the "Master Servicer"). The interest rate (the
"Mortgage Rate") on each Mortgage Loan will be adjusted monthly based on the sum
of the Index (as defined herein) and the related Gross Margin (as defined
herein), subject to certain lifetime rate limitations described herein. The
Index will be based on the monthly weighted average cost of funds of member
institutions of the Eleventh District of the Federal Home Loan Bank System as
described herein. Certain characteristics of the Mortgage Loans are described
herein under "Description of the Mortgage Pool."
_________________________________ (continued on next page)
THE CLASS A 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 Class A 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 $_____________ plus accrued interest, before deducting expenses
payable by the Depositor.
The Class A 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 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.
<PAGE>
[NAME OF UNDERWRITER]
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS __________________.
<PAGE>
(Continued from previous page)
It is a condition of the issuance of the Certificates that the Class A
Certificates be rated "Aaa" by _________ ("______") and "AAA" by _______________
("_________________").
Distributions on the 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 _____________ _____ (each, a "Distribution Date").
As more fully described herein, interest distributions on the Class A
Certificates will be based on the Certificate Principal Balance thereof and the
then-applicable Pass-Through Rate thereof, which will be adjustable. The
Pass-Through Rate on the Class A Certificates will be equal to the weighted
average as determined as of the Due Date (as defined herein) in the month
immediately preceding the month in which such Distribution Date occurs, of the
Net Mortgage Rates of the Mortgage Loans as described herein, which will be
approximately _____% per annum with respect to the first Distribution Date.
THE YIELD TO MATURITY ON THE CLASS A CERTIFICATES WILL DEPEND, AMONG
OTHER THINGS, ON THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS, REPURCHASES, DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE LOANS,
WHICH MAY VARY SIGNIFICANTLY OVER TIME. THE MORTGAGE LOANS GENERALLY MAY BE
PREPAID IN FULL OR IN PART AT ANY TIME. THE YIELD TO INVESTORS ON THE CLASS A
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. NO
ASSURANCE CAN BE GIVEN AS TO THE RATE AND TIMING OF PRINCIPAL PREPAYMENTS
(INCLUDING PREPAYMENTS, REPURCHASES, DEFAULTS AND LIQUIDATIONS) ON ANY OF THE
MORTGAGE LOANS. SEE "SUMMARY OF PROSPECTUS SUPPLEMENT-SPECIAL PREPAYMENT
CONSIDERATIONS," AND "-SPECIAL YIELD CONSIDERATIONS" AND "CERTAIN YIELD AND
PREPAYMENT CONSIDERATIONS" HEREIN AND "SPECIAL CONSIDERATIONS" AND "YIELD,
PREPAYMENT AND MATURITY CONSIDERATIONS" IN THE PROSPECTUS.
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. The Class A Certificates will constitute a "regular
interest" in the REMIC. See "Certain Federal Income Tax Consequences" herein and
in the Prospectus.
There is currently no secondary market for the Class A Certificates.
________________ (the "Underwriter") intends to make a secondary market in the
Class A Certificates but has no obligation to do so. There can be no assurance
that a secondary market for the Class A Certificates will develop or, if it does
develop, that it will continue. The Class A 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", "The Seller"
and "The Pooling and Servicing Agreement-The Master Servicer" has been provided
by the Seller. No representation is made by the Depositor, the Underwriter or
any of their respective affiliates as to the accuracy or completeness of the
information provided by the Seller.
_________________________________
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 Class A 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 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 Class A 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 CLASS A 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 _________________ 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 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS 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.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
Summary of Prospectus Supplement............................................ S-
Description of the Mortgage Pool............................................ S-
The Seller.................................................................. S-
Additional Information...................................................... S-
Description of the Certificates............................................. S-
Certain Yield and Prepayment Considerations................................. S-
Pooling and Servicing Agreement............................................. S-
Certain Federal Income Tax Consequences..................................... S-
Method of Distribution...................................................... S-
Use of Proceeds............................................................. S-
Legal Opinions.............................................................. S-
Ratings..................................................................... S-
Legal Investment............................................................ S-
Erisa Considerations........................................................ S-
PROSPECTUS
Prospectus Supplement........................................................
Additional Information.......................................................
Reports to Certificateholders................................................
Summary of Terms of the Certificates.........................................
Special Considerations.......................................................
Description of the Certificates..............................................
Yield, Prepayment and Maturity Considerations................................
The Trust Funds..............................................................
Loan Underwriting Procedures and Standards...................................
Servicing of Loans...........................................................
Credit Support...............................................................
Description of Mortgage and Other Insurance..................................
The Pooling and Servicing Agreements.........................................
Certain Legal Aspects of Loans...............................................
Certain Federal Income Tax Consequences......................................
State and Other Tax Consequences.............................................
ERISA Considerations.........................................................
Legal Investment.............................................................
Legal Matters................................................................
The Depositor................................................................
Use of Proceeds..............................................................
Plan of Distribution.........................................................
Glossary.....................................................................
<PAGE>
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
_______.
DEPOSITOR......................... DLJ Mortgage Acceptance Corp. (the
"Depositor"). See "The Depositor" in the
Prospectus.
TRUSTEE........................... _____________________ (the "Trustee"), a
__________________________________ located in
____________________. See "Pooling and
Servicing Agreement-The Trustee" herein.
SELLER............................ __________________________ (the "Seller").
See "Description of the Mortgage Pool-The
Seller" herein.
MASTER SERVICER................... _____________________________ in its capacity
as master servicer (the "Master Servicer").
See "Pooling and Servicing Agreement-The
Master Servicer" herein.
CUT-OFF DATE...................... __________________.
DELIVERY DATE..................... On or about __________________.
DENOMINATIONS..................... 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 in excess thereof.
REGISTRATION...................... The Class A Certificates will be represented
by one or more Certificates registered in the
name of Cede & Co., as nominee of the
Depository Trust Company ("DTC"). No person
acquiring a beneficial interest in a Class A
Certificate (each, a "Beneficial Owner") will
be entitled to receive a Class A Certificate
in certificated form, except under the
limited circumstances described herein. For
each Class A Certificate held by DTC, DTC
will effect payments to and transfers of the
Class A 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 Class
<PAGE>
A 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. 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
mortgage pool (the "Mortgage Pool") will
consist of a pool of conventional,
adjustable-rate, fully-amortizing mortgage
loans (the "Mortgage Loans") with an
aggregate outstanding principal balance as of
the Cut-off Date of $_________________. The
Mortgage Loans are secured by first liens on
fee simple or leasehold interests in one- to
four-family residential real properties
(each, a "Mortgaged Property") having
individual principal balances at origination
of at least $___________ but not more than
$______________ with an average principal
balance at origination of approximately
$_____________. The Mortgage Loans have terms
to maturity from the date of origination of
not more than 30 years, and a weighted
average remaining term to maturity of
approximately ___ months as of the Cut-off
Date.
The Mortgage Rate on each Mortgage Loan will
adjust monthly on the date (the "Rate
Adjustment Date") specified in the mortgage
note (the "Mortgage Note"), without any
corresponding adjustment in the amount of
monthly payments, to a per annum rate equal
to the sum (rounded, if applicable, to the
nearest multiple of 0.125%) of the Index
described below and a fixed percentage set
forth in the related Mortgage Note (the
"Gross Margin") subject to the maximum and,
in certain cases, minimum Mortgage Rates
described below. On each Rate Adjustment Date
the Index applicable to the determination of
the Mortgage Rate will be equal to the Index
as most recently published as of 15 days
prior to the Rate Adjustment Date. With
respect to each of the Mortgage Loans, the
Mortgage Rate may not exceed the related
maximum Mortgage Rate, which maximum Mortgage
Rates will range from _____% to _____%, or be
less than the related Gross Margin or, in
certain cases, the related minimum Mortgage
Rate, which minimum Mortgage Rates will range
from _____% to _____%. No Mortgage Loan
provides for a periodic rate cap on any Rate
Adjustment Date.
<PAGE>
The amount of the monthly payment of
principal and interest on each Mortgage Loan
will adjust annually on the date specified in
the Mortgage Note (the "Rate Adjustment
Date") to equal an amount which would
amortize fully the then outstanding principal
balance of the Mortgage Loan over its
remaining term and pay interest thereon at
the then applicable Mortgage Rate.
As of the Cut-off Date, the Mortgage Loans
will have current Mortgage Rates ranging from
_____% per annum to _____% per annum, a
weighted average current Mortgage Rate of
approximately _____% per annum and a weighted
average Gross Margin of approximately _____%.
Approximately ______% of the Mortgage Loans
(by aggregate outstanding principal balance
as of the Cutoff Date) will be refinance
mortgage loans. For a further description of
the Mortgage Loans, see "Description of the
Mortgage Pool" herein.
All of the Mortgage Loans were originated or
acquired pursuant to the Seller's lending
program, as described herein. See
"Description of the Mortgage Pool-The
Seller-Underwriting Standards" herein.
INDEX............................. As of any Rate Adjustment Date, the Index
applicable to the determination of the
Mortgage Rate on each Mortgage Loan will be
the monthly weighted average cost of funds
for depository institutions the home offices
of which are located in Arizona, California
or Nevada that are members of the Eleventh
District of the Federal Home Loan Bank System
as computed from statistics tabulated and
published by the Federal Home Loan Bank of
San Francisco as most recently available as
of the date 15 days prior to such Rate
Adjustment Date. See "Description of the
Mortgage Pool" herein.
THE CLASS A CERTIFICATES.......... The Class A Certificates will be issued
pursuant to a Pooling and Servicing
Agreement, to be dated as of __________ __,
199_, among the Depositor, the Master
Servicer and the Trustee (the "Pooling and
Servicing Agreement"). The Class A
Certificates in the aggregate evidence an
initial interest of approximately _____% in a
trust fund (the "Trust Fund") consisting
primarily of the Mortgage Pool. The Class A
Certificates have a Certificate Principal
Balance of $_______________ as of the Cut-off
Date.
<PAGE>
INTEREST DISTRIBUTIONS............ The Pass-Through Rate on the Class A
Certificates on each Distribution Date (as
defined herein) will equal the weighted
average, as determined as of the Due Date in
the month immediately preceding the month in
which such Distribution Date occurs, of the
related Net Mortgage Rate (as defined below)
on each of the Mortgage Loans. The
Pass-Through Rate on the Class A Certificates
will be approximately __________% per annum
with respect to the first Distribution Date.
The weighted average Net Margin of the
Mortgage Loans is _________%. The "Net
Mortgage Rate" on each of the Mortgage Loans
is equal to the Mortgage Rate thereon minus
_________% per annum (the "Expense Fee
Rate"). The Expense Fee Rate consists of a
component to compensate the Master Servicer
for performing its servicing responsibilities
and obligations under the Pooling and
Servicing Agreement (the "Master Servicing
Fee Rate") and a component to cover certain
expenses and the fees of the Trustee. The
Master Servicing Fee Rate on each Mortgage
Loan is equal to _____% per annum.
Holders of the Class A Certificates will be
entitled to receive interest distributions in
an amount equal to one month's interest
accrued on the Certificate Principal Balance
of the Class A Certificates at the related
Pass- Through Rate, in each case less any
related Prepayment Interest Shortfall (as
defined herein) and shortfalls caused by the
Relief Act (as defined herein) for such
Distribution Date to the extent not covered
by payments by the Master Servicer. 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 priority set forth
herein, to the extent of the portion of the
Available Distribution Amount remaining after
distributions in respect of interest on the
Class A Certificates, a distribution
allocable to principal that will include (i)
the Senior Percentage (as defined below) of
scheduled principal payments due on the
Mortgage Loans and of the principal portion
of any unscheduled collections (other than
Mortgagor prepayments and amounts received in
connection with a Final Disposition of a
Mortgage Loan described in clause (ii)
below), including repurchases of the Mortgage
Loans, (ii) in connection with the Final
Disposition of a Mortgage Loan an amount
equal to the lesser of (a) the Senior
Percentage of the Stated Principal Balance of
such Mortgage Loan and (b) the Senior
<PAGE>
Accelerated Distribution Percentage (as
defined herein) of the related collections,
including any Insurance Proceeds and
Liquidation Proceeds, to the extent applied
as recoveries of principal, and (iii) the
Senior Accelerated Distribution Percentage of
Mortgagor prepayments on the Mortgage Loans.
The Senior Percentage as of the time of any
determination will be equal to the aggregate
Certificate Principal Balance of the Class A
Certificates divided by the aggregate Stated
Principal Balance of all of the Mortgage
Loans. Initially, the Senior Accelerated
Distribution Percentage will equal 100%.
Thereafter, as described herein, during
certain periods, subject to certain loss,
delinquency and other criteria described
herein, the Senior Accelerated Distribution
Percentage may be 100% or otherwise
disproportionately large (relative to the
Senior Percentage). In no event will the
Senior Accelerated Distribution Percentage be
less than the Senior Percentage. See
"Description of the Certificates-Principal
Distributions on the Class A Certificates".
ALLOCATION OF LOSSES;
SUBORDINATION................... All Realized Losses will be allocated first
to the Subordinate Certificates until the
Certificate Principal Balances thereof have
been reduced to zero and second to the Class
A Certificates to the extent described
herein; however, Excess Special Hazard
Losses, Excess Fraud Losses, Excess
Bankruptcy Losses and Extraordinary Losses
(each, as defined herein) will be allocated
to all of the Certificates as described
herein. See "Description of the
Certificates-Allocation of Losses;
Subordination" herein.
ADVANCES.......................... The Master Servicer is required to make
advances ("Advances") in respect of
delinquent payments of principal and interest
on the Mortgage Loans (net of the Master
Servicing Fee Rate), together with an amount
equivalent to interest on each outstanding
REO Property, 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.
OPTIONAL TERMINATION.............. At its option, on any Distribution Date when
the aggregate principal balance of the
Mortgage Loans is less than ____% of the
aggregate principal balance of the Mortgage
<PAGE>
Loans as of the Cut-off Date, 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. See "Pooling and
Servicing Agreement-Termination" herein and
"The Pooling and Servicing
Agreements-Termination" in the Prospectus.
SPECIAL PREPAYMENT
CONSIDERATIONS.................. The rate and timing of principal payments, if
any, on the Class A Certificates will depend,
among other things, on the rate and timing of
principal payments (including prepayments,
repurchases, defaults and liquidations) on
the Mortgage Loans. See "Description of the
Certificates-Principal Distributions on the
Class A Certificates" and "Certain Yield and
Prepayment Considerations" herein and "Yield,
Prepayment and Maturity Considerations" in
the Prospectus.
SPECIAL YIELD CONSIDERATIONS.......The yield to maturity on the Class A
Certificates will depend, among other things,
on 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. The yield to
maturity on the Class A Certificates will
also depend on the Pass-Through Rate as it
adjusts from time to time and the purchase
price for the Class A Certificates. The yield
to investors on the Class A Certificates will
be adversely affected by any allocation
thereto of Prepayment Interest Shortfalls on
the Mortgage Loans to the extent not covered
by payments by the Master Servicer as
described herein.
In general, if the Class A Certificates are
purchased at a premium and principal
distributions thereon occur at a rate faster
than anticipated at the time of purchase, the
investor's actual yield to maturity will be
lower than that assumed at the time of
purchase. Conversely, if the Class A
Certificates are purchased at a discount and
principal distributions thereon occur at a
rate slower than that assumed at the time of
purchase, the investor's actual yield to
maturity will be lower than that assumed at
the time of purchase.
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 Class A
Certificates, Thacher Proffitt & Wood,
counsel to
<PAGE>
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 under Sections 860A through 860G of
the Internal Revenue Code of 1986 (the
"Code").
For federal income tax purposes, the Class R
Certificates will be the sole Class of
"residual interests" of the REMIC; the Class
A Certificates and the Subordinate
Certificates will constitute the "regular
interests" of the REMIC and will be treated
as debt instruments for federal income tax
purposes.
The Class A Certificates will be treated as
having been issued with original issue
discount for federal income tax reporting
purposes. 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 ____% CPR (as defined
herein). No representation is made that the
Mortgage Loans will prepay at that rate or at
any other rate.
[[Grantor trust disclosure:] Upon the
issuance of the offered 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 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.]
LEGAL INVESTMENT.................. The Class A Certificates will constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") for so long as they are in
one of the two highest rating categories by
at least one nationally recognized
statistical rating organization and, as such
will be legal investments for certain
entities to the extent provided 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
prior to October 3, 1991.
<PAGE>
The Depositor makes no representations as to
the proper characterization of the Class A
Certificates for legal investment or other
purposes, or as to the ability of particular
investors to purchase the Class A
Certificates under applicable legal
investment restrictions. These uncertainties
may adversely affect the liquidity of the
Class A 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 the
Class A Certificates constitute a legal
investment or are subject to investment,
capital or other restrictions. See "Legal
Investment" and "ERISA Considerations" herein
and in the Prospectus.
RATINGS........................... It is a condition to the issuance of the
Certificates that the Class A Certificates be
rated "Aaa" by ___________ ("_______") and
"AAA" by _________ ("__________"). 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. See "Certain
Yield and Prepayment Considerations" and
"Ratings" herein and "Yield, Prepayment and
Maturity Considerations" in the Prospectus.
<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
The information set forth in the following paragraphs has been provided
by the Seller. Neither the Depositor, the Underwriter, or 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 Mortgage Pool will consist of Mortgage Loans with an aggregate
outstanding principal balance as of the Cut-off Date of $______________. The
Mortgage Pool will consist of conventional, adjustable-rate, fully-amortizing,
first lien Mortgage Loans with original terms to maturity from the due date of
the first monthly payment of not more than 30 years. All percentages described
herein are approximate percentages (except as otherwise indicated) by aggregate
outstanding principal balance as of the Cut-off Date.
All of the Mortgage Loans to be included in the Mortgage Pool will have
been sold to the Depositor by _________________________________________ in its
capacity as a seller (the "Seller"), pursuant to a mortgage loan purchase
agreement between the Depositor and the Seller. The Mortgage Loans will have
been originated or acquired by the Seller, in accordance with the underwriting
criteria described herein. All of the Mortgage Loans have monthly payments due
on the first day of each month.
The Mortgage Rate on each Mortgage Loan will be subject to monthly
adjustment on the first day of the month specified in the related Mortgage Note
(each such date, a "Rate Adjustment Date") to a per annum rate equal to (i) the
monthly weighted average cost of funds for depository institutions the home
offices of which are located in Arizona, California or Nevada that are members
of the Eleventh District of the Federal Home Loan Bank System as computed from
statistics tabulated and published by the Federal Home Loan Bank of San
Francisco (the "Index"), as most recently available as of the date 15 days prior
to such Rate Adjustment Date, and (ii) a fixed percentage amount specified in
the related Mortgage Note (the "Gross Margin") ranging from _____% to ____%;
provided, however, that the Mortgage Rate will in no event be greater than the
maximum Mortgage Rate stated therein (the "Maximum Rate"), which Maximum Rates
will range from ____% to _____%, or, less than the related Gross Margin or, with
respect to certain of the Mortgage Loans, the minimum Mortgage Rate stated in
the Mortgage Note (the "Minimum Rate"), which Minimum Rates will range from
____% to ____%. No Mortgage Loan provides for a periodic rate cap on any Rate
Adjustment Date. Due to the application of the Maximum Rate, the Mortgage Rate
on any Mortgage Loan, as adjusted on any Rate Adjustment Date, may be less than
the sum of the Index and the related Gross Margin. See "-The Index" herein.
Each Mortgage Loan with a Loan-to-Value Ratio at origination in excess
of 80% is insured by a primary mortgage insurance policy. Each such insurance
policy provides coverage in an amount equal at least to the excess of the
original principal balance of the Mortgage Loan covered thereby, plus accrued
interest thereon and related foreclosure expenses over 75% of the value of the
related Mortgaged Property as determined at the time of origination of the
related Mortgage
<PAGE>
Loan. Any Mortgage Loan having a Loan-to-Value Ratio of less than or equal to
80% at origination is not so insured. There can be no assurance that the
Loan-to-Value Ratio of any Mortgage Loan determined at any time after
origination is less than or equal to its original Loan- to-Value Ratio.
All of the Mortgage Loans will be assumable. None of the Mortgage Loans
will be thirty or more days delinquent in payment as of the Closing Date, or
will have been thirty or more days delinquent more than once during the twelve
months preceding the Closing Date.
Each Mortgage Loan will have been originated or acquired by the Seller
on or before ----------- --, ----.
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. 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,
where applicable, as of the Cut-off Date:
Number of Mortgage Loans..............................
Initial Pass-Through Rate on the Class A
Certificates (1)....................................
Net Margin (2):
Weighted Average....................................
Mortgage Rates:
Weighted Average....................................
Range .............................................
Gross Margins:
Weighted Average....................................
Range .............................................
Maximum Mortgage Rates:
Weighted Average....................................
Range .............................................
Minimum Mortgage Rates:
Weighted Average....................................
Range .............................................
- ---------
(1) The Pass-Through Rate on the Class A Certificates is equal to the
weighted average of the related Net Mortgage Rate on each of the
Mortgage Loans. The Net Mortgage Rate for each Mortgage Loan is equal
to the Mortgage Rate (as adjusted pursuant to the terms of the related
Mortgage Note) minus the related Expense Fee Rate. The Expense Fee
Rate as further described herein is approximately _____% per annum.
(2) Solely for purposes of the above table, the Net Margin for each
Mortgage Loan is equal to (i) the Gross Margin applicable thereto,
minus (ii) the Expense Fee Rate.
The weighted average remaining term to maturity of the Mortgage Loans
will be approximately 29 years. All of the Mortgage Loans had original terms to
maturity of 30 years. None of the Mortgage Loans had a first payment date prior
to _______ __, 199_. The latest maturity date of any of the Mortgage Loans is
___________ __, ____.
<PAGE>
The Mortgage Loans will have had individual principal balances at
origination of at least $__________ but not more than $_____________.
Approximately ______% of the Mortgaged Properties will be located in
the State of ___________; approximately ____% of the Mortgaged Properties will
be located in the State of _______________.
[No more than approximately _____% of the Mortgage Loans will be
secured by Mortgaged Properties located in any one zip code area in the State of
_____________ and no more than approximately ____% of the Mortgage Loans will be
secured by Mortgaged Properties located in any one zip code area outside the
State of ___________.]
Approximately ____% of the Mortgage Loans will be secured by single
family dwelling units. Approximately _____% of the Mortgage Loans will be
secured by units in planned unit developments. Approximately ____% of the
Mortgage Loans will be secured by units in condominiums. Approximately ____% of
the Mortgage Loans will be secured by two- to
four-family dwelling units.
The Mortgage Loans will each have an outstanding principal balance as
of the Cut-off Date of not less than $________ or more than $__________. The
Mortgage Loans will have an average outstanding principal balance as of the
Cut-off Date of approximately $_________. No more than approximately ___% of the
Mortgage Loans will have an outstanding principal balance as of the Cut-off Date
greater than $____________.
With respect to approximately ______% of the Mortgage Loans, the
Mortgagor represented in the documents submitted by such Mortgagor for the
closing of the Mortgage Loan that the Mortgaged Property initially will be
owner-occupied as the Mortgagor's primary residence.
Approximately _____% of the Mortgage Loans are Mortgage Loans the
proceeds of which were used to purchase the applicable Mortgaged Property.
Approximately ____% of the Mortgage Loans are Mortgage Loans the proceeds of
which were used to refinance an existing Mortgage Loan (approximately _____% of
the Mortgage Loans were rate and term refinancings and approximately _____% of
the Mortgage Loans were equity take-out refinancings).
[___________ of the Mortgage Loans will be Buy-Down Loans. Certain of
the Mortgage Loans are secured by a leasehold estate. The Seller has represented
that all Mortgage Loans secured by a leasehold estate conform to the guidelines
of FNMA and FHLMC for leaseholds.]
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans will be approximately _____%. None of the Mortgage Loans will have a
Loan-to-Value Ratio at origination in excess of ______%.
Approximately ______% of the Mortgage Loans were underwritten pursuant
to the Seller's full documentation programs. Approximately _____% of the
Mortgage Loans were underwritten
<PAGE>
pursuant to the Seller's alternative documentation programs. Approximately ____%
of the Mortgage Loans were underwritten pursuant to the Seller's limited
documentation programs.
The following table sets forth as of the Cut-off Date the number,
aggregate outstanding principal balance and percentage of the Mortgage Pool (by
aggregate outstanding principal balance) 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 following table may not equal the totals due to
rounding).
<TABLE>
<CAPTION>
LOAN-TO-VALUE RATIOS
--------------------
Percentage of Mortgage Pool
Loan-to-value Ratios Number Of Aggregate Outstanding By Aggregate Outstanding
at Origination (%) Mortgage Loans Principal Balance Principal Balance
- ------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
Total............
</TABLE>
The following table sets forth the number, aggregate outstanding
principal balance as of the Cut-off Date and percentage of the Mortgage Loans by
aggregate outstanding principal balance as of the Cut-off Date having the Gross
Margins listed. (The sum of the amounts and the percentages in the following
table may not equal the totals because of rounding.)
GROSS MARGINS
-------------
Percentage Of
Mortgage Pool
By Aggregate
Number Of Aggregate Principal
Gross Margins(%) Mortgage Loans Principal Balance Balance
- ---------------- -------------- ----------------- -------
Total............
<PAGE>
THE SELLER
[Disclosure as appropriate.]
UNDERWRITING STANDARDS
[Disclosure as appropriate.]
THE INDEX
The Index is the monthly weighted average cost of funds index for
member institutions of the Eleventh District of the Federal Home Loan Bank
System, as computed from statistics tabulated and published by the Federal Home
Loan Bank of San Francisco. The Index applicable on any Rate Adjustment Date is
the most recent figure as of the date 15 days before such Rate Adjustment Date.
Listed below are some historical values for the months indicated of the Index.
YEAR
------------------------------
MONTH 1995 1994 1993 1992 1991
- ----- ---- ---- ---- ---- ----
January ........................................
February .......................................
March ..........................................
April ..........................................
May ............................................
June ...........................................
July ...........................................
August .........................................
September.......................................
October .......................................
November .......................................
December........................................
If the Index becomes unpublished or is otherwise unavailable, the
Master Servicer will select an alternative index which is based upon comparable
information.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool 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 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 Certificates.
A Current Report on Form 8-K will be available to purchasers of the
Class A 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 Certificates. In the event
<PAGE>
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 the Current
Report on Form 8-K.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 199_-_ Mortgage Pass-Through Certificates (the
"Certificates") will consist of the following five classes: (i) Class A
Certificates; (ii) Class B-1 Certificates, Class B-2 Certificates and Class B-3
Certificates (collectively, the "Subordinate Certificates") and (iii) Class
R Certificates. Only the Class A Certificates are offered hereby.
The Class A Certificates will initially evidence in the aggregate
approximately ____% of the entire beneficial ownership interest in 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 (the "Custodial Account") established by the Master Servicer for
the collection of payments on the Mortgage Loans and in the Certificate Account
and belonging to the Trust Fund, (iii) property acquired by foreclosure of such
Mortgage Loans or deed in lieu of foreclosure, (iv) any applicable primary
insurance policies and primary hazard insurance policies, and all proceeds
thereof and (v) the representations and warranties of the Seller regarding the
Mortgage Loans.
Distributions on the Class A Certificates will be made on the 25th day
of each month or, if such day is not a Business Day, then on the next succeeding
Business Day (each, a "Distribution Date"), commencing in ________________ 199_
to Certificateholders of record on the immediately preceding 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.
Distributions on the Class A 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 Distribution Date, of any holder of an Class A Certificate having
an initial Certificate Principal Balance of not less than $____________, by wire
transfer in immediately available funds; provided that the final distribution in
respect of any Class A 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 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 in excess thereof.
BOOK-ENTRY REGISTRATION OF THE CLASS A CERTIFICATES
GENERAL. Beneficial Owners that are not Participants or Indirect
Participants (as defined in the Prospectus) but desire to purchase, sell or
otherwise transfer ownership of, or other interests
<PAGE>
in, the Class A Certificates may do so only through Participants and Indirect
Participants. In addition, Beneficial Owners will receive all distributions of
principal of and interest on the Class A Certificates from the Paying Agent (as
defined in the Prospectus) through DTC and Participants. Accordingly, Beneficial
Owners may experience delays in their receipt of payments. Unless and until
Definitive Certificates are issued for the Class A Certificates, it is
anticipated that the only registered Certificateholder of the Class A
Certificates will be Cede & Co., 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 of, and 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 Class A 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
Class A Certificates.
None of the Depositor, the Master Servicer or the Trustee 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 Class A Certificates held by
Cede & Co., 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
third paragraph under "Description of the Certificates-Book-Entry Registration,"
the Trustee is required to notify, through DTC, Participants who have ownership
of Class A 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 Class A Certificates and
upon receipt of instructions from DTC for re-registration, the Trustee will
reissue the Class A Certificates as Definitive Certificates issued 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.
For additional information regarding DTC and the Class A Certificates
as DTC Registered Certificates, see "Description of the Certificates-Book-Entry
Registration" in the Prospectus.
<PAGE>
AVAILABLE DISTRIBUTION AMOUNT
The "Available Distribution Amount" for any Distribution Date is
determined with respect to all of the Mortgage Loans in the aggregate and is
equal to (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 amounts required
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 or the Certificate Account, (iii) all amounts reimbursable to the Master
Servicer, (iv) any unscheduled payments, including Mortgagor prepayments on the
Mortgage Loans, Insurance Proceeds, Liquidation Proceeds (each as defined
herein) and proceeds from repurchases of the Mortgage Loans occurring in the
month of such Distribution Date and (v) the fees of the Trustee. 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
On each Distribution Date, holders of the Class A Certificates will be
entitled to receive interest distributions in an amount equal to interest
accrued during the immediately preceding calendar month (such period, an
"Accrual Period") on the Certificate Principal Balance thereof at the then
applicable Pass-Through Rate, subject to reduction only in the event of (i)
shortfalls caused by the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act") or similar legislation or regulations and (ii) any
Prepayment Interest Shortfalls for such Distribution Date to the extent not
covered by the Master Servicer in the manner described below. As described
below, Accrued Certificate Interest on each class of Certificates is subject to
reduction in the event of certain interest shortfalls allocable thereto.
With respect to any Distribution Date and the Class A Certificates,
"Accrued Certificate Interest" will be equal to one month's interest accrued
during the related Accrual Period on the Certificate Principal Balance of the
Class A Certificates immediately prior to such Distribution Date at the then
applicable Pass-Through Rate less interest shortfalls, if any, allocated thereto
for such Distribution Date, to the extent not covered by the subordination
provided by the Subordinate Certificates in an amount equal to (i) any
Prepayment Interest Shortfall to the extent not covered as described below, (ii)
the interest portions of Realized Losses (as defined herein) (including Special
Hazard Losses in excess of the Special Hazard Amount ("Excess Special Hazard
Losses"), Fraud Losses in excess of the Fraud Loss Amount ("Excess Fraud
Losses"), Bankruptcy Losses 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")) not allocated through subordination, (iii) 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 (iv) any other interest shortfalls
not covered by subordination, including interest shortfalls relating to the
Relief Act or similar legislation or regulations, all allocated as described
<PAGE>
below. 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) resulting from Mortgagor prepayments on the Mortgage
Loans during the preceding calendar month (each, a "Prepayment Period"). Such
shortfalls will result because interest on prepayments in full is collected only
to the date of prepayment, and because no interest is collected on prepayments
in part, as such prepayments in part are applied to reduce the outstanding
principal balance of the related Mortgage Loans 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.
The Pass-Through Rate on the Class A Certificates on each Distribution
Date will equal the weighted average, as determined as of the Due Date in the
month immediately preceding the month in which such Distribution Date occurs, of
the related Net Mortgage Rate on each of the Mortgage Loans, which will be
approximately _____% per annum with respect to the first Distribution Date. The
weighted average Net Margin on the Mortgage Loans is _____%. The Net Mortgage
Rate on each of the Mortgage Loans is equal to the Mortgage Rate thereon minus
______% per annum (the "Expense Fee Rate"). The Net Margin on each of the
Mortgage Loans is equal to the Gross Margin less the Expense Fee Rate. The
Expense Fee Rate consists of a component to compensate the Master Servicer for
performing its master servicing responsibilities and obligations under the
Pooling and Servicing Agreement (the "Master Servicing Fee Rate") and a
component to cover the fees of the Trustee. The Master Servicing Fee Rate on
each Mortgage Loan is equal to _____% per annum.
As described herein, the Accrued Certificate Interest allocable to the
Class A Certificates is based on the Certificate Principal Balance thereof. The
Certificate Principal Balance of the Class A Certificate as of any date of
determination is equal to the initial Certificate Principal Balance thereof,
reduced by the aggregate of (a) all amounts previously distributed with respect
to such Certificate and applied to reduce the Certificate Principal Balance
thereof and (b) any reductions in the Certificate Principal Balance thereof
deemed to have occurred in connection with allocations of Realized Losses, as
described below.
PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES
Except as provided below, 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 the interest is distributed to
the holders of the Class A Certificates for such Distribution Date, as described
above, a distribution allocable to principal equal to the sum of the following:
(i) the product of (A) the then-applicable Senior Percentage (as
defined herein) and (B) the aggregate of the following amounts:
<PAGE>
(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;
(2) the principal portion of all proceeds of the repurchase
of a Mortgage Loan (or, in the case of a substitution, certain
amounts representing a principal adjustment) as required by the
Pooling and Servicing Agreement during the preceding calendar
month; and
(3) the principal portion of all other unscheduled
collections received during the preceding calendar month (other
than full and partial principal prepayments made by the
respective Mortgagors and any amounts received in connection with
a Final Disposition (as defined below) of a Mortgage Loan
described in clause (ii) below), to the extent applied as
recoveries of principal;
(ii) in connection with the Final Disposition of a Mortgage Loan
that occurred in the preceding calendar month, 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 then-applicable
Senior Accelerated Distribution Percentage (as defined below) of the
related collections, including Insurance Proceeds and Liquidation
Proceeds, to the extent applied as recoveries of principal;
(iii) the then-applicable Senior Accelerated Distribution
Percentage of the aggregate of all full and partial principal
prepayments made by the respective Mortgagors of the Mortgage Loans
during the preceding calendar month; and
(iv) any amounts allocable to principal for any previous
Distribution Date (calculated pursuant to clauses (i) through (iii)
above) that remain undistributed to the extent that any such amounts
are not attributable to Realized Losses which were allocated to the
Subordinate Certificates.
With respect to any Distribution Date, the lesser of (a) the balance of
the Available Distribution Amount remaining after the Accrued Certificate
Interest for such Distribution Date is distributed and (b) the sum of the
amounts described in clauses (i)-(iv) of the preceding paragraph is hereinafter
referred to as the "Senior Principal Distribution Amount."
A "Final Disposition" of a defaulted Mortgage Loan is deemed to have
occurred upon a determination by the Master Servicer that it has received 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.
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
<PAGE>
thereon has been allocated to one or more Classes of Certificates on or before
the date of determination.
The "Senior Percentage," which initially will equal approximately
_____% and will in no event exceed 100%, will be adjusted for each Distribution
Date to be the percentage equal to the aggregate Certificate Principal Balance
of the Class A Certificates immediately prior to such Distribution Date divided
by the aggregate Stated Principal Balance of all of the 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.
Except as described below, the "Senior Accelerated Distribution
Percentage" for any Distribution Date occurring prior to the Distribution Date
in _____________ _____ will equal 100%. The Senior Accelerated Distribution
Percentage for any Distribution Date occurring after the first ten years
following the Delivery Date will be as follows: for any Distribution Date during
the eleventh year after the Delivery Date, the Senior Percentage for such
Distribution Date plus 70% of the Subordinate Percentage for such Distribution
Date; for any Distribution Date during the twelfth year after the Delivery Date,
the Senior Percentage for such Distribution Date plus 60% of the Subordinate
Percentage for such Distribution Date; for any Distribution Date during the
thirteenth year after the Delivery Date, the Senior Percentage for such
Distribution Date plus 40% of the Subordinate Percentage for such Distribution
Date; for any Distribution Date during the fourteenth year after the Delivery
Date, 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,
in which case the Senior Accelerated Distribution Percentage for such
Distribution Date will once again equal 100%). Any scheduled reduction to the
Senior Accelerated Distribution Percentage described above shall not be made as
of any Distribution Date unless either (a) both (i) the outstanding principal
balance of Mortgage Loans delinquent 60 days or more (including foreclosure 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% and (ii) Realized Losses on the Mortgage
Loans to date for such Distribution Date, if occurring during the eleventh,
twelfth, thirteenth or fourteenth year (or any year thereafter) after the
Delivery Date, are less than 30%, 35%, 40%, 45% or 50%, respectively, of the sum
of the initial Certificate Principal Balances of the Subordinate Certificates or
(b) both (i) the aggregate outstanding principal balance of Mortgage Loans
delinquent 60 days or more (including foreclosure 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 are less than 10% of
the sum of the initial Certificate Principal Balances of the Subordinate
Certificates.
Notwithstanding the above, if on any Distribution Date (a) the
Subordinate Percentage, prior to giving effect to any distribution on such
Distribution Date, equals or exceeds ____% (approximately twice the initial
Subordinate Percentage), and (b) both of the conditions set forth in either
clause (a) or clause (b) in the preceding paragraph have been met, then the
Senior Accelerated Distribution Percentage for such Distribution Date will equal
the sum of (i) the Senior Percentage for such Distribution Date and (ii) 50% of
the Subordinate Percentage for
<PAGE>
such Distribution Date, if such Distribution Date is prior to the Distribution
Date in __________ ____, and will equal the Senior Percentage for such
Distribution Date if such Distribution Date is on or after the Distribution Date
in ________________ ____.
Notwithstanding the foregoing, upon reduction of the Certificate
Principal Balance of the Class A Certificates to zero, the Senior Accelerated
Distribution Percentage will equal 0%. See "Credit Support-Subordinate
Certificates; Subordination Reserve Fund" in the Prospectus.
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.
__________ __.... Cut-off Date. The initial principal balance of the
Mortgage Pool will be the aggregate
principal balance of the Mortgage Loans
as of __________ 1, 199_, after
deducting any principal payments due on
or before such date. Any principal and
interest payments due on or before
____________ __ will not be part of the
Mortgage Pool.
______ __ through
_________ __..... 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 ------- __, 199_.
The Prepayment Period for the
Distribution Date in October 199_ and
each succeeding Distribution Date will
be the immediately preceding calendar
month.
____________ __.. Record Date. Distributions on ___________ __, 199_
will be made to Certificateholders of
record at the close of business on the
last Business Day of the month
immediately preceding the month of
distribution.
________ __ through
________ __...... Collection Period. Payments due during the related Due
Period (_____________ __, 199_ through
_______________ __, 199_) from
mortgagors will be deposited in the
Custodial Account as received, and will
include
<PAGE>
scheduled principal payments plus
interest on the August balances.
___________ __... Determination Date. On the Business Day following the
Determination Date, the information
necessary to determine the amounts of
principal and interest that will be
distributed on __________ __, 199_ will
be transmitted by the Master Servicer to
the Trustee.
___________ __... Certificate Account
Deposit Date. On the __th day of each month, or if
such day is not a Business Day the next
preceding Business Day, 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 on such
Distribution Date.
____________ __.. Distribution Date. On __________ __, 199_ the Trustee will
distribute or cause to be distributed to
the Certificateholders the amounts
determined as of the Determination Date.
If a monthly payment due during the
related Due Period is received from a
Mortgagor after ____________ __, 199_
and funds have been distributed with
respect to such late payment from the
Custodial Account prior to deposit
therein, such late payment will be
deposited into the Custodial Account as
reimbursement therefor. If an Advance
has been made with respect to such late
payment, 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
September.
Succeeding months follow the same pattern except for the Cut-off Date.
<PAGE>
ALLOCATION OF LOSSES; SUBORDINATION
Realized Losses are allocable to the Class A Certificates based on the
following priorities.
Any Realized Losses which are not Excess Special Hazard Losses, Excess
Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses will be allocated
as follows: first, to the Class B-3 Certificates; second, to the Class B-2
Certificates; third, to the Class B-1 Certificates; in each case until the
Certificate Principal Balance of such Class has been reduced to zero; and
thereafter, the remainder of such Realized Losses will be allocated to the Class
A Certificates. Any allocation of a Realized Loss (other than a Debt Service
Reduction) to a Certificate will be made by reducing the Certificate Principal
Balance thereof, in the case of the principal portion of such Realized Loss, in
each case until the Certificate Principal Balance of such Class has been reduced
to zero, 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 Reduction" means
a reduction in the amount of the monthly payment due to certain bankruptcy
proceedings, but does not include any permanent forgiveness of principal. As
used herein, "Subordination" refers to the provisions discussed above for the
sequential allocation of Realized Losses among the various Classes, as well as
all provisions effecting such allocations including the priorities for
distribution of cash flows in the amounts described herein.
As used herein, "Defaulted Mortgage Losses" are Realized Losses that
are attributable to the Mortgagor's failure to make any payment of principal or
interest as required under the Mortgage Note, but not including Special Hazard
Losses, Extraordinary Losses or other losses resulting from damage to a
Mortgaged Property, Bankruptcy Losses or Fraud Losses.
Allocations of the principal portion of Debt Service Reductions to the
Subordinate Certificates will result from the priority of distributions of the
Available Distribution Amount as described herein, which distributions shall be
made first to the Class A Certificates and then to the Class of Subordinate
Certificates then outstanding with the highest payment priority. An allocation
of the interest portion of a Realized Loss as well as the principal portion of
Debt Service Reductions will not reduce the level of Subordination, until an
amount in respect thereof has been actually disbursed to the Class A, Class B-1,
Class B-2 or Class B-3 Certificateholders, as applicable. The holders of the
Class A Certificates will not be entitled to any additional payments with
respect to Realized Losses from amounts otherwise distributable on any Classes
of Certificates subordinate thereto. Accordingly, the Subordination provided to
the Class A Certificates by the Subordinate Certificates with respect to
Realized Losses allocated on any Distribution Date will be effected primarily by
increasing the Senior Percentage, of future distributions of principal of the
remaining Mortgage Loans.
Any Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses, Extraordinary Losses or other losses of a type not covered by
the Subordination will be allocated on a pro rata basis among the Class A
Certificates and Subordinate Certificates (any such Realized Losses so allocated
to the Class A Certificates, and the Subordinate Certificates will be allocated
without priority among such Classes). An allocation of a Realized Loss on a "pro
rata basis" among two or more Classes of Certificates
<PAGE>
means an allocation to each such Class of Certificates on the basis of its then
outstanding Certificate Principal Balance prior to giving effect to
distributions to be made on such Distribution Date in the case of an allocation
of the principal portion of a Realized Loss or based on the Accrued Certificate
Interest thereon in the case of an allocation of the interest portion of a
Realized Loss.
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 Certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal 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 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."
In order to maximize the likelihood of distribution in full of the
Accrued Certificate Interest for such Distribution Date and the Senior Principal
Distribution Amount, on each Distribution Date, holders of Class A Certificates
have a right to distributions of the Available Distribution Amount that is prior
to the rights of the holders of the Subordinate Certificates, to the extent
necessary to satisfy the Accrued Certificate Interest for such Distribution Date
and the Senior Principal Distribution Amount.
The application of the Senior Accelerated Distribution Percentage (when
it exceeds the Senior Percentage) 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. 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 Subordinate Certificates, the
percentage interest evidenced by the Class A Certificates in the Trust Fund will
be decreased (with a corresponding increase in the interest in the Trust Fund
evidenced by the Subordinate Certificates), thereby increasing, relative to
their respective Certificate Principal Balances, the Subordination afforded the
Class A Certificates by the Subordinate Certificates.
The aggregate amount of Realized Losses which may be allocated in
connection with Special Hazard Losses (the "Special Hazard Amount") through
Subordination shall initially be equal to $__________. As of any date of
determination following the Cut-off Date, the Special Hazard Amount shall equal
$______________ less the sum of (A) any amounts allocated through Subordination
in respect of Special Hazard Losses and (B) the Adjustment Amount. The
Adjustment Amount will be equal to an amount calculated pursuant to the terms of
the Pooling and Servicing Agreement. As used in this Prospectus Supplement,
"Special Hazard Losses" has the same meaning set forth in the Prospectus, except
that Special Hazard Losses will not include and the Subordination will not cover
Extraordinary Losses, and Special Hazard Losses will not exceed the lesser of
the cost of repair or replacement of the related Mortgaged Properties.
The aggregate amount of Realized Losses which may be allocated in
connection with Fraud Losses (the "Fraud Loss Amount") through Subordination
shall initially be equal to $______________. As of any date of determination
after the Cut-off Date, the Fraud Loss
<PAGE>
Amount shall equal (X) prior to the first anniversary of the Cut-off Date an
amount equal to _____% of the aggregate principal balance of all of the Mortgage
Loans as of the Cut-off Date minus the aggregate amounts allocated through
Subordination with respect to Fraud Losses up to such date of determination; (Y)
from the first to the second anniversary of the Cut-off Date, an amount equal to
(1) the lesser of (a) the Fraud Loss Amount as of the most recent anniversary of
the Cut-off Date and (b) ____% of the aggregate principal balance of all of the
Mortgage Loans as of the most recent anniversary of the Cut-off Date minus (2)
the aggregate amount allocated through Subordination with respect to Fraud
Losses since the most recent anniversary of the Cutoff Date up to such date of
determination; and (Z) from the second to the fifth anniversary of the Cut-off
Date, an amount equal to (1) the lesser of (a) the Fraud Loss Amount as of the
most recent anniversary of the Cut-off Date and (b) _____% of the aggregate
principal balance of all of the Mortgage Loans as of the most recent anniversary
of the Cut-off Date minus (2) the aggregate amounts allocated through
Subordination with respect to Fraud Losses since the most recent anniversary of
the Cut-off Date up to such date of determination. On and after the fifth
anniversary of the Cut-off Date the Fraud Loss Amount shall be zero and Fraud
Losses shall not be allocated through Subordination.
The aggregate amount of Realized Losses which may be allocated in
connection with Bankruptcy Losses (the "Bankruptcy Amount") through
Subordination will initially be equal to $_____________. As of any date of
determination, the Bankruptcy Amount shall equal $____________ less the sum of
any amounts allocated through Subordination for such losses up
to such date of determination.
Notwithstanding the foregoing, the provisions relating to Subordination
will not be applicable in connection with a Bankruptcy Loss so long as the
Master Servicer has notified the Trustee in writing that the Master Servicer is
diligently pursuing any remedies that may exist in connection with the
representations and warranties made regarding the related Mortgage Loan and
either (A) the related Mortgage Loan is not in default with regard to payments
due thereunder or (B) delinquent payments of principal and interest under the
related Mortgage Loan and any premiums on any applicable Primary Hazard
Insurance Policy and any related escrow payments in respect of such Mortgage
Loan are being advanced on a current basis by the Master Servicer.
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 (as
described in the Prospectus) for future distribution or withdrawal) with respect
to any payments of principal and interest (net of the related Master Servicing
Fees) which were due on the Mortgage Loans on the immediately preceding Due Date
and delinquent on the Business Day next preceding 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, Liquidation Proceeds or amounts otherwise payable to the
holders of the Subordinate Certificates. The purpose of making such Advances is
to maintain a regular cash flow to the Certificateholders, rather than to
guarantee or insure against losses. The Master Servicer will not be required to
make any
<PAGE>
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 or (b) as to any Advance that remains unreimbursed in whole or
in part following the final liquidation of the related Mortgage Loan, from any
amounts otherwise distributable on any of the Subordinate Certificates;
provided, however, that any 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 distributions on any of the Certificates and the amount of such
losses will be allocated as described herein. In addition, if the Certificate
Principal Balances of the Subordinate Certificates have been reduced to zero,
any Advances previously made which are deemed by the Master Servicer to be
nonrecoverable from related late collections, Insurance Proceeds and Liquidation
Proceeds may be reimbursed to the Master Servicer out of any funds in the
Custodial Account prior to distributions on the Class A Certificates.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The effective yield to the holders of the Class A Certificates will be
lower than the yield otherwise produced by the Pass-Through Rate and purchase
price 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
Class A Certificates will be affected by 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 in
the Trust Fund. 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 principal prepayments thereon by the Mortgagors, liquidations of
defaulted Mortgage Loans and purchases 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. Since the rate and 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,
<PAGE>
Prepayment and Maturity Considerations"), no assurance can be given as to such
rate or the timing of principal payments on the Class A Certificates.
The Mortgage Loans generally may be prepaid by the Mortgagors at any
time without payment of any prepayment fee or penalty. As described under
"Description of the Certificates-Principal Distributions on the Class A
Certificates" herein, during certain periods all or a disproportionately large
percentage of principal prepayments on the Mortgage Loans will be allocated
among the Class A Certificates. Prepayments, liquidations and purchases of the
Mortgage Loans will result in distributions to holders of the Class A
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, solicitations and servicing decisions. In addition, if
prevailing mortgage rates fell significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayments (including refinancings) would be
expected to increase in subsequent periods. Conversely, if prevailing mortgage
rates rose significantly above the Mortgage Rates on the Mortgage Loans, the
rate of prepayments on the Mortgage Loans would be expected to decrease in
subsequent periods.
Although the Mortgage Rates on the Mortgage Loans will adjust monthly,
such increases and decreases will be limited by the Maximum Mortgage Rate on
each Mortgage Loan and will be based on the Index (which may not rise and fall
consistently with mortgage interest rates or with other indices) plus the
related Gross Margins (which may be different from the prevailing margins on
other mortgage loans). As a result, the Mortgage Rates on the Mortgage Loans at
any time may not equal the prevailing rates for other adjustable rate loans and
accordingly, the rate of prepayment may be lower or higher than would otherwise
be anticipated.
All of the Mortgage Loans are assumable under certain circumstances if,
in the sole judgment of the Master Servicer, the prospective purchaser of a
Mortgaged Property is creditworthy and the security for such Mortgage Loan is
not impaired by the assumption. The extent to which the Mortgage Loans are
assumed by purchasers of the Mortgaged Properties rather than prepaid by the
related mortgagors in connection with the sales of the Mortgaged Properties will
affect the weighted average life of the Class A Certificates and may result in a
prepayment experience on the Mortgage Loan that differs from that on other
conventional mortgage loans.
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. The rate of default on Mortgage Loans which are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. 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.
<PAGE>
The amount of interest otherwise payable to holders of the Class A
Certificates will be reduced by any interest shortfalls by the Master Servicer
as described herein. Interest shortfalls not allocable to the Subordinate
Certificates and not covered by the Master Servicer would be
allocated to the Class A Certificates as described herein.
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 following the month of receipt, with no 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 full 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 Certificateholders, and will be allocated
among the Class A Certificates and the Subordinate Certificates in proportion to
the interest otherwise distributable or accrued thereon. In addition, the
application of the Relief Act to any Mortgage Loan will adversely affect, for an
indeterminate period of time, the ability of the Master Servicer to collect full
amounts of interest on such Mortgage Loan and such shortfall will not be covered
by the Insurance Instruments or under the Financial Guaranty Insurance Policy.
See "Certain Legal Aspects of the Mortgage Loans-Anti-Deficiency Legislation and
Other Limits on Lenders-Soldiers' and Sailors' Civil Relief Act of 1940" in the
Prospectus.
The yield to maturity of the Class A Certificates will depend on the
price paid by the holders of the Class A Certificates and the Pass-Through Rate.
The extent to which the yield to maturity of a Class A Certificate is sensitive
to prepayments will depend, in part, upon the degree to which it is purchased at
a discount or premium. In general, if a Class A Certificate is purchased at a
premium and principal distributions thereon occur at a rate faster than
anticipated at the time of purchase, the investor's actual yield to maturity
will be lower than that assumed at the time of purchase. Conversely, if a Class
A Certificate is purchased at a discount and principal distributions thereon
occur at a rate slower than that assumed at the time of purchase, the investor's
actual yield to maturity will be lower than that assumed at the time of
purchase. For additional considerations relating to the yield on the
Certificates, see "Yield, Prepayment and Maturity Considerations" in the
Prospectus.
As is the case with conventional, fixed interest rate mortgage loans
originated in a high interest rate environment which may be subject to a greater
rate of principal prepayments when interest rates decrease, adjustable interest
rate mortgage loans may be subject to a greater rate of principal prepayment due
to their refinancing to fixed interest rate loans in a low interest rate
environment. For example, if prevailing interest rates fall significantly,
adjustable interest rate mortgage loans could be subject to higher prepayment
rates than if prevailing interest rates remain constant because the availability
of fixed interest rate or other adjustable rate mortgage loans at competitive
interest rates may encourage mortgagors to refinance their adjustable interest
rate
<PAGE>
mortgages to "lock in" a lower fixed interest rate or to take advantage of their
availability of such other adjustable interest rate mortgage loans. A rising
interest rate environmental may result in an increase in the rate of defaults on
the Mortgage Loans.
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 Class A 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.
CPR: CPR or Constant Prepayment Rate represents an assumed constant
rate of prepayment each month relative to the then aggregate outstanding
principal balance of a pool of mortgage loans for the life of such mortgage
loans. CPR does not purport to be either a historical description of the
prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any mortgage loans, including the Mortgage
Loans included in the Trust Fund.
For additional considerations relating to the yields on the
Certificates, see "Yield, Prepayment and Maturity Considerations" in the
Prospectus.
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 ___________ __,
199_ among the Depositor, the Master Servicer, and ____________________________,
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 Class A Certificates. The Class A
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, DLJ Mortgage
Acceptance Corp., 140 Broadway, New York, New York 10005.
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 master servicer reasonably acceptable to the Trustee
and upon delivery to the Trustee of a letter from the 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.
<PAGE>
ASSIGNMENT OF MORTGAGE LOANS
The Mortgage Loans will be assigned to the Trustee, together with all
principal and interest due on the Mortgage Loans after the Cut-off Date. The
Certificate Registrar 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 and the outstanding principal balance as of the close of
business on the Cut-off Date, the scheduled monthly payment and the maturity
date.
As to each Mortgage Loan in the Mortgage Pool, 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
assignment of the Mortgage in recordable form to the Trustee, (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 Closing Date. The Trustee will
review each Mortgage File within 90 days of the Closing 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 or substitute for 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 shall assign to the Trustee for the benefit of the holders of the
Certificates all of its right, title and interest to the representations and
warranties made therein by the Seller, in respect of the origination 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 are similar to the representations
and warranties summarized in the Prospectus under the caption "Loan Underwriting
Procedures and Standards Representations and Warranties." Although such
representations and warranties differ from those summarized in the Prospectus,
they are generally similar in nature. Upon discovery by the Depositor, the
Master Servicer or 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 party discovering such breach will
promptly give written notice to such other parties. The Seller will have 90 days
from its discovery or its receipt of such notice to cure such breach or
repurchase or substitute for the Mortgage Loan.
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 or substitute
for a Mortgage Loan if the Seller defaults on its obligation to repurchase or
substitute for 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 (as
described herein) will not be available to support the Seller's obligations to
<PAGE>
repurchase or substitute for any Mortgage Loan, to the extent any such Mortgage
Loan is not repurchased or substituted for 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 or substituted for by the Seller.
THE MASTER SERVICER
__________________ (in its capacity as master servicer, the "Master
Servicer") will act as master servicer for the Certificates pursuant to the
Pooling and Servicing Agreement. For a description of the Master Servicer, see
"The Seller" herein.
The following table sets forth certain information regarding the
principal balance of one- to four-family residential mortgage loans included in
the Master Servicer's servicing portfolio. The Master Servicer's servicing
portfolio includes mortgage loans held for sale and mortgage loans held for
investment which were originated or acquired by the Master Servicer's mortgage
banking operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(DOLLARS in millions, except average loan size)
<S> <C> <C> <C> <C> <C>
Beginning servicing portfolio(1)... $
Add:
Loans originated or acquired....
Bulk purchase of servicing......
Deduct:
Sale of servicing rights........
Loans sold, servicing released.....
Run-off(2)......................
Ending servicing portfolio(1)......
Number of loans serviced...........
Average loan size..................
- ---------------------
</TABLE>
(1) Includes mortgage loans held for investment originated or acquired as part
of the Master Servicer's mortgage banking operations which totalled
$__________ at December 31, 1991, 1992, 1993, 1994 and 1995, respectively.
(2) Includes amortization, prepayments and foreclosures.
The following table sets forth certain information regarding the Master
Servicer's delinquency statistics for its one- to-four family residential
mortgage servicing portfolio for the periods presented (excluding mortgage loans
held for sale or investment):
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------------
1992 1993 1994 AT JUNE 30, 1995
------------------- --------------------- --------------------- --------------------
Percent of Percent of Percent of Percent of
Number Servicing Number Servicing Number Servicing Number Servicing
of Loans Portfolio of Loans Portfolio of Loans Portfolio of Loans Portfolio
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days......
60-89 days......
90 days and over.........
-------- --------- -------- --------- -------- --------- -------- ---------
Total delinquencies......
Foreclosures pending.....
-------- --------- -------- --------- -------- --------- -------- ---------
======== ========= ======== ========= ======== ========= ======== ==========
</TABLE>
<PAGE>
There can be no assurance that the delinquency experience of the
Mortgage Loans will correspond to the delinquency experience of the Master
Servicer's servicing portfolio set forth in the foregoing tables. The statistics
shown above represent the delinquency experience for the Master Servicer's
servicing portfolio only for the periods presented, whereas the aggregate
delinquency experience on the Mortgage Loans will depend on the results obtained
over the life of the Mortgage Pool. The Master Servicer's 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. The Master Servicer's
servicing portfolio includes mortgage loans underwritten pursuant to guidelines
not necessarily representative of those applicable to the Mortgage Loans. It
should be noted that if the residential real estate market should experience an
overall decline in property values, the actual rates of delinquencies and
foreclosures could be higher than those previously experienced by the Master
Servicer. 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 delinquencies and foreclosures with
respect to the Mortgage Loans.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicing Fees for each Mortgage Loan are payable out of the
interest payments on such Mortgage Loan. The Master Servicing Fees in respect of
each Mortgage Loan will be ____% per annum of the outstanding principal balance
of such Mortgage Loan. The Master Servicing Fees consist of (a) servicing
compensation payable to the Master Servicer in respect of its master servicing
activities and (b) subservicing and other related compensation payable to a
subservicer. 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. 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. 99% of all Voting Rights
will be allocated among all holders of the Certificates (other than the Class R
Certificates) in proportion to their then outstanding Certificate Principal
Balances, and 1% of all Voting Rights will be allocated among holders of 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 Certificates in certain circumstances.
<PAGE>
EVENTS OF DEFAULT
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 two Business Days after such failure of the Master
Servicer; (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 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
two (2) Business Days after due.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under the Pooling and Servicing
Agreement remains unremedied, the Depositor or the Trustee may in each case 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 Mortgage Loans and the proceeds thereof. Upon receipt by the
Master Servicer of such written notice, all authority and power of the Master
Servicer under the Pooling and Servicing Agreement shall pass to and be vested
in the Trustee, and the Trustee shall 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, 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 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. 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 reasonably acceptable to the Trustee, 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 master servicer has assumed the
Master Servicer's responsibilities, liabilities, obligations and duties under
the Pooling and Servicing Agreement.
<PAGE>
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 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 related
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 __% 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 such repurchase price is distributed and (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
proceeds of any such distribution may not be sufficient to distribute the full
amount to the Class A Certificates if the purchase price is based in part on the
fair market appraised value of any underlying Mortgaged Property and such
appraised value is less than 100% of the unpaid principal balance of the related
Mortgage Loan. 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 of that series.
THE TRUSTEE
_________________ 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
______________________________________________________ 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 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.
<PAGE>
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 _______ and _________________. The Trustee
may also be removed at any time by the Master Servicer, if the Trustee ceases to
be eligible to continue as such as described above or if the Trustee becomes
insolvent. 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
[IF A REMIC]
Upon the issuance of the Class A Certificates, 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 under the
Internal Revenue Code of 1986 (the "Code").
For federal income tax purposes, the Class R Certificates will be the
sole Class of "residual interests" in the REMIC and the Class A Certificates and
the Subordinate Certificates will represent the "regular interests" in the REMIC
and will be treated as debt instruments of the Trust Fund. See "Certain Federal
Income Tax Consequences" in the Prospectus.
For federal income tax reporting purposes, the Class A 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 based on the assumption that subsequent to the date of any
determination the Mortgage Loans will prepay at a rate equal to ___% CPR. 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.
The Internal Revenue Service (the "IRS") has issued regulations under
Sections 1271 to 1275 of the Code generally addressing the treatment of debt
instruments issued with original issue discount. Purchasers of the Class A
Certificates should be aware that the OID Regulations and Section 1272(a)(6) of
the Code do not adequately address certain issues relevant to, or are not
applicable to, securities such as the Class A Certificates. In addition, there
is considerable uncertainty concerning the application of the OID Regulations to
REMIC regular interests that provide for payments based on an adjustable rate
such as the Class A Certificates. Because of the uncertainties concerning the
application of Section 1272(a)(6) of the Code to such Certificates and because
the rules of the OID Regulations relating to debt instruments having an
adjustable rate of interest are limited in their application in ways that could
preclude their application to such Certificates even in the absence of Section
1272(a)(6) of the Code, the IRS could assert that the Class A Certificates
should be governed by some other method not yet set forth in regulations.
<PAGE>
Prospective purchasers of the Certificates are advised to consult their tax
advisors concerning the tax treatment of such Certificates.
It appears that a reasonable method of reporting original issue
discount with respect to the Class A Certificates generally would be to report
all income with respect to such Certificates as original issue discount for each
period, computing such original issue discount (i) by assuming that the value of
the Index will remain constant for purposes of determining the original yield to
maturity of, and projecting future distributions on, each class of such
Certificates, thereby treating such Certificates as fixed rate instruments to
which the original issue discount computation rules described herein can be
applied, and (ii) by accounting for any positive or negative variation in the
actual value of the Index in any period from its assumed value as a current
adjustment to original issue discount with respect to such period.
If the rules of the OID Regulations were applied literally to the Class
A Certificates it appears that such rules would (i) require that the weighted
average interest rate paid on such Certificates be modified and treated as if it
were, prior to the first Adjustment Date of the Mortgage Loans, an adjustable
rate based on the Index (plus or minus a fixed number of basis points) rather
than a fixed rate, with the adjustable rate being such that the fair market
value of the Certificates would not be affected by the substitution of the
adjustable rate for the fixed rate, (ii) accrue original issue discount, if any,
on such Certificates as so modified by assuming that the Index will remain
constant in each accrual period for purposes of determining the constant yield
to maturity of, and the cash flow projections on, such Certificates and (iii)
make a positive (or negative) adjustment to interest income in any period in
which the actual interest paid on such Certificates (including interest actually
paid at a fixed rate prior to the first adjustment date of the Mortgage Loans)
were greater or less than the interest assumed to be paid thereon (including the
interest assumed to be paid thereon at an adjustable rate prior to the first
Adjustment Date of the Mortgage Loans).
The OID Regulations appear to permit 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 a Class A 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 Class A
Certificates are advised to consult their tax advisors concerning the tax
treatment of such Certificates in this regard.
The Class A 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 Class A 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 Class A
Certificates are treated as "real estate assets" under Section 856(c)(5)(A) of
the Code. Moreover, the Class A 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.
<PAGE>
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 Class A Certificates, to the
extent any such tax exceeds amounts otherwise payable to holders of the Class
B-1, Class B-2 and Class B-3 Certificates. 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 Class A Certificates, see "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Regular Certificates" in the
Prospectus.
[[GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
Upon the issuance of the offered 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 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 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, 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
<PAGE>
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 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.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
Holders 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
<PAGE>
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 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 the Grantor Trust Certificates are
[not] higher than the "safe harbors" and, accordingly, may [not] constitute
reasonable servicing compensation.]
[IF STRIPPED BOND RULES APPLY
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 Grantor Trust Fractional Interest Certificates-Market
Discount." Under the stripped bond rules, the holder of a Grantor Trust
<PAGE>
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.
<PAGE>
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 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"in the Prospectus.) 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 on the prepayment assumption of __% [CPR or SPA] (the
"Prepayment Assumption") 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). The interest payable on the Grantor Trust Fractional Interest
Certificate [is [not] more than one percentage point lower than the gross
interest rate payable on the Mortgage Loans. The original issue discount or
market discount on a Grantor Trust Fractional Interest Certificate determined
under the stripped bond rules is [not] less than 0.25% of the stated redemption
price multiplied by the weighted average maturity of the Mortgage Loans,
original issue discount or market discount will [not] 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."]
<PAGE>
[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
"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.
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
<PAGE>
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.
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 "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
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
<PAGE>
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" in the Prospectus. 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 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
<PAGE>
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" in the Prospectus, 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. 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 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).
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" in the Prospectus. 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
<PAGE>
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.
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 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.
<PAGE>
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 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.]
<PAGE>
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 Supplement 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
<PAGE>
when required by law to do so. Because the 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" in the
Prospectus 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" in the Prospectus applies
to Grantor Trust Certificates except that Grantor Trust Certificates will 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.]]
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement (the "Underwriting Agreement") between the Depositor and
_______________ (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 Class A Certificates.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Class A 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 Class A 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. Proceeds
to the Depositor from the sale of the Class A Certificates, before deducting
expenses payable by the Depositor, will be approximately $___________ plus
accrued interest thereon from the Cut-off Date. The Underwriter may effect such
transactions by selling the Class A Certificates to or through dealers, and such
dealers may
<PAGE>
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 Class A 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 Class A Certificates may be deemed to be underwriters
and any profit on the resale of the Class A 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.
There can be no assurance that a secondary market for the Class A
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Class A
Certificates will be the monthly statements discussed in the Prospectus under
"The Pooling and Servicing Agreement-Reports to Certificateholders," which will
include information as to the outstanding principal balance of the Class A
Certificates and the status of the applicable form of credit enhancement. There
can be no assurance that any additional information regarding the Class A
Certificates will be available through any other source. In addition, the
Depositor is not aware of any source through which price information about the
Class A Certificates will be generally available on an ongoing basis. The
limited nature of such information regarding the Class A Certificates may
adversely affect the liquidity of the Class A Certificates, even if a secondary
market for the Class A Certificates becomes available.
USE OF PROCEEDS
The Depositor will apply the net proceeds from the sale of the Class A
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 Certificates that the Class A
Certificates be rated "Aaa" by _________ ("_______") and "AAA" by ___________
("__________").
The ratings of _______ on mortgage pass-through certificates address
the likelihood of the receipt by certificateholders of payments required
thereon. The ratings of _______ take into consideration the credit quality of
the mortgage pool, structural and legal aspects associated with the
certificates, and the extent to which the payment stream on the mortgage pool is
adequate to make payments required under the certificates. The rating of _______
on the Class A Certificates
<PAGE>
does not, however, constitute a statement regarding frequency of prepayments on
the Mortgage Loans.
Ratings by _______ 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.
The Depositor has not requested a rating on the Class A Certificates by
any rating agency other than _______ and _______. However, there can be no
assurance as to whether any other rating agency will rate the Class A
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Class A Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Class A
Certificates by _______ and __________.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of similar ratings on different securities.
LEGAL INVESTMENT
The Class A Certificates will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
so long as they are rated in at least the second highest rating category by
_______ and _______ 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 Depositor makes no representations as to the proper
characterization of the Class A Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase the Class A
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of the Class A Class A 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 of the Class A 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 _____) 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
<PAGE>
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.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus supplement shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
Subject to Completion, Dated July 21, 1998
[Version 2]
PROSPECTUS SUPPLEMENT
(To Prospectus Dated ____________, 19__)
$----------------
DLJ Mortgage Acceptance Corp.
Company
DLJ MBN Trust 19__-___
[Name of Master Servicer]
Master Servicer
Mortgage-Backed Notes, Series 19__-___
The DLJ MBN Trust 19__ (the "Issuer") will be formed pursuant to a
Trust Agreement to be dated as of _________________, 19__ between DLJ Mortgage
Acceptance Corp. (the "Company") and __________________________, the Owner
Trustee. The Issuer will issue $__________ aggregate principal amount of
Mortgage- Backed Notes, Series 19__-____ (the "Notes"). The Notes will be issued
pursuant to an Indenture to be dated as of _________________, 19__, between the
Issuer and ___________________, the Indenture Trustee. The Issuer will also
issue $__________ aggregate principal amount of the Issuer's Trust Certificates,
Series 19__-____ (the "Certificates"). The Notes and the Certificates are
collectively referred to herein as the "Securities". Only the Notes are offered
hereby.
The Notes will represent indebtedness of the related trust fund (the
"Trust Fund") created by the Trust Agreement. The Trust Fund consists of
adjustable-rate, conventional, residential, one- to four-family first lien
mortgage loans (the "Mortgage Loans"). In addition, the Notes will have the
benefit of an irrevocable and unconditional financial guaranty insurance policy
(the "Policy") issued by _______________ (the "Insurer") as described under "The
Policy" herein.
The interest rates on the Mortgage Loans (each, a "Mortgage Rate") will
change semi-annually based on the Index (as defined herein) and the respective
Note Margins described herein, subject to certain periodic and lifetime
limitations as described more fully
herein.
Payments of principal and interest on the Notes will be made on the
_______ day of each month or, if such day is not a business day, then on the
next business day, commencing on ____________, 19__ (each, a "Payment Date"). As
described herein, interest will accrue on the Notes at a floating rate (the
"Bond Rate") equal to [LIBOR (as defined herein)] plus _____% per annum subject
to certain limitations as described herein. See "Description of the
Securities--Interest on the Notes" herein.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" BEGINNING ON PAGE S-__ HEREIN AND ON PAGE ___ IN THE ACCOMPANYING
PROSPECTUS.
<PAGE>
It is a condition of the issuance of the Notes that they be rated "___"
by ___________________ and "____" by ___________________.
THE YIELD TO MATURITY ON THE NOTES WILL DEPEND ON THE RATE AND TIMING
OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, LIQUIDATIONS AND REPURCHASES) ON
THE MORTGAGE LOANS. SEE "CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS" HEREIN AND
"YIELD AND PREPAYMENT CONSIDERATIONS" IN THE PROSPECTUS.
There is currently no secondary market for the Notes. _________________
(the "Underwriter") intends to make a secondary market in the Notes, but is not
obligated to do so. There can be no assurance that a secondary market for the
Notes will develop or, if it does develop, that it will continue. The Notes will
not be listed on any securities exchange.
THE NOTES REPRESENT OBLIGATIONS OF THE ISSUER ONLY AND DO NOT REPRESENT
AN INTEREST IN OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER, OR ANY OF
THEIR AFFILIATES. NONE OF THE NOTES OR THE UNDERLYING MORTGAGE LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE COMPANY,
THE MASTER SERVICER OR ANY OF THEIR 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 Notes will be purchased from the Company by the Underwriter and
will be 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. The proceeds to the Company from the sale of the Notes are expected to be
approximately $___________, before the deduction of expenses payable by the
Company estimated to be approximately $__________.
The Notes are offered by the Underwriter subject to prior sale, when,
as and if delivered to and accepted by the Underwriter and subject to certain
other conditions. The Underwriter reserves the right to withdraw, cancel or
modify such offer and to reject any order in whole or in part. It is expected
that delivery of the Notes will be made on or about ____________, 19__ [in
book-entry form through the Same Day Funds Settlement System of The Depository
Trust Company as discussed herein,] [at the office of __________________,
_______________, _________________] against payment therefor in immediately
available funds.
[Name of Underwriter]
S-2
<PAGE>
[Date of Prospectus Supplement]
S-3
<PAGE>
THE SECURITIES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF
A SEPARATE SERIES OF SECURITIES BEING OFFERED PURSUANT TO THE COMPANY'S
PROSPECTUS DATED ____________, 19__, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A
PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE SECURITIES MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT 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.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER- ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET, SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
S-4
<PAGE>
SUMMARY
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.
Issuer......................... The Notes will be issued by DLJ MBN Trust
19__-___, a Delaware business trust established
pursuant to the Trust Agreement, dated as of
________ 1, 19__ between the Company and the
Owner Trustee.
The Notes...................... $____________ Mortgage-Backed Notes, Series
19__-__. Only the Notes are offered hereby. The
Notes will be issued pursuant to an Indenture,
dated as of ________ 1, 19__ between the Issuer
and ___________________, as Indenture Trustee.
Company........................ DLJ Mortgage Acceptance Corp. (the "Company").
See "The Company" in the Prospectus.
Master Servicer................ [Name of Master Servicer] (the "Master
Servicer"). See "[Name of Master Servicer]" in
the Prospectus.
Owner Trustee.................. ------------------ ------------
Indenture Trustee.............. ------------------ ------------
Delivery Date.................. On or about ____________, 19__.
Payment Date................... The [______] day of each month (or, if such day
is not a business day, the next business day),
beginning on ___________________, 19__, (each, a
"Payment Date").
[Denominations and
Registration................... The Notes (the "Book-Entry Notes") will be
issued, maintained and transferred on the
book-entry records of DTC and its Participants
(as defined in the Prospectus). The Notes will
be offered in registered form, in minimum
denominations of $______ and integral multiples
of $_____ in excess thereof. The Book-Entry
Notes will be represented by one or more Bond
certificates registered in the name of Cede &
Co., as nominee of DTC. No Beneficial Owner will
be entitled to receive a Bond in fully
registered, certificated form (a "Definitive
Bond"), except
S-5
<PAGE>
under the limited circumstances described
herein. See "Description of the Notes--Book
Entry Notes" herein.]
The Mortgage Pool.............. The Mortgage Loans are secured by first liens on
one- to four-family residential real properties
(each, a "Mortgaged Property"). The Mortgage
Loans have individual principal balances at
origination of at least $______ but not more
than $_________ with an average principal
balance at origination of approximately
$_________. The Mortgage Loans have terms to
maturity of __ years from the date of
origination and a weighted average remaining
term to stated maturity of approximately ____
years and __ months as of the Cut-off Date. The
Mortgage Rate on each Mortgage Loan will adjust
semi-annually on its Adjustment Date (as defined
herein), with corresponding adjustments in the
amount of monthly payments, to equal the sum
(rounded as described herein) of the Index
described below and a fixed percentage set forth
in the related Mortgage Note (the "Note
Margin"). However, (i) on any Adjustment Date
such Mortgage Rate may not increase or decrease
by more than 2% (the "Periodic Rate Cap"), (ii)
over the life of such Mortgage Loan, such
Mortgage Rate may not exceed the related maximum
Mortgage Rate (such maximum Mortgage Rate is
equal to the Mortgage Rate at origination plus a
lifetime rate cap (the "Lifetime Rate Cap")),
which maximum Mortgage Rates will range from
______% to ______% and (iii) with respect to
approximately ____% of the Mortgage Loans, by
aggregate principal balance as of the Cut-off
Date, over the life of such Mortgage Loan, such
Mortgage Rate may not be lower than the minimum
Mortgage Rate. The difference between the
Mortgage Rate on each Mortgage Loan at
origination and the minimum Mortgage Rate on
such Mortgage Loan will equal the lifetime rate
floor (the "Lifetime Rate Floor"). The minimum
Mortgage Rates will range from _____% to ______%
per annum. The Mortgage Loans will bear interest
at Mortgage Rates of at least _____% per annum
but not more than ______% per annum, as of the
Cut-off Date. For a further description of the
Mortgage Loans, see "Description of the Mortgage
Pool" herein.
The Index...................... As of any Adjustment Date with respect to any
Mortgage Loan, the Index applicable to the
determination of the
S-6
<PAGE>
related Mortgage Rate will be a rate equal to
the monthly weighted average cost of funds for
members of the Federal Home Loan Bank of San
Francisco as most recently available 45 days
prior to the Adjustment Date (the "Cost of Funds
Index" or "Index").
Interest Payments ............. Interest on the Notes will be paid monthly on
each Payment Date, commencing in 19__, at the
Bond ------ Interest Rate for the related
Interest Period (as defined below). The Bond
Interest Rate for an Interest Period will be
equal to LIBOR plus ___% as described herein
under "Description of the Notes--Interest on the
Notes." Interest on the Notes in respect of any
Payment Date will accrue from the preceding
Payment Date (or in the case of the first
Payment Date, from the date of initial issuance
of the Notes (the "Closing Date") through the
day preceding such Payment Date (each such
period, an "Interest Period")) on the basis of
the actual number of days in the Interest Period
and a 360-day year.
Principal Payments ............ On any Payment Date, to the extent of funds
available therefor, Bondholders will be entitled
to receive principal payments generally equal to
the amount, if any, necessary to bring the
Outstanding Reserve Amount up to the Reserve
Amount Target. In no event will principal
payments on the Notes on any Payment Date exceed
the Bond Principal Balance thereof on such date.
On the Payment Date in __________, principal
will be due and payable on the Notes in an
amount equal to the Bond Principal Balance for
such Payment Date.
The "Bond Principal Balance" of the Notes on any
day is the initial balance thereof as of the
Closing Date reduced by all payments of
principal thereon as of such day.
P&I Collections................ All collections on the Mortgage Loans will be
allocated by the Master Servicer in accordance
with the terms of the Mortgage Loans between
amounts collected in respect of interest and
amounts collected in respect of principal. See
"Description of the Servicing Agreement--P&I
Collections" herein, which describes the
calculation of the Interest Collections and the
Principal Collections on the Mortgage Loans for
the Collection Period related to each Payment
Date.
S-7
<PAGE>
With respect to any Payment Date, the portion of
Principal Collections and Interest Collections
that are distributable pursuant to the Servicing
Agreement (together, the "P&I Collections") will
equal (a) Interest Collections for such Payment
Date and (b) Principal Collections for such
Payment Date.
Outstanding Reserve
Amount......................... The distribution of the Additional Principal
Distribution Amount, if any, on the Mortgage
Loans will create the Outstanding Reserve
Amount. The Outstanding Reserve Amount, if any,
will be available to absorb any Liquidation Loss
Amounts that are allocated to the Mortgage Loans
and not covered by Principal Collections and
Interest Collections. Any Liquidation Loss
Amounts allocable to the Bondholders and not
covered by such overcollateralization will be
covered by draws on the Policy to the extent
provided herein. The "Outstanding Reserve
Amount" on any Payment Date is the amount, if
any, by which the Pool Balance as of the end of
the related Collection Period exceeds the Bond
Principal Balance on such day (after giving
effect to all distributions on such Payment
Date).
As of the Closing Date, the Reserve Amount
Target is equal to ___% of the Cut-Off Date Pool
Balance. The Reserve Amount Target may be
increased or reduced from time to time pursuant
to the terms of the Pooling and Servicing
Agreement, with the consent of the Rating
Agencies and the Indenture Trustee. To the
extent the Reserve Amount Target is reduced on
any Payment Date, the amount of the Principal
Collections distributed on such Payment Date
will be reduced and on each subsequent Payment
Date to the extent the remaining Outstanding
Reserve Amount is in excess of the reduced
Reserve Amount Target until the Outstanding
Reserve Amount equals the Reserve Amount Target.
Insurer........................ _______________. See "The Insurer" herein.
Policy......................... On the Closing Date, the Insurer will issue a
Policy in favor of the [Indenture Trustee on
behalf of the Issuer]. The Policy will
unconditionally and irrevocably guarantee
S-8
<PAGE>
principal payments on the Notes plus accrued and
unpaid interest due on the Notes. The Policy
will not guarantee payments on the Certificates.
On each Payment Date, a draw will be made on the
Policy to cover (a) any shortfall in amounts
available to make payments of interest on the
outstanding Bond Principal Balance of the Notes
and (b) the amount, if any, [by which the Bond
Principal Balance of the Notes exceeds the Pool
Balance at the end of the related Collection
Period]. In addition, the Policy will guarantee
the payment of the outstanding Bond Principal
Balance of each Bond on the Payment Date in
____________ (after giving effect to all other
amounts distributable and allocable to principal
on such Payment Date). See "The Policy" herein
and "Description of Credit Enhancement" in the
Prospectus.
The Certificates............... $________ Trust Certificates, Series 19__-__.
The Certificates will be issued pursuant to the
Trust Agreement and will represent the
beneficial ownership interest in the Issuer. The
Certificates are not offered hereby.
Final Payment of Principal on
the Notes..................... The Notes will be payable in full on _________.
In addition, the Issuer will pay the Notes in
full upon the exercise by the [Master Servicer]
of its option to purchase all Mortgage Loans and
all property acquired in respect of such
Mortgage Loans. See "The
Agreements--Termination; Redemption of Notes" in
the Prospectus.
Federal Income Tax
Consequences.................. In the opinion of Tax Counsel (as defined in the
Prospectus), for federal income tax purposes,
the Notes will be characterized as indebtedness
of the Issuer and the Issuer, as created
pursuant to the terms and conditions of the
Trust Agreement, will not be characterized as an
association (or publicly traded partnership)
taxable as a corporation or as a taxable
mortgage pool within the meaning of section
7701(i) of the Code.
For further information regarding certain
federal income tax consequences of an investment
in the Notes see "Federal Income Tax
Consequences" herein and "Federal
S-9
<PAGE>
Income Tax Consequences" and "State and Other
Tax Consequences" in the Prospectus.
Legal Investment............... So long as the Notes are rated in the top two
rating agencies, the Notes will constitute
"mortgage related securities" for purposes of
SMMEA. See "Legal Investment Considerations"
herein.
Rating......................... It is a condition to the issuance of the Notes
that they be rated "____" by and "____" by (each
a --------- ------------- "Rating Agency"). 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 prepayments of
Mortgage Loans, or the corresponding effect on
yield to investors. See "Certain Yield and
Prepayment Considerations" and "Ratings" herein.
S-10
<PAGE>
[RISK FACTORS]
[Prospective Bondholders should consider, among other things, the items
discussed under "Risk Factors" in the Prospectus and the following factors in
connection with the purchase of the Notes:]
[Appropriate Risk Factors as necessary. Possible Risk Factors based on present
disclosure include the following:
DELINQUENCIES AND POTENTIAL DELINQUENCIES
Approximately _____% 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 (such Mortgage Loans, "Delinquent
Mortgage Loans") as of the Cut-off Date. Prospective investors in the Notes
should be aware, however, that only approximately _____% of the Mortgage Loans
(by aggregate principal balance as of the Cut-off Date), had a first Monthly
Payment due on or before ______ _, 19__, and therefore, the remaining Mortgage
Loans could not have been Delinquent Mortgage Loans as of the Cut-off Date.
Approximately _____% of the Mortgage Loans (by aggregate outstanding
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 an overall 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.
In addition, ___% of the Mortgage Loans are secured by Mortgaged
Properties located in Orange County, California. On December 6, 1994, Orange
County filed for protection under Chapter 9 of the United States Bankruptcy
Code. If public services are curtailed as a result of Orange County's financial
difficulties, property values in the related market area may be adversely
affected.]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date of $____________. The
Mortgage Loans will consist of conventional, adjustable-rate, fully-amortizing,
first lien Mortgage Loans with terms to maturity of not more than ___ years from
the due date of the first monthly
S-11
<PAGE>
payment. On or before the Delivery Date, the Company will acquire the Mortgage
Loans to be included in the Mortgage Pool from _______________ and
________________ (the "Sellers"). The Sellers will make certain representations
and warranties with respect to the Mortgage Loans and, as more particularly
described in the Prospectus, will have certain repurchase or substitution
obligations in connection with a breach of any such representation and warranty,
as well as in connection with an omission or defect in respect of certain
constituent documents required to be delivered with respect to the Mortgage
Loans, in any event if such breach, omission or defect cannot be cured and it
materially and adversely affects the interests of Bondholders. Neither the
Company nor any other entity or person will have any responsibility to purchase
or replace any Mortgage Loan if a Seller is obligated but fails to do so. See
"Description of the Mortgage Pool--Representations by Sellers" and "Description
of the Notes--Assignment of Trust Fund Assets" in the Prospectus and "--The
Seller" below. The Mortgage Loans will have been originated or acquired by the
[Sellers] in accordance with the underwriting criteria described herein. See
"--Underwriting" below. All percentages of the Mortgage Loans described herein
are approximate percentages (except as otherwise indicated) by aggregate
principal balance as of the Cut-off Date.
The Mortgage Rate on each Mortgage Loan will adjust semi-annually on a
date specified in the related Mortgage Note (the "Adjustment Date"). For
approximately _______% of the Mortgage Loans, by aggregate principal balance as
of the Cut-off Date, the first Adjustment Date occurred prior to the Cut-off
Date.
On each Adjustment Date, the Mortgage Rate on a Mortgage Loan will be
adjusted to equal the sum (rounded to either the nearest or next highest
multiple of _____%) of (a) a rate per annum equal to the monthly weighted
average cost of funds for members of the Federal Home Loan Bank of San Francisco
(the "FHLB of San Francisco") as published by the FHLB of San Francisco (the
"Cost of Funds Index" or "Index") and as most recently available as of the day
45 days prior to such Adjustment Date or, in the event that such Index is no
longer available, an index selected by the Master Servicer and reasonably
acceptable to the Trustee that is based on comparable information, and (b) the
related Note Margin, subject to the following limitations. The Mortgage Rate on
the Mortgage Loan on any Adjustment Date may not increase or decrease by more
than the Periodic Rate Cap applicable to such Mortgage Loan and, over the life
of such Mortgage Loan, generally may not exceed the Mortgage Rate at origination
plus the Lifetime Rate Cap, or be less than the Mortgage Rate at origination
minus any Lifetime Rate Floor, applicable to such Mortgage Loan. No Mortgage
Loan provides for payment caps on any Adjustment Date which would result in
deferred interest or negative amortization. Effective with the first payment due
date on a Mortgage Loan after an Adjustment Date therefor, the monthly principal
and interest payment will be adjusted to an amount that will fully amortize the
then outstanding principal balance of such Mortgage Loan at its stated maturity
and pay interest at the adjusted Mortgage Rate. Because the amortization
schedule of each Mortgage Loan will be recalculated semi-annually, any partial
prepayments thereof will not reduce the term to maturity of such Mortgage Loan.
An increase in the Mortgage Rate on a
S-12
<PAGE>
Mortgage Loan will result in a larger monthly payment and in a larger percentage
of such monthly payment being allocated to interest and a smaller percentage
being allocated to principal, and conversely, a decrease in the Mortgage Rate on
the Mortgage Loan will result in a lower monthly payment and in a larger
percentage of each monthly payment being allocated to principal and a smaller
percentage being allocated to interest.
The Cost of Funds Index reflects the monthly weighted average cost of
funds of savings and loan associations and savings banks, the home offices of
which are located in Arizona, California and Nevada, that are member
institutions of the FHLB of San Francisco, as computed from statistics tabulated
and published by the FHLB of San Francisco. The FHLB of San Francisco normally
announces the Cost of Funds Index on or near the last working day of the month
following the month in which the cost of funds was incurred. The Index is
available through a variety of sources, including, without limitation, Telerate,
The Wall Street Journal and USA Today.
Listed below are the historical values of the Cost of Funds Index since
19___. Such values may fluctuate significantly over time and may not increase or
decrease in a constant pattern from period to period. The following does not
purport to be representative of future values of the Index. No assurance can be
given as to the Index value to be applied on any future Adjustment Date.
<TABLE>
<CAPTION>
COST OF FUNDS INDEX
Month 19__ 19__ 19__ 19__ 19__ 19__ 19__ 19__
===== ===== ===== ====== ====== ====== ====== ===== =====
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January............
February...........
March..............
April..............
May................
June...............
July...............
August.............
September..........
October............
November...........
December...........
</TABLE>
The initial Mortgage Rate in effect on a Mortgage Loan generally will
be lower than the sum of the Index that would have been applicable at
origination and the Note Margin. Absent a decline in the Index subsequent to
origination of a Mortgage Loan, the related Mortgage Rate will generally
increase on the first Adjustment Date following origination of such Mortgage
Loan. The repayment of such Mortgage Loans will be dependent on the ability of
the Mortgagor to make larger Monthly Payments following adjustments of the
Mortgage Rate. Moreover, because the maximum Mortgage Rate on any Mortgage Loan
S-13
<PAGE>
is determined by adding the Lifetime Rate Cap to the Mortgage Rate at
origination, irrespective of the Index that would have been applicable at
origination, the maximum Mortgage Rate on a Mortgage Loan will generally be less
than the sum of the Index and the Note Margin that would have been applicable at
origination plus the Lifetime Rate Cap. Mortgage Loans that have the same
initial Mortgage Rate may not always bear interest at the same Mortgage Rate
because the Mortgage Loans may have different Adjustment Dates (and the Mortgage
Rate therefore may reflect different Index values), different Note Margins,
different Lifetime Rate Caps and different Lifetime Rate Floors, if any.
The Mortgage Loans will have approximately the following
characteristics as of the Cut-off Date:
Number of Mortgage Loans...........................
Mortgage Rates:
Weighted Average..........................
Range.....................................
Range of Net Mortgage Rates........................
Note Margins:
Weighted Average..........................
Range.....................................
Maximum Mortgage Rates:
Weighted Average..........................
Range.....................................
Maximum Net Mortgage Rates (1):
Weighted Average..........................
Range.....................................
Weighted Average Months to Next Adjustment Date after ____________, 19__ (2)...
=====
(1) The difference between the maximum Net Mortgage Rate and the Net
Mortgage Rate as of the Cut-off Date may be less than the Lifetime Rate
Cap.
(2) The Weighted Average Months to the next Adjustment Date is equal to the
weighted average of the number of months until the Adjustment Date next
following _____________, 19__.
The Mortgage Loans in the Mortgage Pool will have the following
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 all Mortgage Loans in the
Mortgage Pool):
The Mortgage Loans will have had individual principal balances
at origination of at least $__________ but not more than $__________.
S-14
<PAGE>
None of the Mortgage Loans in the Mortgage Pool will have been
originated prior to _____________, 19__ or will have a scheduled
maturity later than ____________, ____. No Mortgage Loan in the
Mortgage Pool will have an unexpired term to stated maturity as of the
Cut-off Date of less than __ years and __ months. The weighted average
remaining term to stated maturity of the Mortgage Loans in the Mortgage
Pool as of the Cut-off Date will be approximately ____ years and __
months. The weighted average Adjustment Date of the Mortgage Loans in
the Mortgage Pool next following the Cut-off Date is ____________,
19__.
Approximately _____% of the Mortgage Loans will have
Loan-to-Value Ratios at origination exceeding 80% but less than or
equal to 90%, and approximately ____% of the Mortgage Loans will have
Loan-to-Value Ratios exceeding 90%. The weighted average Loan-to-Value
Ratio at origination, as of the
Cut-off Date, is approximately _____%.
At least _____% of such Mortgage Loans will be secured by fee
simple interests in detached one- to four-family dwelling units with
the remaining units being secured by fee simple interests in attached
planned unit developments, condominiums or townhouses.
Approximately _____% of the Mortgage Loans in the Mortgage
Pool will be secured by Mortgaged Properties located in California.
No more than _____% of the Mortgage Loans in the Mortgage Pool
will be secured by Mortgaged Properties located in any one zip code
area in California, and no more than ____% will be secured by Mortgaged
Properties located in any one
zip code area outside California.
No more than _____% of the Mortgage Loans were equity
refinance mortgage loans made to mortgagors who used less than the
entire amount of the proceeds to refinance an existing mortgage loan.
The weighted average Loan-to- Value Ratio at origination of such
Mortgage Loans, as of the Cut-off Date, is approximately ______%.
Approximately ____% of the Mortgage Loans were made to Mortgagors who
used the entire proceeds to refinance an existing Mortgage Loan.
No Mortgage Loan provides for deferred interest or negative
amortization.
Approximately ____% of the Mortgage Loans in the Mortgage Pool
will have been underwritten under a reduced loan documentation program.
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans in the Mortgage Pool which were underwritten under such reduced
loan documentation program will be approximately ____% and no more than
approximately ____% of such Mortgage
S-15
<PAGE>
Loans will be secured by Mortgaged Properties located in California.
See "Servicing Agreement--The Master Servicer" herein.
No more than ____% of the Mortgage Loans will be secured by
vacation or second homes. No more than ____% of the Mortgage Loans will
be secured by one- to four-story condominium units. No Mortgage Loans
will be secured by condominium units in buildings of five or more
stories.
None of the Mortgage Loans in the Mortgage Pool will be
Buydown Mortgage Loans.
The following table sets forth the number and aggregate principal
balance as of the Cut-off Date of Mortgage Loans having their next Adjustment
Dates in the month described therein. The table also indicates the approximate
percentage of Mortgage Loans in the Mortgage Pool with an Adjustment Date in
each such month.
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<PAGE>
MONTH OF NUMBER OF AGGREGATE PERCENTAGE OF
ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
=============== ============== ================= =============
Total........
The following table sets forth the number and aggregate principal
balance of Mortgage Loans having unpaid principal balances in the ranges
described therein as of the Cut-off Date. The table also indicates the
approximate weighted average Mortgage Rate and the approximate weighted average
Loan-to-Value Ratio at origination of the Mortgage Loans in each given range, as
of the Cut-off Date.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER WEIGHTED ORIGINAL
OF AGGREGATE AVERAGE LOAN-TO-
MORTGAGE PRINCIPAL MORTGAGE VALUE
PRINCIPAL BALANCE LOANS BALANCE RATE RATIO
- ----------------- ----- ------- ---- -----
<S> <C> <C> <C> <C>
Total, Average or Weighted Average.... _______ $____________ _______% _______%
</TABLE>
[Specific information with respect to the Mortgage Loans will be
available to purchasers of the Notes on or before the time of issuance of such
Notes. If not included in the Prospectus Supplement, such information will be
included in the Form 8-K.]
UNDERWRITING
[Underwriting standards as appropriate.]
DELINQUENCY AND FORECLOSURE EXPERIENCE
Based solely upon information provided by the Master Servicer, the
following tables summarize, for the respective dates indicated, the delinquency,
forbearance, foreclosure, bankruptcy and REO property status with respect to all
mortgage
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<PAGE>
loans originated or acquired by the Sellers that were originated as of the date
three months prior to the date indicated. The indicated periods of delinquency
are based on the number of days past due on a contractual basis. The monthly
payments under all of such mortgage loans are due on the first day of each
calendar month.
S-18
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 19__ AT DECEMBER 31, 19__
-------------------- --------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total Loans Outstanding............ $ $
DELINQUENCY(1)
Period of Delinquency:
31-60 Days.................. $ $
61-90 Days..................
91-120 Days or More......... _ _____ __ _
Total Delinquencies............. $ $
=== = ===== == = =====
Delinquencies as a Percentage of
Total Loans Outstanding............ % % % %
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 19__ AT DECEMBER 31, 19__
-------------------- --------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FORBEARANCE LOANS(2)................. $ $
Forbearance Loans as a
Percentage of Total Loans
Outstanding.......................... % %
FORECLOSURES PENDING(3).............. $ $
Foreclosures Pending as a
Percentage of Total Loans
Outstanding.......................... % % % %
BANKRUPTCIES PENDING(4).............. $ $
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding.......................... % % % %
Total Delinquencies plus
Forbearance Loans, Foreclosures
Pending and Bankruptcies
Pending.............................. $ $
Total Delinquencies plus
Forbearance Loans, Foreclosures
Pending and Bankruptcies
Pending as a Percentage of Total
Loans Outstanding.................... % % % %
REO PROPERTIES(5).................... $ $
REO Properties as a
Percentage of Total Loans
Outstanding.......................... % % % %
</TABLE>
______________
S-19
<PAGE>
(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 upon foreclosure of the related mortgage loans. 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 "REO
Properties" for delinquency balances, percentages and numbers related
to REO properties that have been purchased upon foreclosure of the
related mortgage loans.
(2) For each of the Forbearance Loans, the Master Servicer has entered into
a written forbearance agreement with the related mortgagor, based on
the Master 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 Master 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 Master Servicer's 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 upon foreclosure of the related
mortgage loans, including mortgaged properties that were purchased by
the Seller after the respective dates
indicated.
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 by the Seller's that were originated as of the date three
months prior to the date 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 or to foreclosure or bankruptcy
proceedings or REO property status. In the absence of such mortgage loans, the
delinquency, forbearance, foreclosure, bankruptcy and REO property
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<PAGE>
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.
The information set forth in the preceding paragraphs concerning ____ and
__________ has been provided by [Names of Sellers].
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool 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 Notes,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise, if the Company deems such removal necessary or
appropriate. The Company believes that the information set forth herein will be
substantially representative of the characteristics of the Mortgage Pool as it
will be constituted at the time the Notes are issued although the range of
Mortgage Rates and maturities and certain other characteristics of the Mortgage
Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the
Notes and will be filed, together with the Servicing Agreement, the Trust
Agreement and the Indenture, with the Securities and Exchange Commission within
fifteen days after the initial issuance of the Notes. In the event 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 the Current
Report on Form 8-K.
See "The Mortgage Pools" and "Certain Legal Aspects of Mortgage Loans"
in the Prospectus.
THE ISSUER
GENERAL
The DLJ MBN Trust 19_-_, is a business trust formed under the laws of
the State of [Delaware] pursuant to the Trust Agreement dated as of _____ 1,
19__ between the Company and ________________, as the Owner Trustee for the
transactions described in this Prospectus Supplement. The Trust Agreement
constitutes the "governing instrument" under the laws of the State of [Delaware]
relating to business trusts. After its formation, the Issuer will not engage in
any activity other than (i) acquiring the Mortgage Loans and the other assets of
the Issuer and proceeds therefrom and pledging them to the Indenture Trustee,
(ii) issuing the Notes and the Certificates, (iii) making payments on the
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<PAGE>
Notes and the Certificates and (iv) engaging in other activities that are
necessary, suitable or convenient to accomplish the foregoing or are incidental
thereto or connected therewith.
The assets of the Issuer will consist of the Mortgage Loans and certain
related assets.
The Issuer's principal offices are in ___________, Delaware, in care of
________________, as Owner Trustee, at the address listed below.
THE OWNER TRUSTEE
_______________ is the Owner Trustee under the Trust Agreement.
__________________ is a [Delaware] banking corporation and its principal offices
are located at ____________________.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Bondholders for
any action taken or for refraining from the taking of any action in good faith
pursuant to the Trust Agreement or for errors in judgment; provided, however,
that none of the Owner Trustee and any director, officer or employee thereof
will be protected against any liability which would otherwise be imposed by
reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
Trust Agreement. All persons into which the Owner Trustee may be merged or with
which it may be consolidated or any person resulting from such merger or
consolidation shall be the successor of the Owner Trustee under the Trust
Agreement.
THE INSURER
[Insert Description of Insurer as Appropriate.]
DESCRIPTION OF THE SECURITIES
GENERAL
The Notes will be issued pursuant to the Indenture dated as of
________, between the Issuer and _________, as Indenture Trustee. The
Certificates will be issued pursuant to the Trust Agreement dated as of
____________, between the Company and _____________, as Owner Trustee. The
following summaries describe certain provisions of the Securities, the Indenture
and the Trust Agreement. The summaries do not purport to be complete and are
subject to, and qualified in their entirety by reference to, the provisions of
the applicable agreement. Only the Notes are offered hereby.
The Notes will be secured by the Trust Fund pledged by the Issuer to
the Indenture Trustee pursuant to the Indenture which will consist of: (i) the
Mortgage Loans; (ii)
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<PAGE>
collections in respect of principal of the Mortgage Loans received after the
applicable CutOff Date and collections in respect of interest on the Mortgage
Loans from the Cut-Off Date relating to the Mortgage Loan; (iii) the amounts on
deposit in the Custodial Account allocated to the Mortgage Loans and the Payment
Account (excluding net earnings thereon); (iv) the Policy; (v) certain hazard
insurance policies maintained by the Mortgagors or by or on behalf of the Master
Servicer or related subservicer in respect of the Mortgage Loans and (vi) an
assignment of the Company's rights under the Purchase Agreement and the
Servicing Agreement.
The Notes will be issued in denominations of $1,000 and integral
multiples in excess thereof. See "--Book-Entry Securities" below.
BOOK-ENTRY SECURITIES
General. Beneficial Owners (as defined in the Prospectus) that are not
Participants or Intermediaries (as defined in the Prospectus) but desire to
purchase, sell or otherwise transfer ownership of, or other interests in, the
related Book-Entry Securities may do so only through Participants and
Intermediaries. In addition, Beneficial Owners will receive all payments of
principal of and interest on the related Book-Entry Securities from the Paying
Agent (as defined in the Prospectus) through DTC and Participants. Accordingly,
Beneficial Owners may experience delays in their receipt of payments. Unless and
until Definitive Securities are issued for the related Book-Entry Securities, it
is anticipated that the only registered Bondholder of such Book-Entry Securities
will be Cede, as nominee of DTC. Beneficial Owners will not be recognized by the
Indenture Trustee or the Master Servicer as Bondholders, as such term is used in
the Indenture, and Beneficial Owners will be permitted to receive information
furnished to Bondholders and to exercise the rights of Bondholders only
indirectly through DTC, its Participants and Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Book-Entry Securities among Participants and to receive and transmit payments
of principal of, and interest on, such Book-Entry Securities. Participants and
Intermediaries with which Beneficial Owners have accounts with respect to such
Book-Entry Securities similarly are required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not possess physical
certificates evidencing their interests in the Book-Entry Securities, the Rules
provide a mechanism by which Beneficial Owners, through their Participants and
Intermediaries, will receive payments and will be able to transfer their
interests in the Book- Entry Securities.
None of the Company, the Master Servicer, the Insurer or the Indenture
Trustee 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 Book-Entry
Securities held by Cede, as nominee for DTC, or for
S-23
<PAGE>
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
Definitive Securities. Definitive Securities 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 Securities--Form of Securities."
Upon the occurrence of an event described in the Prospectus in the
third paragraph under "Description of the Securities--Form of Securities," the
Indenture Trustee is required to notify, through DTC, Participants who have
ownership of Book-Entry Securities as indicated on the records of DTC of the
availability of Definitive Securities for their Book- Entry Securities. Upon
surrender by DTC of the definitive certificates representing the Book-Entry
Securities and upon receipt of instructions from DTC for re-registration, the
Indenture Trustee will reissue the Book-Entry Securities as Definitive
Securities issued in the respective principal amounts owned by individual
Beneficial Owners, and thereafter the Indenture Trustee will recognize the
holders of such Definitive Securities as Bondholders under the Indenture.
For additional information regarding DTC and the Book-Entry Securities,
see "Description of the Notes--Form of Notes" in the Prospectus.]
PAYMENTS
Payments on the Notes will be made by the Indenture Trustee or the
Paying Agent on the _____ day of each month or, if such day is not a Business
Day, then the next succeeding Business Day, commencing in __________. Payments
on the Notes will be made to the persons in whose names such Notes are
registered at the close of business on the day prior to each Payment Date or, if
the Notes are no longer Book-Entry Securities, on the Record Date. See
"Description of the Notes--Payments" in the Prospectus. Payments will be made by
check or money order mailed (or upon the request of a Holder owning Notes having
denominations aggregating at least $_________, by wire transfer or otherwise) to
the address of the person entitled thereto (which, in the case of Book-Entry
Securities, will be DTC or its nominee) as it appears on the Security Register
in amounts calculated as described herein on the Determination Date. However,
the final payment in respect of the Notes will be made only upon presentation
and surrender thereof at the office or the agency of the Indenture Trustee
specified in the notice to Holders of such final payment. A "Business Day" is
any day other than (i) a Saturday or Sunday or (ii) a day on which banking
institutions in the State of ___________ are required or authorized by law to be
closed.
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<PAGE>
INTEREST ON THE NOTES
Interest payments will be made on the Notes on each Payment Date at the
Bond Rate for the related Interest Period. The "Bond Rate" for an Interest
Period will generally equal the sum of [(a) LIBOR determined as specified
herein, as of the second LIBOR Business Day prior to the first day of such
Interest Period (or as of two LIBOR Business Days prior to the Closing Date, in
the case of the first Interest Period)] plus (b) ___% per annum. Notwithstanding
the foregoing, in no event will the Bond Rate on any Payment Date exceed a rate
equal to the weighted average of the Loan Rates (net of the applicable Servicing
Fee Rate) (adjusted to an effective rate reflecting accrued interest calculated
on the basis of the actual number of days in the Collection Period commencing in
the month in which such Interest Period commences and a year assumed to consist
of 360 days).
Interest on the Notes in respect of any Payment Date will accrue on the
applicable Bond Principal Balance from the preceding Payment Date (or in the
case of the first Payment Date, from the Closing Date) through the day preceding
such Payment Date (each such period, an "Interest Period") on the basis of the
actual number of days in the Interest Period and a 360-day year. Interest
payments on the Notes will be funded from P&I Collections [and with respect to
the Notes, if necessary, from draws on the Policy.
[On each Payment Date, LIBOR shall be established by the Indenture
Trustee and as to any Interest Period, LIBOR will equal the rate for United
States dollar deposits for one month which appears on the Telerate Screen Page
3750 as of 11:00 A.M., London time, on the second LIBOR Business Day prior to
the first day of such Interest Period. "Telerate Screen Page 3750" means the
display designated as page 3750 on the Telerate Service (or such other page as
may replace page 3750 on that service for the purpose of displaying London
interbank offered rates of major banks). If such rate does not appear on such
page (or such other page as may replace that page on that service, or if such
service is no longer offered, such other service for displaying LIBOR or
comparable rates as may be selected by the Indenture Trustee after consultation
with the Master Servicer), the rate will be the Reference Bank Rate. The
"Reference Bank Rate" will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks (which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by _________) as of 11:00 A.M., London time, on the day that is
two LIBOR Business Days prior to the immediately preceding Payment Date to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the Bond Principal Balance then outstanding. The
Indenture Trustee will request the principal London office of each of the
reference banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate will be the arithmetic mean of the quotations.
If on such date fewer than two quotations are provided as requested, the rate
will be the arithmetic mean of the rates quoted by one or more major banks in
New York City, selected by the Indenture Trustee after consultation with the
Master Servicer, as of 11:00 A.M., New York City time, on such date for loans in
U.S. Dollars to leading European banks for a period of one month in amounts
approximately equal to the Bond Principal
S-25
<PAGE>
Balance then outstanding. If no such quotations can be obtained, the rate will
be LIBOR for the prior Payment Date. "LIBOR Business Day" means any day other
than (i) a Saturday or a Sunday or (ii) a day on which banking institutions in
the State of [New York] or in the city of London, England are required or
authorized by law to be closed.]
PRINCIPAL PAYMENTS ON THE NOTES
On each Payment Date, other than the Payment Date in _________,
principal payments except as provided below will be due and payable on the Notes
in an amount equal to the Principal Collection Distribution Amount (as defined
below) for such Payment Date, together with any Liquidation Loss Amounts. On the
Payment Date in ______, principal will be due and payable on the Notes in
amounts equal to the Bond Principal Balance on such Payment Date. In no event
will principal payments on the Notes on any Payment Date exceed the Bond
Principal Balance thereof on such date.
ALLOCATION OF P&I COLLECTIONS
The Master Servicer on behalf of the Issuer will establish an account
(the "Distribution Account") into which the Master Servicer will deposit P&I
Collections for each Payment Date on the Business Day prior thereto. The
Distribution Account will be an Eligible Account. Amounts on deposit in the
Distribution Account will be invested in Eligible Investments maturing on or
before the Business Day prior to the related Payment Date.
On each Payment Date, P&I Collections will be allocated from the
Distribution Account in the following order of priority:
(i) to the Notes, the sum of the following:
(a) as payment for the accrued interest due and any
overdue accrued interest at the Bond Rate (as defined herein) on the
Bond Principal Balance (as
defined herein) of the Notes;
(b) an amount equal to the Principal Collection
Distribution Amount, applied to reduce the Bond Principal Balance of
the Notes; and
(c) an additional amount to be applied to reduce the
Bond Principal Balance (each such amount, a "Additional Principal
Distribution Amount"), to the extent necessary to bring the Outstanding
Reserve Amount up to the Reserve Amount Target; and
(ii) to the Insurer, the aggregate of all payments, if
any, made by the Insurer under the Policy [and any other amounts].
(iii) as payment for the premium for the Policy;
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<PAGE>
(iv) to reimburse prior draws made on the Policy (with
interest thereon);
(v) any other amounts owed to the Insurer pursuant to
the Insurance Agreement; and
(vi) the remaining amount, if any, of the P&I Collections
shall be allocated to the Certificates.
For any Payment Date, the "Principal Collection Distribution Amount"
will equal Principal Collections for such Payment Date.
"Liquidation Loss Amount" means with respect to any Liquidated Mortgage
Loan, the unrecovered Principal Balance thereof at the end of the related
Collection Period in which such Mortgage Loan became a Liquidated Mortgage Loan,
after giving effect to the Net Liquidation Proceeds allocable to such Principal
Balance in connection therewith.
A "Liquidated Mortgage Loan" means, as to any Payment Date, any
Mortgage Loan in respect of which the Master Servicer has determined, based on
the servicing procedures specified in the Servicing Agreement, as of the end of
the preceding Collection Period that all liquidation proceeds which it expects
to recover with respect to the disposition of the related Mortgaged Property
have been recovered.
As of the Closing Date, the Reserve Amount Target is equal to at least
___% of the Cut-Off Date Pool Balance. The Reserve Amount Target may be
increased or reduced from time to time pursuant to the terms of the Pooling and
Servicing Agreement, with the consent of the Rating Agencies and the Indenture
Trustee. To the extent the Reserve Amount Target is reduced on any Payment Date,
the amount of the Principal Collections distributed pursuant to clause (ii)(b)
will be reduced on such Payment Date and on each subsequent Payment Date to the
extent the remaining Outstanding Reserve Amount is in excess of the reduced
Reserve Amount Target until the Outstanding Reserve Amount equals the Reserve
Amount Target.
The Indenture Trustee will establish the Payment Account into which the
Master Servicer will deposit the portion of the P&I Collections allocable to the
Mortgage Loan for each Payment Date on the Business Day prior thereto. The
Payment Account will be an Eligible Account. Amounts on deposit in the Payment
Account will be invested in Eligible Investments maturing on or before the
Business Day prior to the related Payment Date.
The "Bond Principal Balance" of the Notes on any day is the initial
principal balance thereof as of the Closing Date, reduced by all payments of
principal thereon as of such
day.
Except as provided below, payments pursuant to clause (i) will be
allocated to the Notes based on the amount of interest such Bond is entitled to
receive pursuant to such
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<PAGE>
clause. Except as provided below, payments pursuant to clauses (ii), (iii) and
(vi) will constitute payments of principal.
An "Amortization Event" will be deemed to occur upon (i) the occurrence
of certain events relating to a violation of the Seller's obligations under the
Mortgage Loan Purchase Agreement, (ii) the occurrence of certain events of
bankruptcy, insolvency or receivership relating to the Seller or the Master
Servicer, (iii) the Issuer becomes subject to regulation as an investment
company within the meaning of the Investment Company Act of 1940, as amended, or
(iv) the aggregate of all draws under the Policy exceeds __________;
Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for the Seller, the conservator, receiver or
trustee-in-bankruptcy may have the power to prevent the commencement of the
Amortization Period.
OUTSTANDING RESERVE AMOUNT
The distribution of the Additional Principal Distribution Amount, if
any, to the Bondholders, will create the Outstanding Reserve Amount. The
Outstanding Reserve Amount, if any, will be available to absorb any Liquidation
Loss Amounts that are allocated to the Mortgage Loans and not covered by
Principal Collections and Interest Collections. Any Liquidation Loss Amounts
allocable to the Bondholders and not covered by such overcollateralization will
be covered by draws on the Policy to the extent provided herein. The
"Outstanding Reserve Amount" on any Payment Date is the amount, if any, by which
the Pool Balance as of the end of the related Collection Period exceed the Bond
Principal Balance on such day (after giving effect to all amounts payable and
allocable to principal on the Notes that are applied to reduce the Bond
Principal Balance on such Payment Date).
To the extent that such overcollateralization is insufficient or not
available to absorb Liquidation Loss Amounts, and payments are not made under
the Policy, a Bondholder may incur a loss.
THE PAYING AGENT
The Paying Agent shall initially be the [Indenture Trustee], together
with any successor thereto. The Paying Agent shall have the revocable power to
withdraw funds from the Payment Account for the purpose of making payments to
the Securityholders.
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MATURITY
The Notes will be payable in full on ___________. In addition, the
Issuer will pay the Notes in full upon the exercise by the Master Servicer of
its option to purchase the assets of the Issuer after the Pool Balance is
reduced to an amount less than or equal to $________ (___% of the initial Pool
Balance). The purchase price will be equal to the sum of the outstanding Pool
Balance and accrued and unpaid interest thereon at the weighted average of the
Loan Rates through the day preceding the Payment Date on which the Notes are
paid in full together with all amounts due and owing to the Insurer.
DESCRIPTION OF THE POLICY
On the Closing Date, the Insurer will issue the Policy in favor of the
[Owner Trustee on behalf of the Issuer] pursuant to an insurance agreement (the
"Insurance
Agreement")
between the Insurer, the Master Servicer and the Trustee. The Policy will
unconditionally and irrevocably guarantee principal payments on the Notes plus
accrued and unpaid interest due on the Notes. On each Payment Date, a draw will
be made on the Policy equal to the sum of (a) the amount by which the sum of
interest accrued at (i) the Bond Rate on the outstanding Bond Principal Balance
of the Notes and (b) the amount (the "Guaranteed Principal Payment Amount"), if
any, [by which the Bond Principal Balance of the Notes exceeds the sum of the
Pool Balance at the end of the related Collection Period (after giving effect to
all amounts paid and allocable to principal on the Notes that are applied to
reduce the Bond Principal Balances on such Payment Date)]. Pursuant to the terms
of [the Indenture], draws under the Policy in respect of the Guaranteed
Principal Payment Amount will be paid on the Notes by the Indenture Trustee, as
principal pro rata, based on the outstanding Bond Principal Balances thereof. In
addition, the Policy will guarantee the payment of the outstanding Bond
Principal Balance of each Bond on the Payment Date in _____________ (after
giving effect to all other amounts paid and allocable to principal on such
Payment Date). In the absence of payments under the Policy, Bondholders will
directly bear the credit and other risks associated with their investment to the
extent such risks are not covered by overcollateralization. The Policy does not
guarantee any payments to the Certificates.
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS
The yield to maturity of the Notes will depend on the price paid by the
holder for such Bond, the Bond Interest Rate and the rate and timing of
principal payments (including payments in excess of required installments,
prepayments or terminations, liquidations and repurchases) on the Mortgage Loans
and the allocation thereof.
In general, if a Bond is purchased at a premium over its face amount
and payments of principal on such Bond occur at a rate faster than anticipated
at the time of purchase,
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the purchaser's actual yield to maturity will be lower than that assumed at the
time of purchase. Conversely, if a Bond is purchased at a discount from its face
amount and payments of principal on such Bond occur at a rate slower than that
assumed at the time of purchase, the purchaser's actual yield to maturity will
be lower than that originally
anticipated.
The rate and timing of defaults on the Mortgage Loans will also affect
the rate and timing of principal payments on the Mortgage Loans and thus the
yield on the Notes. There can be no assurance as to the rate of losses or
delinquencies on any of the Mortgage Loans, however, such losses and
delinquencies may be expected to be higher than those of traditional first lien
mortgage loans. To the extent that any losses are incurred on any of the
Mortgage Loans that are not covered by overcollateralization or the Policy,
losses resulting from default by Mortgagors may be allocated to the Notes. See
"Risk Factors--Limitations, Reduction and Substitution of Credit Enhancement" in
the Prospectus. Even where the Policy covers all losses incurred on the Mortgage
Loans, the effect of losses may be to increase prepayment experience on the
Mortgage Loans, thus reducing average weighted life and affecting yield to
maturity.
[With respect to ___ Mortgage Loans representing ___% of the Cut-off
Date Pool Balance, the Mortgage Rate at origination is below the rate that would
result from the sum of the then-applicable Index and Gross Margin. Under the
applicable underwriting standards, Mortgagors under such Mortgage Loans are
generally qualified based on an assumed payment which reflects a rate
significantly lower than the maximum rate. The repayment of any such Mortgage
Loan may thus be dependent on the ability of the mortgagor to make larger
interest payments following the adjustment of the Mortgage Rate.]
With respect to the Mortgage Loans required minimum monthly payments
are equal to [the amount of interest currently accruing thereon,] and therefore
are not expected to significantly amortize the outstanding principal amounts of
the Mortgage Loans prior to maturity. As a result, a borrower will generally be
required to pay a substantial principal amount at the maturity of a Mortgage
Loan. Such Mortgage Loans pose a greater risk of default than fully-amortizing
mortgage loans, because the Mortgagor's ability to make such a substantial
payment at maturity will generally depend on the Mortgagor's ability to obtain
refinancing of the Mortgage Loans or to sell the Mortgaged Property prior to the
maturity of the Mortgage Loan. See "Yield and Prepayment Considerations" in the
Prospectus and "Risk Factors" herein.
There can be no assurance as to the rate of principal payments on the
Mortgage Loans. The rate of principal payments may fluctuate substantially from
time to time.
DESCRIPTION OF THE PURCHASE AGREEMENT
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The Mortgage Loans to be transferred to the Issuer by the Company were
or will be purchased by the Company from [Name of Master Servicer] (the
"Seller") pursuant to the Purchase Agreement. Under the Purchase Agreement, the
Seller has agreed to transfer to the Company the Initial Mortgage Loans.
Pursuant to an assignment by the Company executed on the Closing Date, upon such
transfer to the Company, the Initial Mortgage Loans will be transferred by the
Company to the Issuer, as well as the Company's rights in, to and under the
Purchase Agreement, which will include the right to purchase the Subsequent
Mortgage Loans. The following summary describes certain terms of the form of the
Purchase Agreement and is qualified in its entirety by reference to the form of
Purchase Agreement.
TRANSFER OF MORTGAGE LOANS
Pursuant to the Purchase Agreement, the Seller will transfer and assign
to the Company all of its right, title and interest in and to the Mortgage
Loans, the related mortgage note, mortgages and other related documents
(collectively, the "Related Documents"). The purchase price of the Mortgage
Loans is a specified percentage of the face amount thereof as of the time of
transfer and is payable by the Company, as provided in the Purchase Agreement.
The Purchase Agreement will require that, within the time period
specified therein, the Seller, acting at the Company's request, deliver to
____________________ (the "Custodian") (as the Issuer's agent for such purpose)
the Mortgage Loans and the Related Documents. In lieu of delivery of original
mortgages, the Seller may deliver true and correct copies thereof which have
been certified as to authenticity by the appropriate county recording office
where such mortgage is recorded. In addition, under the terms of the Purchase
Agreement, the Seller will be required to record assignments of mortgages
relating to such Mortgage Loans.
REPRESENTATIONS AND WARRANTIES
The Seller will represent and warrant to the Company that, among other
things, as of _________________, it is duly organized and in good standing and
that it has the authority to consummate the transactions contemplated by the
Purchase Agreement.
The Seller will also represent and warrant to the Company, that, among
other things, (a) the information with respect to the Initial Mortgage Loans set
forth in the schedule attached to the Purchase Agreement is true and correct in
all material respects and (b) immediately prior to the sale of the Initial
Mortgage Loans to the Company, the Seller was the sole owner and holder of the
Initial Mortgage Loans free and clear of any and all liens and security
interests. The Seller will also represent and warrant to the Company, that,
among other things, as of ______________, (a) the Purchase Agreement constitutes
a legal, valid and binding obligation of the Seller and (b) the Purchase
Agreement constitutes a valid transfer and assignment to the Company of all
right, title and interest of the Seller
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in and to the Initial Mortgage Loans and the proceeds thereof. Such
representations and warranties will also be made by the Seller with respect to
the Subsequent Mortgage Loans as of the date of transfer to the Issuer. The
benefit of the representations and warranties made to the Company by the Seller
in the Purchase Agreement will be assigned by the Company to the Issuer and by
the Issuer to the Indenture Trustee in the Indenture.
Within ____ days of the Closing Date, the Custodian will review or
cause to be reviewed the Mortgage Loans and the Related Documents and if any
Mortgage Loan or Related Document is found to be defective in any material
respect and such defect is not cured within ____ days following notification
thereof to the Seller and the Issuer by the Custodian, the Seller will be
obligated under the Purchase Agreement to deposit the Transfer Price into the
Custodial Account. In lieu of any such deposit, the Seller may substitute an
Eligible Substitute Loan. Any such purchase or substitution will result in the
removal of such Defective Loan from the Trust Fund and the lien of the
Indenture. The obligation of the Seller to remove a Defective Loan from the
Trust Fund is the sole remedy regarding any defects in the Mortgage Loans and
Related Documents available to the Indenture Trustee or the Bondholders against
the Seller.
With respect to any Mortgage Loan, the "Transfer Price" is equal to the
Principal Balance of such Mortgage Loan at the time of any removal described
above plus accrued and unpaid interest thereon to the date of removal. In
connection with the substitution of an Eligible Substitute Loan, the Seller will
be required to deposit in the Custodial Account an amount (the "Substitution
Adjustment Amount") equal to the excess of the Principal Balance of the related
Defective Loan over the Principal Balance of such Eligible Substitute Loan.
An "Eligible Substitute Loan" is a mortgage loan substituted by the
Seller for a Defective Loan which must, on the date of such substitution, (i)
have an outstanding Principal Balance (or in the case of a substitution of more
than one Mortgage Loan for a Defective Loan, an aggregate Principal Balance),
not in excess of the Principal Balance relating to such Defective Loan; (ii)
have a Loan Rate, Net Loan Rate and Gross Margin no lower than and not more than
1% in excess of the Loan Rate, Net Loan Rate and Gross Margin, respectively, of
such Defective Loan; (iii) have a Combined Loan-to-Value Ratio at the time of
substitution no higher than that of the Defective Loan at the time of
substitution; (iv) have a remaining term to maturity not more than one year
earlier and not later than the remaining term to maturity of the Defective Loan;
(v) comply with each representation and warranty as to the Mortgage Loans set
forth in the Purchase Agreement (deemed to be made as of the date of
substitution); and (vi) satisfy certain other conditions specified in the
Indenture.
In addition the Seller will be obligated to deposit the Transfer Price
or substitute an Eligible Substitute Loan with respect to a Mortgage Loan as to
which there is a breach of a representation or warranty in the Purchase
Agreement.
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Mortgage Loans required to be removed from the Trust Fund as described
in the preceding paragraphs are referred to as "Defective Loans."
ASSIGNMENT TO THE ISSUER
The Master Servicer expressly acknowledges and consents to the
Company's transfer of its rights relating to the Mortgage Loans and its
obligation to pay for the Subsequent Mortgage Loans under the Purchase Agreement
to the Issuer, the Issuer's pledge of its interest in the Purchase Agreement to
the Indenture Trustee and the enforcement by the Indenture Trustee of any such
right or remedy against the Master Servicer.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing
Agreement, dated as of ________ 1, 19__ between the Company and the Master
Servicer. The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the Servicing
Agreement. Whenever particular sections or defined terms of the Servicing
Agreement are referred to, such sections or defined terms are thereby
incorporated herein by reference.
P&I COLLECTIONS
The Master Servicer shall establish and maintain an account (the
"Custodial Account") in which the Master Servicer shall deposit or cause to be
deposited any amounts representing payments on and any collections received in
respect of the Mortgage Loans received by it subsequent to the Cut-Off Date. The
Custodial Account shall be an Eligible Account. On the _____ day of each month
or if such day is not a Business Day, the next succeeding Business Day (the
"Determination Date"), the Master Servicer will notify the Indenture Trustee of
the amount of P&I Collections to be included in funds available distribution to
the Mortgage Loan for the related Payment Date.
"Eligible Investments" are specified in the Servicing Agreement and are
limited to investments which meet the criteria of the Rating Agencies from time
to time as being consistent with their then current ratings of the Notes.
On the Business Day prior to each Payment Date, the Master Servicer
will make the following withdrawals from the Custodial Account and deposit such
amounts as follows:
(i) to the Distribution Account, an amount equal to the P&I
Collections for such Payment Date; and
(ii) to pay to itself various reimbursement amounts and other
amounts as provided in the Servicing Agreement.
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As to any Payment Date, "P&I Collections" will equal the sum of (a)
Interest Collections for such Payment Date and (b) Principal Collections for
such date.
All collections on the Mortgage Loans will generally be allocated
between amounts collected in respect of interest and amounts collected in
respect of principal. As to any Payment Date, "Interest Collections" will be
equal to the sum of (i) the amounts collected during the related Collection
Period, including Net Liquidation Proceeds (as defined below), allocated to
interest, reduced by the Servicing Fees for such Collection Period and (ii) the
interest portion of the Transfer Price for any Defective Loans. As to any
Payment Date, "Principal Collections" will be equal to the sum of (i) the amount
collected during the related Collection Period, including Net Liquidation
Proceeds (as defined herein) allocated to principal and (ii) the principal
portion of the Transfer Price for any Defective Loans and any Substitution
Adjustment Amounts.
As to any Payment Date other than the first Payment Date, the
"Collection Period" is the calendar month preceding the month of such Payment
Date and in the case of the first Payment Date the period from the Cut-Off Date
to ___________.
"Net Liquidation Proceeds" with respect to a Mortgage Loan are the
proceeds (excluding amounts drawn on the Policy) received in connection with the
liquidation of any Mortgage Loan, whether through trustee's sale, foreclosure
sale or otherwise, reduced by related expenses, but not including the portion,
if any, of such amount that exceeds the Principal Balance of the Mortgage Loan
at the end of the Collection Period immediately preceding the Collection Period
in which such Mortgage Loan became a Liquidated Mortgage Loan.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Mortgage Loans as of such date. The
Principal Balance of a Mortgage Loan (other than a Liquidated Mortgage Loan) on
any day is equal to the Cut-Off Date Principal Balance thereof, minus all
collections credited against the Principal Balance of such Mortgage Loan prior
to such day. The Principal Balance of a Liquidated Mortgage Loan after final
recovery of related Liquidation Proceeds shall be zero.
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Master Servicer will make reasonable efforts to collect all
payments called for under the Mortgage Loans and will, consistent with the
Servicing Agreement, follow such collection procedures as it follows from time
to time with respect to the mortgage loans in its servicing portfolio comparable
to the Mortgage Loans. Consistent with the above, the Master Servicer may in its
discretion waive any late payment charge or any assumption or other fee or
charge that may be collected in the ordinary course of servicing the Mortgage
Loans.
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With respect to the Mortgage Loans, the Master Servicer may arrange
with a borrower a schedule for the payment of interest due and unpaid for a
period, provided that any such arrangement is consistent with the Master
Servicer's policies with respect to
mortgage loans.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer will foreclose upon or otherwise comparably convert
to ownership Mortgaged Properties securing such of the Mortgage Loans as come
into default when in accordance with applicable servicing procedures under the
Servicing Agreement, no satisfactory arrangements can be made for the collection
of delinquent payments. In connection with such foreclosure or other conversion,
the Master Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general subordinate mortgage servicing
activities, provided the Master Servicer will not be required to expend its own
funds in connection with foreclosure or other conversion, correction of default
on a related senior mortgage loan or restoration of any property unless, in its
sole judgment, such foreclosure, correction or restoration will increase Net
Liquidation Proceeds. The Master Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Bondholders.
EVIDENCE AS TO COMPLIANCE
The Servicing Agreement provides for delivery on or before March 31 in
each year, beginning in March 31, 19__, to the Indenture Trustee of an annual
statement signed by an officer of the Master Servicer to the effect that the
Master Servicer has fulfilled its material obligations under the Servicing
Agreement throughout the preceding calendar year, except as specified in such
statement.
On or before March 31 of each year, beginning March 31, 19__, the
Master Servicer will furnish a report prepared by a firm of nationally
recognized independent public accountants (who may also render other services to
the Master Servicer) to the Indenture Trustee to the effect that such firm has
examined certain documents and the records relating to servicing of the Mortgage
Loans under the Servicing Agreement for the preceding calendar year and that, on
the basis of such examination, such firm believes that such servicing was
conducted in compliance with the Servicing Agreement except for (a) such
exceptions as such firm believes to be immaterial and (b) such other exceptions
as shall be set forth in such report.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Servicing Agreement provides that the Master Servicer may not
resign from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless (i) such duties and obligations are no
longer permissible under applicable
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law or are in material conflict by reason of applicable law with any other
activities of a type and nature presently carried on by it or its affiliate or
(ii) upon the satisfaction of the following conditions: (a) the Master Servicer
has proposed a successor servicer to the Issuer and the Indenture Trustee in
writing and such proposed successor servicer is reasonably acceptable to the
Issuer and the Indenture Trustee; (b) the Rating Agencies have confirmed to the
Issuer and the Indenture Trustee that the appointment of such proposed successor
servicer as the Master Servicer will not result in the reduction or withdrawal
of the then current rating of the Notes and (c) such proposed successor servicer
is reasonably acceptable to the Insurer. No such resignation will become
effective until the Indenture Trustee or a successor servicer has assumed the
Master Servicer's obligations and duties under the Servicing Agreement.
The Master Servicer may perform any of its duties and obligations under
the Servicing Agreement through one or more subservicers or delegates, which may
be affiliates of the Master Servicer. Notwithstanding any such arrangement, the
Master Servicer will remain liable and obligated to the Issuer for the Master
Servicer's duties and obligations under the Servicing Agreement, without any
diminution of such duties and obligations and as if the Master Servicer itself
were performing such duties and obligations.
The Servicing Agreement provides that the Master Servicer will
indemnify the Owner Trustee and the Indenture Trustee, as the case may be, from
and against any loss, liability or expense, imposed by reason of its willful
misfeasance, bad faith or gross negligence in the performance of its duties
under the Servicing Agreement or by reason of its reckless disregard of its
obligations and duties under the Servicing Agreement. The Servicing Agreement
provides that neither the Master Servicer nor its directors, officers, employees
or agents will be under any other liability to the Owner Trustee, the Indenture
Trustee, or any other person for any action taken or for refraining from taking
any action pursuant to the Servicing Agreement. The Master Servicer and any
director or officer or employee or agent of the Master Servicer shall be
indemnified by the Issuer and held harmless against any loss, liability or
expense incurred in connection with any legal action relating to the Servicing
Agreement or the Securities, other than any loss, liability or expense related
to any specific Mortgage Loan or Mortgage Loans (except as any such loss,
liability or expense shall be otherwise reimbursable pursuant to the Servicing
Agreement) and any loss, liability or expense incurred by reason of its willful
misfeasance, bad faith or gross negligence in the performance of its duties
thereunder or by reason of its reckless disregard of its obligations and duties
thereunder. In addition, the Servicing Agreement provides that the Master
Servicer will not be under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its servicing responsibilities under the
Servicing Agreement and which in its opinion may expose it to any expense or
liability. The Master Servicer may, in its sole discretion, undertake any such
legal action which it may deem necessary or desirable with respect to the
Servicing Agreement and the rights and duties of the parties thereto.
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Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer shall be a party, or any corporation
succeeding to the business of the Master Servicer shall be the successor of the
Master Servicer hereunder, without the execution or filing of any paper or any
further act on the part of any of the parties hereto, anything in the Servicing
Agreement to the contrary notwithstanding.
EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" will consist of: (i) any failure by
the Master Servicer to (a) deposit in the Custodial Account or Payment Account
any deposit required to be made under the Servicing Agreement or (b) to pay when
due any amount payable by it under the terms of the Insurance Agreement, which
failure continues unremedied for three Business Days after the giving of written
notice of such failure to the Master Servicer by the Issuer or Indenture
Trustee, or to the Master Servicer, the Issuer and the Indenture Trustee by the
Insurer; (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 Servicing
Agreement or Insurance Agreement which, in each case, materially and adversely
affects the interests of the Bondholders or the Insurer and continues unremedied
for ____ days or ____ days, respectively, after the giving of written notice of
such failure to the Master Servicer by the Issuer or the Indenture Trustee, or
to the Master Servicer, the Issuer and the Indenture Trustee by the Insurer;
(iii) certain events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings relating to the Master Servicer and
certain actions by the Master Servicer indicating insolvency, reorganization or
inability to pay its obligations; or (iv) any merger, consolidation, or
combination with another entity and the surviving entity thereof or corporate
successor is not rated at least investment grade by the Rating Agencies. Under
the above circumstances, the Indenture Trustee with the consent of the Insurer
or the Insurer may deliver written notice to the Master Servicer terminating all
the rights and obligations of the Master Servicer under the Servicing Agreement.
Under certain other circumstances, the Insurer with the consent of 51% of the
outstanding principal amount of the Notes and the Certificates may terminate all
the rights and obligations of the Master Servicer under the Servicing Agreement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for the applicable periods referred to
therein or referred to under clause (ii) above for the applicable periods
referred to therein, shall not constitute an Event of Servicing Termination if
such delay or failure could not be prevented by the exercise of reasonable
diligence by the Master Servicer and such delay or failure was caused by an act
of God or other similar occurrence. Upon the occurrence of any such event the
Master Servicer shall not be relieved from using reasonable efforts to perform
its obligations in a timely manner in accordance with the terms of the Servicing
Agreement and the Master Servicer shall provide the Issuer, the Insurer and the
Indenture Trustee prompt notice of such failure or delay by it, together with a
description of its efforts to so perform its obligations.
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RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied, the
Indenture Trustee with the consent of the Insurer or the Insurer may terminate
all of the rights and obligations of the Master Servicer under the Servicing
Agreement with respect to the Mortgage Loans, whereupon the Indenture Trustee
will succeed to all the responsibilities, duties and liabilities of the Master
Servicer under the Servicing Agreement and will be entitled to similar
compensation arrangements. In the event that the Indenture Trustee would be
obligated to succeed the Master Servicer but is unwilling or unable so to act,
it may appoint, or petition a court of competent jurisdiction for the
appointment of, an established housing and home finance institution or other
mortgage loan or mortgage loan servicer with all licenses and permits required
to perform its obligations under the Servicing Agreement and having a net worth
of at least $25,000,000 and acceptable to the Insurer to act as successor to the
Master Servicer under the Servicing Agreement. Pending such appointment, the
Indenture Trustee will be obligated to act in such capacity unless prohibited by
law. Such successor will be entitled to receive the same compensation that the
Master Servicer would otherwise have received (or such lesser compensation as
the Issuer and such successor may agree). A receiver or conservator for the
Master Servicer may be empowered to prevent the termination and replacement of
the Master Servicer where the only Event of Servicing Termination that has
occurred is an Insolvency Event.
AMENDMENT
The Servicing Agreement may be amended from time to time by the Master
Servicer, the Issuer and the Indenture Trustee, [with the consent of the
Insurer,] provided that the Rating Agencies confirm in writing that such
amendment will not result in a downgrading or a withdrawal of the rating then
assigned to the Notes.
DESCRIPTION OF THE INDENTURE
The following summary describes certain terms of the Indenture. The
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Indenture. Whenever particular
sections or defined terms of the Indenture are referred to, such sections or
defined terms are thereby incorporated herein by reference.
THE TRUST FUND
Simultaneously with the issuance of the Notes, the Issuer will pledge
the Trust Fund to the Indenture Trustee as collateral for the Notes.
REPORTS TO HOLDERS
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The Indenture Trustee will mail to each Holder of Notes, at its address
listed on the Security Register maintained with the Indenture Trustee a report
setting forth certain amounts relating to the Notes for each Payment Date, among
other things:
(i) the amount of principal, if any, payable on such Payment Date
to Bondholders separately stating the portion thereof in respect of Liquidation
Loss Amounts and Additional Principal Distribution Amount and stating the amount
of any remaining Liquidation Loss Amounts;
(ii) the amount of interest payable on such Payment Date to
Bondholders separately stating the portion thereof in respect of overdue accrued
interest and stating the amount of remaining overdue accrued interest;
(iii) the Bond Principal Balance of the Notes after giving effect
to the payment of principal on such Payment Date;
(iv) P&I Collections for the related Collection Period;
(v) the aggregate Principal Balance of the Mortgage Loans as of
last day of the related Collection Period;
[(vi) the amount paid, if any, under the Policy separately stating
the portion thereof included in (i) and (ii) above; and]
(vii) the Outstanding Reserve Amount after giving effect to the
payment of principal on the Notes on such Payment Date.
In the case of information furnished pursuant to clauses (i) and (ii)
above, the amounts shall be expressed as a dollar amount per $1,000 in face
amount of Notes.
CERTAIN COVENANTS
The Indenture will provide that the Issuer may not consolidate with or
merge into any other entity, unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes the
Issuer's obligation to make due and punctual payments upon the Notes and the
performance or observance of any agreement and covenant of the Issuer under the
Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Issuer has been advised
that the ratings of the Notes then in effect would not be reduced or withdrawn
by any Rating Agency as a result of such merger or consolidation, (v) any action
that is necessary to maintain the lien and security interest created by the
Indenture is taken and (vi) the Issuer has received an Opinion of Counsel to the
effect that such consolidation or merger would have no material adverse tax
consequence to the Issuer or to any Bondholder or
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Certificateholder. The Issuer will not, among other things, (i) except as
expressly permitted by the Indenture, sell, transfer, exchange or otherwise
dispose of any of the assets of the Issuer, (ii) claim any credit on or make any
deduction from the principal and interest payable in respect of the Notes (other
than amounts withheld under the Code or applicable state law) or assert any
claim against any present or former holder of Notes because of the payment of
taxes levied or assessed upon the Issuer, (iii) permit the validity or
effectiveness of the Indenture to be impaired or permit any person to be
released from any covenants or obligations with respect to the Notes under the
Indenture except as may be expressly permitted thereby or (iv) permit any lien,
charge excise, claim, security interest, mortgage or other encumbrance to be
created on or extend to or otherwise arise upon or burden the assets of the
Issuer or any part thereof, or any interest therein or the proceeds thereof. The
Issuer may not engage in any activity other than as specified under "The Issuer"
herein.
MODIFICATION OF INDENTURE
With the consent of both the holders of a majority of the outstanding
Notes and the Insurer, the Issuer and the Indenture Trustee may execute a
supplemental indenture to add provisions to, change in any manner or eliminate
any provisions of, the Indenture, or modify (except as provided below) in any
manner the rights of the Bondholders. Without the consent of the holder of each
outstanding Bond affected thereby, however, no supplemental indenture will: (i)
change the due date of any installment of principal of or interest on any Bond
or reduce the principal amount thereof, the interest rate specified thereon or
the redemption price with respect thereto or change any place of payment where
or the coin or currency in which any Bond or any interest thereon is payable;
(ii) impair the right to institute suit for the enforcement of certain
provisions of the Indenture regarding payment; (iii) reduce the percentage of
the aggregate amount of the outstanding Notes, the consent of the holders of
which is required for any supplemental indenture or the consent of the holders
of which is required for any waiver of compliance with certain provisions of the
Indenture or of certain defaults thereunder and their consequences as provided
for in the Indenture; (iv) modify or alter the provisions of the Indenture
regarding the voting of Notes held by the Issuer, the Company or an affiliate of
any of them; (v) decrease the percentage of the aggregate principal amount of
Notes required to amend the sections of the Indenture which specify the
applicable percentage of aggregate principal amount of the Notes necessary to
amend the Indenture or certain other related agreements; (vi) modify any of the
provisions of the Indenture in such manner as to affect the calculation of the
amount of any payment of interest of principal due on any Bond (including the
calculation of any of the individual components of such calculation); or (vii)
permit the creation of any lien ranking prior to or, except as otherwise
contemplated by the Indenture, on a parity with the lien of the Indenture with
respect to any of the collateral for the Notes or, except as otherwise permitted
or contemplated in the Indenture, terminate the lien of the Indenture on any
such collateral or deprive the holder of any Bond of the security afforded by
the lien of the Indenture.
S-40
<PAGE>
The Issuer and the Indenture Trustee may also enter into supplemental
indentures, with the consent of the Insurer and without obtaining the consent of
the Bondholders, for the purpose of, among other things, to cure any ambiguity
or to correct or supplement any provision in the Indenture that may be
inconsistent with any other provision therein.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE ISSUER
Neither the Issuer, the Indenture Trustee nor any director, officer or
employee of the Issuer or the Indenture Trustee will be under any liability to
the Issuer or the related Bondholders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Indenture or for
errors in judgment; provided, however, that none of the Indenture Trustee, the
Issuer and any director, officer or employee thereof will be protected against
any liability which would otherwise be imposed by reason of willful malfeasance,
bad faith or negligence in the performance of duties or by reason of reckless
disregard of obligations and duties under the Indenture. Subject to certain
limitations set forth in the Indenture, the Indenture Trustee and any director,
officer, employee or agent of the Indenture Trustee shall be indemnified by the
Issuer and held harmless against any loss, liability or expense incurred in
connection with investigating, preparing to defend or defending any legal
action, commenced or threatened, relating to the Indenture other than any loss,
liability or expense incurred by reason of willful malfeasance, bad faith or
negligence in the performance of its duties under such Indenture or by reason of
reckless disregard of its obligations and duties under the Indenture. All
persons into which the Indenture Trustee may be merged or with which it may be
consolidated or any person resulting from such merger or consolidation shall be
the successor of the Indenture Trustee under each Indenture.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Notes [will][will not] be treated
as having been issued with "original issue discount" (as defined in the
Prospectus). See "Federal Income Tax Consequences" in the Prospectus. 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 [ ]% [ ]. No representation is made that the Mortgage Loans
will prepay at that rate or any other rate.
The Notes will not 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. In
addition, interest on the Notes will not be treated as "interest on obligations
secured by mortgages on real property" under Section 856(c)(3)(B) of the Code.
The Notes will also not be treated as "qualified mortgages" under Section
860G(a)(3)(C) of the Code.
Prospective investors in the Notes should see "Federal Income Tax
Consequences" and "State and Other Tax Consequences" in the Prospectus for a
discussion of the
S-41
<PAGE>
application of certain federal income and state and local tax laws to the Issuer
and purchasers of the Notes.
ERISA CONSIDERATIONS
Any fiduciary or other investor of Plan assets that proposes to acquire
or hold the Notes on behalf of or with Plan assets of any Plan should consult
with its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code to the proposed investment. See "ERISA Considerations" in the
Prospectus.
LEGAL INVESTMENT
The Notes will constitute "mortgage related securities" for purposes of
SMMEA so long as they are rated in the highest two rating categories by a Rating
Agency. See "Legal Investment" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Company, the Notes.
The Notes will be purchased from the Company by the Underwriter and
will be 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. The proceeds to the Company from the sale of the Notes are expected to be
approximately $___________, before the deduction of expenses payable by the
Company estimated to be approximately $_______. The Underwriter may effect such
transactions by selling the Notes to or through dealers, and such dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriter. In connection with the sale of the Notes, the
Underwriter may be deemed to have received compensation from the Company in the
form of underwriting compensation. The Underwriter and any dealers that
participate with the Underwriter in the distribution of the Notes may be deemed
to be underwriters and any profit on the resale of the Notes positioned by them
may be deemed to be underwriting discounts and commissions under the Securities
Act of 1933.
The Company has been advised by the Underwriter that it presently
intends to make a market in the Notes offered hereby; however, it is not
obligated to do so, any market-making may be discontinued at any time, and there
can be no assurance that an active public market for the Notes will develop.
S-42
<PAGE>
The Underwriting Agreement provides that the Company will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, or contribute payments the Underwriter may be required
to make in respect thereof.
LEGAL MATTERS
Certain legal matters with respect to the Notes will be passed upon for
the Company by [Thacher Proffitt & Wood], New York, New York and for the
Underwriter by ________________, New York, New York.
RATINGS
It is a condition to issuance that the Notes be rated "___" by
_______________ and "___" by ___________________. The Company has not requested
a rating on the Notes by any rating agency other than _______________ and
_______________. However, there can be no assurance as to whether any other
rating agency will rate the Notes, or, if it does, what rating would be assigned
by any such other rating agency. A rating on the Notes by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Notes by
___________ and ___________________________. A securities rating addresses the
likelihood of the receipt by holders of Notes of distributions on the Mortgage
Loans. The rating takes into consideration the structural, legal and tax aspects
associated with the Notes. The ratings on the Notes do not, however, constitute
statements regarding the possibility that Holders might realize a lower than
anticipated yield. 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.
S-43
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or by the Underwriter. This Prospectus Supplement and the Prospectus do not
constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time since the date of this Prospectus Supplement
or the Prospectus.
_____________
TABLE OF CONTENTS
[To be updated] Page
----
Prospectus Supplement
Summary.................................................................. S-
Risk Factors............................................................. S-
Description of the Mortgage Pool......................................... S-
Servicing of the Mortgage Loans.......................................... S-
The Issuer............................................................... S-
The Owner Trustee........................................................ S-
Description of the Securities............................................ S-
Description of the Purchase
Agreement........................................................... S-
Assignment to the Issuer................................................. S-
Description of the Servicing
Agreement........................................................... S-
Description of the Indenture............................................. S-
Federal Income Tax Consequences.......................................... S-
ERISA Considerations..................................................... S-
Legal Investment......................................................... S-
Method of Distribution................................................... S-
Legal Matters............................................................ S-
Ratings.................................................................. S-
Prospectus
Summary of Prospectus ......................................................
Risk Factors................................................................
The Mortgage Pools..........................................................
Servicing of Mortgage Loans.................................................
Description of Credit Enhancement...........................................
Purchase Obligations........................................................
Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder..............................................
The Company.................................................................
The Agreements..............................................................
Yield Considerations........................................................
Maturity and Prepayment Considerations......................................
Certain Legal Aspects of Mortgage Loans.....................................
Federal Income Tax Consequences.............................................
State and Other Tax Consequences............................................
ERISA Considerations........................................................
Legal Investment Matters ...................................................
Use of Proceeds.............................................................
Methods of Distribution.....................................................
Legal Matters...............................................................
Financial Information.......................................................
Rating......................................................................
Index of Principal Definitions..............................................
<PAGE>
DLJ MORTGAGE ACCEPTANCE
CORP.
DLJ MBN TRUST
19__-__
$____________________
Mortgage-Backed Notes
Series 19__-__
_______________
PROSPECTUS SUPPLEMENT
_______________
______________________________________
________________, 19__
[UNDERWRITER]
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
PROSPECTUS
DLJ MORTGAGE ACCEPTANCE CORP.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
MORTGAGE-BACKED NOTES
(ISSUABLE IN SERIES)
This Prospectus relates to Mortgage Pass-Through Certificates (the
"Certificates") and Mortgage-Backed Notes (the "Notes", and together with the
Certificates, the "Securities") 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 a related trust (a "Trust Fund"), the assets of which have been
deposited 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. Each Note of a Series will
represent indebtedness of a Trust Fund, the assets of which have been deposited
by the Depositor pursuant to a Sale and Servicing Agreement executed by the
Depositor, the Trustee and the Master Servicer or pursuant to an Indenture
executed by the Issuer and the Trustee 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 forms of credit support
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 and will have been
acquired by the Depositor from one or more Sellers on or prior to the Closing
Date. Some of the Mortgage Loans or Manufactured Home Loans may have been
originated by an affiliate of the Depositor. 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, balloon 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 Securities 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 related Agreement may be divided into one or more Asset Groups and the
Securities of each separate Class will evidence beneficial ownership of each
corresponding Asset Group. See "Description of the Securities" herein.
Distribution of principal and interest of the Securities 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 the Securities 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
Securities of the related Series. See "Description of the Securities" and
"Yield, Prepayment and Maturity Considerations" herein.
The Depositor's only obligations with respect to any Series will be
pursuant to certain representations and warranties, if any, set forth in the
related Agreement as described herein or in the related Prospectus Supplement.
See "The Agreements" herein.
If specified in the related Prospectus Supplement, one or more separate
elections may be made to treat certain assets of the Trust Fund for a Series of
Certificates as a "Real Estate Mortgage Investment Conduit" (a "REMIC") for
federal income tax purposes. See "Certain Federal Income Tax Considerations"
herein.
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE
SECURITIES, SEE "RISK FACTORS," WHICH BEGINS ON PAGE 9.
----------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF
PAYMENTS ON THE SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF THE DEPOSITOR, THE MASTER SERVICER OR ANY OF THEIR AFFILIATES.
NEITHER THE SECURITIES NOR THE UNDERLYING MORTGAGE LOANS OR MORTGAGE SECURITIES
WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR
BY THE DEPOSITOR, THE MASTER SERVICER OR ANY OF THEIR 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. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Securities 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 Securities 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.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES OFFERED
HEREBY AND THEREBY OR AN OFFER OF SUCH SECURITIES TO ANY PERSON IN ANY STATE OR
OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE
THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE
AMENDED OR SUPPLEMENTED ACCORDINGLY.
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS
PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT 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.
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 Securities. 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, 500 West Madison Street, 14th
Floor, Chicago, Illinois 60661; and New York Regional Office, Seven World Trade
Center, New York, New York 10048. 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 and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval System at the
Commission's website (http:\\www.sec.gov).
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related Trust Fund are
required under the related Agreement to be forwarded to Securityholders. With
respect to each Series of Certificates or Notes, Securityholders will be
referred to as the "Certificateholders" or the "Noteholders", respectively.
Unless otherwise specified in the related Prospectus Supplement, such reports
will not be examined and reported on by an independent public accountant. See
"The Agreements--Reports to Securityholders" 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
Securities 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., 277 Park Avenue, 9th Floor, New York, New York 10172,
Attention: Paul Najarian.
3
<PAGE>
SUMMARY OF PROSPECTUS
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 Agreement executed by the Depositor, the Master
Servicer and 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 attached hereto.
SECURITIES OFFERED.....................The Mortgage Pass-Through Certificates
(the "Certificates") or the
Mortgage-Backed Notes (the "Notes", and
together with the Certificates, the
"Securities") are issuable from time to
time in separate Series pursuant to
separate Pooling and Servicing Agreements
or separate Indentures, respectively.
Each Certificate of a Series will
evidence a beneficial ownership interest
in, and each Note of a Series will
represent indebtedness of the related
Trust Fund for such Series, or in an
Asset Group specified in the related
Prospectus Supplement.
The Certificates of a Series will
evidence interests in, and the Notes of a
Series will represent indebtedness of 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 "Risk
Factors" and "Credit Support" herein.
Each Series of Securities 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 Securities
which are subordinated to other Classes
of Securities 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.
With respect to any Series of Notes, the
related Equity Certificates, insofar as
they represent the beneficial ownership
interest in the Issuer, will be
subordinate to the related Notes. Unless
otherwise specified in the related
Prospectus Supplement, any Class of
Securities 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 four highest rating
categories. See "Description of the
Securities--General," "Credit
Support--Subordinated Securities" and
"Risk Factors" herein.
4
<PAGE>
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.
All of the outstanding capital stock of
the Depositor is owned by Donaldson,
Lufkin & Jenrette, Inc. See "The
Depositor."
MASTER SERVICER........................The entity named as Master Servicer in
the related Prospectus Supplement. See
"The Agreements."
ISSUER.................................With respect to each Series of Notes, the
issuer (the "Issuer") will be the
Depositor or an owner trust established
by it for the purpose of issuing such
Series of Notes. Each such owner trust
will be created pursuant to a trust
agreement (the "Owner Trust Agreement")
between the Depositor, acting as
depositor and the owner trustee (the
"Owner Trustee"). Each Series of Notes
will represent indebtedness of the Issuer
and will be issued pursuant to an
indenture (the "Indenture") between the
Issuer and the Trustee whereby the Issuer
will pledge the Trust Fund to secure the
Notes under the lien of the Indenture. As
to each Series of Notes where the Issuer
is an owner trust, the ownership of the
Trust Fund will be evidenced by
certificates (the "Equity Certificates")
issued under the Owner Trust Agreement.
The Notes will represent nonrecourse
obligations solely of the Issuer, and the
proceeds of the Trust Fund will be the
sole source of payments on the Notes,
except as described herein under "Credit
Support" and in the related Prospectus
Supplement.
TRUSTEES...............................The Trustee or Indenture Trustee (each,
the "Trustee") with respect to each
Series of Certificates and each Series of
Notes, respectively, will be specified in
the related Prospectus Supplement. The
Owner Trustee with respect to each Series
of Notes will be specified in the related
Prospectus Supplement.
INTEREST DISTRIBUTIONS.................Interest Distributions on the Securities
of a Series will be made from amounts
available therefor in the related
Certificate Account on each Distribution
Date at the applicable security interest
rate (a "Security Interest Rate")
specified in (or, with respect to
Floating Interest Securities, determined
in the manner set forth in) the related
Prospectus Supplement. The Security
Interest Rate of each Security offered
hereby will be stated in the related
Prospectus Supplement as the
"Pass-Through Rate" with respect to a
Series of a single Class of Certificates,
the "Certificate Rate" with respect to a
Multiple Class Series of Certificates and
the "Note Interest Rate" with respect to
any Series of Notes. The Security
Interest Rate on Securities of a Series
may be variable and change with changes
in the mortgage rate or pass-through
rates of the Mortgage Assets included
5
<PAGE>
in the related Trust Fund and/or as
prepayments occur with respect to such
Mortgage Assets.
Principal Weighted Securities may not be
entitled to receive any interest
distributions or may be entitled to
receive only nominal interest
distributions.
Compound Interest Securities will not
receive distributions of interest but
interest accruing with respect to the
principal balance of such compound
Interest Securities 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 Securities will be
made on the basis of their Compound
Value.
A Multiple Class Series may include one
or more Classes of Floating Interest
Securities. With respect to any such
Class of Floating Interest Securities,
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 Securities" and
"Yield, Prepayment and Maturity
Considerations" herein.
PRINCIPAL DISTRIBUTIONS................Principal distributions on the Securities
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 Securities may not be
entitled to any principal distributions
or may be entitled to receive only
nominal principal distributions.
See "Description of the Securities" and
"Yield, Prepayment and Maturity
Considerations" herein.
FUNDING ACCOUNT........................If so specified in the related Prospectus
Supplement, a portion of the proceeds of
the sale of one or more Classes of
Securities of a Series or a portion of
collections on the Loans in respect of
principal may be deposited in a
segregated account to be applied to
acquire additional Loans, subject to the
limitations set forth herein under
"Description of the Securities--Funding
Account." Monies on deposit in the
Funding Account and not applied to
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acquire such additional Loans within the
time set forth in the related Agreement
or other applicable agreement may be
treated as principal and applied in the
manner described in the related
Prospectus Supplement.
OPTIONAL TERMINATION...................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 Securities--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 Securities 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 forms of
credit support, all as specified in the
related Prospectus. See "The Trust
Funds--Collection Account and Certificate
Account" and "Credit Support" and
"Description of Mortgage and Other
Insurance" herein.
CREDIT SUPPORT.........................Credit support in the form of reserve
funds, subordination,
overcollateralization, 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
Securities of a Series. If the Mortgage
Assets 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
with respect to Securities evidencing
beneficial ownership of one Asset Group
prior to distributions to Subordinate
Securities evidencing a beneficial
ownership interest in another Asset Group
within the Trust Fund. With respect to
any Series of Notes, the related Equity
Certificates, insofar as they
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represent the beneficial ownership
interest in the Issuer, will be
subordinate to the related Notes.
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
Securities of such Series. The protection
against losses provided by such credit
support will be limited. See "Credit
Support" and "Risk Factors" herein.
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 "Sub-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 Sub-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 forms of
credit support). See "Servicing of
Loans."
FEDERAL INCOME TAX CONSIDERATIONS......If an election is made for treatment of
the Trust Fund, or certain assets of the
Trust Fund, as a REMIC or as REMICs under
the Internal Revenue Code of 1986 (the
"Code"), one or more Classes of
Certificates will be REMIC "Regular
Interests" and one Class will be REMIC
"Residual Interests" in the related
REMIC. If a REMIC election will not be
made for a Trust Fund or certain assets
of a Trust Fund, the federal income
consequences of the purchase, ownership
and disposition of the related
Certificates will be set forth in the
related Prospectus Supplement if such
Certificates are offered thereby. Each
Series of Notes offered hereby will
represent indebtedness for federal income
tax purposes.
Investors are advised to consult their
tax advisors and to review "Certain
Federal Income Tax Considerations" herein
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<PAGE>
and in the related Prospectus Supplement.
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
Securities could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code.
See "ERISA Considerations."
LEGAL INVESTMENT.......................At the date of issuance, as to each
Series, it will be a requirement for
issuance of any Series that the
Securities offered by this Prospectus and
such Prospectus Supplement be rated by at
least one Rating Agency in one of its
four highest applicable rating
categories. The rating or ratings
applicable to Securities of each Series
offered hereby and by the related
Prospectus Supplement will be as set
forth in the related Prospectus
Supplement. Unless otherwise specified in
the related Prospectus Supplement,
Securities 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. Any Class of Securities that
represents an interest in a Trust Fund
that includes junior mortgage loans will
not constitute "mortgage related
securities" for purposes of SMMEA. 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 Securities. If so specified
in the related Prospectus Supplement, the
purchase of the Mortgage Assets for a
Series may be effected by an exchange of
Securities with the Depositor of such
Mortgage Assets. See "Use of Proceeds."
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with an investment in the Securities.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Securities of
any Series will develop or, if it does develop, that it will provide
Securityholders with a sufficient level of liquidity or will continue for the
life of the Securities. Donaldson, Lufkin & Jenrette Securities Corporation (or
one or more of its affiliates) intends to make a secondary market in the
Securities, but has no obligation to do so. In addition, the market value of
Securities of each Series will fluctuate with changes in prevailing rates of
interest. Consequently, sale of the Securities by a Holder in any secondary
market which may develop may be at a discount from par value or from their
purchase price. Securityholders have no optional redemption rights. The
Securities will not be listed on any securities exchange.
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 mortgage market 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 Securities. 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 Securities will be extremely sensitive to prepayments on the Loans
comprising or underlying the Mortgage Assets for such Series. In general, if a
Security, including a Security 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 Securityholder of such Class could,
under some such prepayment scenarios, fail to recoup its original investment.
Conversely, if a Security, including a Security 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 Securities 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 Securities in accordance with the related 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 Security at a
significant premium might fail to recoup its initial investment. See "Yield,
Prepayment and Maturity Considerations."
CREDIT SUPPORT LIMITATIONS
The amount, type and nature of insurance policies, subordination,
overcollateralization, Financial 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,
overcollateralization 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
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<PAGE>
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
Securities of a Multiple Class Series are made in order of the respective Final
Scheduled Distribution Dates of the Class, any limits with respect to the
aggregate amount of losses covered by credit support 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
Securities 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 Securities 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, Financial 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 Securities may include a Class or multiple Classes of Subordinate
Securities 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 Securities, 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 Securities," "The Trust Funds" and
"Credit Support."
CERTAIN LOANS AND MORTGAGED PROPERTY
Reliable prepayment, loss and foreclosure statistics relating to
certain types of Loans may not be available for a Series. 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 the amount of credit
support, the Trust Fund may experience a loss. Furthermore, Multifamily Loans,
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 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 subordination 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
Securities, the Trust Fund for a Series will be the only available source of
funds to make distributions on the Securities of such Series. The only
obligations of the Depositor with respect to the Securities of any Series will
be pursuant to certain representations and warranties, if any, in the related
Agreement. See "The 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 Seller, the Servicer or the Master
Servicer, as the case may be, or from a reserve fund established to provide
funds for such repurchases. See "The Depositor."
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<PAGE>
INABILITY OF TRUSTEE TO LIQUIDATE THE COLLATERAL SECURING THE NOTES
Although the Trustee or the holders of a majority of the then aggregate
outstanding amount of the Notes of a Series may declare the principal amount of
all the Notes of such Series to be due and payable immediately if an Event of
Default occurs and is continuing under the related Indenture, there is no
assurance that the market value of the related collateral will at any time be
equal to or greater than the aggregate outstanding amount of the related Notes.
Therefore, upon an Event of Default with respect to the related Notes, there can
be no assurance that sufficient funds will be available to repay the related
Noteholders in full. In addition, the amount of principal required to be
distributed to Noteholders under the Indenture is generally limited to amounts
available to be deposited in the applicable Certificate Account. Therefore, the
failure to pay principal on a class of the related Notes may not result in the
occurrence of an Event of Default until the Final Scheduled Distribution Date
for such class of Notes.
SUMMARY OF 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 Securities of any Series. See
"ERISA Considerations" herein and in the related Prospectus Supplement.
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 related 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 related 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 related REMIC's taxable income may be treated as "excess inclusion" income
to such holder which (i) 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 related 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 Interest Certificates may be negative or significantly less than that
of a corporate bond or stripped instrument having similar cash flow
characteristics.
DESCRIPTION OF THE SECURITIES
GENERAL
The Securities will be issued in Series. Each Series of Certificates
will be issued pursuant to separate Pooling and Servicing Agreements among the
Depositor, the Master Servicer and the Trustee for the related Series identified
in the related Prospectus Supplement. Each Series of Notes will be issued
pursuant to separate Indentures between the related Issuer and the Trustee for
the related Series identified in the related Prospectus Supplement. The Trust
Fund for each Series of Notes will be created pursuant to an Owner Trust
Agreement between the Depositor and the Owner Trustee. 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
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Agreements and the Prospectus Supplement relating to each Series. When
particular provisions or terms used in each Agreement are referred to, such
provisions or terms shall be as specified in such Agreement.
Each Series will consist of one or more Classes, one or more of which
may consist of Compound Interest Securities, Floating Interest Securities,
Interest Weighted Securities or Principal Weighted Securities. A Series may also
include one or more Classes of Subordinate Securities. Unless otherwise
specified in the related Prospectus Supplement, a Class of Subordinate
Securities will be offered hereby or by such Prospectus Supplement only if rated
by a Rating Agency in at least its fourth 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 Securities of each
separate Class will evidence beneficial ownership of, or be secured by, each
corresponding Asset Group.
The Securities for each Series will be issued in fully registered form,
in the minimum original principal amount, notional amount or percentage interest
specified in the related Prospectus Supplement. The transfer of the Securities
may be registered, and the Securities may be exchanged, without the payment of
any service charge payable in connection with such registration of transfer or
exchange, but the Trustee may require payment of a sum sufficient to cover any
tax or governmental charge that may be imposed in connection with any transfer
or exchange of Securities. If specified in the related Prospectus Supplement,
one or more Classes of a Series may be available in book-entry form only.
DISTRIBUTIONS ON THE SECURITIES
GENERAL. Commencing on the date specified in the related Prospectus
Supplement, distributions of principal and interest on the Securities 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 Securities which receive interest will be
made periodically at the intervals and at the Security Interest Rate specified
or, with respect to Floating Interest Securities, determined in the manner
described in the related Prospectus Supplement. Interest on the Securities 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.
Distributions of principal of and interest on Securities of a Series
will be made by check mailed to Securityholders 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 security register (the
"Security Register"), except that (a) distributions may be made by wire transfer
in certain circumstances described in the related Prospectus Supplement and (b)
the final distribution in retirement of a Security will be made only upon
presentation and surrender of such Security at the corporate trust office of the
Trustee for such Series or such other office of the Trustee as specified in the
Prospectus Supplement. If specified in the related Prospectus Supplement, the
Securities 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 each
Series of Certificates or Notes, the Security Register will be referred to as
the "Certificate Register" or "Note Register", respectively.
With respect to reports to be furnished to Securityholders concerning a
distribution, see "The Agreements--Reports to Securityholders."
SINGLE CLASS SERIES. With respect to a Series other than a Multiple
Class Series, distributions on the Securities on each Distribution Date will
generally be allocated to each Security entitled thereto on the basis of the
undivided percentage interest (the "Percentage Interest") evidenced by such
Security in the Trust Fund or on the basis of their outstanding principal
amounts or notional amounts. If the Mortgage Assets for a Series have adjustable
or variable interest or pass-through rates, then the Security Interest Rate of
the Securities 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 Security Interest Rate on the Securities 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
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lifetime or periodic adjustment caps on their respective pass-through rates,
then the Security Interest Rate on the Securities of the related Series may also
reflect such caps.
MULTIPLE CLASS SERIES. Each Security of a Multiple Class Series will
have a principal amount or a notional amount and a specified Security Interest
Rate (which may be zero). Interest distributions on a Multiple Class Series will
be made on each Security entitled to an interest distribution on each
Distribution Date at the Security Interest Rate specified or, with respect to
Floating Interest Securities, 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 Securities to
receive current distributions. See "Subordinate Securities" below and "Credit
Support."
Interest on all Securities of a Multiple Class Series currently
entitled to receive interest will be distributed on the Distribution Date
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
Securities" below and "Credit Support." Distributions of interest on a Class of
Compound Interest Securities 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 Securities will accrue and the amount of
interest accrued on such Distribution Date 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 Securities on the basis of the current Compound
Value of such Class. The Compound Value of a Class of Compound Interest
Securities 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, the
Securities of a Multiple Class Series may include one or more Classes of
Floating Interest Securities. The Security Interest Rate of a Floating Interest
Security will be a variable or adjustable rate, subject to a Maximum Floating
Rate, Minimum Floating Rate, or both. For each Class of Floating Interest
Securities, 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.
If so specified in the related Prospectus Supplement, a Series may
include one or more Classes of Interest Weighted Securities, Principal Weighted
Securities, 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 Securities within each Class.
The method or formula for determining the Percentage Interest of a Security will
be set forth in the related Prospectus Supplement.
In the case of a Multiple Class Series, the timing, sequential order,
priority of payment or amount of distributions in respect of principal, and any
schedule or formula or other provisions applicable to the determination thereof
of each Class of Securities shall be as set forth in the related Prospectus
Supplement. A Multiple Class Series may contain two or more classes of
Securities as to which distributions of principal or interest or both on any
class may be made upon the occurrence of specified events, in accordance with a
schedule or formula (including "planned amortization classes" and "targeted
amortization classes"), or on the basis of collections from designated portions
of the Trust Fund.
SUBORDINATE SECURITIES. One or more Classes of a Series may consist of
Subordinate Securities. Subordinate Securities 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 Securities 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 Securities
evidencing beneficial ownership of one Asset Group prior to making distributions
on Subordinate Securities evidencing a beneficial ownership interest in another
Asset Group within the Trust Fund. Subordinate Securities will not be
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<PAGE>
offered hereby or by such related Prospectus Supplement unless they are rated in
one of the four highest rating categories by at least one Rating Agency. With
respect to any Series of Notes, the Equity Certificates, insofar as they
represent the beneficial ownership interest in the Issuer, will be subordinate
to the related Notes.
FUNDING ACCOUNT
If so specified in the related Prospectus Supplement, the related
Agreement may provide for the transfer by the Seller of additional Loans to the
related Trust Fund after the Closing Date. Such additional Loans will be
required to conform to the requirements set forth in the related Agreement or
other agreement providing for such transfer. As specified in the related
Prospectus Supplement, such transfer may be funded by the establishment of a
Funding Account (a "Funding Account"). If a Funding Account is established, all
or a portion of the proceeds of the sale of one or more Classes of Securities of
the related Series or a portion of collections on the Loans in respect of
principal will be deposited in such account to be released as additional Loans
are transferred. Unless otherwise specified in the related Prospectus
Supplement, all amounts deposited in a Funding Account will be required to be
invested in Eligible Investments and the amount held therein shall at no time
exceed 25% of the aggregate outstanding principal balance of the Securities.
Unless otherwise specified in the related Prospectus Supplement, the related
Agreement or other agreement providing for the transfer of additional Loans will
provide that all such transfers must be made within 3 months after the Closing
Date, and that amounts set aside to fund such transfers (whether in a Funding
Account or otherwise) and not so applied within the required period of time will
be deemed to be principal prepayments and applied in the manner set forth in
such Prospectus Supplement. A Funding Account can affect the application of the
requirements under ERISA. See "ERISA 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 or elections have been made, the
Trustee shall receive a satisfactory opinion of counsel that the repurchase
price will not jeopardize the REMIC status of the REMIC or REMICs and that the
optional termination will be conducted so as to constitute a "qualified
liquidation" under Section 860F of the Code. See "The Agreements--Termination."
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, the Securities
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 Security 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
Securities (a "Securityowner") will be entitled to receive a Security issued in
fully registered, certificated form (a "Definitive Security") representing such
person's interest in the Securities except in the event that the book-entry
system for the Securities is discontinued (as described below). Unless and until
Definitive Securities are issued, it is anticipated that the only Securityholder
of the Securities will be Cede & Co., as nominee of DTC. Securityowners will not
be registered "Securityholders" or registered "Holders" under the related
Agreement, and Securityowners will only be permitted to exercise the rights of
Securityholders indirectly through DTC Participants. With respect to each Series
of Certificates or Notes, Securityowners and Securityholders will be referred to
as "Certificateowners" and "Certificateholders" or "Noteowners" and
"Noteholders", respectively.
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
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entities that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("indirect participants").
Securityowners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of Securities 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 Securityowner
to pledge such owner's Security to persons or entities that do not participate
in the DTC system, or otherwise take actions in respect of such Security, may be
limited. In addition, under a book-entry format, Securityowners may experience
some delay in their receipt of principal and interest distributions with respect
to the Securities 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 Securityowners.
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 Securities and
DTC, as registered holder, is required to receive and transmit principal and
interest distributions and distributions with respect to the Securities.
Participants and Indirect Participants with which Securityowners have accounts
with respect to Securities similarly are required to make book-entry transfers
and receive and transmit such distributions on behalf of their respective
Securityowners. Accordingly, although Securityowners will not possess
certificates or notes, the Rules provide a mechanism by which Securityowners
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 Securityholder under the related Agreement only at the direction of
one or more Participants to whose account with DTC the Securities 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 notes
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 Securities 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 Securities 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 Securities 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 Securities 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
Securityholders. Such a delay will effectively reduce the yield that would
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 Securityholders.
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 Securityholders 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 Securities, 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.
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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 Securities 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 Security outstanding. The effect of such
provisions is to produce a lower yield on the Securities than would be obtained
if interest were to accrue on the Securities on the actual unpaid principal
amount of such Securities to each Distribution Date. The related Prospectus
Supplement will specify the time at which the principal amounts of the
Securities are determined or are deemed to reduce for purposes of calculating
interest distributions on Securities of a Multiple Class Series.
INTEREST OR PRINCIPAL WEIGHTED SECURITIES
If a Class of Securities consists of Interest Weighted Securities or
Principal Weighted Securities, a lower rate of principal prepayments than
anticipated will negatively affect the yield to investors in Principal Weighted
Securities, and a higher rate of principal prepayments than anticipated will
negatively affect the yield to investors in Interest Weighted Securities. The
Prospectus Supplement for a Series including such Securities will include a
table showing the effect of various levels of prepayment on yields on such
Securities. 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.
FUNDING ACCOUNT
If the applicable Agreement for a Series of Securities provides for a
Funding Account or other means of funding the transfer of additional Loans to
the related Trust Fund, as described under "Description of the
Securities--Funding Account" herein, and the Trust Fund is unable to acquire
such additional Loans within any applicable time limit, the amounts set aside
for such purpose may be applied as principal payments on one or more Classes of
Securities of such Series. See "Risk Factors--Yield, Prepayment and Maturity."
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, if
specified in the related Prospectus Supplement, will be the date (calculated on
the basis of the assumptions applicable to such Series described therein) on
which the 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 the Securities, 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 Securities of a Series will be influenced by the rate at which principal on
the Loans comprising or underlying the Mortgage Assets for such Securities 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
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has fluctuated significantly in recent years. In general, however, if prevailing
mortgage market 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 Security Interest Rate on the Securities may
be a number of percentage points less than interest rates on such Loans. In
addition, the weighted average life of the Securities 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 Securities, 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 assumed.
Prepayments on loans are 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. 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.
Neither CPR or SPA 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 any level of CPR or SPA.
The Prospectus Supplement for each Multiple Class Series may 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 may 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 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 Securities 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 Securities or prepayment rates of the Loans
comprising or underlying the related Mortgage Assets.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF LOAN. Multifamily Loans 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. Additional
Collateral Loans, ARMs, Balloon Loans, 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 Additional Collateral Loans, ARMs, Balloon Loans, Bi-Weekly Loans, GEM
Loans, GPM Loans or Buy- Down 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.
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
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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
Securities 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, Maximum Mortgage Rates,
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, the Servicer, the applicable Seller, the PMBS
Servicer or another party, 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
Securities of the related Series.
Because of the payment terms of Balloon Loans, there is a risk that
such Mortgage Loans, including Multifamily Loans and Additional Collateral
Loans, that require Balloon Payments may default at maturity, or that the
maturity of such Mortgage Loans may be extended in connection with a workout.
With respect to Balloon Loans, payment of the Balloon Payment (which, based on
the amortization schedule of such Mortgage Loans, is expected to be the entire
or a substantial amount of the original principal balance) will generally depend
on the Mortgagor's ability to obtain refinancing of such Mortgage Loans, to sell
the Mortgaged Property prior to the maturity of the Balloon Loan or to otherwise
have sufficient funds to pay such Balloon Payment. The ability to obtain
refinancing will depend on a number of factors prevailing at the time
refinancing or sale is required, including, without limitation, real estate
values, the Mortgagor's financial situation, prevailing mortgage market interest
rates, the Mortgagor's equity in the related Mortgaged Property, tax laws and
prevailing general economic conditions. Unless otherwise specified in the
related Prospectus Supplement, none of the Depositor, the Master Servicer, or
any of their affiliates will be obligated to refinance or repurchase any
Mortgage Loan or to sell the Mortgaged Property.
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.
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 Securities.
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 Securities who
purchased their Securities 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. Whereas FHA Loans are 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
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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. Certain of the Multifamily Loans in a Trust Fund may also contain
a due-on-encumbrance clause that entitles the lender to accelerate the maturity
of the Mortgage Loan upon the creation of any other lien or encumbrance upon the
Mortgaged Property. 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 Securities--Optional Termination."
THE TRUST FUNDS
GENERAL
The Trust Fund for each Series will be held by the Trustee for the
benefit of the related Securityholders. 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 Securityholders by
foreclosure, deed in lieu of foreclosure or repossession and certain proceeds
from the disposition of any related Additional Collateral; (d) any reserve fund
for such Series, if specified in the related Prospectus Supplement; (e) the
Sub-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); provided, that if so
specified in the related Prospectus Supplement, certain of the items listed
above may be held outside of the Trust Fund.
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 Securityholders under the
related 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 from the
Seller. Some of the Loans may have been originated by an affiliate of the
Depositor. Participation interests in Loans may be purchased by the Depositor,
or an affiliate, pursuant to a participation agreement. See "The
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
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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 a FNMA- or FHLMC-approved servicer and, if FHA Loans underlie the Private
Mortgage-Backed Securities, approved by HUD as a 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 the
Depositor or 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 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
Additional Collateral Loans, GEM Loans, GPM Loans, Balloon Loans, Buy-Down
Loans, Bi-Weekly Loans, ARMs, or Loans having 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, overcollateralization, 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 agencies which initially 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
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(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 note
interest rate, pass-through or certificate rate or ranges thereof for the
Private Mortgage-Backed Securities, (vi) the weighted average note interest
rate, 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.
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 Trust Fund (and of the underlying mortgage loans) will be
described in the related Prospectus 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 Trust Fund.
GNMA. GNMA is a wholly-owned corporate instrumentality of the United
States within 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 representing interests
in a pool of mortgages (i) insured by the FHA, under the Housing Act or under
Title V of the Housing Act of 1949, or (ii) partially guaranteed by the VA under
the Servicemen's Readjustment Act of 1944, as amended, or under Chapter 37 of
Title 38, United States Code.
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 guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d) of
the Housing Act, borrow from the United States Treasury an amount that is at any
time sufficient to enable GNMA to perform its obligations under its guarantee.
See "Additional Information" for the availability of further information
regarding GNMA and GNMA Certificates.
GNMA CERTIFICATES. Unless otherwise specified in the related Prospectus
Supplement, each GNMA Certificate relating to a Series (which may be a "GNMA I
Certificate" or a "GNMA II Certificate" as referred to by GNMA) will be a "fully
modified pass-through" mortgage-backed certificate issued and serviced by a
mortgage banking company or other financial concern approved by GNMA, except
with respect to any stripped mortgage-backed securities guaranteed by GNMA or
any REMIC securities issued by GNMA. The characteristics of any GNMA
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Certificates included in the Trust Fund for a Series of Certificates will be set
forth 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 was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of needed
housing. The principal activity of FHLMC currently consists of purchasing
first-lien, conventional, residential mortgage loans or participation interests
in such mortgage loans and reselling the mortgage loans so purchased in the form
of guaranteed mortgage securities, primarily FHLMC Certificates. In 1981, FHLMC
initiated its Home Mortgage Guaranty Program under which it purchases mortgage
loans from sellers with FHLMC Certificates representing interests in the
mortgage loans so purchased. All mortgage loans purchased by FHLMC must meet
certain standards set forth in the FHLMC Act. FHLMC is confined to purchasing,
so far as practicable, mortgage loans that it deems to be of such quality and
type as to meet generally the purchase standards imposed by private
institutional mortgage investors. See "Additional Information" for the
availability of further information regarding FHLMC and FHLMC Certificates.
Neither the United States nor any agency thereof is obligated to finance FHLMC's
operations or to assist FHLMC in any other manner.
FHLMC CERTIFICATES. Unless otherwise specified in the related
Prospectus Supplement, each FHLMC Certificate relating to a Series will
represent an undivided interest in a pool of mortgage loans that typically
consists of conventional loans (but may include FHA Loans and VA Loans)
purchased by FHLMC, except with respect to any stripped mortgage-backed
securities issued by FHLMC. Each such pool will consist of mortgage loans (i)
substantially all of which are secured by one- to four-family residential
properties or (ii) if specified in the related Prospectus Supplement, are
secured by five or more family residential properties. The characteristics of
any FHLMC Certificates included in the Trust Fund for a Series of Certificates
will be set forth in the related Prospectus Supplement.
FNMA. FNMA is a federally chartered and privately owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act (12 U.S.C. ss. 1716 ET SEQ.). It is the nation's largest supplier of
residential mortgage funds. 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. See "Additional Information"
for the availability of further information respecting FNMA and FNMA
Certificates. Although the Secretary of the Treasury of the United States has
authority to lend FNMA up to $2.25 billion outstanding at any time, neither the
United States nor any agency thereof is obligated to finance FNMA's operations
or to assist FNMA in any other manner.
FNMA CERTIFICATES. Unless otherwise specified in the related Prospectus
Supplement, each FNMA Certificate relating to a Series will represent a
fractional undivided interest in a pool of mortgage loans formed by FNMA, except
with respect to any stripped mortgage-backed securities issued by FNMA. Mortgage
loans underlying FNMA Certificates will consist of (i) fixed, variable or
adjustable rate conventional mortgage loans or (ii) fixed-rate FHA Loans or VA
Loans. Such mortgage loans may be secured by either one- to four-family or
multi-family residential properties. The characteristics of any FNMA
Certificates included in the Trust Fund for a Series of Certificates will be set
forth in the related Prospectus Supplement.
THE MORTGAGE LOANS
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 an
affiliate of the Depositor. 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
Additional Collateral Loans, GPM
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Loans, GEM Loans, Balloon 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 or a junior 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 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. 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."
If specified in the related Prospectus Supplement, certain of the
mortgage pools may contain Mortgage Loans secured by junior liens, and the
related senior liens ("Senior Liens") may not be included in the mortgage pool.
The primary risk to holders of Mortgage Loans secured by junior liens is the
possibility that adequate funds will not be received in connection with a
foreclosure of the related Senior Liens to satisfy fully both the Senior Liens
and the Mortgage Loan. In the event that a holder of a Senior Lien forecloses on
a Mortgaged Property, the proceeds of the foreclosure or similar sale will be
applied first to the payment of court costs and fees in connection with the
foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any other
sums due and owing to the holder of the Senior Liens. The claims of the holders
of the Senior Liens will be satisfied in full out of proceeds of the liquidation
of the Mortgage Loan, if such proceeds are sufficient, before the Trust Fund as
holder of the junior lien receives any payments in respect of the Mortgage Loan.
If the Master Servicer were to foreclose on any Mortgage Loan, it would do so
subject to any related Senior Liens. In order for the debt related to the
Mortgage Loan to be paid in full at such sale, a bidder at the foreclosure sale
of such Mortgage Loan would have to bid an amount sufficient to pay off all sums
due under the Mortgage Loan and the Senior Liens or purchase the Mortgaged
Property subject to the Senior Liens. In the event that such proceeds from a
foreclosure or similar sale of the related Mortgaged Property are insufficient
to satisfy all Senior Liens and the Mortgage Loan in the aggregate, the Trust
Fund, as the holder of the junior lien, and, accordingly, holders of one or more
Classes of the Securities bear (i) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (ii) the risk of loss
if the deficiency judgment is not realized upon. Moreover, deficiency judgments
may not be available in certain jurisdictions. In addition, a junior mortgagee
may not foreclose on the property securing a junior mortgage unless it
forecloses subject to the senior mortgages.
Liquidation expenses with respect to defaulted junior mortgage loans do
not vary directly with the outstanding principal balance of the loan at the time
of default. Therefore, assuming that the Master Servicer took the same steps in
realizing upon a defaulted junior mortgage loan having a small remaining
principal balance as it would in the case of a defaulted junior mortgage loan
having a large remaining principal balance, the amount realized after expenses
of liquidation would be smaller as a percentage of the outstanding principal
balance of the small junior mortgage loan than would be the case with the
defaulted junior mortgage loan having a large remaining principal balance.
Because
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the average outstanding principal balance of the Mortgage Loans is smaller
relative to the size of the average outstanding principal balance of the loans
in a typical pool of first priority mortgage loans, liquidation proceeds may
also be smaller as a percentage of the principal balance of a Mortgage Loan than
would be the case in a typical pool of first priority mortgage loans.
If specified in the related Prospectus Supplement, a Trust Fund will
contain Additional Collateral Loans. Unless otherwise specified in the related
Prospectus Supplement, the security agreements and other similar security
instruments related to the Additional Collateral for the Loans in a Trust Fund
will, in the case of Additional Collateral consisting of personal property,
create first liens thereon, and, in the case of Additional Collateral consisting
of real estate, create first or junior liens thereon. Additional Collateral, or
the liens thereon in favor of the related Additional Collateral Loans, may be
greater or less in value than the principal balances of such Additional
Collateral Loans, the Appraised Values of the underlying Mortgaged Properties or
the differences, if any, between such principal balances and such Appraised
Values, and the requirements that Additional Collateral be maintained may be
terminated upon the reduction of the Loan-to-Value Ratios or principal balances
of the related Additional Collateral Loans to certain pre-determined amounts.
Additional Collateral (including any related third-party guarantees) may be
provided either in addition to or in lieu of primary mortgage insurance policies
for the Additional Collateral Loans in a Trust Fund, as specified in the related
Prospectus Supplement. Guarantees supporting Additional Collateral Loans may be
guarantees of payment or guarantees of collectability and may be full guarantees
or limited guarantees. If a Trust Fund includes Additional Collateral Loans, the
related Prospectus Supplement will specify the nature and extent of such
Additional Collateral Loans and of the related Additional Collateral. If
specified in such Prospectus Supplement, the Trustee, on behalf of the related
Securityholders, will have only the right to receive certain proceeds from the
disposition of any such Additional Collateral consisting of personal property
and the liens thereon will not be assigned to the Trustee. No assurance can be
given as to the amount of proceeds, if any, that might be realized from the
disposition of the Additional Collateral for any of the Additional Collateral
Loans. See "Certain Legal Aspects of Loans--Anti-Deficiency Legislation and
Other Limitations on Lenders" herein.
Additional Collateral Loans may include Nest Egg Mortgage Loans(sm).
Such Mortgage Loans are interest-only Mortgage Loans for an initial period
specified in the related Prospectus Supplement. If the related Mortgagor pledges
an eligible life insurance policy as Additional Collateral after such initial
period, the Mortgagor will continue to make interest-only payments with respect
to the Mortgage Loan until the final scheduled payment on such Mortgage Loan, as
described in the Prospectus Supplement.
The percentage 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 Securities. 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%;
(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;
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(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; and
(e) no Mortgage Loan (other than a Cooperative Loan) may be
included unless a title insurance policy 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.
Each Mortgage Loan will be selected by the Depositor for inclusion in a
Trust Fund from among those purchased by the Depositor, either directly or
through its affiliates, from a Seller or Sellers. The related Prospectus
Supplement will specify the extent of Mortgage Loans so acquired. Other mortgage
loans available for purchase by the Depositor may have characteristics which
would make them eligible for inclusion in a Trust Fund but were not selected for
inclusion in such Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans to be included in a Trust Fund will be delivered either directly
or indirectly to the Depositor by one or more Sellers identified in the related
Prospectus Supplement, concurrently with the issuance of the related Series of
Securities (a "Designated Seller Transaction"). Such Securities may be sold in
whole or in part to any such Seller in exchange for the related Mortgage Loans,
or may be offered under any of the other methods described herein under "Methods
of Distribution." The related Prospectus Supplement for a Trust Fund composed of
Mortgage Loans acquired by the Depositor pursuant to a Designated Seller
Transaction will generally include information, provided by the related Seller,
about the Seller, the Mortgage Loans and the underwriting standards applicable
to the Mortgage Loans. Neither the Depositor nor any of its affiliates (other
than the Seller, if applicable) will make any representation or warranty with
respect to such Mortgage Loans, or any representation as to the accuracy or
completeness of such information provided by the Seller and no assurances are
made as to any such Seller's financial strength, stability or wherewithal to
honor its repurchase obligations for breaches of representations and warranties
or otherwise honor its obligations.
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 at origination, plus in the
case of a Mortgage Loan secured by a junior lien, the principal amount of the
related Senior Lien, to 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. 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 Buy-Down Loan is limited to 6% of the Appraised Value of the related
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
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Payments after the Buy-Down Amounts have been depleted and, for certain Buy-Down
Loans, while such Buy-Down Amounts are being depleted.
Unless otherwise specified in the related Prospectus Supplement, with
respect to Multifamily Loans, (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, 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 Seller, the Servicer or the Master Servicer.
ARMs have features that 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 "Maximum Mortgage Rate") 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 "Periodic Rate
Cap"). 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.
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, generally
including, among other things, (a) the aggregate outstanding principal balance
of the Mortgage Loans; (b) the weighted average mortgage rate on the Mortgage
Loans, and, in the case of ARMs, the weighted average of the current mortgage
rates and the Maximum Mortgage Rates, 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 Additional Collateral Loans, ARMs,
Balloon Loans, 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
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support relating to the Mortgage Loans; (i) the geographic distribution of the
Mortgaged Properties securing the Mortgage Loans, (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 and (k) with respect to Mortgage Loans
secured by a junior lien, the amount of the related Senior Liens. 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 Securities 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, together with the related
Pooling and Servicing Agreement, with respect to each Series of Certificates, or
the related Servicing Agreement, Owner Trust Agreement and Indenture, with
respect to each Series of Notes, with the Commission within 15 days after the
initial issuance of such Securities.
THE MANUFACTURED HOME LOANS
The Manufactured Home Loans comprising or underlying the Mortgage
Assets for a Series of Securities 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).
In addition, 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 at
origination to 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
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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 Securities
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 Securities.
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 (other than
Advances deposited into the Certificate Account), 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 related Pooling
and Servicing Agreement or the related Servicing Agreement and Indenture. Unless
otherwise specified in the related Prospectus Supplement or related 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
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 Securities--Distributions on the Securities."
Funds on deposit in the Collection Account will be available for
deposit into the Certificate Account for certain payments provided for in the
related Pooling and Servicing Agreement or the related Servicing Agreement and
Indenture. Unless otherwise specified in the Prospectus Supplement or the
related 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 Securityholders
into which all funds received from the Master Servicer and all required
withdrawals from any reserve funds and any draws on any Financial Guarantee
Insurance for such Series will be deposited, pending distribution to the
Securityholders. 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 or the
Trustee 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 related Agreement, will be
available for remittance to the Securityholders; 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 Securityholders. See also
"The Agreements--Certificate Account" herein.
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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
Loans; Deposits to Collection Accounts." If Private Mortgage-Backed Securities
are backed by GPM Loans and the value of 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 Seller of the Loans (or other entity specified in the related
Prospectus Supplement, which may be the originator) 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 Securities, 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. 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. In the case of a Multifamily
Loan, the Mortgagor will also be required to provide certain information
regarding the related Multifamily Property, including a current rent roll and
operating income statements (which may be pro forma and unaudited). In addition,
the originator will generally also consider the location of the Multifamily
Property, the availability of competitive lease space and rental income of
comparable properties in the relevant market
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area, the overall economy and demographic features of the geographic area and
the Mortgagor's prior experience in owning and operating properties similar to
the Multifamily Properties.
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. With
respect to Multifamily Properties, the appraisal must specify whether an income
analysis, a market analysis or a cost analysis was used. An appraisal employing
the income approach to value analyzes a property's projected net cash flow,
capitalization and other operational information in determining the property's
value. The market approach to value analyzes the prices paid for the purchase of
similar properties in the property's area, with adjustments made for variations
between those other properties and the property being appraised. The cost
approach to value requires the appraiser to make an estimate of land value and
then determine the current cost of reproducing the improvements less any accrued
depreciation. In any case, the value of the property being financed, as
indicated by the appraisal, must be such that it currently supports, and is
anticipated to support in the future, the outstanding loan balance. Unless
otherwise specified in the related Prospectus Supplement, all appraisals are
required to conform to the Uniform Standards of Professional Appraisal Practice
and the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and must be on forms acceptable to the FNMA and/or FHLMC.
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.
In the case of the Multifamily Loans, lenders typically look to the
Debt Service Coverage Ratio of a loan as an important measure of the risk of
default on such a loan. Unless otherwise defined in the related Prospectus
Supplement, the "Debt Service Coverage Ratio" of a Multifamily Loan at any given
time is the ratio of (i) the Net Operating Income of the related Mortgaged
Property for a twelve-month period to (ii) the annualized scheduled payments on
the Mortgage Loan and on any other loan that is secured by a lien on the
Mortgaged Property prior to the lien of the related Mortgage. Unless otherwise
defined in the related Prospectus Supplement, "Net Operating Income" means, for
any given period, the total operating revenues derived from a Multifamily
Property during such period, minus the total operating expenses incurred in
respect of such property during such period other than (i) non-cash items such
as depreciation and amortization, (ii) capital expenditures and (iii) debt
service on loans (including
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the related Mortgage Loan) secured by liens on such property. The Net Operating
Income of a Multifamily Property will fluctuate over time and may or may not be
sufficient to cover debt service on the related Mortgage Loan at any given time.
As the primary source of the operating revenues of a Multifamily Property,
rental income (and maintenance payments from tenant-stockholders of a
cooperatively owned Multifamily Property) may be affected by the condition of
the applicable real estate market and/or area economy. Increases in operating
expenses due to the general economic climate or economic conditions in a
locality or industry segment, such as increases in interest rates, real estate
tax rates, energy costs, labor costs and other operating expenses, and/or to
changes in governmental rules, regulations and fiscal policies, may also affect
the risk of default on a Multifamily Loan. Lenders also look to the
Loan-to-Value Ratio of a Multifamily Loan as a measure of risk of loss if a
property must be liquidated following a default.
If so specified in the related Prospectus Supplement, the underwriting
of a Multifamily Loan may also include environmental testing. Under the laws of
certain states, contamination of real property may give rise to a lien on the
property to assure the costs of cleanup. In several states, such a lien has
priority over an existing mortgage lien on such property. In addition, under the
laws of some states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), a lender may be liable, as an
"owner" or "operator", for costs of addressing releases or threatened releases
of hazardous substances at a property, if agents or employees of the lender have
become sufficiently involved in the operations of the borrower, regardless of
whether or not the environmental damage or threat was caused by the borrower or
a prior owner. A lender also risks such liability on foreclosure of the
mortgage. See "Certain Legal Aspects of Mortgage Loans--Environmental
Legislation."
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, Balloon Loans, 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.
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
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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.
With respect to the underwriting standards applicable to any Mortgage
Loans, such underwriting standards generally include a set of specific criteria
pursuant to which the underwriting evaluation is made. However, the application
of such underwriting standards does not imply that each specific criterion was
satisfied individually. Rather, a Mortgage Loan will be considered to be
originated in accordance with a given set of underwriting standards if, based on
an overall qualitative evaluation, the loan is in substantial compliance with
such underwriting standards. For example, a Mortgage Loan may be considered to
comply with a set of underwriting standards, even if one or more specific
criteria included in such underwriting standards were not satisfied, if other
factors compensated for the criteria that were not satisfied or if the Mortgage
Loan is considered to be in substantial compliance with the underwriting
standards.
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 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 Securities 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
Securities 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."
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REPRESENTATIONS AND WARRANTIES
Unless otherwise specified in the related Prospectus Supplement or in
the related Agreement, the Seller (or other party as described in the related
Prospectus Supplement) 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, generally that: (i) any required hazard and primary mortgage
insurance policies were effective at the origination of such Mortgage Loan, and
each such policy remained in effect on the date of purchase of such Mortgage
Loan from the Seller by or on behalf of the Depositor; (ii) either (A) a title
insurance policy insuring (subject only to permissible title insurance
exceptions) the lien status of the Mortgage was effective at the origination of
such Mortgage Loan and such policy remained in effect on the date of purchase of
the Mortgage Loan from the Seller by or on behalf of the Depositor or (B) if the
Mortgaged Property securing such Mortgage Loan is located in an area where such
policies are generally not available, there is in the related mortgage file an
attorney's certificate of title indicating (subject to such permissible
exceptions set forth therein) the first lien status of the mortgage; (iii) the
Seller has good title to such Mortgage Loan and such Mortgage Loan was subject
to no offsets, defenses or counterclaims except as may be provided under the
Relief Act and except to the extent that any buydown agreement exists for a
Buy-Down Loan; (iv) there are no mechanics' liens or claims for work, labor or
material affecting the related Mortgaged Property which are, or may be a lien
prior to, or equal with, the lien of the related Mortgage (subject only to
permissible title insurance exceptions); (v) the related Mortgaged Property is
free from material damage and at least in adequate repair; (vi) there are no
delinquent tax or assessment liens against the related Mortgaged Property; (vii)
such Mortgage Loan is not more than 30 days' delinquent as to any scheduled
payment of principal and/or interest; (viii) if a primary mortgage insurance
policy is required with respect to such Mortgage Loan, such Mortgage Loan is the
subject of such a policy; and (ix) such Mortgage Loan was made in compliance
with, and is enforceable under, all applicable local, state and federal laws in
all material respects.
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 Seller (or other
party as described in the related Prospectus Supplement) will represent and
warrant 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 Seller (or other party as described
in the related Prospectus Supplement) 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 Seller 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.
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Upon the discovery of the breach of any representation or warranty made
by the Master Servicer in respect of a Loan that materially and adversely
affects the interest of the Securityholder in such Loan, the Seller (or other
party as described in the Prospectus Supplement) 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
Agreements--Assignment of Mortgage Assets." See "Risk Factors--Limited
Obligations and Assets of the Depositor." If the Seller or other party fails to
cure or repurchase, another party may be required to cure or repurchase as
described in the Prospectus Supplement. 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 ("Sub-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 or 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 Securities 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 or 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 Sub-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 related Pooling and Servicing Agreement or Servicing Agreement for a Series
and any applicable insurance policies and other forms of credit support, 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, provided, however, that the Master Servicer shall first determine
that any such waiver or extension will not impair the coverage of any related
insurance policy or materially and adversely affect the lien of the related
Mortgage or the lien on any related Additional Collateral. In addition, unless
otherwise specified in the related Prospectus Supplement, if a material default
occurs or a payment default is reasonably foreseeable with respect to a
Multifamily Loan, the Master Servicer will be permitted, subject to any specific
limitations set forth in the related Pooling and Servicing Agreement or
Servicing Agreement and described in the related Prospectus Supplement, to
modify, waive or amend any term of such Mortgage Loan, including deferring
payments, extending the stated maturity date or otherwise adjusting the payment
schedule, provided that such modification, waiver or amendment (i) is reasonably
likely to produce a greater recovery with respect to such Mortgage Loan on a
present value basis than would liquidation and (ii) will not adversely affect
the coverage under any applicable instrument of credit enhancement.
In the case of Multifamily Loans, a Mortgagor's failure to make
required Mortgage Loan payments may mean that operating income is insufficient
to service the mortgage debt, or may reflect the diversion of that income from
the servicing of the mortgage debt. In addition, a Mortgagor under a Multifamily
Loan that is unable to make Mortgage Loan payments may also be unable to make
timely payment of taxes and otherwise to maintain and insure the related
Mortgaged Property. In general, the related Master Servicer will be required to
monitor any Multifamily Loan that is in default, evaluate whether the causes of
the default can be corrected over a reasonable period without significant
impairment of the value of the related Mortgaged Property, initiate corrective
action in cooperation with the Mortgagor if cure is likely, inspect the related
Mortgaged Property and take such other actions as are consistent with the
servicing standard. A significant period of time may elapse before the Master
Servicer is able to assess the success of any such corrective action or the need
for additional initiatives. The time within which the Master Servicer can make
the initial determination of appropriate action, evaluate the success of
corrective action, develop additional initiatives, institute foreclosure
proceedings and actually foreclose (or accept a deed to a Mortgaged Property in
lieu of foreclosure) on behalf of the Securityholders of the related Series may
vary considerably depending on the particular Multifamily Loan, the Mortgaged
Property, the Mortgagor, the presence of an acceptable party to assume the
Multifamily Loan and the laws of the jurisdiction in which the Mortgaged
Property is located. If a Mortgagor files a bankruptcy petition, the Master
Servicer may not be permitted to accelerate the maturity of the related
Multifamily Loan or to foreclose on the Mortgaged Property for a considerable
period of time. See "Certain Legal Aspects of Mortgage Loans."
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.
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DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless otherwise indicated in the related Prospectus Supplement, the
Collection Account will be an Eligible Account and 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.
Unless otherwise specified in the related Prospectus Supplement, 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 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;
(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 or
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");
(iv) Any Buydown Funds (and, if applicable, investment
earnings thereon) required to be paid as described herein;
(v) All proceeds of any Mortgage Loan in such Trust
Fund purchased (or, in the case of a substitution, certain amounts
representing a principal adjustment) by the Master Servicer, the Seller
or any other person pursuant to the terms of the related Pooling and
Servicing Agreement or Servicing Agreement;
(vi) All amounts required to be deposited therein in
connection with any losses on Eligible Investments pursuant to the
related Pooling and Servicing Agreement or Servicing Agreement; and
(vii) All other amounts required to be deposited therein
pursuant to the related Pooling and Servicing Agreement or Servicing
Agreement.
The Master Servicer is permitted, from time to time, to make
withdrawals from the Collection Account for certain purposes, as specifically
set forth in the related Pooling and Servicing Agreement or Servicing Agreement,
which generally will include the following, except as otherwise provided
therein:
(i) to make deposits to the Certificate Account in the amounts
and in the manner provided in the Pooling and Servicing Agreement or
Servicing Agreement;
(ii) to reimburse itself for Advances, including amounts
advanced in respect of taxes, insurance premiums or similar expenses as
to any Mortgaged Property, out of late payments or collections on the
related Mortgage Loan with respect to which such Advances were made;
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(iii) to pay to itself unpaid Servicing Fees, out of payments
or collections of interest on each Mortgage Loan;
(iv) to pay to itself as additional servicing compensation any
investment income on funds deposited in the Collection Account, and, if
so provided in the related Pooling and Servicing Agreement or Servicing
Agreement, any profits realized upon disposition of a Mortgaged
Property acquired by deed in lieu of foreclosure or otherwise allowed
under the related Pooling and Servicing Agreement or Servicing
Agreement;
(v) to pay to itself or the Seller all amounts received with
respect to each Mortgage Loan purchased, repurchased or removed
pursuant to the terms of the related Pooling and Servicing Agreement or
Servicing Agreement and not required to be distributed as of the date
on which the related purchase price is determined;
(vi) to reimburse itself for any Advance previously made which
the Master Servicer has determined to not be ultimately recoverable
from Liquidation Proceeds, Insurance Proceeds or otherwise, subject, in
the case of a Series with Senior Securities and Subordinate Securities,
to certain limitations set forth in the related Pooling and Servicing
Agreement or Servicing Agreement as described in the related Prospectus
Supplement;
(vii) to pay for costs and expenses incurred by the Trust Fund
for environmental site assessments performed with respect to
Multifamily Properties that constitute security for defaulted Mortgage
Loans, and for any containment, clean-up or remediation of hazardous
wastes and materials present on such Mortgaged Properties, as described
below under "--Presentation of Claims; Realization Upon Defaulted
Loans";
(viii) to reimburse itself, the Trustee or the Depositor for
certain other expenses incurred for which it, the Trustee or the
Depositor is entitled to reimbursement or against which it, the Trustee
or the Depositor is indemnified pursuant to the related Pooling and
Servicing Agreement or the related Servicing Agreement and Indenture;
(ix) to make any other withdrawals permitted by the related
Pooling and Servicing Agreement or Servicing Agreement and described in
the related Prospectus Supplement; and
(x) to clear the Collection Account of amounts relating to the
corresponding Loans in connection with the termination of the Trust
Fund pursuant to the Pooling and Servicing Agreement or Servicing
Agreement.
SERVICING ACCOUNTS
Unless otherwise specified in the related Prospectus Supplement, in
those cases where a Servicer is servicing a Mortgage Loan, the Servicer will
establish and maintain an account (a "Servicing Account") that will be an
Eligible Account 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, less its servicing compensation and any
reimbursed expenses and advances, to the extent permitted by the Sub-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, after deducting from such remittance
an amount equal to the servicing compensation and unreimbursed expenses and
advances to which it is then entitled pursuant to the related Sub- Servicing
Agreement, to the extent not previously paid to or retained by it. In addition
on each such date the Servicer will be required to remit to the Master Servicer
any amount required to be advanced pursuant to the related Sub- Servicing
Agreement, and the Servicer will also be required to the Master Servicer, within
one business day of receipt, the proceeds of any principal Prepayments and all
Insurance Proceeds and Liquidation Proceeds.
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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
Securityholders 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 Securities of 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 Securities 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
Securityholders 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
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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. With respect to any
Multiple Class Series, so long as the related Subordinate Securities remain
outstanding and subject to certain limitations as described in the related
Prospectus Supplement, such Advances by the Master Servicer may also be
reimbursable out of amounts otherwise distributable to holders of the
Subordinate Securities, if any.
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
Securityholders 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 (less any related Servicing
Fees). Any such principal prepayment, together with a full Scheduled Payment of
interest thereon (to the extent of such adjustment or advance), will be
distributed to Securityholders 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."
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 or at any time during the
term of the Loan the Master Servicer or the related Servicer determines that the
related Mortgaged Property is located in an area identified on a Flood Hazard
Boundary Map or Flood Insurance Rate Map issued by the Flood Emergency
Management Agency as having special flood hazards and flood insurance has been
made available, the borrower will cause to be maintained a flood insurance
policy meeting the requirements of the current guidelines of the Federal
Insurance Administration with a generally acceptable insurance carrier, in an
amount representing coverage not less than the lesser of (i) the outstanding
principal balance of the Loan or (ii) the maximum amount of insurance which is
available under the National Flood Insurance Act of 1968, the Flood Disaster
Protection Act of 1983 or the National Flood Insurance Reform Act of 1994, as
amended. The Pooling and Servicing Agreement or Servicing Agreement will
obligate the Mortgagor to obtain and maintain all requisite flood insurance
coverage at the Mortgagor's cost and expense, and on the Mortgagor's failure to
do so, authorizes the Master Servicer or Servicer to obtain and maintain such
coverage at the Mortgagor's cost and expense and to seek reimbursement therefor
from the Mortgagor.
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
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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 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 Securities 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."
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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 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 Securities. 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 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
Securities. 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 Securityholders,
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 Securityholders after reimbursement
to itself for such expenses and (ii) that such expenses will be recoverable by
it either through Liquidation Proceeds
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or the proceeds of insurance. Notwithstanding anything to the contrary herein,
in the case of a Trust Fund for which a REMIC election or elections have been
made, the Master Servicer shall not liquidate any collateral acquired through
foreclosure later than two years after the acquisition of such collateral,
unless a longer period of time is necessary for the orderly liquidation of the
collateral and the Master Servicer has obtained from the Internal Revenue
Service (the "IRS") an extension of the two year period within which it would
otherwise be required to liquidate the 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.
With respect to a Mortgage Loan in default, the Master Servicer may
pursue foreclosure (or similar remedies) concurrently with pursuing any remedy
for a breach of a representation and warranty. However, the Master Servicer is
not required to continue to pursue both such remedies if it determines that one
such remedy is more likely to result in a greater recovery. If such Mortgage
Loan is an Additional Collateral Loan, the Master Servicer (or the related
Servicer, if the lien on the Additional Collateral for such Additional
Collateral Loan is not assigned to the Trustee on behalf of the Securityholders)
may proceed against the related Mortgaged Property or the related Additional
Collateral first or may proceed against both concurrently (as permitted by
applicable law and the terms under which such Additional Collateral is held,
including any third-party guarantee). Upon the first to occur of final
liquidation (by foreclosure or otherwise) and a repurchase or substitution
pursuant to a breach of a representation and warranty, such Mortgage Loan will
be removed from the related Trust Fund if it has not been removed previously.
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 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.
Notwithstanding the foregoing, unless otherwise specified in the
related Prospectus Supplement, the Master Servicer may not acquire title to any
Multifamily Property securing a Mortgage Loan or take any other action that
would cause the related Trustee, for the benefit of Securityholders of the
related Series, or any other specified person to be considered to hold title to,
to be a "mortgagee-in-possession" of, or to be an "owner" or an "operator" of
such Mortgaged Property within the meaning of certain federal environmental
laws, unless the Master Servicer has previously determined, based on a report
prepared by a person who regularly conducts environmental audits (which report
will be an expense of the Trust Fund), that either:
(i) the Mortgaged Property is in compliance with applicable
environmental laws and regulations or, if not, that taking such actions
as are necessary to bring the Mortgaged Property into compliance
therewith is reasonably likely to produce a greater recovery on a
present value basis than not taking such actions; and
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(ii) there are no circumstances or conditions present at the
Mortgaged Property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or
remediation could be required under any applicable environmental laws
and regulations or, if such circumstances or conditions are present for
which any such action could be required, taking such actions with
respect to the Mortgaged Property is reasonably likely to produce a
greater recovery on a present value basis than not taking such actions.
See "Certain Legal Aspects of Mortgage Loans--Environmental
Legislation."
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.
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 is authorized to accept from or enter into a
substitution or 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 a
substitution or assumption.
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 additional
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
and as otherwise specified herein.
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 Sellers and in the preparation of reports to Securityholders.
Certain of these expenses may be reimbursable pursuant to the terms of the
related Agreement from Liquidation Proceeds and the proceeds of insurance
policies and, in the case of enforcement of the obligations of Servicers and
Sellers, 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
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than the outstanding principal balance of and unpaid interest on the related
Loan which would be distributable to Securityholders. 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 Securityholders to
receive any related proceeds of insurance policies, Liquidation Proceeds or
amounts derived from other forms of credit support. The Master Servicer is also
entitled to reimbursement from the Collection Account and the Certificate
Account for Advances.
Unless otherwise provided in the Prospectus Supplement, 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 Securityholders of such Series.
EVIDENCE AS TO COMPLIANCE
Each Pooling and Servicing Agreement and each Servicing Agreement will
provide for delivery (on or before a specified date in each year) to the Trustee
of an annual statement signed by an officer of the Master Servicer, unless
otherwise specified in the related Prospectus Supplement, to the effect that the
Master Servicer has complied in all material respects with the minimum servicing
standards set forth in the Uniform Single Attestation Program for Mortgage
Bankers and has fulfilled in all material respects its obligations under the
related Agreement throughout the preceding year or, if there has been material
noncompliance with such servicing standards or a material default in the
fulfillment of any such obligation, such statement shall include a description
of such noncompliance or specify each such known default, as the case may be,
and the nature and status thereof. Such statement may be provided as a single
form making the required statements as to more than one Agreement.
Each Pooling and Servicing Agreement and each Servicing Agreement will
also provide that on or before a specified date in each year, beginning the
first such date that is at least a specified number of months after the Cut-off
Date, a firm of independent public accountants will furnish a report to the
Depositor and the Trustee stating the opinion of such firm that, unless
otherwise specified in the related Prospectus Supplement, on the basis of an
examination by such firm conducted substantially in accordance with standards
established by the American Institute of Certified Public Accountants, the
assertion by management of the Master Servicer regarding the Master Servicer's
compliance with the minimum servicing standards set forth in the Uniform Single
Attestation Program for Mortgage Bankers during the preceding year is fairly
stated in all material respects, subject to such exceptions and other
qualifications that, in the opinion of such firm, such accounting standards
require it to report. In rendering its statement such firm may rely, as to the
matters relating to the direct servicing of mortgage loans by Servicers, upon
comparable statements for examinations conducted by independent public
accountants substantially in accordance with standards established by the
American Institute of Certified Public Accountants (rendered within one year of
such statement) with respect to those Servicers which also have been the subject
of such an examination.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
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 related
Pooling and Servicing Agreement or Servicing Agreement except upon its
determination that its duties thereunder are no longer permissible under
applicable law or except in connection with a permitted transfer of servicing.
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 related Agreement.
In the event of an Event of Default under the related Pooling and
Servicing Agreement or Servicing Agreement, the Master Servicer may be replaced
by the Trustee or a successor Master Servicer. See "The Agreements--Rights upon
Events of Default" herein.
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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 or Servicing Agreement for
each Series; provided that the purchaser or transferee accepting such assignment
or delegation (i) is qualified to sell loans to and service mortgage loans for
FNMA or FHLMC; (ii) has a net worth of not less than $10,000,000; (iii) is
acceptable to each Rating Agency for purposes of maintaining its then-current
ratings of the Securities; (iv) is reasonably acceptable to the Trustee; and (v)
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 the related Pooling and
Servicing Agreement or 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
related 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 Agreement, provided that such successor or surviving entity meets the
requirements for a successor Master Servicer set forth above.
Each Pooling and Servicing Agreement and each Servicing Agreement will
also provide that neither the Master Servicer, the Depositor, nor any director,
officer, employee or agent of the Master Servicer or the Depositor, will be
under any liability to the related Trust Fund or the Securityholders for any
action taken or for failing to take any action in good faith pursuant to the
related Agreement or for errors in judgment; provided, however, that neither the
Master Servicer, the Depositor, nor any such person will be protected against
any breach of warranty or representations made by such party under the related
Agreement or the failure to perform its obligations in compliance with any
standard of care set forth in the related 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 and each
Servicing Agreement will further provide that the Master Servicer, the Depositor
and any director, officer, employee or agent of the Master Servicer or the
Depositor 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 related Agreement or the Securities, 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
related Agreement provides that neither the Master Servicer nor the Depositor is
under any obligation to appear in, prosecute or defend any legal action which is
not incidental to its servicing responsibilities under the related Agreement
which, in its opinion, may involve it in any expense or liability. The Master
Servicer or the Depositor may, in its discretion, undertake any such action
which it may deem necessary or desirable with respect to the related Agreement
and the rights and duties of the parties thereto and the interests of the
Securityholders thereunder. In such event, the legal expenses and costs of such
action and any liability resulting therefrom will be expenses, costs, and
liabilities of the Trust Fund and the Master Servicer or the Depositor 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
Securities of such Series, subordination created through overcollateralization,
the establishment of one or more reserve funds, use of a pool insurance policy,
bankruptcy bond, repurchase bond or special hazard insurance policy, financial
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 Securities of the related Series. Credit support may also be provided in the
form of an insurance policy covering the risk of collection and
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adequacy of any Additional Collateral provided in connection with any Additional
Collateral Loan, subject to the limitations set forth in any such insurance
policy.
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 principal balance of the
Securities and interest thereon at the Security Interest Rate. If losses occur
which exceed the amount covered by credit support or which are not covered by
credit support, such losses will be borne by the Securityholders. If credit
support is provided with respect to a Series, 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 SECURITIES; SUBORDINATION RESERVE FUND
If so specified in the related Prospectus Supplement, one or more
Classes of a Series may be Subordinate Securities. If so specified in the
related Prospectus Supplement, the rights of the Subordinate Securityholders to
receive distributions of principal and interest from the Certificate Account on
any Distribution Date will be subordinated to such rights of the Senior
Securityholders 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 Securityholders
are paid to the Senior Securityholders (including amounts withdrawn from the
Subordination Reserve Fund, if any, and paid to the Senior Securityholders), and
will (unless otherwise specified in the related Prospectus Supplement) increase
whenever there is distributed to the Subordinate Securityholders amounts in
respect of which subordination payments have previously been paid to the Senior
Securityholders (which will occur when subordination payments in respect of
delinquencies and certain other deficiencies have been recovered).
A Series may include a Class of Subordinate Securities entitled to
receive cash flows remaining after distributions made to all other Classes. Such
right will effectively be subordinate to the rights of other Securityholders,
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 Securities, 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 Securities, 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 Securityholders. Moneys will be withdrawn from the Subordination Reserve
Fund to make distributions of principal of or interest on Senior Securities
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
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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 Securityholders 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 Securityholders and the
employment of reinvestment earnings on amounts in the Subordination Reserve
Fund, if any.
OVERCOLLATERALIZATION
If so specified in the related Prospectus Supplement, subordination may
be provided by one or more Classes of Senior Securities through
overcollateralization; i.e. by having a greater amount of aggregate principal
balance of the Mortgage Assets for a Series than the aggregate principal balance
of the Securities of such Series. Such subordination may exist on the Closing
Date or may be effected through the allocation of interest payments on the Loans
to reduce the principal balances of certain Classes of Securities.
In a Series with overcollateralization, the allocation of losses to the
Securities is handled through the priority of payment process, first by interest
that otherwise would pay down principal on the Securities, and then such losses
would be allocated to the Senior Securities only if the principal balance of the
Mortgage Loans was reduced to less than the principal balance of the Senior
Securities. If so specified in the related Prospectus Supplement, the level of
overcollateralization required under the provisions of the related Pooling and
Servicing Agreement or Indenture will be subject to various tests based
primarily on the loss and delinquency experience of the related Mortgage Assets,
and will be raised and lowered accordingly.
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 Securities evidencing the
beneficial ownership of one Asset Group prior to distributions on Subordinate
Securities 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 Securities of the
related Series.
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LETTER OF CREDIT
The letter of credit, if any, with respect to a Series of Securities
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, 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
Securities (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 Securities 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 Securities--Optional
Termination" and "The 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
Securities of the related Series.
FINANCIAL GUARANTEE INSURANCE
Financial Guarantee Insurance, if any, with respect to a Series of
Securities will be provided by one or more insurance companies. Such Financial
Guarantee Insurance will guarantee, with respect to one or more Classes of
Securities 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 Financial
Guarantee Insurance will also guarantee against any payment made to a
Securityholder which is subsequently recovered as a "voidable preference"
payment under the Bankruptcy Code. A copy of the financial 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 Securities 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 Securities, if required as a condition to the
rating of such Series by each Rating Agency rating such 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 Securities, 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 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.
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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 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
Securityholders 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. Multifamily Loans will not be covered by a primary mortgage
insurance policy, regardless of the related Loan-to-Value Ratio.
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 Securityholders. In
addition, the pool insurance policy and primary mortgage insurance policies do
not provide coverage 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 Securityholders.
PRIMARY MORTGAGE INSURANCE. While the terms and conditions of the
primary mortgage insurance policies issued by one primary mortgage guaranty
insurer (a "Primary Insurer") will differ from those in primary mortgage
insurance policies issued by other Primary Insurers, each primary mortgage
insurance policy generally will pay either: (i) the insured percentage of the
loss on the related Mortgaged Property; (ii) the entire amount of such loss,
after receipt by the Primary Insurer of good and merchantable title to, and
possession of, the Mortgaged Property; or (iii) at the option of the Primary
Insurer under certain primary mortgage insurance policies, the sum of the
delinquent monthly payments plus any advances made by the insured, both to the
date of the claim payment and, thereafter, monthly 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. The amount of the loss as calculated under a primary
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mortgage insurance policy covering a Mortgage Loan will generally consist of the
unpaid principal amount of such Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from the related Mortgaged Property, (ii) hazard
insurance proceeds in excess of the amount required to restore such Mortgaged
Property and which have not been applied to the payment of the Mortgage Loan,
(iii) amounts expended but not approved by the Primary Insurer, (iv) claim
payments previously made on such Mortgage Loan and (v) unpaid premiums and
certain other amounts.
As conditions precedent to the filing or payment of a claim under a
primary mortgage insurance policy, in the event of default by the Mortgagor, the
insured will typically be required, among other things, to: (i) advance or
discharge (a) hazard insurance premiums and (b) as necessary and approved in
advance by the Primary Insurer, real estate taxes, protection and preservation
expenses and foreclosure and related costs; (ii) in the event of any physical
loss or damage to the Mortgaged Property, have the Mortgaged Property restored
to at least its condition at the effective date of the primary mortgage
insurance policy (ordinary wear and tear excepted); and (iii) tender to the
Primary Insurer good and merchantable title to, and possession of, the Mortgaged
Property.
The Pooling and Servicing Agreement or Servicing Agreement for a Series
generally will require that the Master Servicer or Servicer maintain, or cause
to be maintained, coverage under a primary mortgage insurance policy to the
extent such coverage was in place on the Cut-off Date. In the event that the
Depositor gains knowledge that, as of the Closing Date, a Mortgage Loan had a
Loan-to-Value Ratio at origination in excess of 80% and was not the subject of a
primary mortgage insurance policy (and was not included in any exception to such
standard disclosed in the related Prospectus Supplement) and that such Mortgage
Loan has a then current Loan-to-Value Ratio in excess of 80%, then the Master
Servicer or the Servicer is required to use its reasonable efforts to obtain and
maintain a primary mortgage insurance policy to the extent that such a policy is
obtainable at a reasonable price.
Any primary mortgage insurance or primary credit insurance policies
relating to Loans secured by Manufactured Homes will be described in the related
Prospectus Supplement.
FHA INSURANCE AND VA GUARANTEES. The Housing Act authorizes various FHA
mortgage insurance programs. Some of the Mortgage Loans may be insured under
either Section 203(b), Section 234 or Section 235 of the Housing Act. Under
Section 203(b), FHA insures mortgage loans of up to 30 years' duration for the
purchase of one- to four-family dwelling units. Mortgage loans for the purchase
of condominium units are insured by FHA under Section 234. Loans insured under
these programs must bear interest at a rate not exceeding the maximum rate in
effect at the time the loan is made, as established by HUD, and may not exceed
specified percentages of the lesser of the appraised value of the property and
the sales price, less seller paid closing costs for the property, up to certain
specified maximums. In addition, FHA imposes initial investment minimums and
other requirements on mortgage loans insured under the Section 203(b) and
Section 234 programs.
Under Section 235, assistance payments are paid by HUD to the mortgagee
on behalf of eligible mortgagors for as long as the mortgagors continue to be
eligible for the payments. To be eligible, a mortgagor must be part of a family,
have income within the limits prescribed by HUD at the time of initial
occupancy, occupy the property and meet requirements for recertification at
least annually.
The regulations governing these programs provide that insurance
benefits are payable either (i) upon foreclosure (or other acquisition of
possession) and conveyance of the mortgaged premises to HUD or (ii) upon
assignment of the defaulted mortgage loan to HUD. The FHA insurance that may be
provided under these programs upon the conveyance of the home to HUD is equal to
100% of the outstanding principal balance of the mortgage loan, plus accrued
interest, as described below, and certain additional costs and expenses. When
entitlement to insurance benefits results from assignment of the mortgage loan
to HUD, the insurance payment is computed as of the date of the assignment and
includes the unpaid principal amount of the mortgage loan plus mortgage interest
accrued and unpaid to the assignment date.
When entitlement to insurance benefits results from foreclosure (or
other acquisition of possession) and conveyance, the insurance payment is equal
to the unpaid principal amount of the mortgage loan, adjusted to reimburse
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the mortgagee for certain tax, insurance and similar payments made by it and to
deduct certain amounts received or retained by the mortgagee after default, plus
reimbursement not to exceed two-thirds of the mortgagee's foreclosure costs. Any
FHA insurance relating to Loans underlying a Series of Securities will be
described in the related Prospectus Supplement.
The Servicemen's Readjustment Act of 1944, as amended, permits a
veteran (or, in certain instances, his or her spouse) to obtain a mortgage loan
guaranty by the VA covering mortgage financing of the purchase of a one- to
four-family dwelling unit to be occupied as the veteran's home at an interest
rate not exceeding the maximum rate in effect at the time the loan is made, as
established by HUD. The program has no limit on the amount of a mortgage loan,
requires no down payment from the purchaser and permits the guaranty of mortgage
loans with terms, limited by the estimated economic life of the property, up to
30 years. The maximum guaranty that may be issued by the VA under this program
is 50% of the original principal amount of the mortgage loan up to a certain
dollar limit established by the VA. The liability on the guaranty is reduced or
increased on a pro rata basis with any reduction or increase in the amount of
indebtedness, but in no event will the amount payable on the guaranty exceed the
amount of the original guaranty. Notwithstanding the dollar and percentage
limitations of the guaranty, a mortgagee will ordinarily suffer a monetary loss
only when the difference between the unsatisfied indebtedness and the proceeds
of a foreclosure sale of mortgaged premises is greater than the original
guaranty as adjusted. The VA may, at its option, and without regard to the
guaranty, make full payment to a mortgagee of the unsatisfied indebtedness on a
mortgage upon its assignment to the VA.
Since there is no limit imposed by the VA on the principal amount of a
VA-guaranteed mortgage loan but there is a limit on the amount of the VA
guaranty, additional coverage under a Primary Mortgage Insurance Policy may be
required by the Depositor for VA loans in excess of certain amounts. The amount
of any such additional coverage will be set forth in the related Prospectus
Supplement. Any VA guaranty relating to Loans underlying a Series of Securities
will be described in the related Prospectus Supplement.
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 Securityholders. See "Servicing of
Loans--Maintenance of Insurance Policies and Other Servicing Procedures."
Although the terms and 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
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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 Securityholders 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 Securities 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 Securities. 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."
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 FOR MORTGAGE LOANS. The terms of the
Mortgage Loans require each Mortgagor to maintain a hazard insurance policy
covering the related Mortgaged Property and providing for coverage at least
equal to that of the standard form of fire insurance policy with extended
coverage customary in the state in which the property is located. Such coverage
generally will be in an amount equal to the lesser of the principal balance of
such Mortgage Loan or 100% of the insurable value of the improvements securing
the Mortgage Loan. The Pooling and Servicing Agreement or Servicing Agreement
will provide that the Master Servicer or Servicer shall cause such hazard
policies to be maintained or shall obtain a blanket policy insuring against
losses on the Mortgage Loans. The ability of the Master Servicer or Servicer to
ensure that hazard insurance proceeds are appropriately applied may be dependent
on its being named as an additional insured under any hazard insurance policy
and under any flood insurance policy referred to below, or upon the extent to
which information in this regard is furnished to the Master Servicer or the
Servicer by Mortgagors.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm, hail, riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
The policies relating to the Mortgage Loans will be underwritten by different
insurers under different state laws in accordance with different applicable
state forms and therefore will not contain identical terms and conditions, the
basic terms thereof are dictated by respective state laws. Such policies
typically do not cover any physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquakes, landslides and mudflows), nuclear reactions,
wet or dry rot, vermin, rodents, insects or domestic animals, theft and, in
certain cases, vandalism. The foregoing list is merely indicative of certain
kinds of uninsured risks and is not intended to be all-inclusive. Where the
improvements securing a Mortgage Loan are located in a federally designated
flood area at the time of origination of such Mortgage Loan, the Pooling and
Servicing Agreement or Servicing Agreement generally requires the Master
Servicer or Servicer to cause to be maintained for each such Mortgage Loan
serviced, flood insurance as described under "Servicing of Loans--Maintenance of
Insurance Policies and Other Servicing Procedures."
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STANDARD HAZARD INSURANCE POLICIES FOR MANUFACTURED HOME LOANS. The
terms of the Pooling and Servicing Agreement or Servicing Agreement will require
the Servicer or the Master Servicer, as applicable, to cause to be maintained
with respect to each Manufactured Home Loan one or more standard hazard
insurance policies which provide, at a minimum, the same coverage as a standard
form fire and extended coverage insurance policy that is customary for
manufactured housing, issued by a company authorized to issue such policies in
the state in which the Manufactured Home is located, and in an amount which is
not less than the maximum insurable value of such Manufactured Home or the
principal balance due from the Mortgagor on the related Manufactured Home Loan,
whichever is less. Such coverage may be provided by one or more blanket
insurance policies covering losses on the Manufactured Home Loans resulting from
the absence or insufficiency of individual standard hazard insurance policies.
If a Manufactured Home's location was, at the time of origination of the related
Manufactured Home Loan, within a federally designated flood area, the Servicer
or the Master Servicer also will be required to maintain flood insurance.
If the Servicer or the Master Servicer repossesses a Manufactured Home
on behalf of the Trustee, the Servicer or the Master Servicer will either (i)
maintain at its expense hazard insurance with respect to such Manufactured Home
or (ii) indemnify the Trustee against any damage to such Manufactured Home prior
to resale or other disposition.
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 Securities, 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 (and, if specified
in the related Prospectus Supplement, any related Additional Collateral) 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 (and any
related Additional Collateral) 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 Seller, the
Depositor or the 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
Seller, the Depositor or the Master Servicer.
THE AGREEMENTS
The following summaries describe certain provisions of the 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 related Agreements. Where
particular provisions or terms used in the related Agreements are referred to,
such provisions or terms are as specified in the related 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 Securities.
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 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 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 related Agreement, the
Depositor will represent and warrant to the Trustee regarding the Private
Mortgage-Backed Securities: (i) that the information
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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 transfer, convey
and assign to the Trustee (or its nominee or correspondent) all right, title and
interest of the Depositor in the Agency Securities 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 Agency Securities after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interest). The Depositor will cause the Agency Securities to be
registered in the name of the Trustee (or its nominee or correspondent), and the
Trustee will concurrently authenticate and deliver the Securities. Each Agency
Security will be identified in a schedule appearing as an exhibit to the related
Agreement, which will specify as to each Agency Security the original principal
amount and outstanding principal balance as of the Cut-off Date and the annual
pass-through rate or interest rate for each Agency Security conveyed to the
Trustee.
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), an assignment of the
Mortgage in recordable form and, if applicable, any riders or modifications to
such Mortgage Note and Mortgage, together with certain other documents as set
forth in the related Agreement. The Trustee, or, if so specified in the related
Prospectus Supplement, the Custodian, will hold such documents in trust for the
benefit of the Securityholders.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will, at the time of delivery of the Securities, 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. As promptly as possible, the Depositor
will cause such assignments to be so recorded, in which event, the related
Agreement may 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
Securityholders 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 related Agreement (the "Mortgage Loan Schedule"). Such Mortgage
Loan Schedule will specify, among other things, 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 Scheduled Payment of
principal and interest; the maturity date of the related mortgage note; if the
Mortgage Loan is an ARM, the Minimum Mortgage Rate, the Maximum Mortgage Rate,
if any, and the Periodic Rate Cap; and whether the Mortgage Loan is an
Additional Collateral Loan, a Balloon Loan, a Cooperative Loan, a GPM Loan, a
GEM Loan, a Buy-Down Loan or a Mortgage Loan with other than fixed Scheduled
Payments and level amortization.
ASSIGNMENT OF MANUFACTURED HOME LOANS. The Depositor will cause any
Manufactured Home Loans included in the Mortgage Assets for a Series of
Securities to be assigned to the Trustee, together with principal and interest
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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 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
Securityholders 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 Securityholders in the Manufactured Home Loans
could be defeated. See "Certain Legal Aspects of Loans--Manufactured Home
Loans."
The Seller (or other party as described in the related Prospectus
Supplement) will provide limited representations and warranties to the Depositor
and 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 Sub-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 SECURITIES. The Depositor will cause any
Participation Securities obtained under a participation agreement to be assigned
to the Trustee by delivering to the Trustee the Participation Security , which
will be reregistered in the name of the Trustee. Unless otherwise specified 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
Security. Each Participation Security will be identified in a "Participation
Security 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 Security. In the related Agreement, the
Depositor will represent and warrant to the Trustee regarding the Participation
Security: (i) that the information contained in the Participation Security
Schedule is true and correct in all material respects; (ii) that, immediately
prior to the conveyance of the Participation Securities, the Depositor had good
title to and was sole owner of the Participation Security; (iii) that there has
been no other sale by it of such Participation Security and (iv) that such
Participation Security is not subject to any existing lien, charge, security
interest or other encumbrance (other than any Retained Interests).
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REPURCHASE AND SUBSTITUTION OF LOANS
Unless otherwise provided in the related Prospectus Supplement, if any
document in the Loan file delivered by the Depositor to the Trustee, or
Custodian on behalf of the Trustee, is found by the Trustee within 90 days of
the execution of the related 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 or Seller 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 or Seller if, and to the
extent it is obligated to do so under the related servicing agreement or
mortgage loan sale agreement will, not later than 90 days or within such other
period specified in the related Prospectus Supplement, from the date the Seller
or the Master Servicer was notified of the defect by the Depositor, the Master
Servicer or 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 Mortgage
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 120 days of the date of initial
issuance of the Securities and (ii) with respect to a Trust Fund for which a
REMIC election or elections are made, the Trustee must have received a
satisfactory opinion of counsel that such substitution will not result in a
prohibited transactions tax under the Code or cause the Trust Fund to lose its
status as a REMIC, or in the case of a Trust Fund consisting of two or more
REMICs, that such substitution will not cause any such REMIC to lose its status
as a REMIC.
Any Qualified Substitute Mortgage Loan will have, unless otherwise
specified in the related Prospectus Supplement, 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
Securityholders), (ii) an interest rate not lower than and not more than 1% of
the interest rate of the Deleted Loan, (iii) have a Loan-to-Value Ratio at the
time of substitution no higher than that of the Deleted Loan at the time of
substitution, (iv) have a remaining term to maturity not greater than (and not
more than one year less than) that of the Deleted Loan, and (v) comply with all
of the representations and warranties set forth in the related Agreement as of
the date of substitution. The related Agreement may include additional
requirements relating to ARMs or other specific types of Mortgage Loans, or
additional provisions relating to meeting the foregoing requirements on an
aggregate basis where a number of substitutions occur contemporaneously.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Securityholders or the Trustee for a material defect
in a Loan document.
Unless otherwise specified in the related Prospectus Supplement, the
Seller (or other party as described in the related Prospectus Supplement) 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 Seller (or
other party) cannot cure a breach of any such representations and warranties in
all material respects within 60 days after notification by the Master Servicer,
the Depositor or the Trustee of such breach, and if such breach is of a nature
that materially and adversely affects interest of the Securityholders in such
Loan, the Seller is obligated to cure, substitute or repurchase the affected
Mortgage Loan if such Seller is required to do so under the applicable
agreement.
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REPORTS TO SECURITYHOLDERS
The Master Servicer will prepare and will forward or will provide to
the Trustee for forwarding to each Securityholder 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 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 Securities, prior
to the Accrual Termination Date in addition to the information
specified in (i)(B) above, the amount of interest accrued on such
Securities during the related Interest Accrual Period and added to the
Compound Value thereof;
(v) in the case of Floating Interest Securities, the
Floating Rate applicable to the distribution being made;
(vi) if applicable, the number and aggregate principal
balances of Loans (A) delinquent for 31 to 60 days, (B) delinquent for
61 days to 90 days and (C) delinquent 91 days or more, as of the close
of business on the Determination Date to which such distribution
relates;
(vii) if applicable, the book value of any REO Property
acquired on behalf of Securityholders through foreclosure, grant of a
deed in lieu of foreclosure or repossession as of the close of business
on the last Business Day of the calendar month preceding the
Distribution Date to which such distribution relates;
(viii) if applicable, the amount of coverage under any
pool insurance policy as of the close of business on the applicable
Distribution Date;
(ix) if applicable, the amount of coverage under any
special hazard insurance policy as of the close of business on the
applicable Distribution Date;
(x) if applicable, the amount of coverage under any
bankruptcy bond as of the close of business on the applicable
Distribution Date;
(xi) 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;
(xii) 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
Securityholders is less than their required distribution, the amount of
the shortfall;
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(xiii) the amount of any withdrawal from any applicable
Reserve Fund included in amounts actually distributed to
Securityholders 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
(xiv) such other information as specified in the related
Agreement.
With respect to each Series of Certificates or Notes, Securityholders
will be referred to as the "Certificateholders" or the "Noteholders",
respectively.
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 Securityholder of record at any time
during such calendar year a report summarizing the items provided to
Securityholders as specified in the related Agreement to enable Securityholders
to prepare their tax returns including, without limitation, the amount of
original issue discount accrued on the Securities, if applicable. Information in
the Distribution Date and annual reports provided to the Securityholders 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, or
obligations fully guaranteed as to principal and interest by, the United States
of America or any agency or instrumentality thereof, provided that such
obligations are backed by the full faith and credit of the United States of
America; (ii) commercial paper (having original maturities of not more than nine
months) of any corporation incorporated under the laws of the United States or
any state thereof or the District of Columbia which on the date of acquisition
has been rated by each Rating Agency in its highest short-term rating, or such
lower category as will not result in the downgrading or withdrawal of the
ratings then assigned to the Securities by each Rating Agency; (iii)
certificates of deposit, demand or time deposits, federal funds or bankers'
acceptances issued by any bank or trust company incorporated under the laws of
the United States of America or of any state thereof or the District of
Columbia, provided that the short-term commercial paper of such bank or trust
company (or in the case of the principal depository institution in a depository
institution holding company, the long-term unsecured debt obligations of such
holding company) at the date of acquisition thereof has been rated by each
Rating Agency in its highest short-term rating; (iv) money market funds or
mutual funds organized under the Investment Company Act of 1940 rated in the
highest rating category by each Rating Agency; (v) repurchase obligations (the
collateral of which is held by a third party or the Trustee) with respect to any
security described in (i) above, provided that the long-term unsecured
obligations of the party agreeing to repurchase such obligations are at the time
rated by each Rating Agency in one of its two highest long-term rating
categories; and (vi) such other investments which do not adversely affect the
rating on the Securities 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 Securityholders of
such Series.
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Unless 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 will be property of the
Trustee, the Master Servicer or a Servicer and not available for distributions
to Securityholders. See "Servicing of Loans" herein.
EVENT OF DEFAULT AND RIGHTS UPON EVENTS OF DEFAULT
POOLING AND SERVICING AGREEMENT AND SERVICING AGREEMENT. Events of
Default under the Pooling and Servicing Agreement or Servicing Agreement for
each Series of Certificates or Notes, respectively, generally include (i) any
failure by the Master Servicer to remit to the Trustee for distribution to the
Securityholders (or distribution to Holders of the Equity Certificates with
respect to a Series of Notes) 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,
requiring the same to be remedied, to the Master Servicer by the Trustee or the
Depositor with respect to each Series of Certificates or by the Trustee or the
Issuer with respect to each Series of Notes, or to the Master Servicer, the
Depositor and the Trustee with respect to each Series of Certificates or to the
Master Servicer, the Issuer and the Trustee with respect to each Series of Notes
by the related Holders of Securities of such Series evidencing at least 25% of
Voting Rights of the Securities 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 related Pooling and Servicing Agreement or
Servicing Agreement which continues unremedied for 30 days after the giving of
written notice of such failure to the Master Servicer by the Trustee or the
Depositor with respect to each Series of Certificates or by the Trustee or the
Issuer with respect to each Series of Notes, or to the Master Servicer, the
Depositor and the Trustee with respect to each Series of Certificates or to the
Master Servicer, the Issuer and the Trustee with respect to each Series of Notes
by the Holders of Securities of such Series evidencing at least 25% of the
Voting Rights of the Securities 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.
Unless otherwise specified in the related Prospectus Supplement, so
long as an Event of Default remains unremedied under the Pooling and Servicing
Agreement or Servicing Agreement for a Series, the Trustee for such Series or
Holders of Securities of such Series evidencing at least 51% of the aggregate
outstanding principal amount of the Securities for such Series (the first 51%
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 or Servicing Agreement and in and to the Mortgage Loans (other than
its right as a Securityholder (or as Holder of the Equity Certificates with
respect to a Series of Notes) under the Pooling and Servicing Agreement or
Servicing Agreement, as applicable, 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 or 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 related Pooling and Servicing
Agreement or Servicing Agreement. Unless otherwise specified in the related
Prospectus Supplement, in the event that the Trustee would be obligated to
succeed the Master Servicer but is unwilling so to act, it may appoint (or if it
is unable so to act, it shall appoint) or petition a court of competent
jurisdiction for the appointment of, a FNMA- or FHLMC-approved mortgage
servicing institution with a net worth of at least $10,000,000 or such other
amount as specified in the related Prospectus Supplement to act as a successor
to the Master Servicer under the related Pooling and Servicing Agreement or
Servicing Agreement (unless otherwise set forth in the related Pooling and
Servicing Agreement or Servicing Agreement). Pending such appointment, the
Trustee is obligated to act in such capacity.
No Securityholder of a Series, solely by virtue of such Holder's status
as a Securityholder, will have any right under the Pooling and Servicing
Agreement or Servicing Agreement for such Series to institute any proceeding
with respect to the related Pooling and Servicing Agreement or Servicing
Agreement, unless such Holder previously has given to the Trustee for such
Series written notice of default and unless the Holders of Securities evidencing
at least 25% of the aggregate outstanding principal amount of the Securities 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.
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INDENTURE. Unless otherwise provided in the related Prospectus
Supplement for a Series of Notes, an Event of Default under the Indenture
generally will include: (i) a default for five days or more (or other period of
time described in the related Prospectus Supplement) in the payment of any
principal of or interest on any Note or Equity Certificates of such Series; (ii)
failure to perform any other covenant of the Issuer in the Indenture which
continues for a period of 30 days after notice thereof is given in accordance
with the procedures described in the related Prospectus Supplement; (iii) any
representation or warranty made by the Issuer in the Indenture or in any
certificate or other writing delivered pursuant thereto or in connection
therewith with respect to or affecting such Series having been incorrect in a
material respect as of the time made, and such breach is not cured within 30
days after notice thereof is given in accordance with the procedures described
in the related Prospectus Supplement; (iv) certain events of bankruptcy,
insolvency, receivership or liquidation of the Issuer; or (v) any other Event of
Default provided with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, the Trustee or the holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series are Compound
Interest Securities, such portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the holders of a
majority in aggregate outstanding amount of the related Notes.
If following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply payments on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default, unless (a) the holders of 100% of the
then aggregate outstanding amount of the Notes of such Series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the outstanding Notes
of such Series at the date of such sale or (c) the Trustee determines that such
collateral would not be sufficient on an ongoing basis to make all payments on
such Notes as such payments would have become due if such Notes had not been
declared due and payable, and the Trustee obtains the consent of the holders of
66 2/3% of the then aggregate outstanding amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default, the Indenture provides that the Trustee will have a
prior lien on the proceeds of any such liquidation for unpaid fees and expenses.
As a result, upon the occurrence of such an Event of Default, the amount
available for payments to the Noteholders would be less than would otherwise be
the case. However, the Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
In the event the principal of the Notes of a Series is declared due and
payable, as described above, the holders of any such Notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount that is unamortized.
No Noteholder or Holder of an Equity Certificate of a Series, solely by
virtue of such Holder's status as a Noteholder or Holder of an Equity
Certificate, will have any right under an Owner Trust Agreement or Indenture for
such Series to institute any proceeding with respect to such Agreement unless
such holder previously has given to the Trustee for such Series written notice
of default and unless the Holders of Notes or Equity Certificates of any class
evidencing at least 25% of the aggregate Percentage Interests constituting such
class have made written request upon the Trustee to institute such proceeding in
its own name as Trustee thereunder and have offered to the Trustee reasonable
indemnity, and the Trustee for 60 days has neglected or refused to institute any
such proceeding.
[Pursuant to the terms of the Indenture, if an Event of Default occurs
and is continuing, Senior Securityholders may be entitled to exercise certain
rights of the Holders of the Securities, without the consent of
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Subordinate Securityholders, and the Subordinate Securityholders may exercise
such rights only with the prior consent of the Senior Securityholders.]
THE OWNER TRUSTEE
The identity of the commercial bank, national banking association,
banking corporation, savings and loan association or trust company named as the
Owner Trustee for each Series of Notes will be set forth in the related
Prospectus Supplement. The entity serving as Owner Trustee may have normal
banking relationships with the Depositor or the Master Servicer.
THE TRUSTEE
The identity of the commercial bank, national banking association,
banking corporation, savings and loan association or trust company named as the
Trustee for each Series of Securities 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 Securities. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the Pooling and Servicing Agreement or Indenture
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 related Agreement.
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency
of any related Agreement, the Securities or of any Mortgage Asset or related
documents. If no Event of Default (as defined in the related Pooling and
Servicing Agreement, Sale and Servicing Agreement or Indenture) has occurred,
the Trustee is required to perform only those duties specifically required of it
under the related 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 Agreement. However, the Trustee will not be responsible
for the accuracy or content of any such documents furnished by it or the
Securityholders to the Master Servicer under the related 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 Securityholders in an Event of Default. See "Event of Default and Rights
Upon Events 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 the related 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.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, the Master
Servicer and to all Securityholders; provided, that such resignation shall not
be effective until a successor trustee is appointed. If no successor Trustee has
been appointed and has accepted the 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; provided, that such the
resigning Trustee shall not resign and be discharged until such time as the
successor trustee is approved by each Rating Agency. 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 related Pooling and Servicing Agreement or
Indenture, (ii) if the Trustee
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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 related Agreement is located, or (iv) by the Holders of
Securities evidencing at least 51% of the aggregate outstanding principal amount
of the Securities in the Trust Fund upon 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 Securityholders, 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. Unless otherwise
specified in the related Prospectus Supplement, the Certificate Account will be
an Eligible Account, and the funds held therein may be invested, pending
disbursement to Securityholders of the related Series, pursuant to the terms of
the related Pooling and Servicing Agreement or the related Servicing Agreement
and Indenture, in Eligible Investments. Unless otherwise specified in the
related Prospectus Supplement, the Master Servicer or the Trustee 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 itself or 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 Securityholders, to clear and terminate the
Certificate Account and to make other withdrawals as required or permitted by
the related Agreements.
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 AGREEMENTS
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
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.
Unless otherwise specified in the related Prospectus Supplement, the
Pooling and Servicing Agreement for each Series of Certificates 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 662/3% 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 or elections have been made, for the related
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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.
Notwithstanding the foregoing, if a REMIC election or elections have
been made with respect to the related Trust Fund, the Trustee will not be
entitled to consent to any amendment to a Pooling and Servicing Agreement
without having first received an opinion of counsel to the effect that such
amendment or the exercise of any power granted to the Master Servicer, the
Depositor or the Trustee in accordance with such amendment will not result in
the imposition of a tax on the related Trust Fund or any related REMIC or cause
such Trust Fund or any such REMIC to fail to qualify as a REMIC.
Unless otherwise specified in the Prospectus Supplement, the Servicing
Agreement or Indenture for each Series of Notes may be amended by the parties
thereto without the consent of any of the Noteholders covered by such Agreement
(i) to cure any ambiguity, (ii) to correct, modify or supplement any provision
therein which may be defective or inconsistent with any other provision therein
or (iii) to make any other provisions with respect to matters or questions
arising under the Agreement which are not inconsistent with the provisions
thereof, provided that such action will not adversely affect in any material
respect the interests of any Noteholder covered by the Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicing Agreement or Indenture for each Series of Notes may also be amended by
the parties thereto with the consent of the Holders evidencing not less than
662/3% of the aggregate outstanding principal amount of the Notes 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 Agreement or
modifying in any manner the rights of Noteholders of such Series; provided,
however, that no such amendment may (i) reduce the amount of or delay the timing
of, payments received on any Note without the consent of the holder of such
Note, (ii) adversely affect in any material respect the interests of the holders
of any Class of Notes in a manner other than as described in (i), without the
consent of the holders of Notes of such Class evidencing not less than 662/3% of
the aggregate outstanding principal amount of the Notes of each Class of such
Series affected thereby or (iii) reduce the aforesaid percentage of aggregate
outstanding principal amount of Notes 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 Notes
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. If specified in the related Prospectus Supplement, a
provider of credit enhancement may be entitled to certain Voting Rights of the
Securityholders.
REMIC ADMINISTRATOR
With respect to any Multiple Class Series of Certificates as to which a
REMIC election is made, 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 related Agreements for a Series will
terminate upon the distribution to Securityholders of all amounts distributable
to them pursuant to such Agreements 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 or the Depositor (or other party as specified in the
Prospectus Supplement) from the Trustee for such Series of all Mortgage Loans at
that time subject to the related Agreements and all property acquired in respect
of any Mortgage Loan. The exercise of such right will effect early retirement of
the Securities of such Series, but such 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
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Cut-off Date Aggregate Principal Balance. In no event, however, will the trust
created by the related Agreements 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 related Agreements to each Securityholder,
and the final distribution will be made only upon surrender and cancellation of
the Securities at an office or agency specified in the notice of termination.
See "Description of the Securities--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. A deed to secure debt typically has two parties, pursuant to which
the borrower, or grantor, conveys title to the real property to the grantee, or
lender, generally with a power of sale, until such times as the debt is repaid.
The mortgagee's authority under a mortgage or a deed to secure debt and the
trustee's authority under a deed of trust are governed by the law of the state
in which the real property is located, the express provisions of the mortgage,
the deed to secure debt, 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
Securities, 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 cooperative shares and proprietary leases or occupancy
agreements, the priority of which will depend on the terms of the particular
security agreement as well as the order of recordation of the agreement or the
filing of the financing statements related thereto in the appropriate recording
office, or the taking of possession of the cooperative shares; depending on the
law of the state where the cooperative is located. Such a lien or security
interest is not, in general, prior to liens in favor of the cooperative
corporation for unpaid assessments or common charges. Such a lien or security
interest is not prior to the lien for real estate taxes and assessments and
other charges imposed under governmental police powers.
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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 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
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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 or a deed to secure debt 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, 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. 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, a deed of trust, or a
deed to secure debt, 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. 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.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause in a senior
mortgage, the
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junior mortgagee may be required to pay the full amount of the senior mortgages
to the senior mortgagees. Accordingly, with respect to those Mortgage Loans
which are junior mortgage loans, if the lender purchases the property, the
lender's title will be subject to all senior liens and claims and certain
governmental liens. 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 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 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 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.
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Recognition agreements also generally 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 and assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholder.
The terms of the Cooperative Loans do not require either the
tenant-stockholder or the Cooperative to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
also may adversely affect the marketability of the cooperative dwelling unit in
the event of foreclosure.
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 a deed to
secure debt 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 or a deed to secure debt. 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
or a deed to secure debt. 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,
deed to secure debt 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
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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 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.
With respect to mortgage loans secured by collateral in addition to the
related mortgaged properties, realization upon the additional collateral may be
governed by the Uniform Commercial Code in effect under the law of the state
applicable thereto. Some courts have interpreted the Uniform Commercial Code to
prohibit or limit a deficiency award in certain circumstances, including those
in which the disposition of the collateral was not conducted in a commercially
reasonable manner. In some states, the Uniform Commercial Code does not apply to
liens upon additional collateral consisting of certain types of personal
property (including, for example, bank accounts and, to a certain extent,
insurance policies and annuities). Realization upon such additional collateral
will be governed by state laws applicable thereto rather than by the Uniform
Commercial Code, and the availability of deficiency awards under such state laws
may be limited. Whether realization upon any Additional Collateral is governed
by the Uniform Commercial Code or by other state laws, the ability of secured
parties to realize upon the additional collateral may be limited by statutory
prohibitions that limit remedies in respect of the related mortgage loans. Such
prohibitions may affect secured parties either independently or in conjunction
with statutory requirements that secured parties proceed against the related
mortgaged properties first or against both such mortgaged properties and the
additional collateral concurrently. Some state statutes require secured parties
to exhaust the security afforded by the mortgaged properties through foreclosure
before attempting to realize upon the related additional collateral (including
any third-party guarantees). Other state statutes require secured parties to
foreclose upon mortgaged properties and additional collateral concurrently. In
states where statutes limit the rights of secured parties to obtain deficiency
judgments against borrowers or guarantors following foreclosure upon the related
mortgaged properties and where secured parties either are required or elect to
proceed against such mortgaged properties before proceeding against the related
additional collateral, limitations upon the amounts of deficiency judgments may
reduce the amounts that may be realized by the secured parties upon the
disposition of such additional collateral. Further, in certain states where
secured parties may choose whether to proceed against the related mortgaged
properties or additional collateral first or against both concurrently, the
secured parties, following a proceeding against one, may be deemed to have
elected a remedy and may be precluded from exercising remedies with respect to
the other. Consequently, the practical effect of the election requirement, in
those states permitting such election, is that secured parties will usually
proceed against both concurrently or against the mortgaged properties first if
prohibited from proceeding against both by state law.
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 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.
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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. Therefore, with respect to any
Additional Collateral Loan secured by property of the debtor in addition to the
debtor's principal residence, courts with federal bankruptcy jurisdiction may
reduce the amount of each monthly payment, change the rate of interest, alter
the repayment schedule, forgive all or a portion of the debt, reduce the
lender's security interest to the value of the collateral and otherwise subject
such mortgage loan to the cramdown provisions of Chapter 13.
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 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. With respect to mortgage loans secured by collateral in
addition to the related mortgaged properties, such tax liens may in certain
circumstances provide priority over the lien on such additional collateral.
Certain of the Mortgage Loans may be 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
(such Mortgage Loans, "High Cost Loans"), if such Mortgage Loans were originated
on or after October 1, 1995, are not mortgaged loans made to finance the
purchase of the mortgaged property and have interest rates or origination costs
in excess of certain prescribed levels. Purchasers or assignees of any High Cost
Loan could be liable for all claims and subject to all defenses arising under
such provisions that the borrower could assert against the originator thereof.
Remedies available to the borrower include monetary penalties, as well as
rescission rights if the appropriate disclosures were not given as required. See
"Loan Underwriting Procedures and Standards--Representations and Warranties."
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 Securities. 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.
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JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds
of trust, which are junior to senior mortgages or deeds of trust which are not
part of the Trust Fund. The rights of the Securityholders as the holders of a
junior deed of trust or a junior mortgage are subordinate in lien priority and
in payment priority to those of the holder of the senior mortgage or deed of
trust, including the prior rights of the senior mortgagee or beneficiary to
receive and apply hazard insurance and condemnation proceeds and, upon default
of the mortgagor, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage or the sale
pursuant to the deed of trust, the junior mortgagee's or junior beneficiary's
lien will be extinguished unless the junior lienholder satisfies the defaulted
senior loan or asserts its subordinate interest in a property in foreclosure
proceedings. See "--Foreclosure on Mortgages" herein.
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a senior mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Unless the Prospectus Supplement indicates otherwise, the Loans
generally contain due-on-sale clauses. These clauses permit the lender to
accelerate the maturity of the loan if the borrower sells, transfers or conveys
the property. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases the enforceability
of these clauses has been limited or denied. However, the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn-St Germain Act"), preempts state
constitutional, statutory and case law that prohibit the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. 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.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St Germain Act may not exercise 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 mortgage
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 Mortgage Loans and the number of Mortgage Loans which may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower from
the legal effect of its 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 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 the lender to foreclose if the default under the mortgage
instrument is not monetary, such as the borrower failing to adequately maintain
the property or the borrower executing a second mortgage or deed of trust
affecting the property. 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 deeds of trust or
mortgages receive notices in addition to the statutorily prescribed minimum. For
the most part, these cases have
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upheld the notice provisions as being reasonable or have found that the sale by
a trustee under a deed of trust, or under a mortgage having a power of sale,
does not involve sufficient state action to afford constitutional protections to
the borrower.
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 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.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an
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existing junior lender is harmed or the mortgagor is additionally burdened.
Third, if the mortgagor defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior lenders can
impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. Moreover, the bankruptcy of a
junior lender may operate to stay foreclosure or similar proceeds by the senior
lender.
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 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.
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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 or 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.
With respect to a Series of Securities 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 Securityholders would be against the Seller
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
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interest in the Manufactured Home in the state of relocation. In states which do
not require a certificate of title for a 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 related Pooling and Servicing Agreement or 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 Securityholders 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.
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
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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 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.
LOUISIANA LAW. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently
affixed to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the lender obtained an appraisal of the manufactured home prior
to the sale and the property was sold for at least two-thirds of its appraised
value.
FORMALDEHYDE LITIGATION. A number of lawsuits are pending in the United
States alleging personal injury from exposure to the chemical formaldehyde,
which is present in many building materials, including such components of
manufactured housing as plywood flooring and wall paneling. Some of these
lawsuits are pending against manufacturers of manufactured housing, suppliers of
component parts, and related persons in the distribution process. The Depositor
is aware of a limited number of cases in which plaintiffs have won judgments in
these lawsuits.
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any Loan secured by a Manufactured Home with respect to
which a formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Loan and may be unable
to collect amounts still
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due under the Loan. In the event an obligor is successful in asserting such a
claim, the related Securityholders could suffer a loss if (i) the related Seller
fails or cannot be required to repurchase the affected Loan for a breach of
representation and warranty and (ii) the Master Servicer or the Trustee were
unsuccessful in asserting any claim of contribution or subrogation on behalf of
the Securityholders against the manufacturer or other persons who were directly
liable to the plaintiff for the damages. Typical products liability insurance
policies held by manufacturers and component suppliers of manufactured homes may
not cover liabilities arising from formaldehyde in manufactured housing, with
the result that recoveries from such manufacturers, suppliers or other persons
may be limited to their corporate assets without the benefit of insurance.
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 Securities. 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.
FORFEITURES IN DRUG AND RICO PROCEEDINGS. Federal law provides that
property owned by persons convicted of drug-related crimes or of criminal
violations of the Racketeer Influenced and Corrupt Organizations ("RICO")
statute can be seized by the government if the property was used in, or
purchased with the proceeds of, such crimes. Under procedures contained in the
Comprehensive Crime Control Act of 1984 (the "Crime Control Act"), the
government may seize the property even before conviction. The government must
publish notice of the forfeiture proceeding and may give notice to all parties
"known to have an alleged interest in the property," including the holders of
mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before the
commission of the crime upon which the forfeiture is based, or (ii) the lender
was, at the time of the execution of the mortgage, "reasonably without cause to
believe" that the property was used in, or purchased with the proceeds of,
illegal drug or RICO activities.
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 and Notes offered hereunder where Thacher Proffitt & Wood,
Brown & Wood LLP or Stroock & Stroock & Lavan LLP is identified in the
applicable Prospectus Supplement as counsel to the Depositor (hereinafter
"Counsel to the Depositor"). This discussion is directed solely to
Securityholders that hold the Securities 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 and preparers of tax returns (including those filed by
any REMIC or other issuer) should be aware that under applicable Treasury
regulations a provider of advice on specific issues of law is not considered an
income tax return preparer unless the advice (i) is given with respect to events
that have occurred at the time the advice is rendered and is not given with
respect to the consequences of contemplated actions and (ii) is directly
relevant to the determination of an entry on a tax return.
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Accordingly, 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 Securities. See "State and Other Tax Consequences."
Securityholders are advised to consult their own tax advisors concerning the
federal, 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 (the "REMIC Certificates") representing interests in a Trust Fund,
or a portion thereof, that the Trustee will 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) notes (the "Notes") representing
indebtedness of the Issuer for federal income tax purposes. The Prospectus
Supplement for each Series of Securities will indicate which of the foregoing
treatments will apply to such Series and, if a REMIC election (or elections)
will be made with respect to a Series of Certificates, will identify all
"regular interests" and "residual interests" in the REMIC.
REMICS
As to each Series of Certificates, unless otherwise disclosed in the
related Prospectus Supplement, the Trustee will covenant to elect to have
treated the Trust Fund, or a portion thereof, as one or more REMICs. The
Prospectus Supplement for each Series of Certificates will identify all
Certificates representing "regular interests" and the "residual interest" in
each such REMIC. If a REMIC election or elections will not be made for a Trust
Fund or certain assets of a Trust Fund, the federal income tax consequences of
the purchase, ownership and disposition of the related Certificates will be set
forth in the related Prospectus Supplement if such Certificates are offered
thereby. 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.
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 and 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 provide relief in the event of an
inadvertent termination of REMIC status, no regulations have been issued
implementing this provision. 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.
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CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES
In general, the REMIC Certificates will be "real estate assets" within
the meaning of Section 856(c)(4)(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 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)(4)(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. 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 Loans, payments on
Loans (including temporary investments of such proceeds) 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 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 Loans for purposes
of all the foregoing sections. In addition, in some instances Loans (including
Additional Collateral Loans) may not be treated entirely as assets described in
the foregoing sections. If the assets of a REMIC include Additional Collateral
Loans, the non-real property collateral, while itself not an asset of the REMIC,
could cause the Loans not to qualify for one or more of such characterizations.
If so, the related Prospectus Supplement will describe the Loans (including
Additional Collateral Loans) that may not be so treated. The REMIC Regulations
do provide, however, that payments on Loans held pending distribution are
considered part of the Loans for purposes of Section 856(c)(4)(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 "real estate assets" within the meaning of Section 856(c)(4)(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 "constant yield" 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 reasonable prepayment assumption be used with
respect to Loans held by, or Loans underlying Mortgage Assets 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 of REMIC Regular Certificates 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 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 at maturity 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" is interest that is unconditionally
payable at least annually (during the entire term of the instrument) at a single
fixed rate, at a "qualified floating rate," an "objective 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" 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 IRS.
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 provided 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.
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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 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 Loans being prepaid at a rate equal to
the Prepayment Assumption, and in the case of Mortgage Assets other than Loans,
that distributions will be made with respect to each Mortgage Asset in
accordance with the participation agreement or other organizational document
under which such Mortgage Asset was issued, 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 Loans being prepaid at a rate equal to the
Prepayment Assumption, and in the case of Mortgage Assets other than Loans, that
distributions will be made with respect to each Mortgage Asset in accordance
with the participation agreement or other organizational document under which
such Mortgage Asset was issued. 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
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on any given day equals (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 plus (ii) the daily portions of
original issue discount for all days during such accrual period prior to such
day minus (iii) any principal payments made during such accrual period prior to
such day with respect to such certificate.
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. Similarly, a Certificateholder that made this
election for a Certificate that is 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 may not be revoked without the consent
of the IRS.
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 may 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 should apply. The Committee Report
indicates that in each accrual period market discount on REMIC Regular
Certificates accrues, 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.
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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 a REMIC Regular Certificate purchased with market discount.
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 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. By
analogy to recently finalized bond premium regulations, any allocable premium in
excess of the interest income may be deductible to the extent of prior accruals
of interest. The OID Regulations also permit Certificateholders to elect to
include all interest, discount and premium in income based on a constant yield
method, further treating such 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 presumably 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 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 Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the 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.
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TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
GENERAL
Although a REMIC is a separate entity for federal income tax purposes,
a REMIC generally is not subject to entity-level taxation, except with regard to
prohibited transactions and certain other transactions. See "--Prohibited
Transactions and Other Possible REMIC Taxes" below. Rather, the taxable income
or net loss of a REMIC is generally taken into account by the Holder of the
REMIC Residual Certificates. Accordingly, 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 income tax purposes as
direct ownership interests in the Loans or as debt instruments issued by the
REMIC.
A holder 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 activity 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 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"
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. Such disparity between income and distributions may not be offset by
corresponding losses or
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reductions of income attributable to the REMIC Residual Certificateholder until
subsequent tax years and, then, may not be completely offset due to changes in
the Code, tax rates or character of the income or loss.
TAXABLE INCOME OF THE REMIC
The taxable income of the REMIC will equal the income from the 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 amortization of 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
Loans, bad debt losses with respect to the 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). 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 Loans or other property will equal the fair market value of such interests
in the 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 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 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 Loans with market
discount that it holds.
A 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 receipt 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 each REMIC will elect under Section 171 of
the Code to amortize any premium on the Loans. Premium on any 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 Loan originated on or before September 27, 1985. Instead,
premium on such a 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 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
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
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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 taxable
income of the REMIC. However, such bases 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."
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EXCESS INCLUSIONS
Any "excess inclusions" with respect to a REMIC Residual Certificate
will 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.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of the taxpayer is based on the taxpayer's regular
taxable income computed without regard to the rule that taxable income cannot be
less than the amount of excess inclusions, (ii) the alternative minimum taxable
of a taxpayer for a taxable year cannot be less than the amount of excess
inclusions for that year, and (iii) the amount of any alternative minimum tax
net operating loss is computed without regard to any excess inclusions.
Under Treasury regulations yet to be issued, 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. A similar rule will apply with respect
to regulated investment companies, common trust funds and certain cooperatives.
NONECONOMIC REMIC RESIDUAL CERTIFICATES
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates 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
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inclusions, and (2) the transferor reasonably expects that for each anticipated
excess inclusion 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 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 24, 1996, the IRS released final 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, any REMIC Residual Certificate acquired after January 4, 1995 will
not be treated as a security and therefore generally may not be marked to
market.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS
Fees and expenses of a REMIC generally will be allocated to the holders
of the related 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. For taxable years
beginning after December 31, 1997, in the case of a partnership that has 100 or
more partners and elects to be treated as an "electing large partnership," 70
percent of such partnership's miscellaneous itemized deductions will be
disallowed, although the remaining deductions will generally be allowed at the
partnership level and will not be subject to the 2 percent floor that would
otherwise be applicable to individual partners. 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
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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 five 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.
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.
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
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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 Loan, the receipt of income from a source other than a 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 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.
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
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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. For taxable years beginning after December 31,
1997, notwithstanding the preceding two sentences, in the case of a REMIC
Residual Certificate held by an "electing large partnership," all interests in
such partnership shall be treated as held by disqualified organizations (without
regard to whether the record holders of the partnership furnish statements
described in the preceding sentence) and the amount that would be subject to tax
under the second preceding sentence is excluded from the gross income of the
partnership (in lieu of a deduction in the amount of such tax generally allowed
to pass-through entities).
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 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.
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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.
The Trustee, as the tax matters person or as agent for the tax matters
person, subject to certain notice requirements and various restrictions and
limitations, generally will 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 the tax matters person
or as agent for the 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. Any
person that holds a REMIC Residual Certificate as a nominee for another person
may be required to furnish to the related 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 certain trusts and individual holders of
REMIC Regular Interests and the IRS; holders of REMIC Regular Certificates that
are corporations, trusts described in Sections 664(c) and 4947(a)(1) of the
Code, 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 among other things, 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 REMIC may 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. Treasury regulations (the "Final Withholding Regulations"), which
are generally effective with respect to payments made after December 31, 1998,
consolidate and modify the current certification requirements and means by which
a holder may claim exemption from United States federal income tax withholding
and provide certain presumptions regarding the status of holders when payments
to the holders cannot
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be reliably associated with appropriate documentation provided to the payor. All
holders should consult their tax advisors regarding the application of the Final
Withholding Regulations. 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). The Final Withholding Regulations
consolidate and modify the current certification requirements and means by which
a non-United States person may claim exemption from United States federal income
tax withholding. All holders that are non-United States persons should consult
their tax advisors regarding the application of the Final Withholding
Regulations, which are generally effective with respect to payments made after
December 31, 1999. For these purposes, "United States person" means a citizen or
resident of the United States, a corporation or partnership or entity treated as
a partnership or corporation for United States Federal income tax purposes
created or organized in, or under the laws of, the United States, any state
thereof or the District of Columbia (except, in the case of a partnership, to
the extent provided in regulations), an estate whose income is subject to United
States federal income tax regardless of its source, or a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. To the extent
prescribed in regulations by the Secretary of the Treasury, which regulations
have not yet been issued, a trust which was in existence on August 20, 1996
(other than a trust treated as owned by the grantor under subpart E of part I of
subchapter J of chapter 1 of the Code), and which was treated as a United States
person on August 19, 1996, may elect to continue to be treated as a United
States person notwithstanding the previous sentence. 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 related 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.
NOTES
On or prior to the date of the related Prospectus Supplement with
respect to the proposed issuance of each Series of Notes, Counsel to the
Depositor will deliver its opinion to the effect that, assuming compliance with
all provisions of the Indenture, Owner Trust Agreement and certain related
documents and upon issuance of the Notes, for federal income tax purposes (i)
the Notes will be treated as indebtedness and (ii) the Issuer, as created
pursuant to the terms and conditions of the Owner Trust Agreement, will not be
characterized as an association (or publicly traded partnership) taxable as a
corporation or as a taxable mortgage pool.
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STATUS AS REAL PROPERTY LOANS
Notes held by a domestic building and loan association will NOT
constitute "loans . . . secured by an interest in real property" within the
meaning of Code section 7701(a)(19)(C)(v); and (ii) Notes held by a real estate
investment trust will NOT constitute "real estate assets" within the meaning of
Code section 856(c)(4)(A) and interest on Notes will NOT be considered "interest
on obligations secured by mortgages on real property" within the meaning of Code
section 856(c)(3)(B).
TAXATION OF NOTEHOLDERS
Notes generally will be subject to the same rules of taxation as REMIC
Regular Certificates issued by a REMIC, as described above, except that (i)
income reportable on the Notes is not required to be reported under the accrual
method unless the holder otherwise uses the accrual method and (ii) the special
rule treating a portion of the gain on sale or exchange of a REMIC Regular
Certificate as ordinary income is inapplicable to the Notes. See "--REMICs
- --Taxation of Owners of REMIC Regular Certificates" and "-- Sales of REMIC
Certificates."
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 Securities 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
Securities offered hereunder.
ERISA CONSIDERATIONS
ERISA imposes certain fiduciary and prohibited transaction restrictions
on employee pension and welfare benefit plans subject to ERISA ("ERISA Plans").
Section 4975 of the Code imposes similar prohibited transaction restrictions on
tax-qualified retirement plans described in Section 401(a) of the Code
("Qualified Retirement Plans") and on Individual Retirement Accounts ("IRAs")
described in Section 408 of the Code (collectively, "Tax-Favored Plans";
Tax-Favored Plans and ERISA Plans, collectively, "Plans").
Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA), and, if no election has been made under Section
410(d) of the Code, church plans (as defined in Section 3(33) of ERISA), are not
subject to the ERISA requirements discussed herein. Accordingly, assets of such
plans may be invested in Securities without regard to the ERISA considerations
described below, subject to the provisions of applicable federal and state law.
Any such plan that is a Qualified Retirement Plan and exempt from taxation under
Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those
of investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving "Plan Assets", Plans and persons ("parties in interest" under Section
3(14) of ERISA or "disqualified persons" under Section 4975(e)(2) of the Code;
collectively, "Parties In Interest") who have certain specified relationships to
the Plans, unless a statutory, regulatory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to a penalty, or an excise tax, imposed pursuant to
Section 502(i) of ERISA or Section 4975 of the Code, unless a statutory,
regulatory or administrative exemption is available.
PLAN ASSET REGULATIONS. Certain transactions involving a Trust Fund
might be deemed to constitute prohibited transactions under ERISA and the Code
with respect to a Plan that purchases the Securities, if the underlying Mortgage
Assets and other assets included in the Trust Fund are deemed to be assets of
the Plan. The U.S.
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Department of Labor (the "DOL") has promulgated regulations at 29 C.F.R.
ss.2510.3-101 (the "Plan Asset Regulations") defining the term "Plan Assets" for
purposes of applying the general fiduciary responsibility provisions of ERISA
and the prohibited transaction provisions of ERISA and the Code. Under the Plan
Asset Regulations, generally, when a Plan acquires an "equity interest" in
another entity (such as the Trust Fund), the underlying assets of that entity
may be considered to be Plan Assets unless certain exceptions apply. In addition
to several exceptions not applicable to an entity like the Trust Fund, a Plan's
Assets will not include an undivided interest in each asset of an entity in
which such Plan makes an equity investment if Benefit Plan Investors (I.E.,
Plans and certain employee benefit plans not subject to ERISA) do not own 25% or
more in value of any class of equity securities issued by the entity. Neither
Plans nor persons investing Plan Assets should acquire or hold Securities in
reliance upon the availability of any exception under the Plan Asset
Regulations. The Plan Asset Regulations provide that the term "equity interest"
means any interest in an entity other than an instrument which is treated as
indebtedness under applicable local law and which has no "substantial equity
features." Under the Plan Asset Regulations, Plan Assets will be deemed to
include an interest in the instrument evidencing the equity interest of a Plan
(such as a Certificate or a Note with "substantial equity features"), and,
because of the factual nature of certain of the rules set forth in the Plan
Asset Regulations, Plan Assets may be deemed to include an interest in the
underlying assets of the entity in which a Plan acquires an interest (such as
the Trust Fund). Without regard to whether the Notes are characterized as equity
interests, the purchase, sale and holding of Notes by or on behalf of a Plan
could be considered to give rise to a prohibited transaction if the Issuer, the
applicable Trustee or any of their respective affiliates is or becomes a Party
in Interest with respect to such Plan.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Mortgage Assets and other assets included in a Trust Fund
constitute Plan Assets, then any party exercising management or discretionary
control regarding those assets, such as the Master Servicer, any Servicer, any
sub-servicer, the Trustee, the obligor under any credit enhancement mechanism,
or certain affiliates thereof may be deemed to be a Plan "fiduciary" and thus
subject to the fiduciary responsibility provisions and prohibited transaction
provisions of ERISA and the Code with respect to the investing Plan. In
addition, if the Mortgage Assets and other assets included in a Trust Fund
constitute Plan Assets, the purchase of Certificates by a Plan, as well as the
operation of the Trust Fund, may constitute or involve a prohibited transaction
under ERISA or the Code.
The Plan Asset Regulations provide that where a Plan acquires a
"guaranteed governmental mortgage pool certificate", the Plan's assets include
such certificate but do not solely by reason of the Plan's holdings of such
certificate include any of the mortgages underlying such certificate. The Plan
Asset Regulations include in the definition of a "guaranteed governmental
mortgage pool certificate" FHLMC Certificates, GNMA Certificates and FNMA
Certificates. Accordingly, even if such Agency Securities included in a Trust
Fund were deemed to be assets of Plan investors, the mortgages underlying such
Agency Securities would not be treated as assets of such Plans. Private Mortgage
Backed Securities are not "guaranteed governmental mortgage pool certificates"
within the meaning of the Plan Asset Regulations. Potential Plan investors
should consult their counsel and review the ERISA discussion herein and in the
related Prospectus Supplement before purchasing any such Certificates.
PROHIBITED TRANSACTION EXEMPTION. The DOL has granted to Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") an individual prohibited
transaction exemption, as amended (Prohibited Transaction Exemption 90-83, the
"Exemption"), which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Section 4975(a) and (b) of the Code,
certain transactions, among others, relating to the servicing and operation of
mortgage pools and the purchase, sale, holding and disposition of mortgage
pass-through securities underwritten by an Underwriter (as hereinafter defined),
provided that certain conditions set forth in the Exemption are satisfied. For
purposes of this Section "ERISA Considerations," the term "Underwriter" includes
(a) DLJ, (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with DLJ and
(c) any member of the underwriting syndicate or selling group of which a person
described in (a) or (b) is a manager or co-manager with respect to a class of
Securities. "Securities" potentially covered by the Exemptions would include
Certificates, Notes that are treated as "equity interests" under the Plan Asset
Regulations, and interests issued by a Trust Fund that elects to be treated as a
REMIC or FASIT.
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The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief thereunder. First, the acquisition of Securities
by a Plan or with Plan Assets must be on terms that are at least as favorable to
the Plan as they would be in an arm's-length transaction with an unrelated
party. Second, the Exemption only applies to Securities evidencing rights and
interests that are not subordinated to the rights and interests evidenced by the
other Securities of the same Trust Fund. Third, the Securities at the time of
acquisition by or with Plan Assets must be rated in one of the three highest
generic rating categories by Standard and Poor's, a Division of the McGraw-Hill
Companies, Inc., Moody's Investors Service, Inc., Duff & Phelps, Inc. or Fitch
IBCA, Inc. (collectively, the "Exemption Rating Agencies"). Fourth, the Trustee
cannot be an affiliate of any other member of the "Restricted Group" which
consists of any Underwriter, the Master Servicer, any Servicer, any subservicer,
the Trustee and any obligor with respect to assets of a Trust Fund constituting
more than 5% of the aggregate unamortized principal balance of the assets in the
Trust Fund as of the date of initial issuance of the Securities. Fifth, the sum
of all payments made to and retained by the Underwriters must represent not more
than reasonable compensation for underwriting the Securities; the sum of all
payments made to and retained by the Depositor pursuant to the assignment of the
assets to the related Trust Fund must represent not more than the fair market
value of such obligations, and the sum of all payments made to and retained by
the Master Servicer, any Servicer and any subservicer must represent not more
than reasonable compensation for such person's services under the related
Agreement and reimbursement of such person's reasonable expenses in connection
therewith. Sixth, the Exemption requires that the investing Plan be an
accredited investor as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
The Exemption also requires that a Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of a type that
have been included in other investment pools; (ii) securities in such other
investment pools must have been rated in one of the three highest categories of
one of the Exemption Rating Agencies for at least one year prior to the Plan's
acquisition of Securities; and (iii) securities 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 Securities.
A fiduciary of any Plan or other investor of Plan Assets contemplating
purchasing a Certificate or Note must make its own determination that the
general conditions set forth above will be satisfied with respect to such
Certificate or Note.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407 of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code) in
connection with the direct or indirect sale, exchange, transfer, holding,
acquisition or disposition in the secondary market of Securities by Plans or
with Plan Assets. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E) and 406(a)(2) of ERISA in connection with the direct or
indirect sale, exchange, transfer, holding, acquisition or disposition of a
Certificate or Note by a Plan or with Plan Assets of an "Excluded Plan" (as
hereinafter defined) by any person who has discretionary authority or renders
investment advice with respect to Plan Assets of such Excluded Plan. For
purposes of the Securities, an Excluded Plan is a Plan sponsored by any member
of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code in connection with (i) the direct or indirect sale, exchange or
transfer of Securities in the initial issuance of Securities between the Company
or an Underwriter and a Plan when the person who has discretionary authority or
renders investment advice with respect to the investment of the relevant Plan
Assets in the Securities is (a) a mortgagor with respect to 5% or less of the
fair market value of the assets of the related Trust Fund or (b) an affiliate of
such a person, (ii) the direct or indirect acquisition or disposition of
Securities in the secondary market by a Plan or an entity investing Plan Assets
and (iii) the holding of Securities by a Plan or an entity investing Plan
Assets.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by
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Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation of
the Trust Funds. The Depositor expects that the specific conditions of the
Exemption required for this purpose will be satisfied with respect to the
Securities so that the Exemption would provide an exemption from the
restrictions imposed by Sections 406(a) and (b) and 407(a) of ERISA (as well as
the excise taxes imposed by Sections 4975(a) and (b) of the Code by reason of
Section 4975(c) of the Code) for transactions in connection with the servicing,
management and operation of the Trust Funds, provided that the general
conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions
imposed by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code if such restrictions would otherwise apply merely because a person is
deemed to be a Party In Interest with respect to an investing Plan (or the
investing entity holding Plan Assets) by virtue of providing services to the
Plan (or by virtue of having certain specified relationships to such a person)
solely as a result of the ownership of Securities by a Plan or the investment of
Plan Assets in Securities.
On July 21, 1997, the DOL amended the Exemption to extend exemptive
relief to certain mortgage-backed and asset-backed securities transactions using
Funding Accounts for trusts issuing pass-through certificates. With respect to
the Securities, the amendment generally allows Mortgage Loans supporting
payments to Securityholders, and having a value equal to no more than 25% of the
total principal amount of the Securities being offered by a Trust Fund, to be
transferred to such Trust Fund within a period no longer than 90 days or three
months following the Closing Date ("Pre-Funding Period") instead of requiring
that all such Mortgage Loans be either identified or transferred on or before
the Closing Date. In general, the relief applies to the purchase, sale and
holding of Securities which otherwise qualify for the Exemption, provided that
the following general conditions are met:
(1) the ratio of the amount allocated to the Funding Account
to the total principal amount of the Securities being offered
("Pre-Funding Limit") must be less than or equal to 25%;
(2) all additional Mortgage Loans transferred to the related
Trust Fund after the Closing Date ("Subsequent Mortgage Loans") must
meet the same terms and conditions for eligibility as the original
Mortgage Loans used to create the Trust Fund, which terms and
conditions have been approved by one of the Exemption Rating Agencies;
(3) the transfer of such Subsequent Mortgage Loans to the
Trust Fund during the Pre-Funding Period must not result in the
Securities to be covered by the Exemption receiving a lower credit
rating from an Exemption Rating Agency upon termination of the
Pre-Funding Period than the rating that was obtained at the time of the
initial issuance of the Securities by the Trust Fund;
(4) solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate (the "Average Interest Rate")
for all of the Mortgage Loans and Subsequent Mortgage Loans in the
Trust Fund at the end of the Pre-Funding Period must not be more than
100 basis points lower than the Average Interest Rate for the Mortgage
Loans which were transferred to the Trust Fund on the Closing Date;
(5) in order to ensure that the characteristics of the
Subsequent Mortgage Loans are substantially similar to those of the
Original Mortgage Loans:
(i) the characteristics of the Subsequent Mortgage
Loans must be monitored by an insurer or other credit support provider
which is independent of the Depositor; or
(ii) an independent accountant retained by the
Depositor must provide the Depositor with a letter (with copies
provided to the Exemption Rating Agency rating the Securities, the
Underwriter and the Trustee) stating whether or not the characteristics
of the Subsequent Mortgage Loans conform to the characteristics
described in the Prospectus or Prospectus Supplement and/or Agreement.
In preparing such letter, the independent accountant must use the same
type of procedures as were applicable to the Mortgage Loans which were
transferred to the Trust Fund as of the Closing Date;
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(6) the Pre-Funding Period must end no later than three months
or 90 days after the Closing Date or earlier in certain circumstances
if the Funding Accounts falls below the minimum level specified in the
Agreement or an event of default occurs;
(7) amounts transferred to any Funding Accounts and/or
capitalized interest accounts used in connection with the pre-funding
may be invested only in certain permitted investments:
(8) the Prospectus or Prospectus Supplement must describe the
duration of the Pre-Funding Period; and
(9) the Trustee (or any agent with which the Trustee contracts
to provide trust services) must be a substantial financial institution
or trust company experienced in trust activities and familiar with its
duties, responsibilities and liabilities as a fiduciary under ERISA.
The Trustee, as legal owner of the Trust Fund, must enforce all the
rights created in favor of Securityholders of the Trust Fund, including
employee benefit plans subject to ERISA.
Before purchasing a Certificate or Note, a fiduciary of a Plan or other
investor of Plan Assets should itself confirm (a) that the Securities constitute
"certificates" for purposes of the Exemption and (b) that the specific and
general conditions set forth in the Exemption and the other requirements 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 fiduciary or other Plan investor should consider its general
fiduciary obligations under ERISA in determining whether to purchase any
Securities by or with Plan Assets.
Any fiduciary or other Plan investor which proposes to purchase
Securities on behalf of or with Plan Assets should consult with its counsel with
respect to the potential applicability of ERISA and the Code to such investment
and the availability of the Exemption or any other prohibited transaction
exemption in connection therewith. In particular, in connection with a
contemplated purchase of Securities representing a beneficial ownership interest
in a pool of single-family residential first mortgage loans, such fiduciary or
other Plan investor should consider the availability of the Exemption or
Prohibited Transaction Class Exemption ("PTCE") 83-1 ("PTCE 83-1") for certain
transactions involving mortgage pool investment trusts. However, PTCE 83-1 does
not provide exemptive relief with respect to Securities evidencing interests in
Trust Funds which include Cooperative Loans and may not provide exemptive relief
for Securities having certain cash-flow characteristics that may be issued by a
Trust Fund. In addition, such fiduciary or other Plan investor should consider
the availability of PTCE 96-23, regarding transactions effected by "in-house
asset managers", PTCE 95-60, regarding investments by insurance company general
accounts, PTCE 90-1, regarding investments by insurance company pooled separate
accounts, PTCE 91-38, regarding investments by bank collective investment funds,
and PTCE 84-14, regarding transactions effected by "qualified professional asset
managers." The Prospectus Supplement with respect to a Series of Securities may
contain additional information regarding the application of the Exemption, PTCE
83-1, or any other exemption, with respect to the Securities offered thereby.
There can be no assurance that any of these exemptions will apply with respect
to any particular Plan's or other Plan investor's investment in the Securities
or, even if an exemption were deemed to apply, that any exemption would apply to
all prohibited transactions that may occur in connection with such investment.
In addition to any exemption that may be available under PTCE 95-60 for
the purchase and holding of the Securities by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by the Code, for transactions involving an insurance company
general account. Pursuant to Section 401(c) of ERISA, the DOL published proposed
regulations ("Proposed 401(c) Regulations") on December 22, 1997, however the
required final regulations have not been issued as of the date hereof. The
Proposed 401(c) Regulations provide guidance for the purpose of determining, in
cases where insurance policies supported by an insurer's general account are
issued to or for the benefit of a Plan on or before December 31, 1998, which
general account assets constitute Plan Assets. Section 401(c) of ERISA generally
provides that, until the date which is 18 months after the Proposed 401(c)
Regulations become final, no person shall be subject to liability under Part 4
of Title I of ERISA and Section 4975 of the Code on the basis of a claim that
the assets of an insurance company general
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account constitute Plan Assets, unless (i) as otherwise provided by the
Secretary of Labor in the Proposed 401(c) Regulations to prevent avoidance of
the regulations or (ii) an action is brought by the Secretary of Labor for
certain breaches of fiduciary duty which would also constitute a violation of
federal or state criminal law. Any assets of an insurance company general
account which support insurance policies issued to a Plan after December 31,
1998 or issued to Plans on or before December 31, 1998 for which the insurance
company does not comply with the Proposed 401(c) Regulations may be treated as
Plan Assets. In addition, because Section 401(c) does not relate to insurance
company separate accounts, separate account assets are still treated as Plan
Assets of any Plan invested in such separate account. Insurance companies
contemplating the investment of general account assets in the Securities should
consult with their legal counsel with respect to the applicability of Section
401(c) of ERISA, including the general account's ability to continue to hold the
Securities after the date which is 18 months after the date the Proposed 401(c)
Regulations become final.
REPRESENTATIONS FROM PLANS INVESTING IN CERTAIN SECURITIES. Because the
exemptive relief afforded by the Exemption (or any similar exemption that might
be available) will not apply to the purchase, sale or holding of certain
Securities, such as Subordinate Securities or any Securities which are not rated
in one of the three highest generic rating categories by the Exemption Rating
Agencies, transfers of any Securities which would cause the assets of the Trust
Fund to be deemed Plan Assets the purchase, holding or transfer of which would
not be covered by the Exemption or PTCE 83-1, to a Plan, to a trustee or other
person acting on behalf of any Plan, or to any other person investing Plan
Assets to effect such acquisition will not be registered by the Trustee unless
the transferee provides the Depositor, the Trustee and the Master Servicer with
an opinion of counsel satisfactory to the Depositor, the Trustee and the Master
Servicer, which opinion will not be at the expense of the Depositor, the Trustee
or the Master Servicer, that the purchase of such Securities by or on behalf of
such Plan is permissible under applicable law, will not constitute or result in
any non-exempt prohibited transaction under ERISA or Section 4975 of the Code
and will not subject the Depositor, the Trustee or the Master Servicer to any
obligation in addition to those undertaken in the related Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Securities by or
on behalf of such Plan is permissible under applicable law, will not constitute
or result in any non-exempt prohibited transaction under ERISA or Section 4975
of the Code and will not subject the Depositor, the Trustee or the Master
Servicer to any obligation in addition to those undertaken in the Agreement and
that the following statements are correct: (i) the transferee is an insurance
company; (ii) the source of funds used to purchase such Securities is an
"insurance company general account" (as such term is defined in PTCE 95-60);
(iii) the conditions set forth in Sections I and III of PTCE 95-60 have been
satisfied; and (iv) 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 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 the
acquisition of such Securities.
An opinion of counsel or certification will not be required with
respect to the purchase of Securities registered through DTC. Any purchaser of a
Security registered through DTC will be deemed to have represented by such
purchase that either (a) such purchaser is not a Plan and is not purchasing such
Securities on behalf of, or with Plan Assets of, any Plan or (b) the purchase of
any such Security by or on behalf of, or with Plan Assets of, any Plan is
permissible under applicable law, will not result in any non-exempt prohibited
transaction under ERISA or Section 4975 of the Code and will not subject the
Depositor, the Trustee or the Master Servicer to any obligation in addition to
those undertaken in the related Agreement.
TAX EXEMPT INVESTORS. A Plan that is exempt from federal income
taxation pursuant to Section 501 of the Code (a "Tax Exempt Investor")
nonetheless will be subject to federal income taxation to the extent that its
income is "unrelated business taxable income" ("UBTI") within the meaning of
Section 512 of the Code. All "excess inclusions" of a REMIC allocated to a REMIC
Residual Certificate held by a Tax-Exempt Investor will be considered UBTI and
thus will be subject to federal income tax. See "Certain Federal Income Tax
Consequences--Taxation of Owners of REMIC Residual Certificates--Excess
Inclusions."
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CONSULTATION WITH COUNSEL. Any fiduciary of a Plan or other Plan
investor that proposes to acquire or hold Securities on behalf of a Plan or with
Plan Assets should consult with its counsel with respect to the potential
applicability of the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and the Code to the proposed
investment and the availability of the Exemption, PTCE 83-1 or any other
prohibited transaction exemption.
LEGAL INVESTMENT
Each class of Securities offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. Unless otherwise set forth in
the related Prospectus Supplement, Securities 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. Any Class of Securities that represents an interest in a Trust
Fund that includes junior mortgage loans will not constitute "mortgage related
securities" for purposes of SMMEA.
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 Securities 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 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 Securities of any Series will be
treated as high-risk under the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps," which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of such securities
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by insolvent, undercapitalized or otherwise "troubled" institutions. According
to the bulletin, such "high-risk" mortgage derivative securities include
securities having certain specified characteristics, which may include certain
classes of Securities. 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 Securities. Similar policy statements have been issued by regulators
having jurisdiction over other types of depository institutions.
Certain classes of Securities offered hereby, including any class that
is not rated in one of the two highest categories by at least one Rating Agency,
will not constitute "mortgage related securities" for purposes of SMMEA. Any
such class of Securities will be identified in the related Prospectus
Supplement. Prospective investors in such classes of Securities, in particular,
should consider the matters discussed in the following paragraph.
There may be other restrictions on the ability of certain investors
either to purchase certain Classes of Securities or to purchase any Class of
Securities 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 Securities for legal investment or other
purposes, or as to the ability of particular investors to purchase any Class of
Securities under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any Class of Securities. 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 Securities of any Class constitute legal investments under SMMEA or
are subject to investment, capital or other restrictions, and, if applicable,
whether SMMEA has been overridden in any jurisdiction applicable to such
investor.
LEGAL MATTERS
Certain legal matters in connection with the Securities offered hereby
will be passed upon for the Depositor and for the Underwriters by Thacher
Proffitt & Wood, New York, New York, Brown & Wood LLP, New York, New York or
Stroock & Stroock & Lavan LLP, 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 277 Park Avenue, 9th Floor, New York, New York 10172. Its telephone
number is (212) 892-3000.
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 Securities 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 Standards--Representations and Warranties" and
"The 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 Seller of such Loan, or if applicable, the Master Servicer or,
the Servicer. See "Risk Factors" herein.
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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 Securities. If so specified in the related
Prospectus Supplement, Securities may be exchanged by the Depositor for Mortgage
Assets. The Depositor expects that it will make additional sales of securities
similar to the Securities from time to time, but the timing and amount of any
such additional offerings will be dependent upon a number of factors, including
the volume of mortgage loans purchased by the Depositor, prevailing interest
rates, availability of funds and general market conditions.
PLAN OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplements
will be offered in Series 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") through
one or more of the methods described below. The Prospectus Supplement prepared
for each Series will describe the method of offering being utilized for that
Series and will state the net proceeds to the Depositor from such sale.
The Depositor intends that Securities will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
Series of Securities may be made through a combination of two or more of these
methods. Such methods are as follows:
1. by negotiated firm commitment or best efforts
underwriting and public re-offering by the
Underwriters;
2. by placements by the Depositor with institutional
investors through dealers; and
3. by direct placements by the Depositor with
institutional investors.
In addition, if specified in the related Prospectus Supplement, a
Series of Securities may be offered in whole or in part in exchange for the
Loans (and other assets, if applicable) that would comprise the Trust Fund for
such Securities.
If Underwriters are used in a sale of any Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the Underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. The managing underwriter or
underwriters with respect to the offer and sale of a particular Series of
Securities will be set forth on the cover of the Prospectus Supplement relating
to such Series and the members of the underwriting syndicate, if any, will be
named in such Prospectus Supplement.
In connection with the sale of the Securities, the Underwriters may
receive compensation from the Depositor or from purchasers of the Securities in
the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Securities may be deemed to be
underwriters in connection with such Securities, and any discounts or
commissions received by them from the Depositor and any profit on the resale of
Securities by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the
sale of any Series of Securities will provide that the obligations of the
Underwriters will be subject to certain conditions precedent, that the
Underwriters will be obligated to purchase all such Securities if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Depositor will indemnify the
several Underwriters and the
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Underwriters will indemnify the Depositor against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any Series offered by
placements through dealers will contain information regarding the nature of such
offering and any agreements to be entered into between the Depositor and
purchasers of Securities of such Series.
The Depositor anticipates that the Securities offered hereby will be
sold primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of Securities, including dealers, may, depending on the
facts and circumstances of such purchases, be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended, in connection with
reoffers and sales by them of Securities. Holders of Securities should consult
with their legal advisors in this regard prior to any such reoffer or sale.
GLOSSARY
The following are abbreviated definitions of certain capitalized terms
used in this Prospectus. Unless otherwise defined 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 Agreements and
the Agreements generally provides a more complete definition of certain of the
terms. Reference should be made to the Agreements 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 Securities of the Series, as
specified in such Securities and the related Prospectus Supplement.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Securities, the Distribution Date on which all Securities of the
related Series with Final Scheduled Distribution Dates earlier than that of such
Class of Compound Interest Securities have been fully paid, or such other date
or period as may be specified in the related Prospectus Supplement.
"Additional Collateral" means marketable securities, insurance
policies, annuities, certificates of deposit, cash, accounts or other personal
property and, in the case of Additional Collateral owned by any guarantor, may
consist of real estate.
"Additional Collateral Loan" means a Mortgage Loan that, in addition to
being secured by the related Mortgaged Property, is secured by other collateral
owned by the related Mortgagors or are supported by third-party guarantees
secured by collateral owned by the related guarantors.
"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.
"Agreement" means a Pooling and Servicing Agreement, Indenture, Owner
Trust Agreement or Servicing Agreement.
"Appraised Value" means, unless otherwise specified in the related
Prospectus Supplement (i) with respect to a Mortgaged Property securing a Single
Family or Multifamily Property, the lesser of (x) the appraised value determined
in an appraisal obtained at origination of such Mortgage Loan, if any, or, if
the related Mortgaged Property has been appraised subsequent to origination, the
value determined in such subsequent appraisal and (y) the sales price for the
related Mortgaged Property (except in certain circumstances in which there has
been a subsequent appraisal); (ii) with respect to certain refinanced, modified
or converted Single Family or Multifamily Properties, the
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lesser of (x) the appraised value of the related Mortgaged Property determined
at origination or in an appraisal, if any, obtained at the time of refinancing,
modification or conversion and (y) the sales price of the related Mortgage
Property or, if the Mortgage Loan is not a rate and term refinance Mortgage Loan
and if the Mortgaged Property was owned for a relatively short period of time
prior to refinancing, modification or conversion, the sum of the sales price of
the related Mortgaged Property plus the added value of any improvements; and
(iii) with respect to a Mortgaged Property securing a Manufactured Home Loan,
the least of the sale price, the appraised value, and the National Automobile
Dealer's Association book value plus prepaid taxes and hazard insurance
premiums.
"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.
"Asset Group" means a group of individual Mortgage Assets which share
similar characteristics and are aggregated into one group.
"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 Securityholders on a Distribution Date.
"Balloon Loan" means Mortgage Loan with payments similar to a
Conventional Loan, calculated on the basis of an assumed amortization term, but
providing for a Balloon Payment of all outstanding principal and interest to be
made at the end of a specified term that is shorter than such assumed
amortization term.
"Balloon Payment" means the payment of all outstanding principal and
interest made at the end of the term of a Balloon Loan.
"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.
"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.
"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.
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"Class" means a Class of Securities of a Series.
"Closing Date" means, with respect to a Series, the date specified in
the related Prospectus Supplement as the date on which Securities 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 Security" means any Security of a Multiple Class
Series on which interest accrues and is added to the principal balance of such
Security 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
Securities, 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 Securities.
"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.
"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 or Indenture for a Series on or before which amounts due and payable
with respect to a Mortgage Asset will not inure to the benefit of
Securityholders 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.
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"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 Securityholders 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 Account" means an account maintained with a federal or state
chartered depository institution (i) the short-term obligations of which are
rated by each Rating Agency in its highest rating at the time of any deposit
therein, or (ii) insured by the FDIC (to the limits established by such
Corporation), the uninsured deposits in which account are otherwise secured such
that, as evidenced by an opinion of counsel delivered to the Trustee prior to
the establishment of such account, the holders of the Securities will have a
claim with respect to the funds in such account and a perfected first priority
security interest against any collateral securing such funds that is superior to
claims of any other depositors or general creditors of the depository
institution with which such account is maintained or (iii) a trust account or
accounts maintained with a federal or state chartered depository institution or
trust company with trust powers acting in its fiduciary capacity or (iv) an
account or accounts of a depository institution acceptable to the Rating
Agencies. Eligible Accounts may bear interest.
"Eligible Investments" means any one or more of the obligations or
securities described as such at "The Agreements--Investment of Funds."
"Eligible Reserve Fund Investments" means Eligible Investments and any
other obligations or securities described as Eligible Reserve Fund Investments
in the applicable Agreement, as described in the related Prospectus Supplement
for a Series.
"Equity Certificates" means with respect to each Series of Notes where
the Issuer is an owner trust, the ownership interest of the Trust Fund.
"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.
"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 Securities of such Class will remain outstanding
assuming timely payments or distributions are made on the Mortgage Assets in the
related Trust Fund.
"Financial 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.
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"Floating Interest Period" means the period of time during which a
given Security Rate applies to a Class of Floating Interest Securities.
"Floating Interest Security" means any Security of a Multiple Class
Series which accrues interest at a Floating Rate.
"Floating Rate" means a Security 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.
"GNMA" means the Government National Mortgage Association.
"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 Securities 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.
"Indenture" means the agreement relating to a Series of Notes between
the Issuer and the Trustee.
"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 Securities or a Class of Securities of such Series with respect to any
Distribution Date.
"Interest Weighted Securities" means a Class of Securities 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.
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"IRS" means the Internal Revenue Service.
"Issuer" means with respect to each Series of Notes, the Depositor or
an owner trust established by it for the purpose of issuing such Series of
Notes.
"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 Securities of the Series.
"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.
"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, plus in the case of a Loan secured by a junior
lien, the principal amount of the related Senior Lien, 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 Securities of such
Series in the related Prospectus Supplement.
"Maximum Mortgage Rate" means the maximum permissible Mortgage Rate
during the life of each ARM.
"Minimum Floating Rate" means, as to any Multiple Class Series, the per
annum interest rate floor specified for any Floating Rate Security of such
Series in the related Prospectus Supplement.
"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.
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"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 Loan" means any Loan secured by a Multifamily Property.
"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 Securities that may include
Floating Interest Securities, Compound Interest Securities and Planned
Amortization Securities, 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.
"Nest Egg Mortgage Loan(sm)" means a Mortgage Loan originated under the
Nest Egg Mortgage Loan Program(sm), a mortgage loan origination program of DLJ
Mortgage Capital, Inc., an affiliate of the Depositor, and the Nest Egg Mortgage
Company LLC.
"Note Interest Rate" means, with respect to a Series of a single Class
of Notes, the rate of interest paid to the Noteholders in respect of the
Mortgage Assets and with respect to any Multiple Class Series, the per annum
rate at which interest accrues on the principal balance of the Notes of such
Series or a Class of such Series, which rate may be fixed or variable, as
specified in the related Prospectus Supplement.
"Noteholder" or "Holder" means the Person in whose name a Note is
registered in the Note Register.
"Notes" means the Mortgage-Backed Notes.
"OTS" means the Office of Thrift Supervision.
"Owner Trust Agreement" means the agreement relating to a Series of
Notes between the Depositor and the Owner Trustee.
"Owner Trustee" means the owner trustee for each Series of Notes under
an Owner Trust Agreement, and its successors.
"Participation Security" means a certificate or note evidencing a
participation interest in a pool of Loans.
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"Pass-Through Rate" means, with respect to a Series of a single Class
of Certificates, the rate of interest paid to the Certificateholders in respect
of the Mortgage Assets.
"Percentage Interest" means, with respect to a Security, the proportion
(expressed as a percentage) of the percentage amounts of all of the Securities
in the related Class represented by such Security, 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.
"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 of Certificates among the Depositor, the Master Servicer and the Trustee.
"Prepayment Assumption" means the prepayment standard or model used
with respect to the Securities of a Series, such as the Constant Prepayment
Assumption or the Standard Prepayment Assumption, as described in "Yield,
Prepayment and Maturity Considerations--Prepayments and Weighted Average Life."
"Prepayment Period" means with respect to any Distribution Date, the
period specified in the related Prospectus Supplement for a Series.
"Principal Weighted Security" means a Class of Securities 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.
"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.
"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.
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"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 or Indenture.
"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.
"Sale and Servicing Agreement" means the sale and servicing agreement
relating to a Series of Notes among the Depositor, the Master Servicer and the
Trustee.
"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.
"Security Interest Rate" means Pass-Through Rate, Certificate Rate or
Note Interest Rate.
"Securityholder" or "Holder" means Certificateholder or Noteholder.
"Securities" means Certificates or Notes.
"Seller" means the Person or Persons, which may include banks, savings
and loan associations, mortgage bankers, investment banking firms, the
Resolution Trust Corporation (the "RTC"), the Federal Deposit Insurance
Corporation (the "FDIC") and other mortgage loan originators or sellers
affiliated or not affiliated with the Depositor, or who may be the Master
Servicer or a Servicer, who sell the Loans to the Depositor for deposit into the
Trust Fund.
"Senior Lien" means a lien which is senior to a related junior lien.
"Senior Securities" means a Class of Securities as to which the
Holders' rights to receive distributions of principal and interest are senior to
the rights of Holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
"Senior Securityholder" means the Holder of a Senior Security.
"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.
"Servicing Agreement" means the Sale and Servicing Agreement or another
servicing agreement relating to a Series of Notes among the Depositor, the
Master Servicer and the Trustee.
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"Servicing Fee" means the amount paid to the Master Servicer on a given
Distribution Date, generally determined on a loan-by-loan basis, and calculated
at a specified per annum rate.
"Single Family Property" means property securing a Loan consisting of
one- to four-family attached or detached residential housing, including
Cooperative Dwellings.
"Subordinate Securities" means a Class of Securities as to which the
rights of Holders to receive distributions of principal and interest are
subordinated to the rights of Holders of Senior Securities, to the extent and
under the circumstances specified in the related Prospectus Supplement.
"Subordinate Securityholder" means a Holder of a Subordinate Security.
"Subordinated Amount" means the amount, if any, specified in the
related Prospectus Supplement for a Series with a Class of Subordinated
Securities, that the Subordinate Securities are subordinated to the Senior
Securities of the same Series.
"Subordination Reserve Fund" means the subordination reserve fund, if
any, for a Series with a Class of Subordinate Securities, established pursuant
to the related Pooling and Servicing Agreement or Indenture.
"Trustee" means the trustee under a Pooling and Servicing Agreement or
the indenture trustee under an Indenture, and its successors.
"Trust Fund" means all property and assets held for the benefit of the
Securityholders by the Trustee under the related Agreement for a Series of
Securities as described under "The Trust Funds--General."
"UCC" means the Uniform Commercial Code.
"VA" means the Department of Veterans Affairs.
"VA Loans" means housing loans partially guaranteed by the VA.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
PROSPECTUS
DLJ MORTGAGE ACCEPTANCE CORP.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
MORTGAGE-BACKED NOTES
(ISSUABLE IN SERIES)
This Prospectus relates to Mortgage Pass-Through Certificates (the
"Certificates") and Mortgage-Backed Notes (the "Notes", and together with the
Certificates, the "Securities") 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 a related trust (a "Trust Fund"), the assets of which have been
deposited 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. Each Note of a Series will
represent indebtedness of a Trust Fund, the assets of which have been deposited
by the Depositor pursuant to a Sale and Servicing Agreement executed by the
Depositor, the Trustee and the Master Servicer or pursuant to an Indenture
executed by the Issuer and the Trustee 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 forms of credit support
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 and will have been
acquired by the Depositor from one or more Sellers on or prior to the Closing
Date. Some of the Mortgage Loans or Manufactured Home Loans may have been
originated by an affiliate of the Depositor. 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, balloon 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 Securities 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 related Agreement may be divided into one or more Asset Groups and the
Securities of each separate Class will evidence beneficial ownership of each
corresponding Asset Group. See "Description of the Securities" herein.
Distribution of principal and interest of the Securities 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 the Securities 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
Securities of the related Series. See "Description of the Securities" and
"Yield, Prepayment and Maturity Considerations" herein.
The Depositor's only obligations with respect to any Series will be
pursuant to certain representations and warranties, if any, set forth in the
related Agreement as described herein or in the related Prospectus Supplement.
See "The Agreements" herein.
If specified in the related Prospectus Supplement, one or more separate
elections may be made to treat the Trust Fund for a Series of Certificates as a
"Real Estate Mortgage Investment Conduit" (a "REMIC") for federal income tax
purposes. See "Certain Federal Income Tax Considerations" herein.
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE
SECURITIES, SEE "RISK FACTORS," WHICH BEGINS ON PAGE 9.
----------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF
PAYMENTS ON THE SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF THE DEPOSITOR, THE MASTER SERVICER OR ANY OF THEIR AFFILIATES.
NEITHER THE SECURITIES NOR THE UNDERLYING MORTGAGE LOANS OR MORTGAGE SECURITIES
WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR
BY THE DEPOSITOR, THE MASTER SERVICER OR ANY OF THEIR 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. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Securities 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 Securities 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.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES OFFERED
HEREBY AND THEREBY OR AN OFFER OF SUCH SECURITIES TO ANY PERSON IN ANY STATE OR
OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE
THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE
AMENDED OR SUPPLEMENTED ACCORDINGLY.
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS
PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT 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.
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 Securities. 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, 500 West Madison Street, 14th
Floor, Chicago, Illinois 60661; and New York Regional Office, Seven World Trade
Center, New York, New York 10048. 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 and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval System at the
Commission's website (http:\\www.sec.gov).
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related Trust Fund are
required under the related Agreement to be forwarded to Securityholders. With
respect to each Series of Certificates or Notes, Securityholders will be
referred to as the "Certificateholders" or the "Noteholders", respectively.
Unless otherwise specified in the related Prospectus Supplement, such reports
will not be examined and reported on by an independent public accountant. See
"The Agreements--Reports to Securityholders" 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
Securities 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., 277 Park Avenue, 9th Floor, New York, New York 10172,
Attention: Paul Najarian.
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<PAGE>
SUMMARY OF PROSPECTUS
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 Agreement executed by the Depositor, the Master
Servicer and 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 attached hereto.
SECURITIES OFFERED.....................The Mortgage Pass-Through Certificates
(the "Certificates") or the
Mortgage-Backed Notes (the "Notes", and
together with the Certificates, the
"Securities") are issuable from time to
time in separate Series pursuant to
separate Pooling and Servicing Agreements
or separate Indentures, respectively.
Each Certificate of a Series will
evidence a beneficial ownership interest
in, and each Note of a Series will
represent indebtedness of the related
Trust Fund for such Series, or in an
Asset Group specified in the related
Prospectus Supplement.
The Certificates of a Series will
evidence interests in, and the Notes of a
Series will represent indebtedness of 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 "Risk
Factors" and "Credit Support" herein.
Each Series of Securities 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 Securities
which are subordinated to other Classes
of Securities 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.
With respect to any Series of Notes, the
related Equity Certificates, insofar as
they represent the beneficial ownership
interest in the Issuer, will be
subordinate to the related Notes. Unless
otherwise specified in the related
Prospectus Supplement, any Class of
Securities 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 four highest rating
categories. See "Description of the
Securities--General," "Credit
Support--Subordinated Securities" and
"Risk Factors" herein.
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<PAGE>
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.
All of the outstanding capital stock of
the Depositor is owned by Donaldson,
Lufkin & Jenrette, Inc. See "The
Depositor."
MASTER SERVICER........................The entity named as Master Servicer in
the related Prospectus Supplement. See
"The Agreements."
ISSUER.................................With respect to each Series of Notes, the
issuer (the "Issuer") will be the
Depositor or an owner trust established
by it for the purpose of issuing such
Series of Notes. Each such owner trust
will be created pursuant to a trust
agreement (the "Owner Trust Agreement")
between the Depositor, acting as
depositor and the owner trustee (the
"Owner Trustee"). Each Series of Notes
will represent indebtedness of the Issuer
and will be issued pursuant to an
indenture (the "Indenture") between the
Issuer and the Trustee whereby the Issuer
will pledge the Trust Fund to secure the
Notes under the lien of the Indenture. As
to each Series of Notes where the Issuer
is an owner trust, the ownership of the
Trust Fund will be evidenced by
certificates (the "Equity Certificates")
issued under the Owner Trust Agreement.
The Notes will represent nonrecourse
obligations solely of the Issuer, and the
proceeds of the Trust Fund will be the
sole source of payments on the Notes,
except as described herein under "Credit
Support" and in the related Prospectus
Supplement.
TRUSTEES...............................The Trustee or Indenture Trustee (each,
the "Trustee") with respect to each
Series of Certificates and each Series of
Notes, respectively, will be specified in
the related Prospectus Supplement. The
Owner Trustee with respect to each Series
of Notes will be specified in the related
Prospectus Supplement.
INTEREST DISTRIBUTIONS.................Interest Distributions on the Securities
of a Series will be made from amounts
available therefor in the related
Certificate Account on each Distribution
Date at the applicable security interest
rate (a "Security Interest Rate")
specified in (or, with respect to
Floating Interest Securities, determined
in the manner set forth in) the related
Prospectus Supplement. The Security
Interest Rate of each Security offered
hereby will be stated in the related
Prospectus Supplement as the
"Pass-Through Rate" with respect to a
Series of a single Class of Certificates,
the "Certificate Rate" with respect to a
Multiple Class Series of Certificates and
the "Note Interest Rate" with respect to
any Series of Notes. The Security
Interest Rate on Securities of a Series
may be variable and change with changes
in the mortgage rate or pass-through
rates of the Mortgage Assets included
5
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in the related Trust Fund and/or as
prepayments occur with respect to such
Mortgage Assets.
Principal Weighted Securities may not be
entitled to receive any interest
distributions or may be entitled to
receive only nominal interest
distributions.
Compound Interest Securities will not
receive distributions of interest but
interest accruing with respect to the
principal balance of such compound
Interest Securities 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 Securities will be
made on the basis of their Compound
Value.
A Multiple Class Series may include one
or more Classes of Floating Interest
Securities. With respect to any such
Class of Floating Interest Securities,
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 Securities" and
"Yield, Prepayment and Maturity
Considerations" herein.
PRINCIPAL DISTRIBUTIONS................Principal distributions on the Securities
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 Securities may not be
entitled to any principal distributions
or may be entitled to receive only
nominal principal distributions.
See "Description of the Securities" and
"Yield, Prepayment and Maturity
Considerations" herein.
FUNDING ACCOUNT........................If so specified in the related Prospectus
Supplement, a portion of the proceeds of
the sale of one or more Classes of
Securities of a Series or a portion of
collections on the Loans in respect of
principal may be deposited in a
segregated account to be applied to
acquire additional Loans, subject to the
limitations set forth herein under
"Description of the Securities--Funding
Account." Monies on deposit in the
Funding Account and not applied to
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<PAGE>
acquire such additional Loans within the
time set forth in the related Agreement
or other applicable agreement may be
treated as principal and applied in the
manner described in the related
Prospectus Supplement.
OPTIONAL TERMINATION...................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 Securities--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 Securities 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 forms of
credit support, all as specified in the
related Prospectus. See "The Trust
Funds--Collection Account and Certificate
Account" and "Credit Support" and
"Description of Mortgage and Other
Insurance" herein.
CREDIT SUPPORT.........................Credit support in the form of reserve
funds, subordination,
overcollateralization, 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
Securities of a Series. If the Mortgage
Assets 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
with respect to Securities evidencing
beneficial ownership of one Asset Group
prior to distributions to Subordinate
Securities evidencing a beneficial
ownership interest in another Asset Group
within the Trust Fund. With respect to
any Series of Notes, the related Equity
Certificates, insofar as they
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represent the beneficial ownership
interest in the Issuer, will be
subordinate to the related Notes.
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
Securities of such Series. The protection
against losses provided by such credit
support will be limited. See "Credit
Support" and "Risk Factors" herein.
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 "Sub-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 Sub-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 forms of
credit support). See "Servicing of
Loans."
FEDERAL INCOME TAX CONSIDERATIONS......If an election is made for treatment of
the Trust Fund as a REMIC or as REMICs
under the Internal Revenue Code of 1986
(the "Code"), one or more Classes of
Certificates will be REMIC "Regular
Interests" and one Class will be REMIC
"Residual Interests" in the related
REMIC. If a REMIC election will not be
made for a Trust Fund, the federal income
consequences of the purchase, ownership
and disposition of the related
Certificates will be set forth in the
related Prospectus Supplement. Each
Series of Notes offered hereby will
represent indebtedness of the related
Trust Fund.
Investors are advised to consult their
tax advisors and to review "Certain
Federal Income Tax Considerations" herein
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<PAGE>
and in the related Prospectus Supplement.
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
Securities could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code.
See "ERISA Considerations."
LEGAL INVESTMENT.......................At the date of issuance, as to each
Series, it will be a requirement for
issuance of any Series that the
Securities offered by this Prospectus and
such Prospectus Supplement be rated by at
least one Rating Agency in one of its
four highest applicable rating
categories. The rating or ratings
applicable to Securities of each Series
offered hereby and by the related
Prospectus Supplement will be as set
forth in the related Prospectus
Supplement. Unless otherwise specified in
the related Prospectus Supplement,
Securities 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. Any Class of Securities that
represents an interest in a Trust Fund
that includes junior mortgage loans will
not constitute "mortgage related
securities" for purposes of SMMEA. 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 Securities. If so specified
in the related Prospectus Supplement, the
purchase of the Mortgage Assets for a
Series may be effected by an exchange of
Securities with the Depositor of such
Mortgage Assets. See "Use of Proceeds."
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with an investment in the Securities.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Securities of
any Series will develop or, if it does develop, that it will provide
Securityholders with a sufficient level of liquidity or will continue for the
life of the Securities. Donaldson, Lufkin & Jenrette Securities Corporation (or
one or more of its affiliates) intends to make a secondary market in the
Securities, but has no obligation to do so. In addition, the market value of
Securities of each Series will fluctuate with changes in prevailing rates of
interest. Consequently, sale of the Securities by a Holder in any secondary
market which may develop may be at a discount from par value or from their
purchase price. Securityholders have no optional redemption rights. The
Securities will not be listed on any securities exchange.
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 mortgage market 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 Securities. 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 Securities will be extremely sensitive to prepayments on the Loans
comprising or underlying the Mortgage Assets for such Series. In general, if a
Security, including a Security 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 Securityholder of such Class could,
under some such prepayment scenarios, fail to recoup its original investment.
Conversely, if a Security, including a Security 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 Securities 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 Securities in accordance with the related 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 Security at a
significant premium might fail to recoup its initial investment. See "Yield,
Prepayment and Maturity Considerations."
CREDIT SUPPORT LIMITATIONS
The amount, type and nature of insurance policies, subordination,
overcollateralization, Financial 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,
overcollateralization 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
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<PAGE>
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
Securities of a Multiple Class Series are made in order of the respective Final
Scheduled Distribution Dates of the Class, any limits with respect to the
aggregate amount of losses covered by credit support 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
Securities 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 Securities 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, Financial 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 Securities may include a Class or multiple Classes of Subordinate
Securities 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 Securities, 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 Securities," "The Trust Funds" and
"Credit Support."
CERTAIN LOANS AND MORTGAGED PROPERTY
Reliable prepayment, loss and foreclosure statistics relating to
certain types of Loans may not be available for a Series. 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 the amount of credit
support, the Trust Fund may experience a loss. Furthermore, Multifamily Loans,
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 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 subordination 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
Securities, the Trust Fund for a Series will be the only available source of
funds to make distributions on the Securities of such Series. The only
obligations of the Depositor with respect to the Securities of any Series will
be pursuant to certain representations and warranties, if any, in the related
Agreement. See "The 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 Seller, the Servicer or the Master
Servicer, as the case may be, or from a reserve fund established to provide
funds for such repurchases. See "The Depositor."
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<PAGE>
INABILITY OF TRUSTEE TO LIQUIDATE THE COLLATERAL SECURING THE NOTES
Although the Trustee or the holders of a majority of the then aggregate
outstanding amount of the Notes of a Series may declare the principal amount of
all the Notes of such Series to be due and payable immediately if an Event of
Default occurs and is continuing under the related Indenture, there is no
assurance that the market value of the related collateral will at any time be
equal to or greater than the aggregate outstanding amount of the related Notes.
Therefore, upon an Event of Default with respect to the related Notes, there can
be no assurance that sufficient funds will be available to repay the related
Noteholders in full. In addition, the amount of principal required to be
distributed to Noteholders under the Indenture is generally limited to amounts
available to be deposited in the applicable Certificate Account. Therefore, the
failure to pay principal on a class of the related Notes may not result in the
occurrence of an Event of Default until the Final Scheduled Distribution Date
for such class of Notes.
SUMMARY OF 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 Securities of any Series. See
"ERISA Considerations" herein and in the related Prospectus Supplement.
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 related 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 related 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 related REMIC's 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 related 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 Interest Certificates may be
negative or significantly less than that of a corporate bond or stripped
instrument having similar cash flow characteristics.
DESCRIPTION OF THE SECURITIES
GENERAL
The Securities will be issued in Series. Each Series of Certificates
will be issued pursuant to separate Pooling and Servicing Agreements among the
Depositor, the Master Servicer and the Trustee for the related Series identified
in the related Prospectus Supplement. Each Series of Notes will be issued
pursuant to separate Indentures between the related Issuer and the Trustee for
the related Series identified in the related Prospectus Supplement. The Trust
Fund for each Series of Notes will be created pursuant to an Owner Trust
Agreement between the Depositor and the Owner Trustee. 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
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<PAGE>
Agreements and the Prospectus Supplement relating to each Series. When
particular provisions or terms used in each Agreement are referred to, such
provisions or terms shall be as specified in such Agreement.
Each Series will consist of one or more Classes, one or more of which
may consist of Compound Interest Securities, Floating Interest Securities,
Interest Weighted Securities or Principal Weighted Securities. A Series may also
include one or more Classes of Subordinate Securities. Unless otherwise
specified in the related Prospectus Supplement, a Class of Subordinate
Securities will be offered hereby or by such Prospectus Supplement only if rated
by a Rating Agency in at least its fourth 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 Securities of each
separate Class will evidence beneficial ownership of, or be secured by, each
corresponding Asset Group.
The Securities for each Series will be issued in fully registered form,
in the minimum original principal amount, notional amount or percentage interest
specified in the related Prospectus Supplement. The transfer of the Securities
may be registered, and the Securities may be exchanged, without the payment of
any service charge payable in connection with such registration of transfer or
exchange, but the Trustee may require payment of a sum sufficient to cover any
tax or governmental charge that may be imposed in connection with any transfer
or exchange of Securities. If specified in the related Prospectus Supplement,
one or more Classes of a Series may be available in book-entry form only.
DISTRIBUTIONS ON THE SECURITIES
GENERAL. Commencing on the date specified in the related Prospectus
Supplement, distributions of principal and interest on the Securities 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 Securities which receive interest will be
made periodically at the intervals and at the Security Interest Rate specified
or, with respect to Floating Interest Securities, determined in the manner
described in the related Prospectus Supplement. Interest on the Securities 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.
Distributions of principal of and interest on Securities of a Series
will be made by check mailed to Securityholders 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 security register (the
"Security Register"), except that (a) distributions may be made by wire transfer
in certain circumstances described in the related Prospectus Supplement and (b)
the final distribution in retirement of a Security will be made only upon
presentation and surrender of such Security at the corporate trust office of the
Trustee for such Series or such other office of the Trustee as specified in the
Prospectus Supplement. If specified in the related Prospectus Supplement, the
Securities 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 each
Series of Certificates or Notes, the Security Register will be referred to as
the "Certificate Register" or "Note Register", respectively.
With respect to reports to be furnished to Securityholders concerning a
distribution, see "The Agreements--Reports to Securityholders."
SINGLE CLASS SERIES. With respect to a Series other than a Multiple
Class Series, distributions on the Securities on each Distribution Date will
generally be allocated to each Security entitled thereto on the basis of the
undivided percentage interest (the "Percentage Interest") evidenced by such
Security in the Trust Fund or on the basis of their outstanding principal
amounts or notional amounts. If the Mortgage Assets for a Series have adjustable
or variable interest or pass-through rates, then the Security Interest Rate of
the Securities 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 Security Interest Rate on the Securities 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
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<PAGE>
lifetime or periodic adjustment caps on their respective pass-through rates,
then the Security Interest Rate on the Securities of the related Series may also
reflect such caps.
MULTIPLE CLASS SERIES. Each Security of a Multiple Class Series will
have a principal amount or a notional amount and a specified Security Interest
Rate (which may be zero). Interest distributions on a Multiple Class Series will
be made on each Security entitled to an interest distribution on each
Distribution Date at the Security Interest Rate specified or, with respect to
Floating Interest Securities, 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 Securities to
receive current distributions. See "Subordinate Securities" below and "Credit
Support."
Interest on all Securities of a Multiple Class Series currently
entitled to receive interest will be distributed on the Distribution Date
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
Securities" below and "Credit Support." Distributions of interest on a Class of
Compound Interest Securities 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 Securities will accrue and the amount of
interest accrued on such Distribution Date 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 Securities on the basis of the current Compound
Value of such Class. The Compound Value of a Class of Compound Interest
Securities 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, the
Securities of a Multiple Class Series may include one or more Classes of
Floating Interest Securities. The Security Interest Rate of a Floating Interest
Security will be a variable or adjustable rate, subject to a Maximum Floating
Rate, Minimum Floating Rate, or both. For each Class of Floating Interest
Securities, 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.
If so specified in the related Prospectus Supplement, a Series may
include one or more Classes of Interest Weighted Securities, Principal Weighted
Securities, 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 Securities within each Class.
The method or formula for determining the Percentage Interest of a Security will
be set forth in the related Prospectus Supplement.
In the case of a Multiple Class Series, the timing, sequential order,
priority of payment or amount of distributions in respect of principal, and any
schedule or formula or other provisions applicable to the determination thereof
of each Class of Securities shall be as set forth in the related Prospectus
Supplement. A Multiple Class Series may contain two or more classes of
Securities as to which distributions of principal or interest or both on any
class may be made upon the occurrence of specified events, in accordance with a
schedule or formula (including "planned amortization classes" and "targeted
amortization classes"), or on the basis of collections from designated portions
of the Trust Fund.
SUBORDINATE SECURITIES. One or more Classes of a Series may consist of
Subordinate Securities. Subordinate Securities 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 Securities 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 Securities
evidencing beneficial ownership of one Asset Group prior to making distributions
on Subordinate Securities evidencing a beneficial ownership interest in another
Asset Group within the Trust Fund. Subordinate Securities will not be
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<PAGE>
offered hereby or by such related Prospectus Supplement unless they are rated in
one of the four highest rating categories by at least one Rating Agency. With
respect to any Series of Notes, the Equity Certificates, insofar as they
represent the beneficial ownership interest in the Issuer, will be subordinate
to the related Notes.
FUNDING ACCOUNT
If so specified in the related Prospectus Supplement, the related
Agreement may provide for the transfer by the Seller of additional Loans to the
related Trust Fund after the Closing Date. Such additional Loans will be
required to conform to the requirements set forth in the related Agreement or
other agreement providing for such transfer. As specified in the related
Prospectus Supplement, such transfer may be funded by the establishment of a
Funding Account (a "Funding Account"). If a Funding Account is established, all
or a portion of the proceeds of the sale of one or more Classes of Securities of
the related Series or a portion of collections on the Loans in respect of
principal will be deposited in such account to be released as additional Loans
are transferred. Unless otherwise specified in the related Prospectus
Supplement, all amounts deposited in a Funding Account will be required to be
invested in Eligible Investments and the amount held therein shall at no time
exceed 25% of the aggregate outstanding principal balance of the Securities.
Unless otherwise specified in the related Prospectus Supplement, the related
Agreement or other agreement providing for the transfer of additional Loans will
provide that all such transfers must be made within 3 months after the Closing
Date, and that amounts set aside to fund such transfers (whether in a Funding
Account or otherwise) and not so applied within the required period of time will
be deemed to be principal prepayments and applied in the manner set forth in
such Prospectus Supplement. A Funding Account can affect the application of the
requirements under ERISA. See "ERISA 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 or elections have been made, the
Trustee shall receive a satisfactory opinion of counsel that the repurchase
price will not jeopardize the REMIC status of the REMIC or REMICs and that the
optional termination will be conducted so as to constitute a "qualified
liquidation" under Section 860F of the Code. See "The Agreements--Termination."
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, the Securities
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 Security 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
Securities (a "Securityowner") will be entitled to receive a Security issued in
fully registered, certificated form (a "Definitive Security") representing such
person's interest in the Securities except in the event that the book-entry
system for the Securities is discontinued (as described below). Unless and until
Definitive Securities are issued, it is anticipated that the only Securityholder
of the Securities will be Cede & Co., as nominee of DTC. Securityowners will not
be registered "Securityholders" or registered "Holders" under the related
Agreement, and Securityowners will only be permitted to exercise the rights of
Securityholders indirectly through DTC Participants. With respect to each Series
of Certificates or Notes, Securityowners and Securityholders will be referred to
as "Certificateowners" and "Certificateholders" or "Noteowners" and
"Noteholders", respectively.
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
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entities that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("indirect participants").
Securityowners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of Securities 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 Securityowner
to pledge such owner's Security to persons or entities that do not participate
in the DTC system, or otherwise take actions in respect of such Security, may be
limited. In addition, under a book-entry format, Securityowners may experience
some delay in their receipt of principal and interest distributions with respect
to the Securities 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 Securityowners.
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 Securities and
DTC, as registered holder, is required to receive and transmit principal and
interest distributions and distributions with respect to the Securities.
Participants and Indirect Participants with which Securityowners have accounts
with respect to Securities similarly are required to make book-entry transfers
and receive and transmit such distributions on behalf of their respective
Securityowners. Accordingly, although Securityowners will not possess
certificates or notes, the Rules provide a mechanism by which Securityowners
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 Securityholder under the related Agreement only at the direction of
one or more Participants to whose account with DTC the Securities 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 notes
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 Securities 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 Securities 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 Securities 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 Securities 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
Securityholders. Such a delay will effectively reduce the yield that would
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 Securityholders.
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 Securityholders 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 Securities, 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.
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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 Securities 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 Security outstanding. The effect of such
provisions is to produce a lower yield on the Securities than would be obtained
if interest were to accrue on the Securities on the actual unpaid principal
amount of such Securities to each Distribution Date. The related Prospectus
Supplement will specify the time at which the principal amounts of the
Securities are determined or are deemed to reduce for purposes of calculating
interest distributions on Securities of a Multiple Class Series.
INTEREST OR PRINCIPAL WEIGHTED SECURITIES
If a Class of Securities consists of Interest Weighted Securities or
Principal Weighted Securities, a lower rate of principal prepayments than
anticipated will negatively affect the yield to investors in Principal Weighted
Securities, and a higher rate of principal prepayments than anticipated will
negatively affect the yield to investors in Interest Weighted Securities. The
Prospectus Supplement for a Series including such Securities will include a
table showing the effect of various levels of prepayment on yields on such
Securities. 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.
FUNDING ACCOUNT
If the applicable Agreement for a Series of Securities provides for a
Funding Account or other means of funding the transfer of additional Loans to
the related Trust Fund, as described under "Description of the
Securities--Funding Account" herein, and the Trust Fund is unable to acquire
such additional Loans within any applicable time limit, the amounts set aside
for such purpose may be applied as principal payments on one or more Classes of
Securities of such Series. See "Risk Factors--Yield, Prepayment and Maturity."
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, if
specified in the related Prospectus Supplement, will be the date (calculated on
the basis of the assumptions applicable to such Series described therein) on
which the 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 the Securities, 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 Securities of a Series will be influenced by the rate at which principal on
the Loans comprising or underlying the Mortgage Assets for such Securities 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
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has fluctuated significantly in recent years. In general, however, if prevailing
mortgage market 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 Security Interest Rate on the Securities may
be a number of percentage points less than interest rates on such Loans. In
addition, the weighted average life of the Securities 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 Securities, 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 assumed.
Prepayments on loans are 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. 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.
Neither CPR or SPA 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 any level of CPR or SPA.
The Prospectus Supplement for each Multiple Class Series may 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 may 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 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 Securities 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 Securities or prepayment rates of the Loans
comprising or underlying the related Mortgage Assets.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF LOAN. Multifamily Loans 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. Additional
Collateral Loans, ARMs, Balloon Loans, 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 Additional Collateral Loans, ARMs, Balloon Loans, Bi-Weekly Loans, GEM
Loans, GPM Loans or Buy- Down 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.
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
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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
Securities 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, Maximum Mortgage Rates,
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, the Servicer, the applicable Seller, the PMBS
Servicer or another party, 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
Securities of the related Series.
Because of the payment terms of Balloon Loans, there is a risk that
such Mortgage Loans, including Multifamily Loans and Additional Collateral
Loans, that require Balloon Payments may default at maturity, or that the
maturity of such Mortgage Loans may be extended in connection with a workout.
With respect to Balloon Loans, payment of the Balloon Payment (which, based on
the amortization schedule of such Mortgage Loans, is expected to be the entire
or a substantial amount of the original principal balance) will generally depend
on the Mortgagor's ability to obtain refinancing of such Mortgage Loans, to sell
the Mortgaged Property prior to the maturity of the Balloon Loan or to otherwise
have sufficient funds to pay such Balloon Payment. The ability to obtain
refinancing will depend on a number of factors prevailing at the time
refinancing or sale is required, including, without limitation, real estate
values, the Mortgagor's financial situation, prevailing mortgage market interest
rates, the Mortgagor's equity in the related Mortgaged Property, tax laws and
prevailing general economic conditions. Unless otherwise specified in the
related Prospectus Supplement, none of the Depositor, the Master Servicer, or
any of their affiliates will be obligated to refinance or repurchase any
Mortgage Loan or to sell the Mortgaged Property.
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.
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 Securities.
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 Securities who
purchased their Securities 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. Whereas FHA Loans are 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
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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. Certain of the Multifamily Loans in a Trust Fund may also contain
a due-on-encumbrance clause that entitles the lender to accelerate the maturity
of the Mortgage Loan upon the creation of any other lien or encumbrance upon the
Mortgaged Property. 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 Securities--Optional Termination."
THE TRUST FUNDS
GENERAL
The Trust Fund for each Series will be held by the Trustee for the
benefit of the related Securityholders. 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 Securityholders by
foreclosure, deed in lieu of foreclosure or repossession and certain proceeds
from the disposition of any related Additional Collateral; (d) any reserve fund
for such Series, if specified in the related Prospectus Supplement; (e) the
Sub-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); provided, that if so
specified in the related Prospectus Supplement, certain of the items listed
above may be held outside of the Trust Fund.
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 Securityholders under the
related 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 from the
Seller. Some of the Loans may have been originated by an affiliate of the
Depositor. Participation interests in Loans may be purchased by the Depositor,
or an affiliate, pursuant to a participation agreement. See "The
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
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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 a FNMA- or FHLMC-approved servicer and, if FHA Loans underlie the Private
Mortgage-Backed Securities, approved by HUD as a 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 the
Depositor or 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 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
Additional Collateral Loans, GEM Loans, GPM Loans, Balloon Loans, Buy-Down
Loans, Bi-Weekly Loans, ARMs, or Loans having 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, overcollateralization, 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 agencies which initially 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
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(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 note
interest rate, pass-through or certificate rate or ranges thereof for the
Private Mortgage-Backed Securities, (vi) the weighted average note interest
rate, 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.
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 Trust Fund (and of the underlying mortgage loans) will be
described in the related Prospectus 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 Trust Fund.
GNMA. GNMA is a wholly-owned corporate instrumentality of the United
States within 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 representing interests
in a pool of mortgages (i) insured by the FHA, under the Housing Act or under
Title V of the Housing Act of 1949, or (ii) partially guaranteed by the VA under
the Servicemen's Readjustment Act of 1944, as amended, or under Chapter 37 of
Title 38, United States Code.
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 guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d) of
the Housing Act, borrow from the United States Treasury an amount that is at any
time sufficient to enable GNMA to perform its obligations under its guarantee.
See "Additional Information" for the availability of further information
regarding GNMA and GNMA Certificates.
GNMA CERTIFICATES. Unless otherwise specified in the related Prospectus
Supplement, each GNMA Certificate relating to a Series (which may be a "GNMA I
Certificate" or a "GNMA II Certificate" as referred to by GNMA) will be a "fully
modified pass-through" mortgage-backed certificate issued and serviced by a
mortgage banking company or other financial concern approved by GNMA, except
with respect to any stripped mortgage-backed securities guaranteed by GNMA or
any REMIC securities issued by GNMA. The characteristics of any GNMA
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Certificates included in the Trust Fund for a Series of Certificates will be set
forth 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 was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of needed
housing. The principal activity of FHLMC currently consists of purchasing
first-lien, conventional, residential mortgage loans or participation interests
in such mortgage loans and reselling the mortgage loans so purchased in the form
of guaranteed mortgage securities, primarily FHLMC Certificates. In 1981, FHLMC
initiated its Home Mortgage Guaranty Program under which it purchases mortgage
loans from sellers with FHLMC Certificates representing interests in the
mortgage loans so purchased. All mortgage loans purchased by FHLMC must meet
certain standards set forth in the FHLMC Act. FHLMC is confined to purchasing,
so far as practicable, mortgage loans that it deems to be of such quality and
type as to meet generally the purchase standards imposed by private
institutional mortgage investors. See "Additional Information" for the
availability of further information regarding FHLMC and FHLMC Certificates.
Neither the United States nor any agency thereof is obligated to finance FHLMC's
operations or to assist FHLMC in any other manner.
FHLMC CERTIFICATES. Unless otherwise specified in the related
Prospectus Supplement, each FHLMC Certificate relating to a Series will
represent an undivided interest in a pool of mortgage loans that typically
consists of conventional loans (but may include FHA Loans and VA Loans)
purchased by FHLMC, except with respect to any stripped mortgage-backed
securities issued by FHLMC. Each such pool will consist of mortgage loans (i)
substantially all of which are secured by one- to four-family residential
properties or (ii) if specified in the related Prospectus Supplement, are
secured by five or more family residential properties. The characteristics of
any FHLMC Certificates included in the Trust Fund for a Series of Certificates
will be set forth in the related Prospectus Supplement.
FNMA. FNMA is a federally chartered and privately owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act (12 U.S.C. ss. 1716 ET SEQ.). It is the nation's largest supplier of
residential mortgage funds. 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. See "Additional Information"
for the availability of further information respecting FNMA and FNMA
Certificates. Although the Secretary of the Treasury of the United States has
authority to lend FNMA up to $2.25 billion outstanding at any time, neither the
United States nor any agency thereof is obligated to finance FNMA's operations
or to assist FNMA in any other manner.
FNMA CERTIFICATES. Unless otherwise specified in the related Prospectus
Supplement, each FNMA Certificate relating to a Series will represent a
fractional undivided interest in a pool of mortgage loans formed by FNMA, except
with respect to any stripped mortgage-backed securities issued by FNMA. Mortgage
loans underlying FNMA Certificates will consist of (i) fixed, variable or
adjustable rate conventional mortgage loans or (ii) fixed-rate FHA Loans or VA
Loans. Such mortgage loans may be secured by either one- to four-family or
multi-family residential properties. The characteristics of any FNMA
Certificates included in the Trust Fund for a Series of Certificates will be set
forth in the related Prospectus Supplement.
THE MORTGAGE LOANS
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 an
affiliate of the Depositor. 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
Additional Collateral Loans, GPM
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Loans, GEM Loans, Balloon 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 or a junior 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 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. 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."
If specified in the related Prospectus Supplement, certain of the
mortgage pools may contain Mortgage Loans secured by junior liens, and the
related senior liens ("Senior Liens") may not be included in the mortgage pool.
The primary risk to holders of Mortgage Loans secured by junior liens is the
possibility that adequate funds will not be received in connection with a
foreclosure of the related Senior Liens to satisfy fully both the Senior Liens
and the Mortgage Loan. In the event that a holder of a Senior Lien forecloses on
a Mortgaged Property, the proceeds of the foreclosure or similar sale will be
applied first to the payment of court costs and fees in connection with the
foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any other
sums due and owing to the holder of the Senior Liens. The claims of the holders
of the Senior Liens will be satisfied in full out of proceeds of the liquidation
of the Mortgage Loan, if such proceeds are sufficient, before the Trust Fund as
holder of the junior lien receives any payments in respect of the Mortgage Loan.
If the Master Servicer were to foreclose on any Mortgage Loan, it would do so
subject to any related Senior Liens. In order for the debt related to the
Mortgage Loan to be paid in full at such sale, a bidder at the foreclosure sale
of such Mortgage Loan would have to bid an amount sufficient to pay off all sums
due under the Mortgage Loan and the Senior Liens or purchase the Mortgaged
Property subject to the Senior Liens. In the event that such proceeds from a
foreclosure or similar sale of the related Mortgaged Property are insufficient
to satisfy all Senior Liens and the Mortgage Loan in the aggregate, the Trust
Fund, as the holder of the junior lien, and, accordingly, holders of one or more
Classes of the Securities bear (i) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (ii) the risk of loss
if the deficiency judgment is not realized upon. Moreover, deficiency judgments
may not be available in certain jurisdictions. In addition, a junior mortgagee
may not foreclose on the property securing a junior mortgage unless it
forecloses subject to the senior mortgages.
Liquidation expenses with respect to defaulted junior mortgage loans do
not vary directly with the outstanding principal balance of the loan at the time
of default. Therefore, assuming that the Master Servicer took the same steps in
realizing upon a defaulted junior mortgage loan having a small remaining
principal balance as it would in the case of a defaulted junior mortgage loan
having a large remaining principal balance, the amount realized after expenses
of liquidation would be smaller as a percentage of the outstanding principal
balance of the small junior mortgage loan than would be the case with the
defaulted junior mortgage loan having a large remaining principal balance.
Because
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the average outstanding principal balance of the Mortgage Loans is smaller
relative to the size of the average outstanding principal balance of the loans
in a typical pool of first priority mortgage loans, liquidation proceeds may
also be smaller as a percentage of the principal balance of a Mortgage Loan than
would be the case in a typical pool of first priority mortgage loans.
If specified in the related Prospectus Supplement, a Trust Fund will
contain Additional Collateral Loans. Unless otherwise specified in the related
Prospectus Supplement, the security agreements and other similar security
instruments related to the Additional Collateral for the Loans in a Trust Fund
will, in the case of Additional Collateral consisting of personal property,
create first liens thereon, and, in the case of Additional Collateral consisting
of real estate, create first or junior liens thereon. Additional Collateral, or
the liens thereon in favor of the related Additional Collateral Loans, may be
greater or less in value than the principal balances of such Additional
Collateral Loans, the Appraised Values of the underlying Mortgaged Properties or
the differences, if any, between such principal balances and such Appraised
Values, and the requirements that Additional Collateral be maintained may be
terminated upon the reduction of the Loan-to-Value Ratios or principal balances
of the related Additional Collateral Loans to certain pre-determined amounts.
Additional Collateral (including any related third-party guarantees) may be
provided either in addition to or in lieu of primary mortgage insurance policies
for the Additional Collateral Loans in a Trust Fund, as specified in the related
Prospectus Supplement. Guarantees supporting Additional Collateral Loans may be
guarantees of payment or guarantees of collectability and may be full guarantees
or limited guarantees. If a Trust Fund includes Additional Collateral Loans, the
related Prospectus Supplement will specify the nature and extent of such
Additional Collateral Loans and of the related Additional Collateral. If
specified in such Prospectus Supplement, the Trustee, on behalf of the related
Securityholders, will have only the right to receive certain proceeds from the
disposition of any such Additional Collateral consisting of personal property
and the liens thereon will not be assigned to the Trustee. No assurance can be
given as to the amount of proceeds, if any, that might be realized from the
disposition of the Additional Collateral for any of the Additional Collateral
Loans. See "Certain Legal Aspects of Loans--Anti-Deficiency Legislation and
Other Limitations on Lenders" herein.
Additional Collateral Loans may include Nest Egg Mortgage Loans(sm).
Such Mortgage Loans are interest-only Mortgage Loans for an initial period
specified in the related Prospectus Supplement. If the related Mortgagor pledges
an eligible life insurance policy as Additional Collateral after such initial
period, the Mortgagor will continue to make interest-only payments with respect
to the Mortgage Loan until the final scheduled payment on such Mortgage Loan, as
described in the Prospectus Supplement.
The percentage 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 Securities. 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%;
(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;
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(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; and
(e) no Mortgage Loan (other than a Cooperative Loan) may be
included unless a title insurance policy 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.
Each Mortgage Loan will be selected by the Depositor for inclusion in a
Trust Fund from among those purchased by the Depositor, either directly or
through its affiliates, from a Seller or Sellers. The related Prospectus
Supplement will specify the extent of Mortgage Loans so acquired. Other mortgage
loans available for purchase by the Depositor may have characteristics which
would make them eligible for inclusion in a Trust Fund but were not selected for
inclusion in such Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans to be included in a Trust Fund will be delivered either directly
or indirectly to the Depositor by one or more Sellers identified in the related
Prospectus Supplement, concurrently with the issuance of the related Series of
Securities (a "Designated Seller Transaction"). Such Securities may be sold in
whole or in part to any such Seller in exchange for the related Mortgage Loans,
or may be offered under any of the other methods described herein under "Methods
of Distribution." The related Prospectus Supplement for a Trust Fund composed of
Mortgage Loans acquired by the Depositor pursuant to a Designated Seller
Transaction will generally include information, provided by the related Seller,
about the Seller, the Mortgage Loans and the underwriting standards applicable
to the Mortgage Loans. Neither the Depositor nor any of its affiliates (other
than the Seller, if applicable) will make any representation or warranty with
respect to such Mortgage Loans, or any representation as to the accuracy or
completeness of such information provided by the Seller and no assurances are
made as to any such Seller's financial strength, stability or wherewithal to
honor its repurchase obligations for breaches of representations and warranties
or otherwise honor its obligations.
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 at origination, plus in the
case of a Mortgage Loan secured by a junior lien, the principal amount of the
related Senior Lien, to 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. 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 Buy-Down Loan is limited to 6% of the Appraised Value of the related
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
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Payments after the Buy-Down Amounts have been depleted and, for certain Buy-Down
Loans, while such Buy-Down Amounts are being depleted.
Unless otherwise specified in the related Prospectus Supplement, with
respect to Multifamily Loans, (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, 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 Seller, the Servicer or the Master Servicer.
ARMs have features that 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 "Maximum Mortgage Rate") 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 "Periodic Rate
Cap"). 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.
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, generally
including, among other things, (a) the aggregate outstanding principal balance
of the Mortgage Loans; (b) the weighted average mortgage rate on the Mortgage
Loans, and, in the case of ARMs, the weighted average of the current mortgage
rates and the Maximum Mortgage Rates, 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 Additional Collateral Loans, ARMs,
Balloon Loans, 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
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support relating to the Mortgage Loans; (i) the geographic distribution of the
Mortgaged Properties securing the Mortgage Loans, (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 and (k) with respect to Mortgage Loans
secured by a junior lien, the amount of the related Senior Liens. 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 Securities 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, together with the related
Pooling and Servicing Agreement, with respect to each Series of Certificates, or
the related Servicing Agreement, Owner Trust Agreement and Indenture, with
respect to each Series of Notes, with the Commission within 15 days after the
initial issuance of such Securities.
THE MANUFACTURED HOME LOANS
The Manufactured Home Loans comprising or underlying the Mortgage
Assets for a Series of Securities 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).
In addition, 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 at
origination to 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
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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 Securities
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 Securities.
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 (other than
Advances deposited into the Certificate Account), 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 related Pooling
and Servicing Agreement or the related Servicing Agreement and Indenture. Unless
otherwise specified in the related Prospectus Supplement or related 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
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 Securities--Distributions on the Securities."
Funds on deposit in the Collection Account will be available for
deposit into the Certificate Account for certain payments provided for in the
related Pooling and Servicing Agreement or the related Servicing Agreement and
Indenture. Unless otherwise specified in the Prospectus Supplement or the
related 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 Securityholders
into which all funds received from the Master Servicer and all required
withdrawals from any reserve funds and any draws on any Financial Guarantee
Insurance for such Series will be deposited, pending distribution to the
Securityholders. 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 or the
Trustee 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 related Agreement, will be
available for remittance to the Securityholders; 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 Securityholders. See also
"The Agreements--Certificate Account" herein.
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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
Loans; Deposits to Collection Accounts." If Private Mortgage-Backed Securities
are backed by GPM Loans and the value of 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 Seller of the Loans (or other entity specified in the related
Prospectus Supplement, which may be the originator) 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 Securities, 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. 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. In the case of a Multifamily
Loan, the Mortgagor will also be required to provide certain information
regarding the related Multifamily Property, including a current rent roll and
operating income statements (which may be pro forma and unaudited). In addition,
the originator will generally also consider the location of the Multifamily
Property, the availability of competitive lease space and rental income of
comparable properties in the relevant market
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area, the overall economy and demographic features of the geographic area and
the Mortgagor's prior experience in owning and operating properties similar to
the Multifamily Properties.
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. With
respect to Multifamily Properties, the appraisal must specify whether an income
analysis, a market analysis or a cost analysis was used. An appraisal employing
the income approach to value analyzes a property's projected net cash flow,
capitalization and other operational information in determining the property's
value. The market approach to value analyzes the prices paid for the purchase of
similar properties in the property's area, with adjustments made for variations
between those other properties and the property being appraised. The cost
approach to value requires the appraiser to make an estimate of land value and
then determine the current cost of reproducing the improvements less any accrued
depreciation. In any case, the value of the property being financed, as
indicated by the appraisal, must be such that it currently supports, and is
anticipated to support in the future, the outstanding loan balance. Unless
otherwise specified in the related Prospectus Supplement, all appraisals are
required to conform to the Uniform Standards of Professional Appraisal Practice
and the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and must be on forms acceptable to the FNMA and/or FHLMC.
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.
In the case of the Multifamily Loans, lenders typically look to the
Debt Service Coverage Ratio of a loan as an important measure of the risk of
default on such a loan. Unless otherwise defined in the related Prospectus
Supplement, the "Debt Service Coverage Ratio" of a Multifamily Loan at any given
time is the ratio of (i) the Net Operating Income of the related Mortgaged
Property for a twelve-month period to (ii) the annualized scheduled payments on
the Mortgage Loan and on any other loan that is secured by a lien on the
Mortgaged Property prior to the lien of the related Mortgage. Unless otherwise
defined in the related Prospectus Supplement, "Net Operating Income" means, for
any given period, the total operating revenues derived from a Multifamily
Property during such period, minus the total operating expenses incurred in
respect of such property during such period other than (i) non-cash items such
as depreciation and amortization, (ii) capital expenditures and (iii) debt
service on loans (including
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the related Mortgage Loan) secured by liens on such property. The Net Operating
Income of a Multifamily Property will fluctuate over time and may or may not be
sufficient to cover debt service on the related Mortgage Loan at any given time.
As the primary source of the operating revenues of a Multifamily Property,
rental income (and maintenance payments from tenant-stockholders of a
cooperatively owned Multifamily Property) may be affected by the condition of
the applicable real estate market and/or area economy. Increases in operating
expenses due to the general economic climate or economic conditions in a
locality or industry segment, such as increases in interest rates, real estate
tax rates, energy costs, labor costs and other operating expenses, and/or to
changes in governmental rules, regulations and fiscal policies, may also affect
the risk of default on a Multifamily Loan. Lenders also look to the
Loan-to-Value Ratio of a Multifamily Loan as a measure of risk of loss if a
property must be liquidated following a default.
If so specified in the related Prospectus Supplement, the underwriting
of a Multifamily Loan may also include environmental testing. Under the laws of
certain states, contamination of real property may give rise to a lien on the
property to assure the costs of cleanup. In several states, such a lien has
priority over an existing mortgage lien on such property. In addition, under the
laws of some states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), a lender may be liable, as an
"owner" or "operator", for costs of addressing releases or threatened releases
of hazardous substances at a property, if agents or employees of the lender have
become sufficiently involved in the operations of the borrower, regardless of
whether or not the environmental damage or threat was caused by the borrower or
a prior owner. A lender also risks such liability on foreclosure of the
mortgage. See "Certain Legal Aspects of Mortgage Loans--Environmental
Legislation."
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, Balloon Loans, 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.
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
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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.
With respect to the underwriting standards applicable to any Mortgage
Loans, such underwriting standards generally include a set of specific criteria
pursuant to which the underwriting evaluation is made. However, the application
of such underwriting standards does not imply that each specific criterion was
satisfied individually. Rather, a Mortgage Loan will be considered to be
originated in accordance with a given set of underwriting standards if, based on
an overall qualitative evaluation, the loan is in substantial compliance with
such underwriting standards. For example, a Mortgage Loan may be considered to
comply with a set of underwriting standards, even if one or more specific
criteria included in such underwriting standards were not satisfied, if other
factors compensated for the criteria that were not satisfied or if the Mortgage
Loan is considered to be in substantial compliance with the underwriting
standards.
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 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 Securities 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
Securities 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."
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REPRESENTATIONS AND WARRANTIES
Unless otherwise specified in the related Prospectus Supplement or in
the related Agreement, the Seller (or other party as described in the related
Prospectus Supplement) 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, generally that: (i) any required hazard and primary mortgage
insurance policies were effective at the origination of such Mortgage Loan, and
each such policy remained in effect on the date of purchase of such Mortgage
Loan from the Seller by or on behalf of the Depositor; (ii) either (A) a title
insurance policy insuring (subject only to permissible title insurance
exceptions) the lien status of the Mortgage was effective at the origination of
such Mortgage Loan and such policy remained in effect on the date of purchase of
the Mortgage Loan from the Seller by or on behalf of the Depositor or (B) if the
Mortgaged Property securing such Mortgage Loan is located in an area where such
policies are generally not available, there is in the related mortgage file an
attorney's certificate of title indicating (subject to such permissible
exceptions set forth therein) the first lien status of the mortgage; (iii) the
Seller has good title to such Mortgage Loan and such Mortgage Loan was subject
to no offsets, defenses or counterclaims except as may be provided under the
Relief Act and except to the extent that any buydown agreement exists for a
Buy-Down Loan; (iv) there are no mechanics' liens or claims for work, labor or
material affecting the related Mortgaged Property which are, or may be a lien
prior to, or equal with, the lien of the related Mortgage (subject only to
permissible title insurance exceptions); (v) the related Mortgaged Property is
free from material damage and at least in adequate repair; (vi) there are no
delinquent tax or assessment liens against the related Mortgaged Property; (vii)
such Mortgage Loan is not more than 30 days' delinquent as to any scheduled
payment of principal and/or interest; (viii) if a primary mortgage insurance
policy is required with respect to such Mortgage Loan, such Mortgage Loan is the
subject of such a policy; and (ix) such Mortgage Loan was made in compliance
with, and is enforceable under, all applicable local, state and federal laws in
all material respects.
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 Seller (or other
party as described in the related Prospectus Supplement) will represent and
warrant 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 Seller (or other party as described
in the related Prospectus Supplement) 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 Seller 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.
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Upon the discovery of the breach of any representation or warranty made
by the Master Servicer in respect of a Loan that materially and adversely
affects the interest of the Securityholder in such Loan, the Seller (or other
party as described in the Prospectus Supplement) 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
Agreements--Assignment of Mortgage Assets." See "Risk Factors--Limited
Obligations and Assets of the Depositor." If the Seller or other party fails to
cure or repurchase, another party may be required to cure or repurchase as
described in the Prospectus Supplement. 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 ("Sub-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 or 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 Securities 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 or 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 Sub-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 related Pooling and Servicing Agreement or Servicing Agreement for a Series
and any applicable insurance policies and other forms of credit support, 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, provided, however, that the Master Servicer shall first determine
that any such waiver or extension will not impair the coverage of any related
insurance policy or materially and adversely affect the lien of the related
Mortgage or the lien on any related Additional Collateral. In addition, unless
otherwise specified in the related Prospectus Supplement, if a material default
occurs or a payment default is reasonably foreseeable with respect to a
Multifamily Loan, the Master Servicer will be permitted, subject to any specific
limitations set forth in the related Pooling and Servicing Agreement or
Servicing Agreement and described in the related Prospectus Supplement, to
modify, waive or amend any term of such Mortgage Loan, including deferring
payments, extending the stated maturity date or otherwise adjusting the payment
schedule, provided that such modification, waiver or amendment (i) is reasonably
likely to produce a greater recovery with respect to such Mortgage Loan on a
present value basis than would liquidation and (ii) will not adversely affect
the coverage under any applicable instrument of credit enhancement.
In the case of Multifamily Loans, a Mortgagor's failure to make
required Mortgage Loan payments may mean that operating income is insufficient
to service the mortgage debt, or may reflect the diversion of that income from
the servicing of the mortgage debt. In addition, a Mortgagor under a Multifamily
Loan that is unable to make Mortgage Loan payments may also be unable to make
timely payment of taxes and otherwise to maintain and insure the related
Mortgaged Property. In general, the related Master Servicer will be required to
monitor any Multifamily Loan that is in default, evaluate whether the causes of
the default can be corrected over a reasonable period without significant
impairment of the value of the related Mortgaged Property, initiate corrective
action in cooperation with the Mortgagor if cure is likely, inspect the related
Mortgaged Property and take such other actions as are consistent with the
servicing standard. A significant period of time may elapse before the Master
Servicer is able to assess the success of any such corrective action or the need
for additional initiatives. The time within which the Master Servicer can make
the initial determination of appropriate action, evaluate the success of
corrective action, develop additional initiatives, institute foreclosure
proceedings and actually foreclose (or accept a deed to a Mortgaged Property in
lieu of foreclosure) on behalf of the Securityholders of the related Series may
vary considerably depending on the particular Multifamily Loan, the Mortgaged
Property, the Mortgagor, the presence of an acceptable party to assume the
Multifamily Loan and the laws of the jurisdiction in which the Mortgaged
Property is located. If a Mortgagor files a bankruptcy petition, the Master
Servicer may not be permitted to accelerate the maturity of the related
Multifamily Loan or to foreclose on the Mortgaged Property for a considerable
period of time. See "Certain Legal Aspects of Mortgage Loans."
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.
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DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless otherwise indicated in the related Prospectus Supplement, the
Collection Account will be an Eligible Account and 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.
Unless otherwise specified in the related Prospectus Supplement, 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 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;
(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 or
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");
(iv) Any Buydown Funds (and, if applicable, investment
earnings thereon) required to be paid as described herein;
(v) All proceeds of any Mortgage Loan in such Trust
Fund purchased (or, in the case of a substitution, certain amounts
representing a principal adjustment) by the Master Servicer, the Seller
or any other person pursuant to the terms of the related Pooling and
Servicing Agreement or Servicing Agreement;
(vi) All amounts required to be deposited therein in
connection with any losses on Eligible Investments pursuant to the
related Pooling and Servicing Agreement or Servicing Agreement; and
(vii) All other amounts required to be deposited therein
pursuant to the related Pooling and Servicing Agreement or Servicing
Agreement.
The Master Servicer is permitted, from time to time, to make
withdrawals from the Collection Account for certain purposes, as specifically
set forth in the related Pooling and Servicing Agreement or Servicing Agreement,
which generally will include the following, except as otherwise provided
therein:
(i) to make deposits to the Certificate Account in the amounts
and in the manner provided in the Pooling and Servicing Agreement or
Servicing Agreement;
(ii) to reimburse itself for Advances, including amounts
advanced in respect of taxes, insurance premiums or similar expenses as
to any Mortgaged Property, out of late payments or collections on the
related Mortgage Loan with respect to which such Advances were made;
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(iii) to pay to itself unpaid Servicing Fees, out of payments
or collections of interest on each Mortgage Loan;
(iv) to pay to itself as additional servicing compensation any
investment income on funds deposited in the Collection Account, and, if
so provided in the related Pooling and Servicing Agreement or Servicing
Agreement, any profits realized upon disposition of a Mortgaged
Property acquired by deed in lieu of foreclosure or otherwise allowed
under the related Pooling and Servicing Agreement or Servicing
Agreement;
(v) to pay to itself or the Seller all amounts received with
respect to each Mortgage Loan purchased, repurchased or removed
pursuant to the terms of the related Pooling and Servicing Agreement or
Servicing Agreement and not required to be distributed as of the date
on which the related purchase price is determined;
(vi) to reimburse itself for any Advance previously made which
the Master Servicer has determined to not be ultimately recoverable
from Liquidation Proceeds, Insurance Proceeds or otherwise, subject, in
the case of a Series with Senior Securities and Subordinate Securities,
to certain limitations set forth in the related Pooling and Servicing
Agreement or Servicing Agreement as described in the related Prospectus
Supplement;
(vii) to pay for costs and expenses incurred by the Trust Fund
for environmental site assessments performed with respect to
Multifamily Properties that constitute security for defaulted Mortgage
Loans, and for any containment, clean-up or remediation of hazardous
wastes and materials present on such Mortgaged Properties, as described
below under "--Presentation of Claims; Realization Upon Defaulted
Loans";
(viii) to reimburse itself, the Trustee or the Depositor for
certain other expenses incurred for which it, the Trustee or the
Depositor is entitled to reimbursement or against which it, the Trustee
or the Depositor is indemnified pursuant to the related Pooling and
Servicing Agreement or the related Servicing Agreement and Indenture;
(ix) to make any other withdrawals permitted by the related
Pooling and Servicing Agreement or Servicing Agreement and described in
the related Prospectus Supplement; and
(x) to clear the Collection Account of amounts relating to the
corresponding Loans in connection with the termination of the Trust
Fund pursuant to the Pooling and Servicing Agreement or Servicing
Agreement.
SERVICING ACCOUNTS
Unless otherwise specified in the related Prospectus Supplement, in
those cases where a Servicer is servicing a Mortgage Loan, the Servicer will
establish and maintain an account (a "Servicing Account") that will be an
Eligible Account 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, less its servicing compensation and any
reimbursed expenses and advances, to the extent permitted by the Sub-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, after deducting from such remittance
an amount equal to the servicing compensation and unreimbursed expenses and
advances to which it is then entitled pursuant to the related Sub- Servicing
Agreement, to the extent not previously paid to or retained by it. In addition
on each such date the Servicer will be required to remit to the Master Servicer
any amount required to be advanced pursuant to the related Sub- Servicing
Agreement, and the Servicer will also be required to the Master Servicer, within
one business day of receipt, the proceeds of any principal Prepayments and all
Insurance Proceeds and Liquidation Proceeds.
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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
Securityholders 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 Securities of 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 Securities 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
Securityholders 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
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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. With respect to any
Multiple Class Series, so long as the related Subordinate Securities remain
outstanding and subject to certain limitations as described in the related
Prospectus Supplement, such Advances by the Master Servicer may also be
reimbursable out of amounts otherwise distributable to holders of the
Subordinate Securities, if any.
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
Securityholders 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 (less any related Servicing
Fees). Any such principal prepayment, together with a full Scheduled Payment of
interest thereon (to the extent of such adjustment or advance), will be
distributed to Securityholders 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."
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 or at any time during the
term of the Loan the Master Servicer or the related Servicer determines that the
related Mortgaged Property is located in an area identified on a Flood Hazard
Boundary Map or Flood Insurance Rate Map issued by the Flood Emergency
Management Agency as having special flood hazards and flood insurance has been
made available, the borrower will cause to be maintained a flood insurance
policy meeting the requirements of the current guidelines of the Federal
Insurance Administration with a generally acceptable insurance carrier, in an
amount representing coverage not less than the lesser of (i) the outstanding
principal balance of the Loan or (ii) the maximum amount of insurance which is
available under the National Flood Insurance Act of 1968, the Flood Disaster
Protection Act of 1983 or the National Flood Insurance Reform Act of 1994, as
amended. The Pooling and Servicing Agreement or Servicing Agreement will
obligate the Mortgagor to obtain and maintain all requisite flood insurance
coverage at the Mortgagor's cost and expense, and on the Mortgagor's failure to
do so, authorizes the Master Servicer or Servicer to obtain and maintain such
coverage at the Mortgagor's cost and expense and to seek reimbursement therefor
from the Mortgagor.
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
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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 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 Securities 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."
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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 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 Securities. 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 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
Securities. 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 Securityholders,
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 Securityholders after reimbursement
to itself for such expenses and (ii) that such expenses will be recoverable by
it either through Liquidation Proceeds
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or the proceeds of insurance. Notwithstanding anything to the contrary herein,
in the case of a Trust Fund for which a REMIC election or elections have been
made, the Master Servicer shall not liquidate any collateral acquired through
foreclosure later than two years after the acquisition of such collateral,
unless a longer period of time is necessary for the orderly liquidation of the
collateral and the Master Servicer has obtained from the Internal Revenue
Service (the "IRS") an extension of the two year period within which it would
otherwise be required to liquidate the 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.
With respect to a Mortgage Loan in default, the Master Servicer may
pursue foreclosure (or similar remedies) concurrently with pursuing any remedy
for a breach of a representation and warranty. However, the Master Servicer is
not required to continue to pursue both such remedies if it determines that one
such remedy is more likely to result in a greater recovery. If such Mortgage
Loan is an Additional Collateral Loan, the Master Servicer (or the related
Servicer, if the lien on the Additional Collateral for such Additional
Collateral Loan is not assigned to the Trustee on behalf of the Securityholders)
may proceed against the related Mortgaged Property or the related Additional
Collateral first or may proceed against both concurrently (as permitted by
applicable law and the terms under which such Additional Collateral is held,
including any third-party guarantee). Upon the first to occur of final
liquidation (by foreclosure or otherwise) and a repurchase or substitution
pursuant to a breach of a representation and warranty, such Mortgage Loan will
be removed from the related Trust Fund if it has not been removed previously.
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 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.
Notwithstanding the foregoing, unless otherwise specified in the
related Prospectus Supplement, the Master Servicer may not acquire title to any
Multifamily Property securing a Mortgage Loan or take any other action that
would cause the related Trustee, for the benefit of Securityholders of the
related Series, or any other specified person to be considered to hold title to,
to be a "mortgagee-in-possession" of, or to be an "owner" or an "operator" of
such Mortgaged Property within the meaning of certain federal environmental
laws, unless the Master Servicer has previously determined, based on a report
prepared by a person who regularly conducts environmental audits (which report
will be an expense of the Trust Fund), that either:
(i) the Mortgaged Property is in compliance with applicable
environmental laws and regulations or, if not, that taking such actions
as are necessary to bring the Mortgaged Property into compliance
therewith is reasonably likely to produce a greater recovery on a
present value basis than not taking such actions; and
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(ii) there are no circumstances or conditions present at the
Mortgaged Property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or
remediation could be required under any applicable environmental laws
and regulations or, if such circumstances or conditions are present for
which any such action could be required, taking such actions with
respect to the Mortgaged Property is reasonably likely to produce a
greater recovery on a present value basis than not taking such actions.
See "Certain Legal Aspects of Mortgage Loans--Environmental
Legislation."
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.
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 is authorized to accept from or enter into a
substitution or 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 a
substitution or assumption.
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 additional
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
and as otherwise specified herein.
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 Sellers and in the preparation of reports to Securityholders.
Certain of these expenses may be reimbursable pursuant to the terms of the
related Agreement from Liquidation Proceeds and the proceeds of insurance
policies and, in the case of enforcement of the obligations of Servicers and
Sellers, 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
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than the outstanding principal balance of and unpaid interest on the related
Loan which would be distributable to Securityholders. 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 Securityholders to
receive any related proceeds of insurance policies, Liquidation Proceeds or
amounts derived from other forms of credit support. The Master Servicer is also
entitled to reimbursement from the Collection Account and the Certificate
Account for Advances.
Unless otherwise provided in the Prospectus Supplement, 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 Securityholders of such Series.
EVIDENCE AS TO COMPLIANCE
Each Pooling and Servicing Agreement and each Servicing Agreement will
provide for delivery (on or before a specified date in each year) to the Trustee
of an annual statement signed by an officer of the Master Servicer, unless
otherwise specified in the related Prospectus Supplement, to the effect that the
Master Servicer has complied in all material respects with the minimum servicing
standards set forth in the Uniform Single Attestation Program for Mortgage
Bankers and has fulfilled in all material respects its obligations under the
related Agreement throughout the preceding year or, if there has been material
noncompliance with such servicing standards or a material default in the
fulfillment of any such obligation, such statement shall include a description
of such noncompliance or specify each such known default, as the case may be,
and the nature and status thereof. Such statement may be provided as a single
form making the required statements as to more than one Agreement.
Each Pooling and Servicing Agreement and each Servicing Agreement will
also provide that on or before a specified date in each year, beginning the
first such date that is at least a specified number of months after the Cut-off
Date, a firm of independent public accountants will furnish a report to the
Depositor and the Trustee stating the opinion of such firm that, unless
otherwise specified in the related Prospectus Supplement, on the basis of an
examination by such firm conducted substantially in accordance with standards
established by the American Institute of Certified Public Accountants, the
assertion by management of the Master Servicer regarding the Master Servicer's
compliance with the minimum servicing standards set forth in the Uniform Single
Attestation Program for Mortgage Bankers during the preceding year is fairly
stated in all material respects, subject to such exceptions and other
qualifications that, in the opinion of such firm, such accounting standards
require it to report. In rendering its statement such firm may rely, as to the
matters relating to the direct servicing of mortgage loans by Servicers, upon
comparable statements for examinations conducted by independent public
accountants substantially in accordance with standards established by the
American Institute of Certified Public Accountants (rendered within one year of
such statement) with respect to those Servicers which also have been the subject
of such an examination.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
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 related
Pooling and Servicing Agreement or Servicing Agreement except upon its
determination that its duties thereunder are no longer permissible under
applicable law or except in connection with a permitted transfer of servicing.
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 related Agreement.
In the event of an Event of Default under the related Pooling and
Servicing Agreement or Servicing Agreement, the Master Servicer may be replaced
by the Trustee or a successor Master Servicer. See "The Agreements--Rights upon
Events of Default" herein.
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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 or Servicing Agreement for
each Series; provided that the purchaser or transferee accepting such assignment
or delegation (i) is qualified to sell loans to and service mortgage loans for
FNMA or FHLMC; (ii) has a net worth of not less than $10,000,000; (iii) is
acceptable to each Rating Agency for purposes of maintaining its then-current
ratings of the Securities; (iv) is reasonably acceptable to the Trustee; and (v)
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 the related Pooling and
Servicing Agreement or 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
related 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 Agreement, provided that such successor or surviving entity meets the
requirements for a successor Master Servicer set forth above.
Each Pooling and Servicing Agreement and each Servicing Agreement will
also provide that neither the Master Servicer, the Depositor, nor any director,
officer, employee or agent of the Master Servicer or the Depositor, will be
under any liability to the related Trust Fund or the Securityholders for any
action taken or for failing to take any action in good faith pursuant to the
related Agreement or for errors in judgment; provided, however, that neither the
Master Servicer, the Depositor, nor any such person will be protected against
any breach of warranty or representations made by such party under the related
Agreement or the failure to perform its obligations in compliance with any
standard of care set forth in the related 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 and each
Servicing Agreement will further provide that the Master Servicer, the Depositor
and any director, officer, employee or agent of the Master Servicer or the
Depositor 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 related Agreement or the Securities, 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
related Agreement provides that neither the Master Servicer nor the Depositor is
under any obligation to appear in, prosecute or defend any legal action which is
not incidental to its servicing responsibilities under the related Agreement
which, in its opinion, may involve it in any expense or liability. The Master
Servicer or the Depositor may, in its discretion, undertake any such action
which it may deem necessary or desirable with respect to the related Agreement
and the rights and duties of the parties thereto and the interests of the
Securityholders thereunder. In such event, the legal expenses and costs of such
action and any liability resulting therefrom will be expenses, costs, and
liabilities of the Trust Fund and the Master Servicer or the Depositor 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
Securities of such Series, subordination created through overcollateralization,
the establishment of one or more reserve funds, use of a pool insurance policy,
bankruptcy bond, repurchase bond or special hazard insurance policy, financial
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 Securities of the related Series. Credit support may also be provided in the
form of an insurance policy covering the risk of collection and
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adequacy of any Additional Collateral provided in connection with any Additional
Collateral Loan, subject to the limitations set forth in any such insurance
policy.
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 principal balance of the
Securities and interest thereon at the Security Interest Rate. If losses occur
which exceed the amount covered by credit support or which are not covered by
credit support, such losses will be borne by the Securityholders. If credit
support is provided with respect to a Series, 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 SECURITIES; SUBORDINATION RESERVE FUND
If so specified in the related Prospectus Supplement, one or more
Classes of a Series may be Subordinate Securities. If so specified in the
related Prospectus Supplement, the rights of the Subordinate Securityholders to
receive distributions of principal and interest from the Certificate Account on
any Distribution Date will be subordinated to such rights of the Senior
Securityholders 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 Securityholders
are paid to the Senior Securityholders (including amounts withdrawn from the
Subordination Reserve Fund, if any, and paid to the Senior Securityholders), and
will (unless otherwise specified in the related Prospectus Supplement) increase
whenever there is distributed to the Subordinate Securityholders amounts in
respect of which subordination payments have previously been paid to the Senior
Securityholders (which will occur when subordination payments in respect of
delinquencies and certain other deficiencies have been recovered).
A Series may include a Class of Subordinate Securities entitled to
receive cash flows remaining after distributions made to all other Classes. Such
right will effectively be subordinate to the rights of other Securityholders,
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 Securities, 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 Securities, 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 Securityholders. Moneys will be withdrawn from the Subordination Reserve
Fund to make distributions of principal of or interest on Senior Securities
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
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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 Securityholders 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 Securityholders and the
employment of reinvestment earnings on amounts in the Subordination Reserve
Fund, if any.
OVERCOLLATERALIZATION
If so specified in the related Prospectus Supplement, subordination may
be provided by one or more Classes of Senior Securities through
overcollateralization; i.e. by having a greater amount of aggregate principal
balance of the Mortgage Assets for a Series than the aggregate principal balance
of the Securities of such Series. Such subordination may exist on the Closing
Date or may be effected through the allocation of interest payments on the Loans
to reduce the principal balances of certain Classes of Securities.
In a Series with overcollateralization, the allocation of losses to the
Securities is handled through the priority of payment process, first by interest
that otherwise would pay down principal on the Securities, and then such losses
would be allocated to the Senior Securities only if the principal balance of the
Mortgage Loans was reduced to less than the principal balance of the Senior
Securities. If so specified in the related Prospectus Supplement, the level of
overcollateralization required under the provisions of the related Pooling and
Servicing Agreement or Indenture will be subject to various tests based
primarily on the loss and delinquency experience of the related Mortgage Assets,
and will be raised and lowered accordingly.
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 Securities evidencing the
beneficial ownership of one Asset Group prior to distributions on Subordinate
Securities 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 Securities of the
related Series.
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LETTER OF CREDIT
The letter of credit, if any, with respect to a Series of Securities
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, 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
Securities (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 Securities 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 Securities--Optional
Termination" and "The 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
Securities of the related Series.
FINANCIAL GUARANTEE INSURANCE
Financial Guarantee Insurance, if any, with respect to a Series of
Securities will be provided by one or more insurance companies. Such Financial
Guarantee Insurance will guarantee, with respect to one or more Classes of
Securities 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 Financial
Guarantee Insurance will also guarantee against any payment made to a
Securityholder which is subsequently recovered as a "voidable preference"
payment under the Bankruptcy Code. A copy of the financial 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 Securities 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 Securities, if required as a condition to the
rating of such Series by each Rating Agency rating such 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 Securities, 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 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.
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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 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
Securityholders 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. Multifamily Loans will not be covered by a primary mortgage
insurance policy, regardless of the related Loan-to-Value Ratio.
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 Securityholders. In
addition, the pool insurance policy and primary mortgage insurance policies do
not provide coverage 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 Securityholders.
PRIMARY MORTGAGE INSURANCE. While the terms and conditions of the
primary mortgage insurance policies issued by one primary mortgage guaranty
insurer (a "Primary Insurer") will differ from those in primary mortgage
insurance policies issued by other Primary Insurers, each primary mortgage
insurance policy generally will pay either: (i) the insured percentage of the
loss on the related Mortgaged Property; (ii) the entire amount of such loss,
after receipt by the Primary Insurer of good and merchantable title to, and
possession of, the Mortgaged Property; or (iii) at the option of the Primary
Insurer under certain primary mortgage insurance policies, the sum of the
delinquent monthly payments plus any advances made by the insured, both to the
date of the claim payment and, thereafter, monthly 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. The amount of the loss as calculated under a primary
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mortgage insurance policy covering a Mortgage Loan will generally consist of the
unpaid principal amount of such Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from the related Mortgaged Property, (ii) hazard
insurance proceeds in excess of the amount required to restore such Mortgaged
Property and which have not been applied to the payment of the Mortgage Loan,
(iii) amounts expended but not approved by the Primary Insurer, (iv) claim
payments previously made on such Mortgage Loan and (v) unpaid premiums and
certain other amounts.
As conditions precedent to the filing or payment of a claim under a
primary mortgage insurance policy, in the event of default by the Mortgagor, the
insured will typically be required, among other things, to: (i) advance or
discharge (a) hazard insurance premiums and (b) as necessary and approved in
advance by the Primary Insurer, real estate taxes, protection and preservation
expenses and foreclosure and related costs; (ii) in the event of any physical
loss or damage to the Mortgaged Property, have the Mortgaged Property restored
to at least its condition at the effective date of the primary mortgage
insurance policy (ordinary wear and tear excepted); and (iii) tender to the
Primary Insurer good and merchantable title to, and possession of, the Mortgaged
Property.
The Pooling and Servicing Agreement or Servicing Agreement for a Series
generally will require that the Master Servicer or Servicer maintain, or cause
to be maintained, coverage under a primary mortgage insurance policy to the
extent such coverage was in place on the Cut-off Date. In the event that the
Depositor gains knowledge that, as of the Closing Date, a Mortgage Loan had a
Loan-to-Value Ratio at origination in excess of 80% and was not the subject of a
primary mortgage insurance policy (and was not included in any exception to such
standard disclosed in the related Prospectus Supplement) and that such Mortgage
Loan has a then current Loan-to-Value Ratio in excess of 80%, then the Master
Servicer or the Servicer is required to use its reasonable efforts to obtain and
maintain a primary mortgage insurance policy to the extent that such a policy is
obtainable at a reasonable price.
Any primary mortgage insurance or primary credit insurance policies
relating to Loans secured by Manufactured Homes will be described in the related
Prospectus Supplement.
FHA INSURANCE AND VA GUARANTEES. The Housing Act authorizes various FHA
mortgage insurance programs. Some of the Mortgage Loans may be insured under
either Section 203(b), Section 234 or Section 235 of the Housing Act. Under
Section 203(b), FHA insures mortgage loans of up to 30 years' duration for the
purchase of one- to four-family dwelling units. Mortgage loans for the purchase
of condominium units are insured by FHA under Section 234. Loans insured under
these programs must bear interest at a rate not exceeding the maximum rate in
effect at the time the loan is made, as established by HUD, and may not exceed
specified percentages of the lesser of the appraised value of the property and
the sales price, less seller paid closing costs for the property, up to certain
specified maximums. In addition, FHA imposes initial investment minimums and
other requirements on mortgage loans insured under the Section 203(b) and
Section 234 programs.
Under Section 235, assistance payments are paid by HUD to the mortgagee
on behalf of eligible mortgagors for as long as the mortgagors continue to be
eligible for the payments. To be eligible, a mortgagor must be part of a family,
have income within the limits prescribed by HUD at the time of initial
occupancy, occupy the property and meet requirements for recertification at
least annually.
The regulations governing these programs provide that insurance
benefits are payable either (i) upon foreclosure (or other acquisition of
possession) and conveyance of the mortgaged premises to HUD or (ii) upon
assignment of the defaulted mortgage loan to HUD. The FHA insurance that may be
provided under these programs upon the conveyance of the home to HUD is equal to
100% of the outstanding principal balance of the mortgage loan, plus accrued
interest, as described below, and certain additional costs and expenses. When
entitlement to insurance benefits results from assignment of the mortgage loan
to HUD, the insurance payment is computed as of the date of the assignment and
includes the unpaid principal amount of the mortgage loan plus mortgage interest
accrued and unpaid to the assignment date.
When entitlement to insurance benefits results from foreclosure (or
other acquisition of possession) and conveyance, the insurance payment is equal
to the unpaid principal amount of the mortgage loan, adjusted to reimburse
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the mortgagee for certain tax, insurance and similar payments made by it and to
deduct certain amounts received or retained by the mortgagee after default, plus
reimbursement not to exceed two-thirds of the mortgagee's foreclosure costs. Any
FHA insurance relating to Loans underlying a Series of Securities will be
described in the related Prospectus Supplement.
The Servicemen's Readjustment Act of 1944, as amended, permits a
veteran (or, in certain instances, his or her spouse) to obtain a mortgage loan
guaranty by the VA covering mortgage financing of the purchase of a one- to
four-family dwelling unit to be occupied as the veteran's home at an interest
rate not exceeding the maximum rate in effect at the time the loan is made, as
established by HUD. The program has no limit on the amount of a mortgage loan,
requires no down payment from the purchaser and permits the guaranty of mortgage
loans with terms, limited by the estimated economic life of the property, up to
30 years. The maximum guaranty that may be issued by the VA under this program
is 50% of the original principal amount of the mortgage loan up to a certain
dollar limit established by the VA. The liability on the guaranty is reduced or
increased on a pro rata basis with any reduction or increase in the amount of
indebtedness, but in no event will the amount payable on the guaranty exceed the
amount of the original guaranty. Notwithstanding the dollar and percentage
limitations of the guaranty, a mortgagee will ordinarily suffer a monetary loss
only when the difference between the unsatisfied indebtedness and the proceeds
of a foreclosure sale of mortgaged premises is greater than the original
guaranty as adjusted. The VA may, at its option, and without regard to the
guaranty, make full payment to a mortgagee of the unsatisfied indebtedness on a
mortgage upon its assignment to the VA.
Since there is no limit imposed by the VA on the principal amount of a
VA-guaranteed mortgage loan but there is a limit on the amount of the VA
guaranty, additional coverage under a Primary Mortgage Insurance Policy may be
required by the Depositor for VA loans in excess of certain amounts. The amount
of any such additional coverage will be set forth in the related Prospectus
Supplement. Any VA guaranty relating to Loans underlying a Series of Securities
will be described in the related Prospectus Supplement.
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 Securityholders. See "Servicing of
Loans--Maintenance of Insurance Policies and Other Servicing Procedures."
Although the terms and 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
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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 Securityholders 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 Securities 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 Securities. 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."
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 FOR MORTGAGE LOANS. The terms of the
Mortgage Loans require each Mortgagor to maintain a hazard insurance policy
covering the related Mortgaged Property and providing for coverage at least
equal to that of the standard form of fire insurance policy with extended
coverage customary in the state in which the property is located. Such coverage
generally will be in an amount equal to the lesser of the principal balance of
such Mortgage Loan or 100% of the insurable value of the improvements securing
the Mortgage Loan. The Pooling and Servicing Agreement or Servicing Agreement
will provide that the Master Servicer or Servicer shall cause such hazard
policies to be maintained or shall obtain a blanket policy insuring against
losses on the Mortgage Loans. The ability of the Master Servicer or Servicer to
ensure that hazard insurance proceeds are appropriately applied may be dependent
on its being named as an additional insured under any hazard insurance policy
and under any flood insurance policy referred to below, or upon the extent to
which information in this regard is furnished to the Master Servicer or the
Servicer by Mortgagors.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm, hail, riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
The policies relating to the Mortgage Loans will be underwritten by different
insurers under different state laws in accordance with different applicable
state forms and therefore will not contain identical terms and conditions, the
basic terms thereof are dictated by respective state laws. Such policies
typically do not cover any physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquakes, landslides and mudflows), nuclear reactions,
wet or dry rot, vermin, rodents, insects or domestic animals, theft and, in
certain cases, vandalism. The foregoing list is merely indicative of certain
kinds of uninsured risks and is not intended to be all-inclusive. Where the
improvements securing a Mortgage Loan are located in a federally designated
flood area at the time of origination of such Mortgage Loan, the Pooling and
Servicing Agreement or Servicing Agreement generally requires the Master
Servicer or Servicer to cause to be maintained for each such Mortgage Loan
serviced, flood insurance as described under "Servicing of Loans--Maintenance of
Insurance Policies and Other Servicing Procedures."
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STANDARD HAZARD INSURANCE POLICIES FOR MANUFACTURED HOME LOANS. The
terms of the Pooling and Servicing Agreement or Servicing Agreement will require
the Servicer or the Master Servicer, as applicable, to cause to be maintained
with respect to each Manufactured Home Loan one or more standard hazard
insurance policies which provide, at a minimum, the same coverage as a standard
form fire and extended coverage insurance policy that is customary for
manufactured housing, issued by a company authorized to issue such policies in
the state in which the Manufactured Home is located, and in an amount which is
not less than the maximum insurable value of such Manufactured Home or the
principal balance due from the Mortgagor on the related Manufactured Home Loan,
whichever is less. Such coverage may be provided by one or more blanket
insurance policies covering losses on the Manufactured Home Loans resulting from
the absence or insufficiency of individual standard hazard insurance policies.
If a Manufactured Home's location was, at the time of origination of the related
Manufactured Home Loan, within a federally designated flood area, the Servicer
or the Master Servicer also will be required to maintain flood insurance.
If the Servicer or the Master Servicer repossesses a Manufactured Home
on behalf of the Trustee, the Servicer or the Master Servicer will either (i)
maintain at its expense hazard insurance with respect to such Manufactured Home
or (ii) indemnify the Trustee against any damage to such Manufactured Home prior
to resale or other disposition.
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 Securities, 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 (and, if specified
in the related Prospectus Supplement, any related Additional Collateral) 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 (and any
related Additional Collateral) 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 Seller, the
Depositor or the 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
Seller, the Depositor or the Master Servicer.
THE AGREEMENTS
The following summaries describe certain provisions of the 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 related Agreements. Where
particular provisions or terms used in the related Agreements are referred to,
such provisions or terms are as specified in the related 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 Securities.
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 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 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 related Agreement, the
Depositor will represent and warrant to the Trustee regarding the Private
Mortgage-Backed Securities: (i) that the information
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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 transfer, convey
and assign to the Trustee (or its nominee or correspondent) all right, title and
interest of the Depositor in the Agency Securities 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 Agency Securities after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interest). The Depositor will cause the Agency Securities to be
registered in the name of the Trustee (or its nominee or correspondent), and the
Trustee will concurrently authenticate and deliver the Securities. Each Agency
Security will be identified in a schedule appearing as an exhibit to the related
Agreement, which will specify as to each Agency Security the original principal
amount and outstanding principal balance as of the Cut-off Date and the annual
pass-through rate or interest rate for each Agency Security conveyed to the
Trustee.
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), an assignment of the
Mortgage in recordable form and, if applicable, any riders or modifications to
such Mortgage Note and Mortgage, together with certain other documents as set
forth in the related Agreement. The Trustee, or, if so specified in the related
Prospectus Supplement, the Custodian, will hold such documents in trust for the
benefit of the Securityholders.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will, at the time of delivery of the Securities, 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. As promptly as possible, the Depositor
will cause such assignments to be so recorded, in which event, the related
Agreement may 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
Securityholders 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 related Agreement (the "Mortgage Loan Schedule"). Such Mortgage
Loan Schedule will specify, among other things, 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 Scheduled Payment of
principal and interest; the maturity date of the related mortgage note; if the
Mortgage Loan is an ARM, the Minimum Mortgage Rate, the Maximum Mortgage Rate,
if any, and the Periodic Rate Cap; and whether the Mortgage Loan is an
Additional Collateral Loan, a Balloon Loan, a Cooperative Loan, a GPM Loan, a
GEM Loan, a Buy-Down Loan or a Mortgage Loan with other than fixed Scheduled
Payments and level amortization.
ASSIGNMENT OF MANUFACTURED HOME LOANS. The Depositor will cause any
Manufactured Home Loans included in the Mortgage Assets for a Series of
Securities to be assigned to the Trustee, together with principal and interest
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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 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
Securityholders 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 Securityholders in the Manufactured Home Loans
could be defeated. See "Certain Legal Aspects of Loans--Manufactured Home
Loans."
The Seller (or other party as described in the related Prospectus
Supplement) will provide limited representations and warranties to the Depositor
and 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 Sub-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 SECURITIES. The Depositor will cause any
Participation Securities obtained under a participation agreement to be assigned
to the Trustee by delivering to the Trustee the Participation Security , which
will be reregistered in the name of the Trustee. Unless otherwise specified 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
Security. Each Participation Security will be identified in a "Participation
Security 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 Security. In the related Agreement, the
Depositor will represent and warrant to the Trustee regarding the Participation
Security: (i) that the information contained in the Participation Security
Schedule is true and correct in all material respects; (ii) that, immediately
prior to the conveyance of the Participation Securities, the Depositor had good
title to and was sole owner of the Participation Security; (iii) that there has
been no other sale by it of such Participation Security and (iv) that such
Participation Security is not subject to any existing lien, charge, security
interest or other encumbrance (other than any Retained Interests).
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REPURCHASE AND SUBSTITUTION OF LOANS
Unless otherwise provided in the related Prospectus Supplement, if any
document in the Loan file delivered by the Depositor to the Trustee, or
Custodian on behalf of the Trustee, is found by the Trustee within 90 days of
the execution of the related 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 or Seller 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 or Seller if, and to the
extent it is obligated to do so under the related servicing agreement or
mortgage loan sale agreement will, not later than 90 days or within such other
period specified in the related Prospectus Supplement, from the date the Seller
or the Master Servicer was notified of the defect by the Depositor, the Master
Servicer or 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 Mortgage
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 120 days of the date of initial
issuance of the Securities and (ii) with respect to a Trust Fund for which a
REMIC election or elections are made, the Trustee must have received a
satisfactory opinion of counsel that such substitution will not result in a
prohibited transactions tax under the Code or cause the Trust Fund to lose its
status as a REMIC, or in the case of a Trust Fund consisting of two or more
REMICs, that such substitution will not cause any such REMIC to lose its status
as a REMIC.
Any Qualified Substitute Mortgage Loan will have, unless otherwise
specified in the related Prospectus Supplement, 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
Securityholders), (ii) an interest rate not lower than and not more than 1% of
the interest rate of the Deleted Loan, (iii) have a Loan-to-Value Ratio at the
time of substitution no higher than that of the Deleted Loan at the time of
substitution, (iv) have a remaining term to maturity not greater than (and not
more than one year less than) that of the Deleted Loan, and (v) comply with all
of the representations and warranties set forth in the related Agreement as of
the date of substitution. The related Agreement may include additional
requirements relating to ARMs or other specific types of Mortgage Loans, or
additional provisions relating to meeting the foregoing requirements on an
aggregate basis where a number of substitutions occur contemporaneously.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Securityholders or the Trustee for a material defect
in a Loan document.
Unless otherwise specified in the related Prospectus Supplement, the
Seller (or other party as described in the related Prospectus Supplement) 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 Seller (or
other party) cannot cure a breach of any such representations and warranties in
all material respects within 60 days after notification by the Master Servicer,
the Depositor or the Trustee of such breach, and if such breach is of a nature
that materially and adversely affects interest of the Securityholders in such
Loan, the Seller is obligated to cure, substitute or repurchase the affected
Mortgage Loan if such Seller is required to do so under the applicable
agreement.
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REPORTS TO SECURITYHOLDERS
The Master Servicer will prepare and will forward or will provide to
the Trustee for forwarding to each Securityholder 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 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 Securities, prior
to the Accrual Termination Date in addition to the information
specified in (i)(B) above, the amount of interest accrued on such
Securities during the related Interest Accrual Period and added to the
Compound Value thereof;
(v) in the case of Floating Interest Securities, the
Floating Rate applicable to the distribution being made;
(vi) if applicable, the number and aggregate principal
balances of Loans (A) delinquent for 31 to 60 days, (B) delinquent for
61 days to 90 days and (C) delinquent 91 days or more, as of the close
of business on the Determination Date to which such distribution
relates;
(vii) if applicable, the book value of any REO Property
acquired on behalf of Securityholders through foreclosure, grant of a
deed in lieu of foreclosure or repossession as of the close of business
on the last Business Day of the calendar month preceding the
Distribution Date to which such distribution relates;
(viii) if applicable, the amount of coverage under any
pool insurance policy as of the close of business on the applicable
Distribution Date;
(ix) if applicable, the amount of coverage under any
special hazard insurance policy as of the close of business on the
applicable Distribution Date;
(x) if applicable, the amount of coverage under any
bankruptcy bond as of the close of business on the applicable
Distribution Date;
(xi) 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;
(xii) 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
Securityholders is less than their required distribution, the amount of
the shortfall;
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(xiii) the amount of any withdrawal from any applicable
Reserve Fund included in amounts actually distributed to
Securityholders 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
(xiv) such other information as specified in the related
Agreement.
With respect to each Series of Certificates or Notes, Securityholders
will be referred to as the "Certificateholders" or the "Noteholders",
respectively.
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 Securityholder of record at any time
during such calendar year a report summarizing the items provided to
Securityholders as specified in the related Agreement to enable Securityholders
to prepare their tax returns including, without limitation, the amount of
original issue discount accrued on the Securities, if applicable. Information in
the Distribution Date and annual reports provided to the Securityholders 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, or
obligations fully guaranteed as to principal and interest by, the United States
of America or any agency or instrumentality thereof, provided that such
obligations are backed by the full faith and credit of the United States of
America; (ii) commercial paper (having original maturities of not more than nine
months) of any corporation incorporated under the laws of the United States or
any state thereof or the District of Columbia which on the date of acquisition
has been rated by each Rating Agency in its highest short-term rating, or such
lower category as will not result in the downgrading or withdrawal of the
ratings then assigned to the Securities by each Rating Agency; (iii)
certificates of deposit, demand or time deposits, federal funds or bankers'
acceptances issued by any bank or trust company incorporated under the laws of
the United States of America or of any state thereof or the District of
Columbia, provided that the short-term commercial paper of such bank or trust
company (or in the case of the principal depository institution in a depository
institution holding company, the long-term unsecured debt obligations of such
holding company) at the date of acquisition thereof has been rated by each
Rating Agency in its highest short-term rating; (iv) money market funds or
mutual funds organized under the Investment Company Act of 1940 rated in the
highest rating category by each Rating Agency; (v) repurchase obligations (the
collateral of which is held by a third party or the Trustee) with respect to any
security described in (i) above, provided that the long-term unsecured
obligations of the party agreeing to repurchase such obligations are at the time
rated by each Rating Agency in one of its two highest long-term rating
categories; and (vi) such other investments which do not adversely affect the
rating on the Securities 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 Securityholders of
such Series.
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Unless 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 will be property of the
Trustee, the Master Servicer or a Servicer and not available for distributions
to Securityholders. See "Servicing of Loans" herein.
EVENT OF DEFAULT AND RIGHTS UPON EVENTS OF DEFAULT
POOLING AND SERVICING AGREEMENT AND SERVICING AGREEMENT. Events of
Default under the Pooling and Servicing Agreement or Servicing Agreement for
each Series of Certificates or Notes, respectively, generally include (i) any
failure by the Master Servicer to remit to the Trustee for distribution to the
Securityholders (or distribution to Holders of the Equity Certificates with
respect to a Series of Notes) 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,
requiring the same to be remedied, to the Master Servicer by the Trustee or the
Depositor with respect to each Series of Certificates or by the Trustee or the
Issuer with respect to each Series of Notes, or to the Master Servicer, the
Depositor and the Trustee with respect to each Series of Certificates or to the
Master Servicer, the Issuer and the Trustee with respect to each Series of Notes
by the related Holders of Securities of such Series evidencing at least 25% of
Voting Rights of the Securities 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 related Pooling and Servicing Agreement or
Servicing Agreement which continues unremedied for 30 days after the giving of
written notice of such failure to the Master Servicer by the Trustee or the
Depositor with respect to each Series of Certificates or by the Trustee or the
Issuer with respect to each Series of Notes, or to the Master Servicer, the
Depositor and the Trustee with respect to each Series of Certificates or to the
Master Servicer, the Issuer and the Trustee with respect to each Series of Notes
by the Holders of Securities of such Series evidencing at least 25% of the
Voting Rights of the Securities 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.
Unless otherwise specified in the related Prospectus Supplement, so
long as an Event of Default remains unremedied under the Pooling and Servicing
Agreement or Servicing Agreement for a Series, the Trustee for such Series or
Holders of Securities of such Series evidencing at least 51% of the aggregate
outstanding principal amount of the Securities for such Series (the first 51%
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 or Servicing Agreement and in and to the Mortgage Loans (other than
its right as a Securityholder (or as Holder of the Equity Certificates with
respect to a Series of Notes) under the Pooling and Servicing Agreement or
Servicing Agreement, as applicable, 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 or 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 related Pooling and Servicing
Agreement or Servicing Agreement. Unless otherwise specified in the related
Prospectus Supplement, in the event that the Trustee would be obligated to
succeed the Master Servicer but is unwilling so to act, it may appoint (or if it
is unable so to act, it shall appoint) or petition a court of competent
jurisdiction for the appointment of, a FNMA- or FHLMC-approved mortgage
servicing institution with a net worth of at least $10,000,000 or such other
amount as specified in the related Prospectus Supplement to act as a successor
to the Master Servicer under the related Pooling and Servicing Agreement or
Servicing Agreement (unless otherwise set forth in the related Pooling and
Servicing Agreement or Servicing Agreement). Pending such appointment, the
Trustee is obligated to act in such capacity.
No Securityholder of a Series, solely by virtue of such Holder's status
as a Securityholder, will have any right under the Pooling and Servicing
Agreement or Servicing Agreement for such Series to institute any proceeding
with respect to the related Pooling and Servicing Agreement or Servicing
Agreement, unless such Holder previously has given to the Trustee for such
Series written notice of default and unless the Holders of Securities evidencing
at least 25% of the aggregate outstanding principal amount of the Securities 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.
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INDENTURE. Unless otherwise provided in the related Prospectus
Supplement for a Series of Notes, an Event of Default under the Indenture
generally will include: (i) a default for five days or more (or other period of
time described in the related Prospectus Supplement) in the payment of any
principal of or interest on any Note or Equity Certificates of such Series; (ii)
failure to perform any other covenant of the Issuer in the Indenture which
continues for a period of 30 days after notice thereof is given in accordance
with the procedures described in the related Prospectus Supplement; (iii) any
representation or warranty made by the Issuer in the Indenture or in any
certificate or other writing delivered pursuant thereto or in connection
therewith with respect to or affecting such Series having been incorrect in a
material respect as of the time made, and such breach is not cured within 30
days after notice thereof is given in accordance with the procedures described
in the related Prospectus Supplement; (iv) certain events of bankruptcy,
insolvency, receivership or liquidation of the Issuer; or (v) any other Event of
Default provided with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, the Trustee or the holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series are Compound
Interest Securities, such portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the holders of a
majority in aggregate outstanding amount of the related Notes.
If following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply payments on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default, unless (a) the holders of 100% of the
then aggregate outstanding amount of the Notes of such Series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the outstanding Notes
of such Series at the date of such sale or (c) the Trustee determines that such
collateral would not be sufficient on an ongoing basis to make all payments on
such Notes as such payments would have become due if such Notes had not been
declared due and payable, and the Trustee obtains the consent of the holders of
66 2/3% of the then aggregate outstanding amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default, the Indenture provides that the Trustee will have a
prior lien on the proceeds of any such liquidation for unpaid fees and expenses.
As a result, upon the occurrence of such an Event of Default, the amount
available for payments to the Noteholders would be less than would otherwise be
the case. However, the Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
In the event the principal of the Notes of a Series is declared due and
payable, as described above, the holders of any such Notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount that is unamortized.
No Noteholder or Holder of an Equity Certificate of a Series, solely by
virtue of such Holder's status as a Noteholder or Holder of an Equity
Certificate, will have any right under an Owner Trust Agreement or Indenture for
such Series to institute any proceeding with respect to such Agreement unless
such holder previously has given to the Trustee for such Series written notice
of default and unless the Holders of Notes or Equity Certificates of any class
evidencing at least 25% of the aggregate Percentage Interests constituting such
class have made written request upon the Trustee to institute such proceeding in
its own name as Trustee thereunder and have offered to the Trustee reasonable
indemnity, and the Trustee for 60 days has neglected or refused to institute any
such proceeding.
[Pursuant to the terms of the Indenture, if an Event of Default occurs
and is continuing, Senior Securityholders may be entitled to exercise certain
rights of the Holders of the Securities, without the consent of
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Subordinate Securityholders, and the Subordinate Securityholders may exercise
such rights only with the prior consent of the Senior Securityholders.]
THE OWNER TRUSTEE
The identity of the commercial bank, national banking association,
banking corporation, savings and loan association or trust company named as the
Owner Trustee for each Series of Notes will be set forth in the related
Prospectus Supplement. The entity serving as Owner Trustee may have normal
banking relationships with the Depositor or the Master Servicer.
THE TRUSTEE
The identity of the commercial bank, national banking association,
banking corporation, savings and loan association or trust company named as the
Trustee for each Series of Securities 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 Securities. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the Pooling and Servicing Agreement or Indenture
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 related Agreement.
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency
of any related Agreement, the Securities or of any Mortgage Asset or related
documents. If no Event of Default (as defined in the related Pooling and
Servicing Agreement, Sale and Servicing Agreement or Indenture) has occurred,
the Trustee is required to perform only those duties specifically required of it
under the related 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 Agreement. However, the Trustee will not be responsible
for the accuracy or content of any such documents furnished by it or the
Securityholders to the Master Servicer under the related 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 Securityholders in an Event of Default. See "Event of Default and Rights
Upon Events 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 the related 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.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, the Master
Servicer and to all Securityholders; provided, that such resignation shall not
be effective until a successor trustee is appointed. If no successor Trustee has
been appointed and has accepted the 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; provided, that such the
resigning Trustee shall not resign and be discharged until such time as the
successor trustee is approved by each Rating Agency. 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 related Pooling and Servicing Agreement or
Indenture, (ii) if the Trustee
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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 related Agreement is located, or (iv) by the Holders of
Securities evidencing at least 51% of the aggregate outstanding principal amount
of the Securities in the Trust Fund upon 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 Securityholders, 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. Unless otherwise
specified in the related Prospectus Supplement, the Certificate Account will be
an Eligible Account, and the funds held therein may be invested, pending
disbursement to Securityholders of the related Series, pursuant to the terms of
the related Pooling and Servicing Agreement or the related Servicing Agreement
and Indenture, in Eligible Investments. Unless otherwise specified in the
related Prospectus Supplement, the Master Servicer or the Trustee 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 itself or 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 Securityholders, to clear and terminate the
Certificate Account and to make other withdrawals as required or permitted by
the related Agreements.
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 AGREEMENTS
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
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.
Unless otherwise specified in the related Prospectus Supplement, the
Pooling and Servicing Agreement for each Series of Certificates 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 662/3% 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 or elections have been made, for the related
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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.
Notwithstanding the foregoing, if a REMIC election or elections have
been made with respect to the related Trust Fund, the Trustee will not be
entitled to consent to any amendment to a Pooling and Servicing Agreement
without having first received an opinion of counsel to the effect that such
amendment or the exercise of any power granted to the Master Servicer, the
Depositor or the Trustee in accordance with such amendment will not result in
the imposition of a tax on the related Trust Fund or any related REMIC or cause
such Trust Fund or any such REMIC to fail to qualify as a REMIC.
Unless otherwise specified in the Prospectus Supplement, the Servicing
Agreement or Indenture for each Series of Notes may be amended by the parties
thereto without the consent of any of the Noteholders covered by such Agreement
(i) to cure any ambiguity, (ii) to correct, modify or supplement any provision
therein which may be defective or inconsistent with any other provision therein
or (iii) to make any other provisions with respect to matters or questions
arising under the Agreement which are not inconsistent with the provisions
thereof, provided that such action will not adversely affect in any material
respect the interests of any Noteholder covered by the Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicing Agreement or Indenture for each Series of Notes may also be amended by
the parties thereto with the consent of the Holders evidencing not less than
662/3% of the aggregate outstanding principal amount of the Notes 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 Agreement or
modifying in any manner the rights of Noteholders of such Series; provided,
however, that no such amendment may (i) reduce the amount of or delay the timing
of, payments received on any Note without the consent of the holder of such
Note, (ii) adversely affect in any material respect the interests of the holders
of any Class of Notes in a manner other than as described in (i), without the
consent of the holders of Notes of such Class evidencing not less than 662/3% of
the aggregate outstanding principal amount of the Notes of each Class of such
Series affected thereby or (iii) reduce the aforesaid percentage of aggregate
outstanding principal amount of Notes 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 Notes
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. If specified in the related Prospectus Supplement, a
provider of credit enhancement may be entitled to certain Voting Rights of the
Securityholders.
REMIC ADMINISTRATOR
With respect to any Multiple Class Series of Certificates as to which a
REMIC election is made, 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 related Agreements for a Series will
terminate upon the distribution to Securityholders of all amounts distributable
to them pursuant to such Agreements 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 or the Depositor (or other party as specified in the
Prospectus Supplement) from the Trustee for such Series of all Mortgage Loans at
that time subject to the related Agreements and all property acquired in respect
of any Mortgage Loan. The exercise of such right will effect early retirement of
the Securities of such Series, but such 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
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Cut-off Date Aggregate Principal Balance. In no event, however, will the trust
created by the related Agreements 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 related Agreements to each Securityholder,
and the final distribution will be made only upon surrender and cancellation of
the Securities at an office or agency specified in the notice of termination.
See "Description of the Securities--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. A deed to secure debt typically has two parties, pursuant to which
the borrower, or grantor, conveys title to the real property to the grantee, or
lender, generally with a power of sale, until such times as the debt is repaid.
The mortgagee's authority under a mortgage or a deed to secure debt and the
trustee's authority under a deed of trust are governed by the law of the state
in which the real property is located, the express provisions of the mortgage,
the deed to secure debt, 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
Securities, 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 cooperative shares and proprietary leases or occupancy
agreements, the priority of which will depend on the terms of the particular
security agreement as well as the order of recordation of the agreement or the
filing of the financing statements related thereto in the appropriate recording
office, or the taking of possession of the cooperative shares; depending on the
law of the state where the cooperative is located. Such a lien or security
interest is not, in general, prior to liens in favor of the cooperative
corporation for unpaid assessments or common charges. Such a lien or security
interest is not prior to the lien for real estate taxes and assessments and
other charges imposed under governmental police powers.
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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 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
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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 or a deed to secure debt 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, 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. 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, a deed of trust, or a
deed to secure debt, 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. 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.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause in a senior
mortgage, the
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junior mortgagee may be required to pay the full amount of the senior mortgages
to the senior mortgagees. Accordingly, with respect to those Mortgage Loans
which are junior mortgage loans, if the lender purchases the property, the
lender's title will be subject to all senior liens and claims and certain
governmental liens. 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 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 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 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.
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Recognition agreements also generally 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 and assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholder.
The terms of the Cooperative Loans do not require either the
tenant-stockholder or the Cooperative to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
also may adversely affect the marketability of the cooperative dwelling unit in
the event of foreclosure.
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 a deed to
secure debt 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 or a deed to secure debt. 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
or a deed to secure debt. 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,
deed to secure debt 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
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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 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.
With respect to mortgage loans secured by collateral in addition to the
related mortgaged properties, realization upon the additional collateral may be
governed by the Uniform Commercial Code in effect under the law of the state
applicable thereto. Some courts have interpreted the Uniform Commercial Code to
prohibit or limit a deficiency award in certain circumstances, including those
in which the disposition of the collateral was not conducted in a commercially
reasonable manner. In some states, the Uniform Commercial Code does not apply to
liens upon additional collateral consisting of certain types of personal
property (including, for example, bank accounts and, to a certain extent,
insurance policies and annuities). Realization upon such additional collateral
will be governed by state laws applicable thereto rather than by the Uniform
Commercial Code, and the availability of deficiency awards under such state laws
may be limited. Whether realization upon any Additional Collateral is governed
by the Uniform Commercial Code or by other state laws, the ability of secured
parties to realize upon the additional collateral may be limited by statutory
prohibitions that limit remedies in respect of the related mortgage loans. Such
prohibitions may affect secured parties either independently or in conjunction
with statutory requirements that secured parties proceed against the related
mortgaged properties first or against both such mortgaged properties and the
additional collateral concurrently. Some state statutes require secured parties
to exhaust the security afforded by the mortgaged properties through foreclosure
before attempting to realize upon the related additional collateral (including
any third-party guarantees). Other state statutes require secured parties to
foreclose upon mortgaged properties and additional collateral concurrently. In
states where statutes limit the rights of secured parties to obtain deficiency
judgments against borrowers or guarantors following foreclosure upon the related
mortgaged properties and where secured parties either are required or elect to
proceed against such mortgaged properties before proceeding against the related
additional collateral, limitations upon the amounts of deficiency judgments may
reduce the amounts that may be realized by the secured parties upon the
disposition of such additional collateral. Further, in certain states where
secured parties may choose whether to proceed against the related mortgaged
properties or additional collateral first or against both concurrently, the
secured parties, following a proceeding against one, may be deemed to have
elected a remedy and may be precluded from exercising remedies with respect to
the other. Consequently, the practical effect of the election requirement, in
those states permitting such election, is that secured parties will usually
proceed against both concurrently or against the mortgaged properties first if
prohibited from proceeding against both by state law.
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 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.
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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. Therefore, with respect to any
Additional Collateral Loan secured by property of the debtor in addition to the
debtor's principal residence, courts with federal bankruptcy jurisdiction may
reduce the amount of each monthly payment, change the rate of interest, alter
the repayment schedule, forgive all or a portion of the debt, reduce the
lender's security interest to the value of the collateral and otherwise subject
such mortgage loan to the cramdown provisions of Chapter 13.
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 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. With respect to mortgage loans secured by collateral in
addition to the related mortgaged properties, such tax liens may in certain
circumstances provide priority over the lien on such additional collateral.
Certain of the Mortgage Loans may be 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
(such Mortgage Loans, "High Cost Loans"), if such Mortgage Loans were originated
on or after October 1, 1995, are not mortgaged loans made to finance the
purchase of the mortgaged property and have interest rates or origination costs
in excess of certain prescribed levels. Purchasers or assignees of any High Cost
Loan could be liable for all claims and subject to all defenses arising under
such provisions that the borrower could assert against the originator thereof.
Remedies available to the borrower include monetary penalties, as well as
rescission rights if the appropriate disclosures were not given as required. See
"Loan Underwriting Procedures and Standards--Representations and Warranties."
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 Securities. 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.
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JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds
of trust, which are junior to senior mortgages or deeds of trust which are not
part of the Trust Fund. The rights of the Securityholders as the holders of a
junior deed of trust or a junior mortgage are subordinate in lien priority and
in payment priority to those of the holder of the senior mortgage or deed of
trust, including the prior rights of the senior mortgagee or beneficiary to
receive and apply hazard insurance and condemnation proceeds and, upon default
of the mortgagor, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage or the sale
pursuant to the deed of trust, the junior mortgagee's or junior beneficiary's
lien will be extinguished unless the junior lienholder satisfies the defaulted
senior loan or asserts its subordinate interest in a property in foreclosure
proceedings. See "--Foreclosure on Mortgages" herein.
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a senior mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Unless the Prospectus Supplement indicates otherwise, the Loans
generally contain due-on-sale clauses. These clauses permit the lender to
accelerate the maturity of the loan if the borrower sells, transfers or conveys
the property. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases the enforceability
of these clauses has been limited or denied. However, the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn-St Germain Act"), preempts state
constitutional, statutory and case law that prohibit the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. 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.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St Germain Act may not exercise 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 mortgage
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 Mortgage Loans and the number of Mortgage Loans which may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower from
the legal effect of its 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 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 the lender to foreclose if the default under the mortgage
instrument is not monetary, such as the borrower failing to adequately maintain
the property or the borrower executing a second mortgage or deed of trust
affecting the property. 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 deeds of trust or
mortgages receive notices in addition to the statutorily prescribed minimum. For
the most part, these cases have
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upheld the notice provisions as being reasonable or have found that the sale by
a trustee under a deed of trust, or under a mortgage having a power of sale,
does not involve sufficient state action to afford constitutional protections to
the borrower.
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 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.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an
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existing junior lender is harmed or the mortgagor is additionally burdened.
Third, if the mortgagor defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior lenders can
impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. Moreover, the bankruptcy of a
junior lender may operate to stay foreclosure or similar proceeds by the senior
lender.
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 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.
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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 or 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.
With respect to a Series of Securities 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 Securityholders would be against the Seller
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
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interest in the Manufactured Home in the state of relocation. In states which do
not require a certificate of title for a 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 related Pooling and Servicing Agreement or 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 Securityholders 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.
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
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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 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.
LOUISIANA LAW. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently
affixed to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the lender obtained an appraisal of the manufactured home prior
to the sale and the property was sold for at least two-thirds of its appraised
value.
FORMALDEHYDE LITIGATION. A number of lawsuits are pending in the United
States alleging personal injury from exposure to the chemical formaldehyde,
which is present in many building materials, including such components of
manufactured housing as plywood flooring and wall paneling. Some of these
lawsuits are pending against manufacturers of manufactured housing, suppliers of
component parts, and related persons in the distribution process. The Depositor
is aware of a limited number of cases in which plaintiffs have won judgments in
these lawsuits.
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any Loan secured by a Manufactured Home with respect to
which a formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Loan and may be unable
to collect amounts still
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due under the Loan. In the event an obligor is successful in asserting such a
claim, the related Securityholders could suffer a loss if (i) the related Seller
fails or cannot be required to repurchase the affected Loan for a breach of
representation and warranty and (ii) the Master Servicer or the Trustee were
unsuccessful in asserting any claim of contribution or subrogation on behalf of
the Securityholders against the manufacturer or other persons who were directly
liable to the plaintiff for the damages. Typical products liability insurance
policies held by manufacturers and component suppliers of manufactured homes may
not cover liabilities arising from formaldehyde in manufactured housing, with
the result that recoveries from such manufacturers, suppliers or other persons
may be limited to their corporate assets without the benefit of insurance.
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 Securities. 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.
FORFEITURES IN DRUG AND RICO PROCEEDINGS. Federal law provides that
property owned by persons convicted of drug-related crimes or of criminal
violations of the Racketeer Influenced and Corrupt Organizations ("RICO")
statute can be seized by the government if the property was used in, or
purchased with the proceeds of, such crimes. Under procedures contained in the
Comprehensive Crime Control Act of 1984 (the "Crime Control Act"), the
government may seize the property even before conviction. The government must
publish notice of the forfeiture proceeding and may give notice to all parties
"known to have an alleged interest in the property," including the holders of
mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before the
commission of the crime upon which the forfeiture is based, or (ii) the lender
was, at the time of the execution of the mortgage, "reasonably without cause to
believe" that the property was used in, or purchased with the proceeds of,
illegal drug or RICO activities.
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 and Notes offered hereunder where Thacher Proffitt & Wood,
Brown & Wood LLP or Stroock & Stroock & Lavan LLP is identified in the
applicable Prospectus Supplement as counsel to the Depositor (hereinafter
"Counsel to the Depositor"). This discussion is directed solely to
Securityholders that hold the Securities 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 and preparers of tax returns (including those filed by
any REMIC or other issuer) should be aware that under applicable Treasury
regulations a provider of advice on specific issues of law is not considered an
income tax return preparer unless the advice (i) is given with respect to events
that have occurred at the time the advice is rendered and is not given with
respect to the consequences of contemplated actions and (ii) is directly
relevant to the determination of an entry on a tax return.
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Accordingly, 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 Securities. See "State and Other Tax Consequences."
Securityholders are advised to consult their own tax advisors concerning the
federal, 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 (the "REMIC Certificates") representing interests in a Trust Fund,
or a portion thereof, that the Trustee will 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) notes (the "Notes") representing
indebtedness of the Issuer for federal income tax purposes. The Prospectus
Supplement for each Series of Securities will indicate which of the foregoing
treatments will apply to such Series and, if a REMIC election (or elections)
will be made with respect to a Series of Certificates, will identify all
"regular interests" and "residual interests" in the REMIC.
REMICS
As to each Series of Certificates, unless otherwise disclosed in the
related Prospectus Supplement, the Trustee will covenant to elect to have
treated the Trust Fund, or a portion thereof, as one or more REMICs. The
Prospectus Supplement for each Series of Certificates will identify all
Certificates representing "regular interests" and the "residual interest" in
each such REMIC. If a REMIC election or elections will not be made for a Trust
Fund, the federal income tax consequences of the purchase, ownership and
disposition of the related Certificates will be set forth in the related
Prospectus Supplement. 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.
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 and 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 provide relief in the event of an
inadvertent termination of REMIC status, no regulations have been issued
implementing this provision. 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.
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CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES
In general, the REMIC Certificates will be "real estate assets" within
the meaning of Section 856(c)(4)(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 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)(4)(A) of
the Code. 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. In addition, the REMIC
Regular Certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code if transferred to a REMIC on such REMICs start-up day in
exchange for regular or residual interests in such REMIC.
The assets of the REMIC will include, in addition to Loans, payments on
Loans (including temporary investments of such proceeds) 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 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 Loans for purposes
of the foregoing sections. In addition, in some instances Loans (including
Additional Collateral Loans) may not be treated entirely as assets described in
the foregoing sections. If the assets of a REMIC include Additional Collateral
Loans, the non-real property collateral, while itself not an asset of the REMIC,
could cause the Loans not to qualify for one or more of such characterizations.
If so, the related Prospectus Supplement will describe the Loans (including
Additional Collateral Loans) that may not be so treated. The REMIC Regulations
do provide, however, that payments on Loans held pending distribution are
considered part of the Loans for purposes of Section 856(c)(4)(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 "real estate assets" within the meaning of Section 856(c)(4)(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 "constant yield" 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 reasonable prepayment assumption be used with
respect to Loans held by, or Loans underlying Mortgage Assets 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 of REMIC Regular Certificates 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 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 at maturity 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" is interest that is unconditionally
payable at least annually (during the entire term of the instrument) at a single
fixed rate, at a "qualified floating rate," an "objective 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" 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 IRS.
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 provided 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.
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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 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 Loans being prepaid at a rate equal to
the Prepayment Assumption, and in the case of Mortgage Assets other than Loans,
that distributions will be made with respect to each Mortgage Asset in
accordance with the prepayment assumption, if any, described in the
participation agreement or other organizational document under which such
Mortgage Asset was issued, 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 Loans being prepaid at a rate equal to the Prepayment
Assumption, and in the case of Mortgage Assets other than Loans, that
distributions will be made with respect to each Mortgage Asset in accordance
with the participation agreement or other organizational document under which
such Mortgage Asset was issued. 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
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on any given day equals (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 plus (ii) the daily portions of
original issue discount for all days during such accrual period prior to such
day minus (iii) any principal payments made during such accrual period prior to
such day with respect to such certificate.
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. Similarly, a Certificateholder that made this
election for a Certificate that is 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 may not be revoked without the consent
of the IRS.
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 may 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 should apply. The Committee Report
indicates that in each accrual period market discount on REMIC Regular
Certificates accrues, 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.
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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 a REMIC Regular Certificate purchased with market discount.
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 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. By
analogy to recently finalized bond premium regulations, any allocable premium in
excess of the interest income may be deductible to the extent of prior accruals
of interest. The OID Regulations also permit Certificateholders to elect to
include all interest, discount and premium in income based on a constant yield
method, further treating such 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 presumably 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 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 Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the 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.
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TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
GENERAL
Although a REMIC is a separate entity for federal income tax purposes,
a REMIC generally is not subject to entity-level taxation, except with regard to
prohibited transactions and certain other transactions. See "--Prohibited
Transactions and Other Possible REMIC Taxes" below. Rather, the taxable income
or net loss of a REMIC is generally taken into account by the Holder of the
REMIC Residual Certificates. Accordingly, 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 income tax purposes as
direct ownership interests in the Loans or as debt instruments issued by the
REMIC.
A holder 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 activity 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 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"
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. Such disparity between income and distributions may not be offset by
corresponding losses or
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reductions of income attributable to the REMIC Residual Certificateholder until
subsequent tax years and, then, may not be completely offset due to changes in
the Code, tax rates or character of the income or loss.
TAXABLE INCOME OF THE REMIC
The taxable income of the REMIC will equal the income from the 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 amortization of 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
Loans, bad debt losses with respect to the 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). 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 Loans or other property will equal the fair market value of such interests
in the 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 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 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 Loans with market
discount that it holds.
A 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 receipt 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 each REMIC will elect under Section 171 of
the Code to amortize any premium on the Loans. Premium on any 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 Loan originated on or before September 27, 1985. Instead,
premium on such a 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 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
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
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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 taxable
income of the REMIC. However, such bases 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."
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EXCESS INCLUSIONS
Any "excess inclusions" with respect to a REMIC Residual Certificate
will 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.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of the taxpayer is based on the taxpayer's regular
taxable income computed without regard to the rule that taxable income cannot be
less than the amount of excess inclusions, (ii) the alternative minimum taxable
of a taxpayer for a taxable year cannot be less than the amount of excess
inclusions for that year, and (iii) the amount of any alternative minimum tax
net operating loss is computed without regard to any excess inclusions.
Under Treasury regulations yet to be issued, 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. A similar rule will apply with respect
to regulated investment companies, common trust funds and certain cooperatives.
NONECONOMIC REMIC RESIDUAL CERTIFICATES
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates 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
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inclusions, and (2) the transferor reasonably expects that for each anticipated
excess inclusion 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 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 24, 1996, the IRS released final 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, any REMIC Residual Certificate acquired after January 4, 1995 will
not be treated as a security and therefore generally may not be marked to
market.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS
Fees and expenses of a REMIC generally will be allocated to the holders
of the related 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. For taxable years
beginning after December 31, 1997, in the case of a partnership that has 100 or
more partners and elects to be treated as an "electing large partnership," 70
percent of such partnership's miscellaneous itemized deductions will be
disallowed, although the remaining deductions will generally be allowed at the
partnership level and will not be subject to the 2 percent floor that would
otherwise be applicable to individual partners. 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
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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 five 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.
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.
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
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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 Loan, the receipt of income from a source other than a 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 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.
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
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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. For taxable years beginning after December 31,
1997, notwithstanding the preceding two sentences, in the case of a REMIC
Residual Certificate held by an "electing large partnership," all interests in
such partnership shall be treated as held by disqualified organizations (without
regard to whether the record holders of the partnership furnish statements
described in the preceding sentence) and the amount that would be subject to tax
under the second preceding sentence is excluded from the gross income of the
partnership (in lieu of a deduction in the amount of such tax generally allowed
to pass-through entities).
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 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.
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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.
The Trustee, as the tax matters person or as agent for the tax matters
person, subject to certain notice requirements and various restrictions and
limitations, generally will 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 the tax matters person
or as agent for the 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. Any
person that holds a REMIC Residual Certificate as a nominee for another person
may be required to furnish to the related 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 certain trusts and individual holders of
REMIC Regular Interests and the IRS; holders of REMIC Regular Certificates that
are corporations, trusts described in Sections 664(c) and 4947(a)(1) of the
Code, 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 among other things, 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 REMIC may 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. Treasury regulations (the "Final Withholding Regulations"), which
are generally effective with respect to payments made after December 31, 1999,
consolidate and modify the current certification requirements and means by which
a holder may claim exemption from United States federal income tax withholding
and provide certain presumptions regarding the status of holders when payments
to the holders cannot
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be reliably associated with appropriate documentation provided to the payor. All
holders should consult their tax advisors regarding the application of the Final
Withholding Regulations. 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). The Final Withholding Regulations
consolidate and modify the current certification requirements and means by which
a non-United States person may claim exemption from United States federal income
tax withholding. All holders that are non-United States persons should consult
their tax advisors regarding the application of the Final Withholding
Regulations, which are generally effective with respect to payments made after
December 31, 1999. For these purposes, "United States person" means a citizen or
resident of the United States, a corporation or partnership or entity treated as
a partnership or corporation for United States Federal income tax purposes
created or organized in, or under the laws of, the United States, any state
thereof or the District of Columbia (except, in the case of a partnership, to
the extent provided in regulations), an estate whose income is subject to United
States federal income tax regardless of its source, or a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. To the extent
prescribed in regulations by the Secretary of the Treasury, which regulations
have not yet been issued, a trust which was in existence on August 20, 1996
(other than a trust treated as owned by the grantor under subpart E of part I of
subchapter J of chapter 1 of the Code), and which was treated as a United States
person on August 19, 1996, may elect to continue to be treated as a United
States person notwithstanding the previous sentence. 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 related 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.
NOTES
On or prior to the date of the related Prospectus Supplement with
respect to the proposed issuance of each Series of Notes, Counsel to the
Depositor will deliver its opinion to the effect that, assuming compliance with
all provisions of the Indenture, Owner Trust Agreement and certain related
documents and upon issuance of the Notes, for federal income tax purposes (i)
the Notes will be treated as indebtedness and (ii) the Issuer, as created
pursuant to the terms and conditions of the Owner Trust Agreement, will not be
characterized as an association (or publicly traded partnership) taxable as a
corporation or as a taxable mortgage pool.
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STATUS AS REAL PROPERTY LOANS
Notes held by a domestic building and loan association will NOT
constitute "loans . . . secured by an interest in real property" within the
meaning of Code section 7701(a)(19)(C)(v); and (ii) Notes held by a real estate
investment trust will NOT constitute "real estate assets" within the meaning of
Code section 856(c)(4)(A) and interest on Notes will NOT be considered "interest
on obligations secured by mortgages on real property" within the meaning of Code
section 856(c)(3)(B).
TAXATION OF NOTEHOLDERS
Notes generally will be subject to the same rules of taxation as REMIC
Regular Certificates issued by a REMIC, as described above, except that (i)
income reportable on the Notes is not required to be reported under the accrual
method unless the holder otherwise uses the accrual method and (ii) the special
rule treating a portion of the gain on sale or exchange of a REMIC Regular
Certificate as ordinary income is inapplicable to the Notes. See "--REMICs
- --Taxation of Owners of REMIC Regular Certificates" and "-- Sales of REMIC
Certificates."
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 Securities 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
Securities offered hereunder.
ERISA CONSIDERATIONS
ERISA imposes certain fiduciary and prohibited transaction restrictions
on employee pension and welfare benefit plans subject to ERISA ("ERISA Plans").
Section 4975 of the Code imposes similar prohibited transaction restrictions on
tax-qualified retirement plans described in Section 401(a) of the Code
("Qualified Retirement Plans") and on Individual Retirement Accounts ("IRAs")
described in Section 408 of the Code (collectively, "Tax-Favored Plans";
Tax-Favored Plans and ERISA Plans, collectively, "Plans").
Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA), and, if no election has been made under Section
410(d) of the Code, church plans (as defined in Section 3(33) of ERISA), are not
subject to the ERISA requirements discussed herein. Accordingly, assets of such
plans may be invested in Securities without regard to the ERISA considerations
described below, subject to the provisions of applicable federal and state law.
Any such plan that is a Qualified Retirement Plan and exempt from taxation under
Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those
of investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving "Plan Assets", Plans and persons ("parties in interest" under Section
3(14) of ERISA or "disqualified persons" under Section 4975(e)(2) of the Code;
collectively, "Parties In Interest") who have certain specified relationships to
the Plans, unless a statutory, regulatory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to a penalty, or an excise tax, imposed pursuant to
Section 502(i) of ERISA or Section 4975 of the Code, unless a statutory,
regulatory or administrative exemption is available.
PLAN ASSET REGULATIONS. Certain transactions involving a Trust Fund
might be deemed to constitute prohibited transactions under ERISA and the Code
with respect to a Plan that purchases the Securities, if the underlying Mortgage
Assets and other assets included in the Trust Fund are deemed to be assets of
the Plan. The U.S.
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Department of Labor (the "DOL") has promulgated regulations at 29 C.F.R.
ss.2510.3-101 (the "Plan Asset Regulations") defining the term "Plan Assets" for
purposes of applying the general fiduciary responsibility provisions of ERISA
and the prohibited transaction provisions of ERISA and the Code. Under the Plan
Asset Regulations, generally, when a Plan acquires an "equity interest" in
another entity (such as the Trust Fund), the underlying assets of that entity
may be considered to be Plan Assets unless certain exceptions apply. In addition
to several exceptions not applicable to an entity like the Trust Fund, a Plan's
Assets will not include an undivided interest in each asset of an entity in
which such Plan makes an equity investment if Benefit Plan Investors (I.E.,
Plans and certain employee benefit plans not subject to ERISA) do not own 25% or
more in value of any class of equity securities issued by the entity. Neither
Plans nor persons investing Plan Assets should acquire or hold Securities in
reliance upon the availability of any exception under the Plan Asset
Regulations. The Plan Asset Regulations provide that the term "equity interest"
means any interest in an entity other than an instrument which is treated as
indebtedness under applicable local law and which has no "substantial equity
features." Under the Plan Asset Regulations, Plan Assets will be deemed to
include an interest in the instrument evidencing the equity interest of a Plan
(such as a Certificate or a Note with "substantial equity features"), and,
because of the factual nature of certain of the rules set forth in the Plan
Asset Regulations, Plan Assets may be deemed to include an interest in the
underlying assets of the entity in which a Plan acquires an interest (such as
the Trust Fund). Without regard to whether the Notes are characterized as equity
interests, the purchase, sale and holding of Notes by or on behalf of a Plan
could be considered to give rise to a prohibited transaction if the Issuer, the
applicable Trustee or any of their respective affiliates is or becomes a Party
in Interest with respect to such Plan.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Mortgage Assets and other assets included in a Trust Fund
constitute Plan Assets, then any party exercising management or discretionary
control regarding those assets, such as the Master Servicer, any Servicer, any
sub-servicer, the Trustee, the obligor under any credit enhancement mechanism,
or certain affiliates thereof may be deemed to be a Plan "fiduciary" and thus
subject to the fiduciary responsibility provisions and prohibited transaction
provisions of ERISA and the Code with respect to the investing Plan. In
addition, if the Mortgage Assets and other assets included in a Trust Fund
constitute Plan Assets, the purchase of Certificates by a Plan, as well as the
operation of the Trust Fund, may constitute or involve a prohibited transaction
under ERISA or the Code.
The Plan Asset Regulations provide that where a Plan acquires a
"guaranteed governmental mortgage pool certificate", the Plan's assets include
such certificate but do not solely by reason of the Plan's holdings of such
certificate include any of the mortgages underlying such certificate. The Plan
Asset Regulations include in the definition of a "guaranteed governmental
mortgage pool certificate" FHLMC Certificates, GNMA Certificates and FNMA
Certificates. Accordingly, even if such Agency Securities included in a Trust
Fund were deemed to be assets of Plan investors, the mortgages underlying such
Agency Securities would not be treated as assets of such Plans. Private Mortgage
Backed Securities are not "guaranteed governmental mortgage pool certificates"
within the meaning of the Plan Asset Regulations. Potential Plan investors
should consult their counsel and review the ERISA discussion herein and in the
related Prospectus Supplement before purchasing any such Certificates.
PROHIBITED TRANSACTION EXEMPTION. The DOL has granted to Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") an individual prohibited
transaction exemption, as amended (Prohibited Transaction Exemption 90-83, the
"Exemption"), which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Section 4975(a) and (b) of the Code,
certain transactions, among others, relating to the servicing and operation of
mortgage pools and the purchase, sale, holding and disposition of mortgage
pass-through securities underwritten by an Underwriter (as hereinafter defined),
provided that certain conditions set forth in the Exemption are satisfied. For
purposes of this Section "ERISA Considerations," the term "Underwriter" includes
(a) DLJ, (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with DLJ and
(c) any member of the underwriting syndicate or selling group of which a person
described in (a) or (b) is a manager or co-manager with respect to a class of
Securities. "Securities" potentially covered by the Exemptions would include
Certificates, Notes that are treated as "equity interests" under the Plan Asset
Regulations, and interests issued by a Trust Fund that elects to be treated as a
REMIC or FASIT.
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The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief thereunder. First, the acquisition of Securities
by a Plan or with Plan Assets must be on terms that are at least as favorable to
the Plan as they would be in an arm's-length transaction with an unrelated
party. Second, the Exemption only applies to Securities evidencing rights and
interests that are not subordinated to the rights and interests evidenced by the
other Securities of the same Trust Fund. Third, the Securities at the time of
acquisition by or with Plan Assets must be rated in one of the three highest
generic rating categories by Standard and Poor's, a Division of the McGraw-Hill
Companies, Inc., Moody's Investors Service, Inc., Duff & Phelps, Inc. or Fitch
IBCA, Inc. (collectively, the "Exemption Rating Agencies"). Fourth, the Trustee
cannot be an affiliate of any other member of the "Restricted Group" which
consists of any Underwriter, the Master Servicer, any Servicer, any subservicer,
the Trustee and any obligor with respect to assets of a Trust Fund constituting
more than 5% of the aggregate unamortized principal balance of the assets in the
Trust Fund as of the date of initial issuance of the Securities. Fifth, the sum
of all payments made to and retained by the Underwriters must represent not more
than reasonable compensation for underwriting the Securities; the sum of all
payments made to and retained by the Depositor pursuant to the assignment of the
assets to the related Trust Fund must represent not more than the fair market
value of such obligations, and the sum of all payments made to and retained by
the Master Servicer, any Servicer and any subservicer must represent not more
than reasonable compensation for such person's services under the related
Agreement and reimbursement of such person's reasonable expenses in connection
therewith. Sixth, the Exemption requires that the investing Plan be an
accredited investor as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
The Exemption also requires that a Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of a type that
have been included in other investment pools; (ii) securities in such other
investment pools must have been rated in one of the three highest categories of
one of the Exemption Rating Agencies for at least one year prior to the Plan's
acquisition of Securities; and (iii) securities 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 Securities.
A fiduciary of any Plan or other investor of Plan Assets contemplating
purchasing a Certificate or Note must make its own determination that the
general conditions set forth above will be satisfied with respect to such
Certificate or Note.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407 of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code) in
connection with the direct or indirect sale, exchange, transfer, holding,
acquisition or disposition in the secondary market of Securities by Plans or
with Plan Assets. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E) and 406(a)(2) of ERISA in connection with the direct or
indirect sale, exchange, transfer, holding, acquisition or disposition of a
Certificate or Note by a Plan or with Plan Assets of an "Excluded Plan" (as
hereinafter defined) by any person who has discretionary authority or renders
investment advice with respect to Plan Assets of such Excluded Plan. For
purposes of the Securities, an Excluded Plan is a Plan sponsored by any member
of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code in connection with (i) the direct or indirect sale, exchange or
transfer of Securities in the initial issuance of Securities between the Company
or an Underwriter and a Plan when the person who has discretionary authority or
renders investment advice with respect to the investment of the relevant Plan
Assets in the Securities is (a) a mortgagor with respect to 5% or less of the
fair market value of the assets of the related Trust Fund or (b) an affiliate of
such a person, (ii) the direct or indirect acquisition or disposition of
Securities in the secondary market by a Plan or an entity investing Plan Assets
and (iii) the holding of Securities by a Plan or an entity investing Plan
Assets.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by
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Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation of
the Trust Funds. The Depositor expects that the specific conditions of the
Exemption required for this purpose will be satisfied with respect to the
Securities so that the Exemption would provide an exemption from the
restrictions imposed by Sections 406(a) and (b) and 407(a) of ERISA (as well as
the excise taxes imposed by Sections 4975(a) and (b) of the Code by reason of
Section 4975(c) of the Code) for transactions in connection with the servicing,
management and operation of the Trust Funds, provided that the general
conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions
imposed by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code if such restrictions would otherwise apply merely because a person is
deemed to be a Party In Interest with respect to an investing Plan (or the
investing entity holding Plan Assets) by virtue of providing services to the
Plan (or by virtue of having certain specified relationships to such a person)
solely as a result of the ownership of Securities by a Plan or the investment of
Plan Assets in Securities.
On July 21, 1997, the DOL amended the Exemption to extend exemptive
relief to certain mortgage-backed and asset-backed securities transactions using
Funding Accounts for trusts issuing pass-through certificates. With respect to
the Securities, the amendment generally allows Mortgage Loans supporting
payments to Securityholders, and having a value equal to no more than 25% of the
total principal amount of the Securities being offered by a Trust Fund, to be
transferred to such Trust Fund within a period no longer than 90 days or three
months following the Closing Date ("Pre-Funding Period") instead of requiring
that all such Mortgage Loans be either identified or transferred on or before
the Closing Date. In general, the relief applies to the purchase, sale and
holding of Securities which otherwise qualify for the Exemption, provided that
the following general conditions are met:
(1) the ratio of the amount allocated to the Funding Account
to the total principal amount of the Securities being offered
("Pre-Funding Limit") must be less than or equal to 25%;
(2) all additional Mortgage Loans transferred to the related
Trust Fund after the Closing Date ("Subsequent Mortgage Loans") must
meet the same terms and conditions for eligibility as the original
Mortgage Loans used to create the Trust Fund, which terms and
conditions have been approved by one of the Exemption Rating Agencies;
(3) the transfer of such Subsequent Mortgage Loans to the
Trust Fund during the Pre-Funding Period must not result in the
Securities to be covered by the Exemption receiving a lower credit
rating from an Exemption Rating Agency upon termination of the
Pre-Funding Period than the rating that was obtained at the time of the
initial issuance of the Securities by the Trust Fund;
(4) solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate (the "Average Interest Rate")
for all of the Mortgage Loans and Subsequent Mortgage Loans in the
Trust Fund at the end of the Pre-Funding Period must not be more than
100 basis points lower than the Average Interest Rate for the Mortgage
Loans which were transferred to the Trust Fund on the Closing Date;
(5) in order to ensure that the characteristics of the
Subsequent Mortgage Loans are substantially similar to those of the
Original Mortgage Loans:
(i) the characteristics of the Subsequent Mortgage
Loans must be monitored by an insurer or other credit support provider
which is independent of the Depositor; or
(ii) an independent accountant retained by the
Depositor must provide the Depositor with a letter (with copies
provided to the Exemption Rating Agency rating the Securities, the
Underwriter and the Trustee) stating whether or not the characteristics
of the Subsequent Mortgage Loans conform to the characteristics
described in the Prospectus or Prospectus Supplement and/or Agreement.
In preparing such letter, the independent accountant must use the same
type of procedures as were applicable to the Mortgage Loans which were
transferred to the Trust Fund as of the Closing Date;
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(6) the Pre-Funding Period must end no later than three months
or 90 days after the Closing Date or earlier in certain circumstances
if the Funding Accounts falls below the minimum level specified in the
Agreement or an event of default occurs;
(7) amounts transferred to any Funding Accounts and/or
capitalized interest accounts used in connection with the pre-funding
may be invested only in certain permitted investments:
(8) the Prospectus or Prospectus Supplement must describe the
duration of the Pre-Funding Period; and
(9) the Trustee (or any agent with which the Trustee contracts
to provide trust services) must be a substantial financial institution
or trust company experienced in trust activities and familiar with its
duties, responsibilities and liabilities as a fiduciary under ERISA.
The Trustee, as legal owner of the Trust Fund, must enforce all the
rights created in favor of Securityholders of the Trust Fund, including
employee benefit plans subject to ERISA.
Before purchasing a Certificate or Note, a fiduciary of a Plan or other
investor of Plan Assets should itself confirm (a) that the Securities constitute
"certificates" for purposes of the Exemption and (b) that the specific and
general conditions set forth in the Exemption and the other requirements 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 fiduciary or other Plan investor should consider its general
fiduciary obligations under ERISA in determining whether to purchase any
Securities by or with Plan Assets.
Any fiduciary or other Plan investor which proposes to purchase
Securities on behalf of or with Plan Assets should consult with its counsel with
respect to the potential applicability of ERISA and the Code to such investment
and the availability of the Exemption or any other prohibited transaction
exemption in connection therewith. In particular, in connection with a
contemplated purchase of Securities representing a beneficial ownership interest
in a pool of single-family residential first mortgage loans, such fiduciary or
other Plan investor should consider the availability of the Exemption or
Prohibited Transaction Class Exemption ("PTCE") 83-1 ("PTCE 83-1") for certain
transactions involving mortgage pool investment trusts. However, PTCE 83-1 does
not provide exemptive relief with respect to Securities evidencing interests in
Trust Funds which include Cooperative Loans and may not provide exemptive relief
for Securities having certain cash-flow characteristics that may be issued by a
Trust Fund. In addition, such fiduciary or other Plan investor should consider
the availability of PTCE 96-23, regarding transactions effected by "in-house
asset managers", PTCE 95-60, regarding investments by insurance company general
accounts, PTCE 90-1, regarding investments by insurance company pooled separate
accounts, PTCE 91-38, regarding investments by bank collective investment funds,
and PTCE 84-14, regarding transactions effected by "qualified professional asset
managers." The Prospectus Supplement with respect to a Series of Securities may
contain additional information regarding the application of the Exemption, PTCE
83-1, or any other exemption, with respect to the Securities offered thereby.
There can be no assurance that any of these exemptions will apply with respect
to any particular Plan's or other Plan investor's investment in the Securities
or, even if an exemption were deemed to apply, that any exemption would apply to
all prohibited transactions that may occur in connection with such investment.
In addition to any exemption that may be available under PTCE 95-60 for
the purchase and holding of the Securities by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by the Code, for transactions involving an insurance company
general account. Pursuant to Section 401(c) of ERISA, the DOL published proposed
regulations ("Proposed 401(c) Regulations") on December 22, 1997, however the
required final regulations have not been issued as of the date hereof. The
Proposed 401(c) Regulations provide guidance for the purpose of determining, in
cases where insurance policies supported by an insurer's general account are
issued to or for the benefit of a Plan on or before December 31, 1998, which
general account assets constitute Plan Assets. Section 401(c) of ERISA generally
provides that, until the date which is 18 months after the Proposed 401(c)
Regulations become final, no person shall be subject to liability under Part 4
of Title I of ERISA and Section 4975 of the Code on the basis of a claim that
the assets of an insurance company general
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account constitute Plan Assets, unless (i) as otherwise provided by the
Secretary of Labor in the Proposed 401(c) Regulations to prevent avoidance of
the regulations or (ii) an action is brought by the Secretary of Labor for
certain breaches of fiduciary duty which would also constitute a violation of
federal or state criminal law. Any assets of an insurance company general
account which support insurance policies issued to a Plan after December 31,
1998 or issued to Plans on or before December 31, 1998 for which the insurance
company does not comply with the Proposed 401(c) Regulations may be treated as
Plan Assets. In addition, because Section 401(c) does not relate to insurance
company separate accounts, separate account assets are still treated as Plan
Assets of any Plan invested in such separate account. Insurance companies
contemplating the investment of general account assets in the Securities should
consult with their legal counsel with respect to the applicability of Section
401(c) of ERISA, including the general account's ability to continue to hold the
Securities after the date which is 18 months after the date the Proposed 401(c)
Regulations become final.
REPRESENTATIONS FROM PLANS INVESTING IN CERTAIN SECURITIES. Because the
exemptive relief afforded by the Exemption (or any similar exemption that might
be available) will not apply to the purchase, sale or holding of certain
Securities, such as Subordinate Securities or any Securities which are not rated
in one of the three highest generic rating categories by the Exemption Rating
Agencies, transfers of any Securities which would cause the assets of the Trust
Fund to be deemed Plan Assets the purchase, holding or transfer of which would
not be covered by the Exemption or PTCE 83-1, to a Plan, to a trustee or other
person acting on behalf of any Plan, or to any other person investing Plan
Assets to effect such acquisition will not be registered by the Trustee unless
the transferee provides the Depositor, the Trustee and the Master Servicer with
an opinion of counsel satisfactory to the Depositor, the Trustee and the Master
Servicer, which opinion will not be at the expense of the Depositor, the Trustee
or the Master Servicer, that the purchase of such Securities by or on behalf of
such Plan is permissible under applicable law, will not constitute or result in
any non-exempt prohibited transaction under ERISA or Section 4975 of the Code
and will not subject the Depositor, the Trustee or the Master Servicer to any
obligation in addition to those undertaken in the related Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Securities by or
on behalf of such Plan is permissible under applicable law, will not constitute
or result in any non-exempt prohibited transaction under ERISA or Section 4975
of the Code and will not subject the Depositor, the Trustee or the Master
Servicer to any obligation in addition to those undertaken in the Agreement and
that the following statements are correct: (i) the transferee is an insurance
company; (ii) the source of funds used to purchase such Securities is an
"insurance company general account" (as such term is defined in PTCE 95-60);
(iii) the conditions set forth in Sections I and III of PTCE 95-60 have been
satisfied; and (iv) 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 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 the
acquisition of such Securities.
An opinion of counsel or certification will not be required with
respect to the purchase of Securities registered through DTC. Any purchaser of a
Security registered through DTC will be deemed to have represented by such
purchase that either (a) such purchaser is not a Plan and is not purchasing such
Securities on behalf of, or with Plan Assets of, any Plan or (b) the purchase of
any such Security by or on behalf of, or with Plan Assets of, any Plan is
permissible under applicable law, will not result in any non-exempt prohibited
transaction under ERISA or Section 4975 of the Code and will not subject the
Depositor, the Trustee or the Master Servicer to any obligation in addition to
those undertaken in the related Agreement.
TAX EXEMPT INVESTORS. A Plan that is exempt from federal income
taxation pursuant to Section 501 of the Code (a "Tax Exempt Investor")
nonetheless will be subject to federal income taxation to the extent that its
income is "unrelated business taxable income" ("UBTI") within the meaning of
Section 512 of the Code. All "excess inclusions" of a REMIC allocated to a REMIC
Residual Certificate held by a Tax-Exempt Investor will be considered UBTI and
thus will be subject to federal income tax. See "Certain Federal Income Tax
Consequences--Taxation of Owners of REMIC Residual Certificates--Excess
Inclusions."
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CONSULTATION WITH COUNSEL. Any fiduciary of a Plan or other Plan
investor that proposes to acquire or hold Securities on behalf of a Plan or with
Plan Assets should consult with its counsel with respect to the potential
applicability of the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and the Code to the proposed
investment and the availability of the Exemption, PTCE 83-1 or any other
prohibited transaction exemption.
LEGAL INVESTMENT
Each class of Securities offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. Unless otherwise set forth in
the related Prospectus Supplement, Securities 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. Any Class of Securities that represents an interest in a Trust
Fund that includes junior mortgage loans will not constitute "mortgage related
securities" for purposes of SMMEA.
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 Securities 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 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 Securities of any Series will be
treated as high-risk under the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps," which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of such securities
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by insolvent, undercapitalized or otherwise "troubled" institutions. According
to the bulletin, such "high-risk" mortgage derivative securities include
securities having certain specified characteristics, which may include certain
classes of Securities. 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 Securities. Similar policy statements have been issued by regulators
having jurisdiction over other types of depository institutions.
Certain classes of Securities offered hereby, including any class that
is not rated in one of the two highest categories by at least one Rating Agency,
will not constitute "mortgage related securities" for purposes of SMMEA. Any
such class of Securities will be identified in the related Prospectus
Supplement. Prospective investors in such classes of Securities, in particular,
should consider the matters discussed in the following paragraph.
There may be other restrictions on the ability of certain investors
either to purchase certain Classes of Securities or to purchase any Class of
Securities 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 Securities for legal investment or other
purposes, or as to the ability of particular investors to purchase any Class of
Securities under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any Class of Securities. 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 Securities of any Class constitute legal investments under SMMEA or
are subject to investment, capital or other restrictions, and, if applicable,
whether SMMEA has been overridden in any jurisdiction applicable to such
investor.
LEGAL MATTERS
Certain legal matters in connection with the Securities offered hereby
will be passed upon for the Depositor and for the Underwriters by Thacher
Proffitt & Wood, New York, New York, Brown & Wood LLP, New York, New York or
Stroock & Stroock & Lavan LLP, 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 277 Park Avenue, 9th Floor, New York, New York 10172. Its telephone
number is (212) 892-3000.
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 Securities 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 Standards--Representations and Warranties" and
"The 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 Seller of such Loan, or if applicable, the Master Servicer or,
the Servicer. See "Risk Factors" herein.
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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 Securities. If so specified in the related
Prospectus Supplement, Securities may be exchanged by the Depositor for Mortgage
Assets. The Depositor expects that it will make additional sales of securities
similar to the Securities from time to time, but the timing and amount of any
such additional offerings will be dependent upon a number of factors, including
the volume of mortgage loans purchased by the Depositor, prevailing interest
rates, availability of funds and general market conditions.
PLAN OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplements
will be offered in Series 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") through
one or more of the methods described below. The Prospectus Supplement prepared
for each Series will describe the method of offering being utilized for that
Series and will state the net proceeds to the Depositor from such sale.
The Depositor intends that Securities will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
Series of Securities may be made through a combination of two or more of these
methods. Such methods are as follows:
1. by negotiated firm commitment or best efforts
underwriting and public re-offering by the
Underwriters;
2. by placements by the Depositor with institutional
investors through dealers; and
3. by direct placements by the Depositor with
institutional investors.
In addition, if specified in the related Prospectus Supplement, a
Series of Securities may be offered in whole or in part in exchange for the
Loans (and other assets, if applicable) that would comprise the Trust Fund for
such Securities.
If Underwriters are used in a sale of any Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the Underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. The managing underwriter or
underwriters with respect to the offer and sale of a particular Series of
Securities will be set forth on the cover of the Prospectus Supplement relating
to such Series and the members of the underwriting syndicate, if any, will be
named in such Prospectus Supplement.
In connection with the sale of the Securities, the Underwriters may
receive compensation from the Depositor or from purchasers of the Securities in
the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Securities may be deemed to be
underwriters in connection with such Securities, and any discounts or
commissions received by them from the Depositor and any profit on the resale of
Securities by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the
sale of any Series of Securities will provide that the obligations of the
Underwriters will be subject to certain conditions precedent, that the
Underwriters will be obligated to purchase all such Securities if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Depositor will indemnify the
several Underwriters and the
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Underwriters will indemnify the Depositor against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any Series offered by
placements through dealers will contain information regarding the nature of such
offering and any agreements to be entered into between the Depositor and
purchasers of Securities of such Series.
The Depositor anticipates that the Securities offered hereby will be
sold primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of Securities, including dealers, may, depending on the
facts and circumstances of such purchases, be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended, in connection with
reoffers and sales by them of Securities. Holders of Securities should consult
with their legal advisors in this regard prior to any such reoffer or sale.
GLOSSARY
The following are abbreviated definitions of certain capitalized terms
used in this Prospectus. Unless otherwise defined 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 Agreements and
the Agreements generally provides a more complete definition of certain of the
terms. Reference should be made to the Agreements 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 Securities of the Series, as
specified in such Securities and the related Prospectus Supplement.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Securities, the Distribution Date on which all Securities of the
related Series with Final Scheduled Distribution Dates earlier than that of such
Class of Compound Interest Securities have been fully paid, or such other date
or period as may be specified in the related Prospectus Supplement.
"Additional Collateral" means marketable securities, insurance
policies, annuities, certificates of deposit, cash, accounts or other personal
property and, in the case of Additional Collateral owned by any guarantor, may
consist of real estate.
"Additional Collateral Loan" means a Mortgage Loan that, in addition to
being secured by the related Mortgaged Property, is secured by other collateral
owned by the related Mortgagors or are supported by third-party guarantees
secured by collateral owned by the related guarantors.
"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.
"Agreement" means a Pooling and Servicing Agreement, Indenture, Owner
Trust Agreement or Servicing Agreement.
"Appraised Value" means, unless otherwise specified in the related
Prospectus Supplement (i) with respect to a Mortgaged Property securing a Single
Family or Multifamily Property, the lesser of (x) the appraised value determined
in an appraisal obtained at origination of such Mortgage Loan, if any, or, if
the related Mortgaged Property has been appraised subsequent to origination, the
value determined in such subsequent appraisal and (y) the sales price for the
related Mortgaged Property (except in certain circumstances in which there has
been a subsequent appraisal); (ii) with respect to certain refinanced, modified
or converted Single Family or Multifamily Properties, the
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lesser of (x) the appraised value of the related Mortgaged Property determined
at origination or in an appraisal, if any, obtained at the time of refinancing,
modification or conversion and (y) the sales price of the related Mortgage
Property or, if the Mortgage Loan is not a rate and term refinance Mortgage Loan
and if the Mortgaged Property was owned for a relatively short period of time
prior to refinancing, modification or conversion, the sum of the sales price of
the related Mortgaged Property plus the added value of any improvements; and
(iii) with respect to a Mortgaged Property securing a Manufactured Home Loan,
the least of the sale price, the appraised value, and the National Automobile
Dealer's Association book value plus prepaid taxes and hazard insurance
premiums.
"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.
"Asset Group" means a group of individual Mortgage Assets which share
similar characteristics and are aggregated into one group.
"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 Securityholders on a Distribution Date.
"Balloon Loan" means Mortgage Loan with payments similar to a
Conventional Loan, calculated on the basis of an assumed amortization term, but
providing for a Balloon Payment of all outstanding principal and interest to be
made at the end of a specified term that is shorter than such assumed
amortization term.
"Balloon Payment" means the payment of all outstanding principal and
interest made at the end of the term of a Balloon Loan.
"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.
"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.
"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.
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"Class" means a Class of Securities of a Series.
"Closing Date" means, with respect to a Series, the date specified in
the related Prospectus Supplement as the date on which Securities 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 Security" means any Security of a Multiple Class
Series on which interest accrues and is added to the principal balance of such
Security 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
Securities, 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 Securities.
"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.
"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 or Indenture for a Series on or before which amounts due and payable
with respect to a Mortgage Asset will not inure to the benefit of
Securityholders 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.
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"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 Securityholders 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 Account" means an account maintained with a federal or state
chartered depository institution (i) the short-term obligations of which are
rated by each Rating Agency in its highest rating at the time of any deposit
therein, or (ii) insured by the FDIC (to the limits established by such
Corporation), the uninsured deposits in which account are otherwise secured such
that, as evidenced by an opinion of counsel delivered to the Trustee prior to
the establishment of such account, the holders of the Securities will have a
claim with respect to the funds in such account and a perfected first priority
security interest against any collateral securing such funds that is superior to
claims of any other depositors or general creditors of the depository
institution with which such account is maintained or (iii) a trust account or
accounts maintained with a federal or state chartered depository institution or
trust company with trust powers acting in its fiduciary capacity or (iv) an
account or accounts of a depository institution acceptable to the Rating
Agencies. Eligible Accounts may bear interest.
"Eligible Investments" means any one or more of the obligations or
securities described as such at "The Agreements--Investment of Funds."
"Eligible Reserve Fund Investments" means Eligible Investments and any
other obligations or securities described as Eligible Reserve Fund Investments
in the applicable Agreement, as described in the related Prospectus Supplement
for a Series.
"Equity Certificates" means with respect to each Series of Notes where
the Issuer is an owner trust, the ownership interest of the Trust Fund.
"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.
"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 Securities of such Class will remain outstanding
assuming timely payments or distributions are made on the Mortgage Assets in the
related Trust Fund.
"Financial 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.
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"Floating Interest Period" means the period of time during which a
given Security Rate applies to a Class of Floating Interest Securities.
"Floating Interest Security" means any Security of a Multiple Class
Series which accrues interest at a Floating Rate.
"Floating Rate" means a Security 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.
"GNMA" means the Government National Mortgage Association.
"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 Securities 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.
"Indenture" means the agreement relating to a Series of Notes between
the Issuer and the Trustee.
"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 Securities or a Class of Securities of such Series with respect to any
Distribution Date.
"Interest Weighted Securities" means a Class of Securities 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.
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"IRS" means the Internal Revenue Service.
"Issuer" means with respect to each Series of Notes, the Depositor or
an owner trust established by it for the purpose of issuing such Series of
Notes.
"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 Securities of the Series.
"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.
"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, plus in the case of a Loan secured by a junior
lien, the principal amount of the related Senior Lien, 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 Securities of such
Series in the related Prospectus Supplement.
"Maximum Mortgage Rate" means the maximum permissible Mortgage Rate
during the life of each ARM.
"Minimum Floating Rate" means, as to any Multiple Class Series, the per
annum interest rate floor specified for any Floating Rate Security of such
Series in the related Prospectus Supplement.
"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.
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"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 Loan" means any Loan secured by a Multifamily Property.
"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 Securities that may include
Floating Interest Securities, Compound Interest Securities and Planned
Amortization Securities, 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.
"Nest Egg Mortgage Loan(sm)" means a Mortgage Loan originated under the
Nest Egg Mortgage Loan Program(sm), a mortgage loan origination program of DLJ
Mortgage Capital, Inc., an affiliate of the Depositor, and the Nest Egg Mortgage
Company LLC.
"Note Interest Rate" means, with respect to a Series of a single Class
of Notes, the rate of interest paid to the Noteholders in respect of the
Mortgage Assets and with respect to any Multiple Class Series, the per annum
rate at which interest accrues on the principal balance of the Notes of such
Series or a Class of such Series, which rate may be fixed or variable, as
specified in the related Prospectus Supplement.
"Noteholder" or "Holder" means the Person in whose name a Note is
registered in the Note Register.
"Notes" means the Mortgage-Backed Notes.
"OTS" means the Office of Thrift Supervision.
"Owner Trust Agreement" means the agreement relating to a Series of
Notes between the Depositor and the Owner Trustee.
"Owner Trustee" means the owner trustee for each Series of Notes under
an Owner Trust Agreement, and its successors.
"Participation Security" means a certificate or note evidencing a
participation interest in a pool of Loans.
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"Pass-Through Rate" means, with respect to a Series of a single Class
of Certificates, the rate of interest paid to the Certificateholders in respect
of the Mortgage Assets.
"Percentage Interest" means, with respect to a Security, the proportion
(expressed as a percentage) of the percentage amounts of all of the Securities
in the related Class represented by such Security, 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.
"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 of Certificates among the Depositor, the Master Servicer and the Trustee.
"Prepayment Assumption" means the prepayment standard or model used
with respect to the Securities of a Series, such as the Constant Prepayment
Assumption or the Standard Prepayment Assumption, as described in "Yield,
Prepayment and Maturity Considerations--Prepayments and Weighted Average Life."
"Prepayment Period" means with respect to any Distribution Date, the
period specified in the related Prospectus Supplement for a Series.
"Principal Weighted Security" means a Class of Securities 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.
"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.
"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.
112
<PAGE>
"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 or Indenture.
"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.
"Sale and Servicing Agreement" means the sale and servicing agreement
relating to a Series of Notes among the Depositor, the Master Servicer and the
Trustee.
"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.
"Security Interest Rate" means Pass-Through Rate, Certificate Rate or
Note Interest Rate.
"Securityholder" or "Holder" means Certificateholder or Noteholder.
"Securities" means Certificates or Notes.
"Seller" means the Person or Persons, which may include banks, savings
and loan associations, mortgage bankers, investment banking firms, the
Resolution Trust Corporation (the "RTC"), the Federal Deposit Insurance
Corporation (the "FDIC") and other mortgage loan originators or sellers
affiliated or not affiliated with the Depositor, or who may be the Master
Servicer or a Servicer, who sell the Loans to the Depositor for deposit into the
Trust Fund.
"Senior Lien" means a lien which is senior to a related junior lien.
"Senior Securities" means a Class of Securities as to which the
Holders' rights to receive distributions of principal and interest are senior to
the rights of Holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
"Senior Securityholder" means the Holder of a Senior Security.
"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.
"Servicing Agreement" means the Sale and Servicing Agreement or another
servicing agreement relating to a Series of Notes among the Depositor, the
Master Servicer and the Trustee.
113
<PAGE>
"Servicing Fee" means the amount paid to the Master Servicer on a given
Distribution Date, generally determined on a loan-by-loan basis, and calculated
at a specified per annum rate.
"Single Family Property" means property securing a Loan consisting of
one- to four-family attached or detached residential housing, including
Cooperative Dwellings.
"Subordinate Securities" means a Class of Securities as to which the
rights of Holders to receive distributions of principal and interest are
subordinated to the rights of Holders of Senior Securities, to the extent and
under the circumstances specified in the related Prospectus Supplement.
"Subordinate Securityholder" means a Holder of a Subordinate Security.
"Subordinated Amount" means the amount, if any, specified in the
related Prospectus Supplement for a Series with a Class of Subordinated
Securities, that the Subordinate Securities are subordinated to the Senior
Securities of the same Series.
"Subordination Reserve Fund" means the subordination reserve fund, if
any, for a Series with a Class of Subordinate Securities, established pursuant
to the related Pooling and Servicing Agreement or Indenture.
"Trustee" means the trustee under a Pooling and Servicing Agreement or
the indenture trustee under an Indenture, and its successors.
"Trust Fund" means all property and assets held for the benefit of the
Securityholders by the Trustee under the related Agreement for a Series of
Securities as described under "The Trust Funds--General."
"UCC" means the Uniform Commercial Code.
"VA" means the Department of Veterans Affairs.
"VA Loans" means housing loans partially guaranteed by the VA.
114
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (ITEM 14 OF FORM S-3).
The expenses expected to be incurred in connection with the issuance
and distribution of the Securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
Filing Fee for Registration Statement................. $442,500
Legal Fees and Expenses............................... 600,000
Accounting Fees and Expenses.......................... 200,000
Trustee's Fees and Expenses
(including counsel fees)....................... 90,000
Printing and Engraving Fees........................... 180,000
Rating Agency Fees.................................... 240,000
Miscellaneous......................................... 100,000
-------
Total ............................................... $1,852,500
==========
INDEMNIFICATION OF DIRECTORS AND OFFICERS (ITEM 15 OF FORM S-3).
The Pooling and Servicing Agreement with respect to each series of
Certificates and the Servicing Agreement, Indenture and Owner Trust Agreement
with respect to each series of Notes will provide that no director, officer,
employee or agent of the Depositor is liable to the Trust Fund or the
Securityholders, except for such person's own willful misfeasance, bad faith or
gross negligence in the performance of duties or reckless disregard of
obligations and duties. The Pooling and Servicing Agreement with respect to each
series of Certificates and the Servicing Agreement, Indenture and Owner Trust
Agreement with respect to each series of Notes will further provide that, with
the exceptions stated above, a director, officer, employee or agent of the
Depositor is entitled to be indemnified against any loss, liability or expense
incurred in connection with legal action relating to such Pooling and Servicing
Agreement or such Servicing Agreement, Indenture and Owner Trust Agreement and
related Securities other than such expenses related to particular Mortgage
Loans.
Any underwriters who execute an Underwriting Agreement in the form
filed as Exhibit 1.1 to this Registration Statement will agree to indemnify the
Registrant's directors and its officers who signed this Registration Statement
against certain liabilities which might arise under the Securities Act of 1933
from certain information furnished to the Registrant by or on behalf of such
indemnifying party.
<PAGE>
-2-
Subsection (a) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that despite the adjudication of liability such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification or advancement of expenses provided
for by Section 145 shall not be deemed exclusive of any other rights to which
the indemnified party may be entitled; and empowers the corporation to purchase
and maintain insurance on behalf of a director, officer, employee or agent of
the corporation against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
The Restated Certificate of Incorporation and By-Laws of the Registrant
provide that, to the fullest extent and under the circumstances permitted by
Section 145 of the General Corporation Law of the State of Delaware, the
Registrant shall indemnify any person who was or is a party or is threatened to
be made a party to any action, suit or proceeding of the type described above by
<PAGE>
-3-
reason of the fact that he or she is or was a director, officer, employee or
agent of the Registrant or is or was serving at the request of the Registrant as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise.
EXHIBITS (ITEM 16 OF FORM S-3).
Exhibits--
*1.1 -- Form of Underwriting Agreement.
****3.1 -- Certificate of Incorporation of DLJ Mortgage Corp., as
currently in effect.
*3.2 -- Bylaws of DLJ Mortgage Acceptance Corp. as currently in
effect.
*4.1 -- Forms of Trust Agreement including forms of Certificates.
*4.2 -- Form of Sale and Servicing Agreement.
*4.3 -- Form of Standard Provisions for Servicing.
****4.4 -- Form of Servicing Agreement, for a series consisting of
Mortgage-Backed Notes.
****4.5 -- Form of Trust Agreement, for a series consisting of Mortgage-
Backed Notes.
****4.6 -- Form of Indenture, for a series consisting of Mortgage-Backed
Notes.
5.1 -- Opinion of Thacher Proffitt & Wood regarding the legality of
the Securities.
5.2 -- Opinion of Stroock & Stroock & Lavan LLP regarding the
legality of the Securities.
5.3 -- Opinion of Brown & Wood LLP regarding the legality of the
Securities.
8.1 -- Opinion of Thacher Proffitt & Wood as to certain tax matters
(included in Exhibit 5.1).
8.2 -- Opinion of Stroock & Stroock & Lavan LLP as to certain tax
matters (included in Exhibit 5.2).
8.3 -- Opinion of Brown & Wood LLP as to certain tax matters.
23.1 -- Consent of Thacher Proffitt & Wood (included in Exhibit 5.1).
23.2 -- Consent of Stroock & Stroock & Lavan LLP (included in
Exhibit 5.2).
23.3 -- Consent of Brown & Wood (included in Exhibit 5.3).
**23.4 -- Consent of Coopers & Lybrand.
***24.1 -- Power of Attorney.
- -----------
* Filed as an exhibit to Registration Statement on Form S-11 (No. 33-22364)
and incorporated herein by reference.
<PAGE>
-4-
** Filed as an exhibit to Registration Statement on Form S-3 (No. 33-77722)
and incorporated herein by reference.
*** Filed as an exhibit to Registration Statement on Form S-3 (No. 333-39325)
and incorporated herein by reference.
**** Filed as an exhibit to Registration Statement on Form S-3 (No. 333-51537)
and incorporated herein by reference.
UNDERTAKINGS (ITEM 17 OF FORM S-3).
A. UNDERTAKINGS PURSUANT TO RULE 415.
The Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
PROVIDED HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
<PAGE>
-5-
(b) The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this Registration Statement shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
B. UNDERTAKING IN RESPECT OF INDEMNIFICATION.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The Registrant hereby undertakes to file an application for the purpose
of determining the eligibility of the trustee to act under subsection (a) of
section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under section 305(b)(2) of the Trust
Indenture Act.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3, reasonably believes that the
security rating requirement contained in Transaction Requirement B.5 of Form S-3
will be met by the time of the sale of the securities registered hereunder, and
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on July 21, 1998.
DLJ MORTGAGE ACCEPTANCE CORP.
By: /s/ Steven L. Kantor
-------------------------
Name: Steven L. Kantor
Title: Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/ Leon M. Pollack* President and Director July 21, 1998
- -------------------- (Principal Executive
Leon M. Pollack Officer)
/s/ Marjorie S. White* Secretary and Treasurer July 21, 1998
- ---------------------- (Principal Financial and
Marjorie S. White Accounting Officer)
/s/ David F. DeLucia* Director July 21, 1998
- ---------------------
David F. DeLucia
/s/ Thomas E. Siegler* Director July 21, 1998
- ----------------------
Thomas E. Siegler
/s/ Steven L. Kantor* Director July 21, 1998
- ---------------------
Steven L. Kantor
*By: /s/ Steven L. Kantor
--------------------
Steven L. Kantor
Attorney-in-fact
Exhibit 5.1
-----------
[Letterhead of Thacher Proffitt & Wood]
July 21, 1998
DLJ Mortgage Acceptance Corp.
277 Park Avenue
New York, New York 10172
Re: DLJ Mortgage Acceptance Corp.
Mortgage Pass-Through Certificates and
Mortgage-Backed Notes Registration Statement on Form S-3
--------------------------------------------------------
Ladies and Gentlemen:
We are counsel to DLJ Mortgage Acceptance Corp., a Delaware
corporation (the "Registrant") in connection with the registration under the
Securities Act of 1933, as amended (the "Act"), of Mortgage Pass-Through
Certificates (the "Certificates") and Mortgage-Backed Notes (the "Notes"; and
together with the Certificates, the "Securities") and the related preparation
and filing of a Registration Statement on Form S-3 (the "Registration
Statement"). The Certificates are issuable in series under separate pooling and
servicing agreements (each such agreement, a "Pooling and Servicing Agreement"),
among the Registrant, a master servicer to be identified in the prospectus
supplement for such series of Certificates and a trustee to be identified in the
prospectus supplement for such series of Certificates. The Notes are issuable in
series under indentures (each such agreement, an "Indenture"; a Pooling and
Servicing Agreement or an Indenture, an "Agreement"), between an issuer and an
indenture trustee, to be identified in the prospectus supplement for such series
of Notes. Each Agreement will be substantially in the form filed as an Exhibit
to the Registration Statement.
<PAGE>
DLJ Mortgage Acceptance Corp.
July 21, 1998 Page 2.
In connection with rendering this opinion letter, we have
examined the forms of the Agreements incorporated by reference in the
Registration Statement, the Registration Statement and such records and other
documents as we have deemed necessary. As to matters of fact, we have examined
and relied upon representations or certifications of officers of the Registrant
or public officials. We have assumed the authenticity of all documents submitted
to us as originals, the genuineness of all signatures, the legal capacity of
natural persons and the conformity to the originals of all documents. We have
assumed that all parties, other than the Registrant, had the corporate power and
authority to enter into and perform all obligations thereunder and, as to such
parties, we also have assumed the enforceability of such documents.
In rendering this opinion letter, we express no opinion as to
the laws of any jurisdiction other than the laws of the State of New York and
the corporate laws of the State of Delaware, nor do we express any opinion,
either implicitly or otherwise, on any issue not expressly addressed below. In
rendering this opinion letter, we have not passed upon and do not pass upon the
application of "doing business" or the securities laws of any jurisdiction. This
opinion letter is further subject to the qualification that enforceability may
be limited by (i) bankruptcy, insolvency, liquidation, receivership, moratorium,
reorganization or other laws affecting the enforcement of the rights of
creditors generally and (ii) general principles of equity, whether enforcement
is sought in a proceeding in equity or at law.
Based on the foregoing, we are of the opinion that:
1. When a Pooling and Servicing Agreement for a series of
Certificates has been duly authorized by all necessary action and duly executed
and delivered by the parties thereto, such Pooling and Servicing Agreement will
be a legal and valid obligation of the Registrant.
2. When an Indenture for a series of Notes has been duly
authorized by all necessary action and duly executed and delivered by the
parties thereto, such Indenture will be a legal and valid obligation of the
applicable issuer.
3. When a Pooling and Servicing Agreement for a series of
Certificates has been duly authorized by all necessary action and duly executed
and delivered by the parties thereto, and when the Certificates of such series
have been duly executed and authenticated in accordance with the provisions of
that Pooling and Servicing Agreement, and issued and sold as contemplated in the
Registration Statement and the prospectus and prospectus supplement delivered in
connection therewith, such Certificates will be legally and validly issued and
outstanding, fully paid and non-assessable, and the holders of such Certificates
will be entitled to the benefits of that Pooling and Servicing Agreement.
<PAGE>
DLJ Mortgage Acceptance Corp.
July 21, 1998 Page 3.
4. When an Indenture for a series of Notes has been duly
authorized by all necessary action and duly executed and delivered by the
parties thereto, and when the Notes of such series have been duly executed and
authenticated in accordance with the provisions of that Indenture, and issued
and sold as contemplated in the Registration Statement and the prospectus and
prospectus supplement delivered in connection therewith, such Notes will be
legally and validly issued and outstanding, fully paid and non-assessable, and
the holders of such Notes will be entitled to the benefits of that Indenture.
5. The description of federal income tax consequences
appearing under the heading "Certain Federal Income Tax Consequences" in the
prospectus contained in the Registration Statement, while not purporting to
discuss all possible federal income tax consequences of an investment in
Securities, is accurate with respect to those tax consequences that are
discussed.
We hereby consent to the filing of this opinion letter as an
Exhibit to the Registration Statement, and to the use of our name in the
prospectus and prospectus supplements included in the Registration Statement
under the heading "Legal Matters", and in the prospectus included in the
Registration Statement under the heading "Certain Federal Income Tax
Consequences", without admitting that we are "experts" within the meaning of the
Act, and the rules and regulations thereunder, with respect to any part of the
Registration Statement, including this Exhibit.
Very truly yours,
THACHER PROFFITT & WOOD
By /s/ Thacher Proffitt & Wood
EXHIBIT 5.2
[Letterhead of Stroock & Stroock & Lavan LLP]
July 21, 1998
DLJ Mortgage Acceptance Corp.
277 Park Avenue
New York, New York 10172
Ladies and Gentlemen:
We have acted as counsel to DLJ Mortgage Acceptance Corp., a Delaware
corporation (the "Company") in connection with the preparation of a registration
statement on Form S-3 (the "Registration Statement") relating to the proposed
offering from time to time in one or more series (each, a "Series") by one or
more trusts of Mortgage-Backed Notes (the "Notes") and Mortgage Pass- Through
Certificates (the "Certificates," and, together with the Notes, the
"Securities"). The Registration Statement will be filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"). As set forth in the Registration Statement, each Series of
Securities is to be issued under and pursuant to the terms of a separate pooling
and servicing agreement, or sale and servicing agreement, trust agreement and
indenture (each, an "Agreement") among two or more of the Company, a master
servicer to be identified in the prospectus supplement relating to a Series of
Securities (the "Master Servicer"), the issuer of a Series of Securities and one
or more independent trustees (each, a "Trustee") to be identified in the
prospectus supplement for such Series of Securities.
As such counsel, we have examined copies of the Certificate of Incorporation and
By-Laws of the Company, the Registration Statement, the base Prospectus and form
of Prospectus Supplement included therein, the form of each Agreement, and
originals or copies of such other corporate minutes, records, agreements and
other instruments of the Company, certificates of public officials and other
documents and have made such examinations of law, as we have deemed necessary to
form the basis for the opinions hereinafter expressed. In our examination of
such materials, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity to
original documents of all copies submitted to us. As to various questions of
fact material to such opinion, we have relied, to the extent we deemed
appropriate, upon
<PAGE>
representations, statements and certificates of officers and representatives of
the Company and others.
Attorneys involved in the preparation of this opinion are admitted to practice
law in the State of New York and we do not express any opinion herein concerning
any law other than the federal laws of the United States of America, the laws of
the State of New York and the General Corporation Law of the State of Delaware.
Based upon and subject to the foregoing, we are of the opinion that:
1. When the issuance, execution and delivery of each Series of Notes
have been authorized by all necessary corporate action of the Company in
accordance with the provisions of the related indenture, and when such Notes
have been duly executed and delivered, authenticated by the Trustee and sold as
described in the Registration Statement, assuming that the terms of such Notes
are otherwise in compliance with applicable law at such time, such Notes will
constitute valid and binding obligations of the issuer thereof in accordance
with their terms and the terms of such indenture. This opinion is subject to the
effect of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar
laws relating to or affecting creditors' rights generally and court decisions
with respect thereto and we express no opinion with respect to the application
of equitable principles or remedies in any proceeding, whether at law or in
equity.
2. When the issuance, execution and delivery of each Series of
Certificates have been authorized by all necessary corporate action of the
Company in accordance with the provisions of the related Agreement or
Agreements, and when such Certificates have been duly executed and delivered,
authenticated by the Trustee and sold as described in the Registration
Statement, assuming that the terms of such Certificates are otherwise in
compliance with applicable law at such time, such Certificates will be legally
issued, fully paid and non-assessable.
3. The statements set forth in the base Prospectus under the heading
"Certain Federal Income Tax Considerations," to the extent they constitute
maters of law or legal conclusions with respect thereto, are correct.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, to the references to this firm under the caption
"Certain Federal Income Tax Consequences" and "Legal Matters" in the prospectus
which forms a part of the Registration Statement. In giving such consent, we do
not admit hereby that we come within the category of persons whose consent is
required under Section 7 of the Act or the Rules and Regulations of the
Commission thereunder.
Very truly yours,
/s/ Stroock & Stroock & Lavan LLP
- ---------------------------------
STROOCK & STROOCK & LAVAN LLP
July 21, 1998
DLJ Mortgage Acceptance Corp.
277 Park Avenue
New York, New York 10172
Re: DLJ Mortgage Acceptance Corp.
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have acted as counsel for DLJ Mortgage Acceptance Corp., a Delaware
corporation (the "Company"), in connection with the registration statement on
Form S-3 (the "Registration Statement") relating to the Securities (defined
below) and with the authorization and issuance from time to time in one or more
series (each, a "Series") of up to $1,500,000,000 aggregate principal amount of
Mortgage Pass-Through Certificates (the "Certificates") and Mortgage-Backed
Notes (the "Notes," and together with the Certificates, the "Securities"). As
set forth in the Registration Statement, each Series of Securities will be
issued under and pursuant to the conditions of a separate pooling and servicing
agreement or indenture (each, an "Agreement") among the Company, a trustee (the
"Trustee") and, where appropriate, one or more servicers (the "Servicer"), each
to be identified in the prospectus supplement for such Series of Securities.
We have examined copies of the Company's Certificate of Incor poration,
the Company's By-laws and forms of each Agreement, as filed or incorporated by
reference as exhibits to the Registration Statement, and the forms of Securities
included in any Agreement so filed or incorporated by reference in the
Registration Statement and such other records, documents and statutes as we have
deemed necessary for purposes of this opinion.
<PAGE>
Based upon the foregoing, we are of the opinion that:
1. When any Agreement relating to a Series of Securities has been duly
and validly authorized by all necessary action on the part of the Company and
has been duly executed and delivered by the Company, the Servicer, if any, the
Trustee and any other party thereto, such Agreement will constitute a legal,
valid and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as enforcement thereof may be limited by
bankruptcy, insolvency or other laws relating to or affecting creditors' rights
generally or by general equity prin ciples.
2. When a Series of Securities has been duly authorized by all
necessary action on the part of the Company (subject to the terms thereof being
otherwise in compliance with applicable law at such time), duly executed and
authenticated by the Trustee for such Series in accordance with the terms of the
related Agreement and issued and delivered against payment therefor as described
in the Registration Statement, such Series of Securities will be legally and
validly issued, fully paid and nonassessable, and the holders thereof will be
entitled to the benefits of the related Agreement.
In rendering the foregoing opinions, we express no opinion as to the
laws of any jurisdiction other than the laws of the State of New York (excluding
choice of law principles therein) and the federal laws of the United States of
America.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus forming a part of the Registration Statement,
without admitting that we are "experts" within the meaning of the Securities Act
of 1933, as amended, or the Rules and Regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement, including
this exhibit.
Very truly yours,
/s/ Brown & Wood LLP
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July 21, 1998
DLJ Mortgage Acceptance Corp.
277 Park Avenue
New York, New York 10172
Re: DLJ Mortgage Acceptance Corp.
Registration Statement on Form S-3
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Ladies and Gentlemen:
We have acted as special tax counsel for DLJ Mortgage
Acceptance Corp., a Delaware corporation (the "Company"), in connection with the
registration statement on Form S-3, as amended (the "Registration Statement"),
referred to above relating to $1,500,000,000 aggregate principal amount of
Mortgage Pass-Through Certificates (the "Certificates") and Mortgage-Backed
Notes (the "Notes", and together with the Certificates, the "Securities")
issuable in series (each, a "Series"). The Registration Statement has been filed
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended. As set forth in the Registration Statement, each Series of Certificates
will be issued under and pursuant to the conditions of a separate pooling and
servicing agreement or indenture (each, an "Agreement") among the Company, a
trustee and, where appropriate, one or more servicers to be identified in the
prospectus supplement for such Series (the "Trustee" and the "Servicer" for such
Series, respectively).
We have examined the prospectus contained in the Registration
Statement (the "Prospectus") and such other records, documents and instruments
as we have deemed necessary for the purposes of this opinion.
In arriving at the opinion expressed below, we have assumed
that each Pooling Agreement will be duly authorized by all necessary corporate
action on the part of the Company, the Trustee, the Servicer, if any, and any
other party thereto and will be duly executed and delivered by the Company, the
Trustee, the Servicer, if any, and any other party thereto substantially in the
form filed
<PAGE>
as an exhibit to the Registration Statement; that each Series of Certificates
will be duly executed and delivered in substantially the forms set forth in the
related Agreement filed as an exhibit to the Registration Statement; that
Certificates will be sold as described in the Registration Statement; and we
have relied upon the documents referred to above (the "Documents"). We have
assumed that all parties had the corporate power and authority to enter into and
perform all obligations thereunder, and we have also assumed the due
authorization by all requisite corporate actions, the due execution and delivery
and the validity and binding effect and enforceability of such Documents. We
have made investigations of such matters of law and fact as we have considered
necessary or appropriate for the purpose of this opinion.
Our opinion is also based on the assumption that there are no
agreements or understandings with respect to the transactions contemplated in
the Documents other than those contained in the Documents. Furthermore, our
opinion is based on the assumption that all parties to the Documents will comply
with the terms thereof, including all tax reporting requirements contained
therein.
As special tax counsel to the Company, we have advised the
Company with respect to certain federal income tax aspects of the proposed
issuance of each Series of Certificates pursuant to the related Agreement. Such
advice has formed the basis for the description of selected federal income tax
consequences for holders of such Securities that appears under the heading
"Certain Federal Income Tax Consequences" in the Prospectus forming a part of
the Registration Statement. Such description does not purport to discuss all
possible federal income tax ramifications of the proposed issuance of the
Securities, but with respect to those federal income tax consequences which are
discussed, in our opinion, the description is accurate in all material respects.
The opinions set forth herein are based upon the existing
provisions of the Code and Treasury regulations issued or proposed thereunder,
published Revenue Rulings and releases of the Internal Revenue Service and
existing case law, any of which could be changed at any time. Any such changes
may be retroactive in application and could modify the legal conclusions upon
which such opinions are based. The opinions expressed herein are limited as
described above, and we do not express an opinion on any other legal or income
tax aspect of the transactions contemplated by the Documents relating to the
transaction.
In rendering the foregoing opinions, we express no opinion as to the
laws of any jurisdiction other than the federal income tax laws of the United
States. This opinion is rendered as of the date hereof and we undertake no
obligation to update this opinion or advise you of changes in the event there is
any change in legal authorities, facts, assumptions or Documents on which this
opinion is based (including the taking of any action by any party to the
Documents pursuant to any opinion of counsel or a waiver), or any inaccuracy in
any of the representations, warranties or assumptions
2
<PAGE>
upon which we have relied in rendering this opinion, unless we are specifically
engaged to do so. This opinion is rendered only to those to whom it is addressed
and may not be relied on in connection with any transactions other than the
transactions contemplated herein. The opinion may not be relied upon for any
other purpose, or relied upon by any other person, firm or corporation for any
purpose, without our prior written consent.
We hereby consent to the filing of this letter as an exhibit
to the Registration Statement and to the references to this firm under the
heading "Certain Federal Income Tax Consequences" in the Prospectus forming a
part of the Registration Statement, without admitting that we are "experts"
within the meaning of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission issued thereunder, with
respect to any part of the Registration Statement, including this exhibit.
Very truly yours,
/s/ Brown & Wood LLP
3
