Registration No. 333-75921
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-3/A
AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
ON FORM S-3
Under
THE SECURITIES ACT OF 1933
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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)
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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
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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. |_|
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================================
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)(3)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates and
Mortgage-Backed Notes, issued in series $4,000,000,000 100% $4,000,000,000 $1,112,000
===========================================================================================================================
</TABLE>
(1) 1,431,735,474.33 aggregate principal amount of Mortgage Pass-Through
Certificates and Mortgage-Backed Notes registered by the Registrant under
Registration Statement No. 333-59691 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
$5,431,735,474.33.
(2) Estimated solely for the purposes of calculating the registration fee on
the basis of the proposed maximum aggregate offering price.
(3) The registration fee in connection with the $4,000,000,000 aggregate
principal amount of Mortgage Pass-Through Certificates and Mortgage-Backed
Notes to be registered by Registrant under this Registration Statement has
been previously paid by the Registrant in connection with the original
filing on April 8, 1999.
--------------------------
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.
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<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>
- --------------------------------------------------------------------------------
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION
Preliminary Prospectus Supplement dated May 26, 1999 [Version 1]
Prospectus Supplement (to Prospectus Dated ______ ___, ____)
____________ TRUST SERIES ____-_
Issuer
DLJ MORTGAGE ACCEPTANCE CORP.
Depositor
[NAME OF MASTER SERVICER]
Master Servicer
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES ____-_
$__________________
(Approximate)
- ----------------------------
You should carefully
review the information in
"Risk Factors" on page
S-_ in this prospectus
supplement and page _ in
the prospectus.
This prospectus
supplement, together with
the accompanying
prospectus, will constitute
the complete prospectus.
- ----------------------------
The Trust will issue:
o [Four] classes of senior Class A Certificates,
including one accrual class.
o One class of senior principal-only Class P Certificates.
o One class of senior interest-only Class X Certificates.
o One class of senior residual Class A-R Certificates.
o Six classes of Class B Certificates, which provide credit
enhancement. Each class of Class B Certificates is
subordinated to the Senior Certificates and each
class of Class B Certificates, if any, with a
lower numerical designation.
The Certificates:
o Represent ownership interests in a trust, whose
assets are primarily a pool of fixed rate, first
lien residential mortgage loans.
o Offered to the public are listed under the heading
"Offered Certificates" in the table on page S-_.
Risks:
o The yield on the Class P Certificates and the
Class X Certificates are extremely sensitive to
the rate and timing of principal prepayments, as
discussed in "Risk Factors" in this prospectus
supplement.
[The Underwriter], as underwriter, will buy the offered certificates from DLJ
Mortgage Acceptance Corp. at a price equal to ____% of their face value. DLJ
Mortgage Acceptance Corp. will pay the expenses related to the issuance of the
certificates from these proceeds. The underwriter will sell the offered
certificates purchased by it from time to time in negotiated transactions at
varying prices determined at the time of sale.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
[The Attorney General of the State of New York has not passed on or endorsed the
merits of this offering. Any representation to the contrary is unlawful.]
[Name of Underwriter]
______ ___, ____
<PAGE>
TABLE OF CONTENTS
Page
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PROSPECTUS SUPPLEMENT
Summary Information.........................................................S-
Risk Factors................................................................S-
The Mortgage Pool...........................................................S-
The Seller..................................................................S-
Servicing of Mortgage Loans.................................................S-
Description of the Certificates.............................................S-
Glossary of Terms........................................................S-
Yield, Prepayment and Maturity
Considerations...........................................................S-
Credit Enhancement..........................................................S-
Use of Proceeds.............................................................S-
Material Federal Income Tax
Considerations...........................................................S-
ERISA Considerations........................................................S-
Method of Distribution......................................................S-
Legal Matters...............................................................S-
Ratings.....................................................................S-
Page
----
PROSPECTUS
Additional Information........................................................
Prospectus Supplement.........................................................
Incorporation of Certain Documents By
Reference..................................................................
Summary of the Prospectus.....................................................
Risk Factors..................................................................
Description of the Securities.................................................
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 Agreements................................................................
Certain Legal Aspects of Loans................................................
Material Federal Income Tax
Considerations.............................................................
State and Other Tax Consequences..............................................
ERISA Considerations..........................................................
Legal Investment..............................................................
Legal Matters.................................................................
The Depositor.................................................................
Use of Proceeds ..............................................................
Plan of Distribution..........................................................
S-2
<PAGE>
Summary Information
This summary highlights selected information from this prospectus supplement and
does not contain all of the information to make your investment decision. Please
read this entire prospectus supplement and the accompanying prospectus carefully
for additional information about the offered certificates.
Mortgage Pass-Through Certificates, Series ____-_
<TABLE>
<CAPTION>
Initial Pass- Initial Rating of
Certificate Through Certificates
Principal Rate (per Designations and
Class Balance annum) ____ Rating ____ Rating Features Form
- ----- ------- ------ ----------- ----------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Offered
Certificates
[A-1 $ % AAA AAA] Senior Book Entry
[A-2 % AAA AAA] Senior/Accrual Book Entry
[A-3 % AAA AAA] Senior/Lockout Book Entry
[A-4 % AAA AAA] Senior Book Entry
P 0.00% AAAr AAA Senior/Principal Only Book Entry
X % AAAr AAA Senior/Interest Only Book Entry
A-R % AAA AAA Senior/Residual Physical
B-1 % N/A AA Subordinate Book Entry
B-2 % N/A A Subordinate Book Entry
B-3 % N/A BBB Subordinate Book Entry
Total $
Offered
Certificates
Non-Offered
Certificates
B-4 $ % N/A BB Subordinate Physical
B-5 % N/A B Subordinate Physical
B-6 % N/A N/A Subordinate Physical
Total $
Offered and
Non-Offered
Certificates
</TABLE>
- ----------
All balances are subject to a variance of 5%.
Other Information:
Class X:
o The variable rate varies according to the excess interest available
on the mortgage loans.
o The Class X Certificates do not have a principal balance. For the
purpose of calculating interest payments, interest will accrue on a
notional amount which initially is $________.
S-3
<PAGE>
Depositor
o DLJ Mortgage Acceptance Corp.
Seller
o [Name of Seller] will sell the mortgage loans to the depositor.
Master Servicer
o [Name of Master Servicer] will initially service all of the mortgage
loans directly.
Trustee
o [Name of Trustee].
Cut-off Date
o _____ 1, ____.
Closing Date
o _____ __, ____.
Determination Date
o With respect to the mortgage loans, the ____ day of each month or if
that day is not a business day, the next business day.
Distribution Date
o Beginning on _____ 25, ____ and thereafter on the 25th day of each
month or if that day is not a business day, the next business day.
Record Date
o The last business day of the month preceding the month of a
distribution date.
The Mortgage Pool
On _____ __, ____, the trust will acquire a pool of mortgage loans. As of _____
1, ____, the mortgage pool consists of approximately _____ mortgage loans, with
an aggregate principal balance of approximately $_____. All of the mortgage
loans are secured by residential properties and each is set to mature within __
to __ years of the date it was originated.
Priority of Distributions
Funds available from monthly payments and other amounts received on the mortgage
loans on any distribution date will be distributed to the holders of the
certificates in the following order:
o distribution of interest to the interest-bearing senior
certificates;
o distribution of principal to the senior certificates entitled to
principal;
o distribution of any deferred amounts payable on the Class P
Certificates; and
o distribution of interest and principal to each class of subordinate
certificates, in order of their numerical class designations,
beginning with the Class B-1 Certificates.
See "Description of the Certificates--Priority of Distributions Among
Certificates" in this prospectus supplement for more detail.
Interest Distributions
Interest accrues on the interest-bearing certificates during the calendar month
prior to a distribution date.
S-4
<PAGE>
On each distribution date, you will be entitled to the following:
o interest at the pass-through rate that accrued during the related
accrual period.
o interest due on a prior distribution date that was not paid.
Your interest entitlement may be reduced as a result of prepayments on the
mortgage loans and certain types of losses on the mortgage loans.
The Class P Certificates do not receive interest distributions.
Principal Distributions
Principal distributions are payable on each distribution date. The priority and
amount of principal distributions varies from class to class. Shortfalls in
available funds may result in a class receiving less than what is due. [The
calculation of the amount a class is entitled to receive on each distribution
date is described in this prospectus supplement under "Description of the
Certificates--Distributions of Principal."]
The Class X Certificates do not receive principal distributions.
Class P and Class X Certificate Risks
The Class P Certificates are principal only certificates, and their yield is
extremely sensitive to the rate and timing of principal prepayments. A slow
prepayment speed will reduce their yield.
The Class X Certificates are interest only certificates, and their yield is
extremely sensitive to the rate and timing of principal prepayments. A fast
prepayment speed will reduce their yield, and may result in your failure to
fully recover your investment.
Credit Enhancement
Credit enhancement in the form of subordination should reduce delays in
distributions and losses on certain classes of certificates. The subordination
feature will support the classes of certificates in varying degrees.
There are two types of subordination in this transaction:
1. The senior certificates will receive distributions of interest and
principal prior to distributions of interest and principal to the
subordinate certificates. Also, on each distribution dates each class of
subordinate certificates will receive its interest and principal
distribution before any other class of subordinate certificates with a
higher numerical class designation; and
2. Losses resulting from the liquidation of defaulted mortgage loans (other
than any losses from special hazards, mortgagor fraud or mortgagor
bankruptcy that are above set limits) will be the following allocated to
the subordinate certificates in the following order until their class
balance has been reduced to zero:
o Class B-6
o Class B-5
o Class B-4
o Class B-3
o Class B-2
o Class B-1
See "Description of the Certificates--Priority of Distributions Among
Certificates" and "--Allocation of Losses; Subordination" in this prospectus
supplement for more detail.
S-5
<PAGE>
[Cross-Collateralization
[Note: the following would be used if the trust contained two loan groups, and
issued separate series for each loan group with common subordinate classes.]
Generally, distributions of principal and interest to the holders of the senior
certificates will be based solely on the payments received or advanced on the
related mortgage loans. However, in certain limited circumstances, principal and
interest collected from the Group I or Group II Loans may be used to pay
principal or interest, or both, to the Group I or Group II Senior Certificates,
as applicable, unrelated to that loan group.
We refer you to "Description of the Certificates--Cross-Collateralization" in
this prospectus supplement for more detail.]
Optional Termination
If the aggregate principal balance of the mortgage loans declines below __% of
the total pool principal balance as of the cut-off date, then the depositor may
purchase all of the mortgage loans and the related properties in the trust. If
the depositor purchases all of the mortgage loans, you will receive a final
distribution and then the trust will be terminated.
Advances
If the master servicer reasonably believes that cash advances can be recovered
from a delinquent mortgagor, then the master servicer will make cash advances to
the trust to cover related delinquent mortgage loan payments. Advances are
intended to maintain a regular flow of scheduled interest and principal payments
on the certificates, and not to guarantee or insure against losses.
S-6
<PAGE>
Federal Income Tax Consequences
For federal income tax purposes, the trust will be treated as a real estate
mortgage investment conduit. All classes of certificates, other than the Class
A-R Certificates, will represent regular interests in the real estate mortgage
investment conduit. The Class A-R Certificates will represent ownership of the
residual interest in the real estate mortgage investment conduit.
ERISA Considerations
The senior certificates, other than the Class A-R Certificates, may be eligible
for purchase by persons investing assets of employee benefit plans or individual
retirement accounts subject to important considerations. Sales of the Class B
Certificates and the Class A-R Certificates to these plans or retirement
accounts are prohibited, except as permitted under "ERISA Considerations" in
this prospectus supplement. If you invest in a Class B-1, Class B-2 or Class B-3
Certificate, you will be deemed to represent that you comply with these
restrictions.
Legal Investment
When issued, the senior certificates and the Class B-1 Certificates will be
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984. The Class B-2 and Class B-3 Certificates will not be
"mortgage related securities" for purposes of SMMEA.
Ratings
The trust will not issue the offered certificates unless they have been assigned
the ratings designated on page S-__.
A rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by either rating agency.
S-7
<PAGE>
Risk Factors
This prospectus supplement together with the prospectus will describe the
material risk factors related to your securities. The securities offered under
this prospectus supplement are complex securities. You should possess, either
alone or together with an investment advisor, the expertise necessary to
evaluate the information contained in this prospectus supplement in the context
of your financial situation and tolerance for risk.
[Appropriate Risk Factors as necessary. Possible Risk Factors based on
this form include the following:
You may have to hold your certificates to maturity if their marketability is
limited.
[The underwriter intends to make a secondary market for the certificates, but is
not obligated to do so.] There is currently no secondary market for the offered
certificates. We cannot give you any assurance that such a secondary market will
develop or, if it develops, that it will continue. Consequently, you may not be
able to sell your offered certificates readily or at prices that will enable you
to realize your desired yield. The market values of the offered certificates are
likely to fluctuate; these fluctuations may be significant and could result in
significant losses to you.
The secondary markets for mortgage backed securities have experienced periods of
illiquidity and can be expected to do so in the future. Illiquidity means you
may not be able to find a buyer to buy your securities readily or at prices that
will enable you to realize a desired yield. Illiquidity can have a severely
adverse effect on the prices of securities that are especially sensitive to
prepayment, credit or interest rate risk, or that have been structured to meet
the investment requirements of limited categories of investors.
S-8
<PAGE>
The yield on your certificates will vary depending on the rate or prepayments.
The yield to maturity on your certificates will be directly related to the rate
of principal payments on the mortgage loans, which will be affected by factors
including:
o the amortization schedules of the mortgage loans;
o the rate of prepayments by mortgagors, including prepayments
resulting from refinancing;
o liquidations of defaulted mortgage loans;
o repurchases of mortgage loans as a result of breaches of
representations and warranties; and
o the optional purchase of the mortgage loans in connection with the
termination of the trust.
The rate of principal payments on pools of mortgage loans is influenced by a
variety of economic, geographic, social and other factors. For example, if
currently offered mortgage rates for similar mortgage loans fall below the
mortgage rates on the mortgage loans, the prepayment rate should increase. On
the other hand, if currently offered mortgage rates rise above the mortgage
rates on the mortgage loans, the prepayment rate should decrease.
S-9
<PAGE>
If the rate of prepayments on the mortgage loans is different than expected,
your yield may be considerably lower than anticipated.
We cannot predict the rate at which mortgagors will repay their mortgage loans.
Please consider the following:
o If you are purchasing a certificate at a discount, your yield may be
lower than expected if principal payments on the mortgage loans
occur at a slower rate than you expected.
o If you are purchasing a certificate at a premium, your yield may be
lower than expected if principal payments on the mortgage loans
occur at a faster rate than you expected.
o Certificates that receive only payments of interest are especially
sensitive to variations in the rate of prepayments. If the rate of
prepayments is faster than you expected, your yield will be lower
than expected and you may not fully recoup your initial investment.
o The earlier a payment of principal occurs, the greater the impact on
your yield. For example, if you purchase a certificate at a premium,
although the average rate of principal payments is consistent with
your expectations, if the rate of principal payments occurs
initially at a rate higher than expected, which would adversely
impact your yield, a subsequent reduction in the rate of principal
payments will not offset any adverse yield effect.
See "Yield, Prepayment and Maturity Considerations" in this
prospectus supplement for more detail.
The value of your certificates may be reduced if losses are higher than
expected.
If the performance of the mortgage loans is substantially worse than
assumed by the rating agencies, the ratings of any class of the certificates may
be lowered in the future. This would probably reduce the value of those
certificates. Neither the depositor, the master servicer nor any other entity
will have any obligation to supplement any credit enhancement, or to take any
other action to maintain any rating of the certificates.
S-10
<PAGE>
[Losses on the mortgage loans in Loan Group I and Loan Group II may reduce the
yield on Group I or Group II senior certificates, as applicable, unrelated that
loan group.
The subordination will cover mortgage loans in Loan Group I and Loan Group II.
Therefore, if mortgage loans in either of these loan groups suffer a high level
of these losses, it will reduce the available coverage for certificates related
to both Loan Group I and Loan Group II.
Investors in these senior certificates should also be aware that because the
subordinate certificates represent interest in both Loan Group I and Loan Group
II, the class balance of the subordinate certificates could be reduced to zero
as a result of realized losses on the mortgage loans in either of these loan
groups. Therefore, the allocation of realized losses on the mortgage loans in
either of these loan groups to the subordinate certificates will reduce the
subordination provided by the subordinate certificates to Group I and Group II
senior certificates, including the senior certificates related to a loan group
which did not suffer any losses. This will increase the likelihood that future
realized losses may be allocated to the senior certificates related to the other
loan group.]
The yield on your certificates will be affected by the specific terms that apply
to that class, discussed below.
The offered certificates of each class have different yield considerations and
different sensitivities to the rate and timing of principal distributions. The
following is a discussion of yield considerations and prepayment sensitivities
of each class.
Class A Certificates -- sequential pay
The Class A Certificates have different priorities for payment of principal.
Those classes of Class A Certificates with a later priority of payment will be
more likely to be affected by losses on the mortgage loans not covered by the
credit enhancement.
See "Description of the Certificates--Distributions in
this prospectus supplement.
[Class A-2 Certificates -- accrual
o Because the Class A-2 Certificates are not entitled to receive any
distributions of interest for some period of time, these
certificates will likely experience significant price and yield
volatility. Investors should consider whether this volatility is
suitable to their investment needs.]
S-11
<PAGE>
[Class A-3 Certificates -- lockout
o It is not expected that the Class A-3 Certificates will receive any
distributions of principal until the distribution date in
____________. Until the distribution date in ____________, the Class
A-3 Certificates may receive a portion of principal prepayments that
is smaller than its proportionate share of principal prepayments.]
[Note: The following paragraphs show sample risk factor disclosure for types of
class included in the base but not in this form of supplement.]
[Class [A-__] Certificates -- PAC
Based on the structuring assumptions, the Class [A-__] Certificates are
structured so that principal payments will be made in accordance with the table
in this prospectus supplement, but only if the mortgage loans prepay at a
constant rate between __% SPA and __% SPA. If prepayments occur at a rate below
that range, distribution of principal on the Class [A-__] Certificates may not
be enough to pay to the amount in the table, and the weighted average life of
the Class [A-__] Certificates will be extended. On the other hand, if
prepayments occur at a rate above that range, and if the principal balance of
some other classes of certificates are reduced to zero, the principal balance on
the Class [A-__] Certificates may be reduced below the amount in the table, and
the weighted average life of the Class [A-__] Certificates will be reduced.]
[Class [A-__] Certificates -- TAC
Based on the structuring assumptions, the Class [A-__] Certificates are
structured so that principal payments will be made in accordance with the table
in this prospectus supplement, but only if the mortgage loans prepay at a
constant rate of __% SPA. If prepayments occur at a rate slower than that rate,
distribution of principal on the Class [A-__] Certificates may not be enough to
pay to the amount in the table, and the weighted average life of the Class
[A-__] Certificates will be extended. On the other hand, if prepayments occur at
a rate faster than that rate, and if the principal balance of some other classes
of certificates are reduced to zero, the principal balance on the Class [A-__]
Certificates may be reduced below the amount in the table, and the weighted
average life of the Class [A-__] Certificates will be reduced.]
S-12
<PAGE>
[Class [A-F] Certificates and Class [A-IF] Certificates -- floating rate
- -- inverse floating rate
The interest rate on the Class A-F Certificates will vary with LIBOR. The
interest rate on the Class [A-IF] Certificates will vary inversely with a
multiple of LIBOR. Therefore, the yield to investors on the Class [A-IF]
Certificates will be sensitive, and the Class [A-IF] Certificates will be
extremely sensitive, to fluctuations of LIBOR.]
[Class [-__] Certificates -- companion
o The Class [A-__] Certificates may receive small or large
distributions of principal on each distribution date to the extent
necessary to stabilize principal distributions on the [PAC and TAC]
Certificates and Class A-2 Certificates. Due to the companion nature
of the Class [A-__] Certificates, these certificates will likely
experience price and yield volatility and these certificates would
not be an appropriate investment for any investor requiring a
distribution of a particular amount of principal or interest on a
specific date or dates. Investors should consider whether this
volatility is suitable to their investment needs.
o Investors in the Class A-[__] Certificates should be aware that such
certificates have a later priority of payment with respect to
principal in relation to some of the other classes of Class A
Certificates. Therefore, these certificates are particularly
sensitive to the rate and timing of principal prepayments.]
S-13
<PAGE>
Class P Certificates -- principal only
o The Class P Certificates will receive a portion of the principal
payments only on the mortgage loans that have net mortgage rates
lower than ____%. Therefore, the yield on the Class P Certificates
is extremely sensitive to the rate and timing of principal
prepayments and defaults on the mortgage loans that have net
mortgage rates lower than ____%.
o If you invest in the Class P Certificates, you should be aware that
mortgage loans with lower mortgage rates are less likely to be
prepaid than mortgage loans with higher mortgage rates. If
prepayments of principal on the mortgage loans that have net
mortgage rates lower than ____% occur at a rate slower than you
assumed at the time of purchase, your yield will be less than
expected.
Class X Certificates -- interest only
o The Class X Certificates will receive a portion of the interest
payments only from mortgage loans that have net mortgage rates
higher than ____%. Therefore, the yield on the Class X Certificates
will be extremely sensitive to the rate and timing of principal
prepayments and defaults on the mortgage loans that have net
mortgage rates higher than ____%.
o If you invest in the Class X Certificates, you should be aware that
mortgage loans with higher mortgage rates are more likely to be
prepaid than mortgage loans with lower mortgage rates. If the
mortgage loans that have net mortgage rates higher than ____% are
prepaid at a rate faster than you assumed at the time of purchase,
the yield in the Class X Certificates will be adversely affected.
You should fully consider the risk that a rapid rate of prepayments
on the mortgage loans that have net mortgage rates higher than ____%
could result in your failure to fully recover your investments.
S-14
<PAGE>
Subordinate Certificates
Before purchasing subordinate certificates, you should consider the following
factors that may negatively impact your yield:
o The subordinate certificates are not entitled to a proportionate
share of principal prepayments on the mortgage loans until the
beginning of the _____ year after the closing date. In addition, if
losses on the mortgage loans exceed stated levels, classes of
subordinate certificates with higher numerical class designations
will not receive a principal distribution.
o Losses resulting from the liquidation of defaulted mortgage loans,
other than excess losses resulting from special hazards, mortgagor
fraud or mortgagor bankruptcy, will be allocated to the subordinate
certificates in reverse order of numerical class designation, until
the class balance has been reduced to zero. A loss allocation
results in a reduction in a class balance without a corresponding
distribution of cash to the holder. Also, the lower class balance
will result in less interest accruing on the certificate.
o The earlier in the transaction that a loss on a mortgage loan
occurs, the greater the reduction in yield.
o These risks are more severe for the classes of subordinate
certificates with higher numerical class designations.
See "Description of the Certificates" and "Yield, Prepayment and
Maturity Considerations" in this prospectus supplement for more
detail.
S-15
<PAGE>
[Geographic Concentration
Approximately ___% of the mortgage loans, by principal balance as of _____ __,
____, are secured by properties located in California. If the California
residential real estate market should 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
increase, as compared to such rates in a stable or improving real estate market.
Also, California is more susceptible to certain types of uninsurable hazards,
such as earthquakes, brush fires, floods, mudslides and other natural disasters.
If these occur, the rates of delinquency, foreclosure, bankruptcy and loss on
the mortgage loans may increase.]
S-16
<PAGE>
Important Notice About Information Presented in this
Prospectus Supplement and the Prospectus
We provide information to you about the offered certificates in two separate
documents that progressively provide more detail:
o the prospectus, which provides general information, some of which
may not apply to your series of certificates; and
o this prospectus supplement, which describes the specific terms of
your series of certificates.
If the description of your certificates in this prospectus supplement differs
from the related description in the prospectus, you should rely on the
information in this prospectus supplement.
S-17
<PAGE>
Introduction
The depositor will establish a trust with respect to Series ____-__ on the
closing date, under a pooling and servicing agreement among the depositor, the
master servicer and the trustee, dated as of the cut-off date. On the closing
date, the depositor will deposit into the trust a pool of mortgage loans, that
in the aggregate, will constitute a mortgage pool, secured by one- to
four-family residential properties with terms to maturity of not more than
thirty years.
Some capitalized terms used in this prospectus supplement will have
meanings given below under "Description of the Certificates--Glossary of Terms"
or in the prospectus under "Glossary."
The Mortgage Pool
The depositor will acquire _____ mortgage loans with an aggregate Stated
Principal Balance as of the cut-off date of $__________, from the seller under
the mortgage loan purchase agreement dated as of ______, __ ____.
Under the pooling and servicing agreement dated as of _____ 1, ____ among
the depositor, the trustee and the master servicer, the depositor will assign
the mortgage loans and the depositor's rights under the mortgage loan purchase
agreement to the Trustee for the benefit of the holders of the certificates.
Under the mortgage loan purchase agreement, the seller will make certain
representations and warranties relating to the characteristics of the applicable
mortgage loans, as further described in the prospectus under "Loan Underwriting
Procedures and Standards--Representations and Warranties". These representations
and warranties relating to the mortgage loans will be made by the seller as of
the closing date and will be assigned to the trust. In the event of a breach of
any representation or warranty relating to a mortgage loan that materially and
adversely affects the interests of the certificateholders in that mortgage loan,
the seller will be obligated to do one of the following:
o cure that breach,
o repurchase that mortgage loan at an amount equal to the sum of the
unpaid principal balance of the mortgage loan on the date of that
repurchase, and accrued interest thereon at the applicable net rate
from the date through which interest was last paid by the mortgagor
to the date of the purchase, or
o substitute a replacement mortgage loan for that mortgage loan.
However, this substitution is permitted only within two years of the closing
date and may not be made unless an opinion of counsel is provided to the effect
that the substitution will not disqualify the real estate mortgage investment
conduit, or REMIC, or result in a prohibited transaction under the Internal
Revenue Code. The depositor will make no representations or warranties for the
mortgage loans and will have no obligation to repurchase or substitute mortgage
loans with deficient documentation or that are otherwise defective. The seller
is selling the mortgage loans without recourse and will have no obligations for
the mortgage loans in its capacity as seller other than the
S-18
<PAGE>
cure, repurchase or substitution obligations described above. The obligations of
the master servicer for to the certificates is limited to its contractual
servicing obligations under the pooling and servicing agreement.
Certain information relating to the mortgage loans to be included in the
mortgage pool is presented in this section. Prior to the closing date, mortgage
loans may be removed from the mortgage loans to be included in the mortgage pool
and other mortgage loans may be substituted for those mortgage loans. The
depositor believes that the information set forth in this prospectus supplement
with respect to the mortgage loans to be included in the mortgage pool as
presently constituted is representative of the characteristics of the these
mortgage loans as it will be constituted at the closing date, although certain
characteristics of the mortgage loans in the mortgage pool may vary. Information
presented below expressed as a percentage, other than rates of interest, are
approximate percentages based on the Stated Principal Balances of the mortgage
loans as of the cut-off date, unless otherwise indicated.
As of the cut-off date, the aggregate Stated Principal Balance of the
mortgage loans is expected to be approximately $__________. The mortgage loans
provide for the amortization of the amount financed over a series of
substantially equal monthly payments. All of the mortgage loans provide for
payments due on the first day of each month. The mortgage loans to be included
in the mortgage pool were originated or acquired by the seller in the normal
course of its business and in accordance with the underwriting criteria
specified in this prospectus supplement. At origination, the mortgage loans had
stated terms to maturity which ranged from ___ to ___ years. Scheduled monthly
payments made by the mortgagors on the mortgage loans either earlier or later
than the scheduled due dates of those mortgage loans will not affect the
amortization schedule or the relative application of those payments to principal
and interest. [Each mortgage loan is prepayable at anytime without penalty.]
Each mortgage loan was originated on or after __________________.
The latest stated maturity date of any mortgage loan is __________, and
the earliest stated maturity date of any mortgage loan is __________.
[As of the cut-off date, no mortgage loan will be delinquent more than 30
days.
No mortgage loan is subject to a buydown agreement. No mortgage loan
provides for deferred interest or negative amortization.]
All of the mortgage loans as of the cut-off date had a LTV ratio at
origination of 95% or less. Except for ___ mortgage loans, representing
approximately ____% of the principal balance as of the cut-off date, each
mortgage loan with a LTV ratio at origination of greater than 80% will be
covered by a primary mortgage guaranty insurance policy issued by a mortgage
insurance company acceptable to Fannie Mae or Freddie Mac, or any nationally
recognized statistical rating organization. This primary mortgage guaranty
insurance policy will provide coverage of a portion of the original principal
balance of the related mortgage loan equal to the product of the original
principal balance of the related mortgage loan and a fraction, the numerator of
which is the excess of the original principal balance of the related mortgage
loan over 75% of the lesser of the appraised value and
S-19
<PAGE>
selling price of the related mortgaged property and the denominator of which is
the original principal balance of the related mortgage loan, plus accrued
interest on the mortgage loans and related foreclosure expenses. This primary
mortgage guaranty insurance policy will not be required for any of these
mortgage loans after the date that the related LTV ratio is 80% or less or,
based on a new appraisal, the principal balance of that mortgage loan represents
80% or less of the new appraised value. See "-- Underwriting Standards" in this
prospectus supplement.
The LTV ratio of a mortgage loan at any given time is a fraction,
expressed as a percentage. The numerator is the principal balance of the related
mortgage loan at the date of determination. The denominator is the appraised
value, as described on page 26 of the prospectus. No assurance can be given that
the value of any mortgaged property has remained or will remain at the level
that existed on the appraisal or sales date. If residential real estate values
generally or in a particular geographic area decline, the LTV ratios might not
be a reliable indicator of the rates of delinquencies, foreclosures and losses
that could occur on those mortgage loans.
The following information shows in tabular format some information, as of
the cut-off date, about the mortgage loans. Except with respect to rates of
interest, percentages, which are approximate, are stated by principal balance of
the mortgage loans as of the cut-off date and have been rounded in order to
total 100%.
S-20
<PAGE>
Original Loan-to-Value Ratios
--------------------------------------------------------------------
Aggregate
Number of Principal Percent of
Original Loan-to- Mortgage Balance Mortgage
Value Ratios (%) Loans Outstanding Pool
---------------- ----- ----------- ----
....................
----- ----- -----
Total.............
===== ===== =====
- ----------
The weighted average original LTV ratio of the mortgage loans is expected to be
approximately ____%.
Current Mortgage Loan Principal Balances
--------------------------------------------------------------------
Aggregate
Current Mortgage Number of Principal Percent of
Loan Principal Mortgage Balance Mortgage
Balances ($) Loans Outstanding Pool
---------------- ----- ----------- ----
....................
----- ----- -----
Total.............
===== ===== =====
- ----------
As of the cut-off date, the average current mortgage loan principal balance is
expected to be approximately $_____________.
S-21
<PAGE>
Mortgage Rates
--------------------------------------------------------------------
Aggregate
Number of Principal Percent of
Mortgage Balance Mortgage
Mortgage Rates (%) Loans Outstanding Pool
---------------- ----- ----------- ----
....................
----- ----- -----
Total.............
===== ===== =====
- ----------
As of the cut-off date, the average current mortgage rate of the mortgage loans
is expected to be approximately ____%.
Occupancy Types
--------------------------------------------------------------------
Aggregate
Number of Principal Percent of
Mortgage Balance Mortgage
Occupancy Type Loans Outstanding Pool
---------------- ----- ----------- ----
Primary..............
Secondary............
----- ----- -----
Total..............
===== ===== =====
- ----------
Based upon representations of the related mortgagors at the time of origination.
S-22
<PAGE>
Original Terms to Maturity
--------------------------------------------------------------------
Aggregate
Number of Principal Percent of
Original Term to Mortgage Balance Mortgage
Maturity Loans Outstanding Pool
---------------- ----- ----------- ----
....................
....................
----- ----- -----
Total.............
===== ===== =====
- ----------
As of the cut-off date, the weighted average remaining term to maturity of the
mortgage loans is expected to be approximately _____ months.
S-23
<PAGE>
State Distribution of Mortgaged Properties
--------------------------------------------------------------------
Aggregate
Number of Principal Percent of
Mortgage Balance Mortgage
State Loans Outstanding Pool
---------------- ----- ----------- ----
[Add rows as needed].
.....................
----- ----- -----
Total..............
===== ===== =====
- ----------
Other includes ____ other states and the District of Columbia with under ___%
concentrations individually. No more than approximately ___% of the mortgage
loans will be secured by mortgaged properties located in any one postal zip code
area.
Purpose of Mortgage Loans
--------------------------------------------------------------------
Aggregate
Number of Principal Percent of
Mortgage Balance Mortgage
Loan Purpose Loans Outstanding Pool
---------------- ----- ----------- ----
Rate/Term Refinance.
Purchase............
Cash-out Refinance..
----- ----- -----
Total.............
===== ===== =====
Documentation Programs for Mortgage Loans
--------------------------------------------------------------------
Aggregate
Number of Principal Percent of
Mortgage Balance Mortgage
Type of Program Loans Outstanding Pool
----------------- ----- ----------- ----
Full or Alternative.
Reduced (Limited)...
----- ----- -----
Total.............
===== ===== =====
S-24
<PAGE>
Types of Mortgaged Properties
--------------------------------------------------------------------
Aggregate
Number of Principal Percent of
Mortgage Balance Mortgage
Property Type Loans Outstanding Pool
---------------- ----- ----------- ----
Single Family.......
PUD.................
Condominium.........
Duplex..............
----- ----- -----
Total.............
===== ===== =====
Underwriting Standards
The depositor acquired the mortgage Loans from the seller under the
mortgage loan purchase agreement. The mortgage loans have either been originated
by the seller or purchased by the seller from various banks, savings and loan
associations, mortgage bankers, which may or may not be affiliated with the
seller, and other mortgage loan originators, in accordance with the underwriting
criteria, described in this prospectus supplement. The information presented in
the following paragraphs has been provided by the seller. None of the depositor,
the underwriter, the trustee or any of their respective affiliates has made or
will make any representation as to the accuracy or completeness of the
information provided in this prospectus supplement.
[Disclosure as appropriate.]
S-25
<PAGE>
The Seller
[Disclosure as appropriate. Disclosure will include the following to the extent
available:
The following table lists some information regarding the seller's delinquency
statistics for its one-to-four family residential mortgage portfolio for the
periods presented, excluding mortgage loans held for sale or investment:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------------------------
1994 1994 1995 1995 1996 1996 1997 1997 1998 1998
--------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
Number Percent of Number Percent of Number Percent of Number Percent of Number Percent of
of Loans Portfolio of Loans Portfolio of Loans Portfolio of Loans Portfolio of Loans Portfolio
--------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <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
--------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ----------
========= ========== ======== ========== ======== ========== ======== ========== ======== ==========
<CAPTION>
At March 31,
----------------------
1999 1999
--------- -----------
Number Percent of
of Loans Portfolio
--------- -----------
<S> <C> <C>
Loans delinquent
for:
30-59 days
60-89 days
--------- -----------
90 days and over
Total delinquencies
Foreclosures
pending
--------- -----------
========= ===========
</TABLE>
The following table shows the loss experience on the dates indicated for
the seller's one - to four-family residential mortgage portfolio, excluding
loans held for sale or investment:
Total Net Losses Total portfolio
(Millions) (Millions) Loss Ratio
---------------- --------------- ----------
As of December 31, 1994........ $ $ %
As of December 31, 1995........
As of December 31, 1996........
As of December 31, 1997........
As of December 31, 1998........
As of March 31, 1999...........
- ---------------
The loss ratio represents total net losses for the period as a percentage of the
total portfolio at the end of the period.
S-26
<PAGE>
There can be no assurance that the delinquency and loss experience of the
mortgage loans will correspond to the delinquency and loss experience of the
seller's portfolio listed in the above tables. The statistics shown above
represent the delinquency and loss experience for the seller's portfolio only
for the periods presented, whereas the aggregate delinquency and loss experience
on the mortgage loans will depend on the results obtained over the life of the
mortgage pool. The seller's portfolio includes mortgage loans with a variety of
payment and other characteristics, including geographic location, that are not
necessarily representative of the payment and other characteristics of the
mortgage loans. The seller's portfolio includes mortgage loans underwritten
using 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, foreclosures and losses could be higher than those previously
experienced by the seller. 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 for the mortgage loans.
[The loss and delinquency experience of the seller, as shown in the tables
above, reflects a stable, consistently managed servicing operation. Loss and
delinquency levels during these periods were consistently within the ranges
anticipated by management.]
Servicing of Mortgage Loans
[Disclosure as appropriate. Servicing of the mortgage loans disclosure may
include the following:
General
Under the pooling and servicing agreement, [name of master servicer] will
act as master servicer of the mortgage loans. The master servicer will be
responsible for servicing the mortgage loans serviced by it under the terms of
the pooling and servicing agreement, employing that degree of skill and care
which it employs in servicing mortgage loans comparable to those mortgage loans
serviced by it for itself or others. The master servicer will not have any
servicing obligations for the mortgage loans not serviced by it.
The master servicer will make reasonable efforts to collect or cause to be
collected all payments called for under the terms and provisions of the mortgage
loans serviced by it and, to the extent those procedures are consistent with the
pooling and servicing agreement, will follow collection procedures as are
followed for mortgage loans comparable to the mortgage loans in the trust in the
local areas where each mortgaged property is located. Under the pooling and
servicing agreement, the master servicer will establish and maintain, or cause
to be established and maintained, one or more Collection Accounts, into which
deposits will be made on a daily basis of payments and collections on the
mortgage loans serviced by it or its primary servicers, net of the related
servicing compensation. Funds credited to a Collection Account may be invested
for the benefit and at the risk of the master servicer or its primary servicers
in permitted investments, as described in the pooling and servicing agreement,
that are scheduled to mature on or prior to the business day preceding the next
distribution date.
S-27
<PAGE>
The pooling and servicing agreement prohibits the resignation of the
master servicer, except upon a determination that its duties thereunder are no
longer permitted under applicable law. No such resignation will be effective
until a successor has assumed such servicing obligations in the manner provided
in the pooling and servicing agreement.
Under the pooling and servicing agreement, the master servicer may
contract with subservicers to perform some or all of its servicing duties.
Notwithstanding its servicing arrangement, the master servicer will remain
liable for its servicing duties and obligations under the pooling and servicing
agreement as if that master servicer alone were servicing the mortgage loans.
Servicing Compensation and Payment of Expenses
The expense fees for the mortgage loans are payable out of the interest
payments on each mortgage loan. The expense fees will vary from mortgage loan to
mortgage loan. The rate at which the expense fees accrue is expected to range
from ___% to ___% per annum of the Stated Principal Balance of the related
mortgage loan. As of the cut-off date, the weighted average rate at which the
expense fees accrue is expected to equal approximately ___%. The expense fees
consist of the servicing fee and fees payable to the trustee for its activities
as trustee under the pooling and servicing agreement. The servicing fee payable
to the master servicer will be ____% per annum of the Stated Principal Balance
of each mortgage loan. The fees payable to the trustee for its activities as
trustee under the pooling and servicing agreement will range from ____% to ____%
per annum, subject to a maximum of ____% per annum, of the Stated Principal
Balance of each mortgage loan. The master servicer is obligated to pay some
ongoing expenses associated with the trust and incurred by the master servicer
in connection with its responsibilities under the pooling and servicing
agreement and such amounts will be paid by the master servicer, out of its
servicing fee. The amount of the servicing fee is subject to adjustment for
prepaid mortgage loans, as described in this prospectus supplement under
"Adjustment to Servicing Fee in Connection with Certain Prepaid Mortgage Loans".
The master servicer will also be entitled to receive late payment fees,
prepayment penalty fees, assumption fees and other similar charges. The master
servicer will be entitled to receive all reinvestment income earned on amounts
on deposit in the related Collection Account.
The net rate of a mortgage loan is the mortgage rate of that mortgage loan
minus the related rate at which the expense fees accrue. The mortgage rate of a
mortgage loan is the rate at which interest accrues on that mortgage loan in
accordance with the terms of the related mortgage note.
[Portfolio History of the Master Servicer]
[Year 2000 Considerations]
Adjustment to Servicing Fee in Connection with Certain Prepaid Mortgage Loans
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 that prepayment, instead
of for a full month. In most cases, partial principal prepayments are applied as
of the day of receipt, with a resulting reduction in interest payable for the
month during which the partial principal prepayment is made. As to principal
prepayments in full and
S-28
<PAGE>
partial principal prepayments for the mortgage loans, the master servicer is
obligated to remit to the trust an amount equal to the lesser of the following:
o any shortfall in interest collections resulting from the timing of
principal payments in full and partial principal prepayments made
during the calendar month preceding a distribution date, and
o the monthly servicing fee, exclusive of the related subservicing
fee, if any, otherwise payable to the master servicer in connection
with that distribution Date.
If shortfalls in interest as a result of principal prepayments in full and
partial principal prepayments during the prepayment periods applicable to a
distribution date exceed the amount of the servicing fee and other amounts
described above available to cover that shortfall for that distribution date,
the amount of interest available to be distributed to certificateholders will be
reduced by the amount of that excess. You may refer to "Description of the
Certificates--Distributions of Interest" in this prospectus supplement for more
detail.
Advances from the Master Servicer
Subject to the following limitations, the master servicer will be required
to advance, prior to each distribution date, from its own funds or amounts
received for the mortgage loans that do not constitute Available Funds for that
distribution date, an amount equal to the aggregate of payments of principal of
and interest on the mortgage loans, net of the servicing fee and the
subservicing fee or the fees payable to the trustee for its activities as
trustee under the pooling and servicing agreement, if applicable, which were due
on the related due date and which were delinquent on the related determination
date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the certificates rather than to guarantee or insure
against losses. The master servicer is obligated to make advances for delinquent
payments of principal of or interest on each mortgage loan to the extent that
those advances are, in its reasonable judgment, recoverable from future payments
and collections or insurance payments or proceeds of liquidation of the related
mortgage loan. Subject to the foregoing, advances will be made through the
liquidation of the related mortgaged property. If the master servicer determines
on any determination date to make an advance, that advance will be included with
the distribution to certificateholders on the related distribution date. Any
failure by the master servicer to make an advance as required under the pooling
and servicing agreement will constitute an event of default under the pooling
and servicing agreement subject to grace periods specified in the pooling and
servicing agreement. If the master servicer is terminated as a result of the
occurrence of an event of default, the trustee or the successor servicer will be
obligated to make that advance, in accordance with the terms of the pooling and
servicing agreement. For a discussion of other events of default under the
pooling and servicing agreement and the rights of the trustee upon any event of
default, see "The Agreements--Event of Default and Rights Upon Events of
Default" in the prospectus.
S-29
<PAGE>
Optional Purchase of Defaulted Loans
The master servicer may, at its option, purchase from the trust any
mortgage loan serviced by it which is delinquent 91 days or more. That purchase
shall be at a price equal to 100% of the Stated Principal Balance of that
mortgage loan plus accrued interest on that mortgage loan at the applicable
mortgage rate from the date through which interest was last paid by the related
mortgagor or advanced to the first day of the month in which that amount is to
be distributed.
Special Servicing Agreements
The pooling and servicing agreement will permit the master servicer to
enter into a special servicing agreement with an unaffiliated holder of
subordinate certificates. Under that agreement, that unaffiliated holder may
instruct the master servicer, to commence or delay foreclosure proceedings with
respect to delinquent mortgage loan being serviced or master serviced by it. The
commencement or delay at that holder's direction will be taken by the master
servicer, only after that holder deposits a specified amount of cash with the
master servicer. That cash will be available for payment to related
certificateholders if Liquidation Proceeds are less than they otherwise may have
been had the master servicer acted using its normal servicing procedures.
Voting Rights
Voting rights of the trust will be allocated 1% to the Class X
Certificates with the balance allocated among the other classes of certificates
based upon their respective class principal balances.
S-30
<PAGE>
Description of the Certificates
[Contents of this section will vary depending on the transaction structure.]
General
The certificates will be issued under the pooling and servicing agreement.
Described below in this section are summaries of the specific terms and
provisions under which the certificates will be issued. The following summaries
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, the provisions of the pooling and servicing agreement.
The Mortgage Pass-Through Certificates, Series ____-__ will consist of the
[Class A-1, Class A-2, Class A-3, Class A-4,] Class P, Class X and Class R
Certificates, which are collectively referred to as the Senior Certificates, and
the Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6
Certificates, which are collectively referred to as the Subordinate
Certificates. Only the Senior Certificates and the Class B-1, Class B-2 and
Class B-3 Certificates, which are collectively referred to as the Offered
Certificates, are offered by this prospectus supplement. The classes of Offered
Certificates will have the respective initial class principal balances or
initial notional amounts, subject to the permitted variance, and pass-through
rates listed or described on page S-__ of this prospectus supplement.
The Class X Certificates do not have a principal balance and are not entitled to
any distributions in respect of principal of the mortgage loans.
The Senior Certificates will evidence in the aggregate an initial
beneficial ownership interest of approximately ____% of the mortgage loans as of
the closing date. The Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and
Class B-6 Certificates, as of the closing date, represent an initial beneficial
ownership of interest of ____%, ____%, ____%, ____%, ____% and ____%,
respectively, in the mortgage loans.
The Senior Certificates, other than the Class P, Class X and Class R
Certificates, will be available only in book-entry form through the facilities
of DTC. The Subordinate Certificates and the Class P, Class X and Class R
Certificates will be issued in fully registered certificated form. The Class R
Certificates will be issued as a single certificate with a dollar denomination
of $100.
REMIC Structure
For federal income tax purposes, the Trust will be treated as a REMIC. The
assets of the REMIC will generally consist of the mortgage loans.
DTC Registered Certificates
Each class available in book-entry form will be issued in one or more
certificates which equal the aggregate initial class principal balance of each
of those classes of certificates and which will be held by a nominee of DTC, and
are collectively referred to as the DTC registered certificates. Beneficial
interests in the DTC registered certificates will be held indirectly by
investors through the
S-31
<PAGE>
book-entry facilities of DTC, as described in this prospectus supplement.
Investors in the DTC registered certificates, other than the Class X
Certificates, may hold such beneficial interests in these certificates in
minimum denominations representing an original principal amount of $25,000 and
multiples of $1 in excess of that amount. Investors in the Class A-4
Certificates may hold those beneficial interests in the DTC registered
certificates in minimum denominations representing an original principal amount
of not less than $1,000 and multiples of $1 in excess of that amount. Investors
in the Class X Certificates may hold those beneficial interests in the DTC
registered certificates in minimum denominations representing an original
notional amount of not less than $100,000 and multiples of $1 in excess of that
amount. The depositor has been informed by DTC that its nominee will be Cede &
Co. Accordingly, Cede & Co. is expected to be the holder of record of the DTC
registered certificates. No person acquiring a DTC registered certificate will
be entitled to receive a physical certificate representing such certificate, a
definitive certificate, except as described in the third paragraph below.
Unless and until definitive certificates are issued, it is anticipated
that the only "certificateholder" of the DTC registered certificates will be
Cede & Co., as nominee of DTC. Beneficial owners of the DTC registered
certificates will not be certificateholders, as that term is used in the pooling
and servicing agreement. Beneficial owners are only permitted to exercise the
rights of certificateholders indirectly through participants and DTC. Monthly
and annual reports on the trust provided to Cede & Co., as nominee of DTC, may
be made available to beneficial owners upon request, in accordance with the
rules, regulations and procedures creating and affecting DTC, and to the
participants to whose DTC accounts the DTC registered certificates of those
beneficial owners are credited.
For a description of the procedures generally applicable to the DTC
registered certificates, see "Description of the Securities--Book-Entry
Registration" in the prospectus.
Definitive certificates will be issued to beneficial owners of DTC
registered certificates, or their nominees, rather than to DTC, only if:
o DTC or the depositor advises the trustee in writing that the
depository is no longer willing, qualified or able to discharge
properly its responsibilities as nominee and depository for the DTC
registered certificates and the depositor or the trustee is unable
to locate a qualified successor;
o the depositor, at its sole option, in writing, elects to terminate
the book-entry system through DTC; or
o after the occurrence of an event of default, beneficial owners of
any class of DTC registered certificates representing not less than
51 % of the related aggregate class principal balance advise the
trustee and DTC through the participants in writing that the
continuation of a book-entry system through DTC, or a successor
thereto, is no longer in the best interests of the beneficial
owners.
DTC management is aware that some computer applications, systems and the
like for processing data that are dependent upon calendar dates, including dates
before, on, and after
S-32
<PAGE>
January 1, 2000, may encounter Year 2000 problems. DTC has informed its
participants and other members of the financial community that it has developed
and is implementing a program so that its systems, as the same relate to the
timely payment of distributions, including principal and income payments, to
securityholders, book-entry deliveries, and settlement of trades within DTC,
continue to function appropriately. This program includes a technical assessment
and a remediation plan, each of which is complete. Additionally, DTC's plan
includes a testing phase, which is expected to be completed within appropriate
time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information of the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the its participants that it is contacting and
will continue to contact third party vendors from whom DTC acquires services to:
o (i) impress upon them the importance of such services being Year
2000 compliant; and
o (ii) determine the extent of their efforts for Year 2000
remediation, and, as appropriate, testing of their services.
In addition, DTC is in the process of developing such contingency plans as it
deems appropriate.
According to DTC, the information above for DTC has been provided for
informational purposes only and is not intended to serve as a representation,
warranty or contract modification of any kind.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all beneficial
owners of the occurrence of that event and the availability of definitive
certificates. Upon surrender by DTC of the global certificate or certificates
representing the DTC registered certificates and instructions for
re-registration, the trustee will issue the definitive certificates. After that,
the Trustee will recognize the holders of those definitive certificates as
certificateholders under the pooling and servicing agreement.
Glossary of Terms
The following terms are given the meanings shown below to help describe
the cash flows on the certificates:
Available Funds--for any distribution date will be equal to the sum of:
o all scheduled installments of interest, net of the related expense
fees, and principal due on the due date in the month in which that
distribution date occurs and received prior to the related
determination date, together with any advances for the mortgage
loans;
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o all Insurance Proceeds and Liquidation Proceeds during the month
preceding the month of that distribution date, in each case net of
unreimbursed expenses incurred in connection with a liquidation or
foreclosure and unreimbursed advances, if any;
o all partial or full prepayments received during the related
prepayment period applicable to that distribution date;
o amounts received for that distribution date in an amount equal to
the unpaid principal balance or purchase price for a deleted
mortgage loan, or a mortgage loan repurchased by the seller or the
master servicer as of that distribution date, reduced by amounts in
reimbursement for advances previously made and other amounts as to
which the master servicer is entitled to be reimbursed under the
pooling and servicing agreement; and
o the total, to the extent not previously distributed and to the
extent received by the master servicer, any amounts payable as
Compensating Interest by the master servicer on that distribution
date relating to those mortgage loans.
Bankruptcy Loss Coverage Amount--The aggregate amount of Realized Losses
which may be allocated in connection with Bankruptcy Losses.
Bankruptcy Losses--A Realized Loss attributable to certain actions which
may be taken by a bankruptcy court in connection with a mortgage loan, including
a reduction by a bankruptcy court of the principal balance of or the mortgage
rate on a mortgage loan or an extension of its maturity.
Certificate Principal Balance--For any offered certificate as of any date
of determination, an amount equal to the initial principal balance of that
certificate, reduced by the aggregate of the following amounts allocable to the
certificates:
o all amounts previously distributed to holders of certificates of
that class as payments of principal,
o the amount of Realized Losses, including Excess Losses, allocated to
that class and
o in the case of any Subordinate Certificate any amounts allocated to
that class in reduction of its class principal balance for payment
of Class P Deferred Amounts, as described below under "--Allocation
of Losses"
and
o in the case of the Accrual Certificates, increased by all interest accrued
and added to the class principal balance of that class prior to that
distribution date.
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Class A-2 Accrual Amount--On each distribution date up to and including
the Class A-2 Accrual Termination Date, the amount of accrued interest on the
Class A-2 Certificates added to the class principal balance of the class will be
distributed as principal in the following order of priority:
o first, to the Class A-1 Certificates, until the class principal
balance of that class has been reduced to zero; and
o second, to the Class A-2 Certificates, until the class principal
balance of that class has been reduced to zero.
Class A-2 Accrual Termination Date--The earlier of the related Senior
Credit Support Depletion Date and the distribution date on which the Certificate
Principal Balance of the Class A-1 Certificates has been reduced to zero.
Class A-3 Adjusted Percentage--Equal to:
o 0% for any distribution date occurring prior to the distribution
date in _____ ____ and
o the Class A-3 Percentage for any distribution date occurring on or
after the distribution date in _____ ____.
Class A-3 Liquidation Amount--The aggregate, for each mortgage loan that
became a Liquidated Mortgage Loan during the calendar month preceding the month
of the distribution date, of the lesser of:
o the Class A-3 Percentage of the Stated Principal Balance of that
mortgage loan, exclusive of the Class P Fraction related to that
mortgage loan, with respect to any Class P Mortgage Loan and
o the Class A-3 Percentage on any distribution date occurring prior to
the fifth anniversary of the first distribution date, and the Class
A-3 Prepayment Percentage on the fifth anniversary of the first
distribution date and each distribution date after that fifth
anniversary, in each case, of the Liquidation Principal for that
mortgage loan.
Class A-3 Lockout Principal Distribution Amount--For any distribution
date, the sum of:
o the Class A-3 Adjusted Percentage of the Principal Payment Amount,
exclusive of the portion of that Principal Payment Amount
attributable to the Class P Principal Distribution Amount;
o the Class A-3 Prepayment Percentage of the Principal Prepayment
Amount, exclusive of the portion of that Principal Payment Amount
attributable to the Class P Principal Distribution Amount; and
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o the Class A-3 Liquidation Amount.
Class A-3 Percentage--for any distribution date, the lesser of:
o 100% and
o the Certificate Principal Balance of the Class A-3 Certificates
divided by the aggregate Stated Principal Balance of the mortgage
loans, less the Class P Principal Balance, in each case immediately
prior to the distribution date.
The Class A-3 Percentage as of the closing date will be approximately ____%.
Class A-3 Prepayment Percentage--for any distribution date, the product of
the Class A-3 Percentage and the Step Down Percentage.
Class P Fraction--A portion of the amount of principal attributable to
principal received by a Class P Mortgage Loan multiplied by a fraction, the
numerator of which is ____% minus the Net Mortgage Rate on that Class P Mortgage
Loan and the denominator of which is ____%.
Class P Mortgage Loan--any mortgage loan with a Net Mortgage Rate of less
than ____% per annum on which the Class P Certificates will receive a portion of
the Available Funds attributable to principal received on that mortgage loan.
Class P Principal Distribution Amount--For each distribution date, a
portion of the Available Funds attributable to principal received by a Class P
Mortgage Loan, equal to the Class P Fraction. The aggregate of the amounts
payable to the Class P Certificates described in this paragraph are referred to
in this prospectus supplement as the Class P Principal Distribution Amount.
Compensating Interest--With respect to any mortgage loan that prepaid in
full during the related prepayment period an additional payment made by the
master servicer, to the extent funds are available from the servicing fee, equal
to the amount of interest at the mortgage rate, less the servicing fee, for that
mortgage loan from the date of the prepayment to the related due date.
Excess Losses--Special Hazard Losses in excess of the Special Hazard Loss
Coverage Amount; Bankruptcy Losses in excess of the applicable Bankruptcy Loss
Coverage Amount; and Fraud Losses in excess of the applicable Fraud Loss
Coverage Amount.
Fraud Loss Coverage Amount--The aggregate amount of Realized Losses which
may be allocated in connection with Fraud Losses.
Fraud Losses--A Realized Loss incurred on defaulted mortgage loans as to
which there was fraud in the origination of the mortgage loans.
Interest Accrual Period--For each distribution date for each
interest-bearing class of certificates, the calendar month preceding the month
of that distribution date.
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Liquidation Principal--The principal portion of Liquidation Proceeds
received for each mortgage loan which became a Liquidated Mortgage Loan, but not
in excess of the principal balance of that Liquidated Mortgage Loan, during the
calendar month preceding the month of the distribution date, exclusive of the
portion of the Liquidation Principal attributable to the applicable Class P
Principal Distribution Amount.
Net Interest Shortfall--For any distribution date, the sum of:
o the amount of interest which would otherwise have been received for
any mortgage loan that was the subject of (x) a Relief Act Reduction
or (y) a Special Hazard Loss, Fraud Loss, Debt Service Reduction or
Deficient Valuation, after the exhaustion of the respective amounts
of coverage provided by the Subordinate Certificates for that types
of losses; and
o any Net Prepayment Interest Shortfalls.
Net Interest Shortfalls on any distribution date will be allocated pro rata
among all classes of certificates entitled to receive distributions of interest
on that distribution date, based on the amount of interest each of those classes
of certificates would otherwise be entitled to receive on that distribution date
before taking into account any reduction in that amounts resulting from that Net
Interest Shortfalls. The amount the Subordinate Certificates would otherwise be
entitled to receive from the mortgage loans before taking into account any of
those reductions will be based upon the amount of interest accruing at the
applicable pass-through rate on that class's proportionate share, based upon the
class principal balance, of the aggregate Stated Principal Balance of the
mortgage loans.
Net Prepayment Interest Shortfall--For any distribution date, is the
amount by which the aggregate of Prepayment Interest Shortfalls during the
applicable prepayment period applicable to that distribution date exceeds the
available Compensating Interest for that period.
Original Subordinate Principal Balance--The aggregate principal balance
the Certificate Principal Balance of the Subordinate Certificates as of the
closing date.
Premium Rate Mortgage Loans--Mortgage Loans having Net Mortgage Rates in
excess of ___% per annum.
Prepayment Interest Shortfall--The amount by which interest paid by a
borrower in connection with a prepayment of principal on a mortgage loan is less
than one month's interest at the related mortgage rate, net of the related
servicing fee, on the Stated Principal Balance of that mortgage loan.
Principal Payment Amount--For any distribution date, the sum of
o scheduled principal payments on the mortgage loans due on the
related due date;
o the principal portion of repurchase proceeds received for any
mortgage loan which
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was repurchased as permitted or required by the pooling and
servicing agreement during the calendar month preceding the month of
the distribution date; and
o any other unscheduled payments of principal which were received on
the mortgage loans during the preceding calendar month, other than
principal payments in full, partial principal prepayments or
Liquidation Principal, as defined in this glossary.
Principal Prepayment Amount--An unscheduled payment of principal
representing a partial prepayment or payment in full in connection with any
mortgage loans.
Realized Loss--For a Liquidated Mortgage Loan, the amount by which the
remaining unpaid principal balance of the mortgage loan exceeds the amount of
Liquidation Proceeds applied to the principal balance of the related mortgage
loan.
Relief Act Reduction--A reduction in the amount of monthly interest
payment on a mortgage loan under the Relief Act.
Senior Credit Support Depletion Date--The date on which the aggregate
class principal Balance of the Subordinate Certificates has been reduced to
zero.
Senior Liquidation Amount--The aggregate, for each mortgage loan which
became a Liquidated Mortgage Loan during the calendar month preceding the month
of the distribution date, of the lesser of the Senior Percentage of the Stated
Principal Balance of that mortgage loan, exclusive of the Class P Fraction
related to that mortgage loan, if applicable, and the Senior Prepayment
Percentage of the Liquidation Principal for that mortgage loan.
Senior Percentage--For any distribution date, the percentage equivalent of
a fraction, the numerator of which is the aggregate Certificate Principal
Balance of the classes of Senior Certificates, other than the Class P
Certificates, immediately prior to that date and the denominator of which is the
aggregate Stated Principal Balance of the mortgage loans less the Class P
Principal Balance, in each case immediately prior to the distribution date. In
no event will the Senior Percentage exceed 100%.
Senior Prepayment Percentage--For any distribution date occurring during
the five years beginning on the first distribution date, 100%. Thereafter, the
Senior Prepayment Percentage will, except as described below, be subject to
gradual reduction as described in the following paragraph. This disproportionate
allocation of certain unscheduled payments in respect of principal will have the
effect of accelerating the amortization of the Senior Certificates while, in the
absence of Realized Losses, increasing the interest in the aggregate Stated
Principal Balance evidenced by the Subordinate Certificates. Increasing the
respective interest of the Subordinate Certificates relative to that of the
Senior Certificates is intended to preserve the availability of the
subordination provided by the Subordinate Certificates.
The Senior Prepayment Percentage for any distribution date occurring on or
after the fifth anniversary of the first distribution date will be as follows:
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o for any distribution date in the first year after the first
distribution date, the Senior Percentage plus 70% of the Subordinate
Percentage for that distribution date;
o for any distribution date in the second year after the first
distribution date, the Senior Percentage plus 60% of the Subordinate
Percentage for that distribution date;
o for any distribution date in the third year after the first
distribution date, the Senior Percentage plus 40% of the Subordinate
Percentage for that distribution date;
o for any distribution date in the fourth year after the first
distribution date, the Senior Percentage plus 20% of the Subordinate
Percentage for that distribution date; and
o for any distribution date after the first distribution date, the
Senior Percentage for such distribution date.
If for any of the foregoing distribution dates the Senior Percentage
exceeds the initial Senior Percentage for the Senior Certificates, the Senior
Prepayment Percentage for that distribution date will once again equal 100%.
Notwithstanding the foregoing, no decrease in the reduction to the Senior
Prepayment Percentage for the Senior Certificates as described above will occur
if, as of the first distribution date as to which that decrease applies the
outstanding principal balance of the mortgage loans, delinquent 60 days or more
averaged over the preceding six month period, as a percentage of the aggregate
principal balance of the Certificate Principal Balance of the Subordinate
Certificates as of that distribution date is equal to or greater than 50% or
cumulative Realized Losses for the mortgage loans exceed:
o for the distribution date on the fifth anniversary of the first
distribution date, 30% of that Original Subordinate Principal
Balance,
o for the distribution date on the sixth anniversary of the first
distribution date, 35% of that Original Subordinate Principal
Balance,
o for the distribution date on the seventh anniversary of the first
distribution date, 40% of that Original Subordinate Principal
Balance,
o for the distribution date on the eighth anniversary of the first
distribution date, 45% of that Original Subordinate Principal
Balance and
o for the distribution date on the ninth anniversary of the first
distribution date, 50% of that Original Subordinate Principal
Balance.
If on any distribution date the allocation to the class of Senior
Certificates then entitled to distributions of principal payments in full and
partial principal prepayments and other amounts in the percentage required above
would reduce the outstanding Certificate Principal Balance of that class below
zero, the distribution to that class of certificates of the Senior Prepayment
Percentage
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<PAGE>
of those amounts for such distribution date will be limited to the percentage
necessary to reduce the related Certificate Principal Balance to zero.
Senior Principal Distribution Amount--For any distribution date, the sum
of
o the related Senior Percentage of the Principal Payment Amount,
exclusive of the portion of the Principal Payment Amount
attributable to the Class P Principal Distribution Amount;
o the related Senior Prepayment Percentage of the Principal Prepayment
Amount, exclusive of the portion of the Principal Payment Amount
attributable to the Class P Principal Distribution Amount; and
o the Senior Liquidation Amount.
Special Hazard Loss Coverage--The aggregate amount of Realized Losses
which may be allocated in connection with Special Hazard Losses.
Special Hazard Losses--A Realized Loss incurred, to the extent that the
loss was attributable to direct physical damage to a mortgaged property other
than any loss of a type covered by a hazard insurance policy or a flood
insurance policy, if applicable; and any shortfall in insurance proceeds for
partial damage due to the application of the co-insurance clauses contained in
hazard insurance policies. The amount of the Special Hazard Loss is limited to
he lesser of the cost of repair or replacement of the mortgaged property; any
loss above that amount would be a Defaulted Mortgage Loss or other applicable
type of loss. [Special Hazard Losses does not include losses occasioned by war,
civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials, except under certain circumstances, nuclear reaction,
chemical contamination or waste by the mortgagor.]
Stated Principal Balance--As to any mortgage loan and due date, the unpaid
principal balance of that mortgage loan as of that due date, as specified in the
amortization schedule at the time relating to that mortgage loan and due date
before any adjustment to the amortization schedule by reason of any moratorium
or similar waiver or grace period, after giving effect to any previous partial
principal prepayments and Liquidation Proceeds received and to the payment of
principal due on that due date and irrespective of any delinquency in payment by
the related mortgagor.
Step Down Percentage--For any distribution date, the percentage indicated
below:
[Distribution Date Occurring in Step Down Percentage
- ------------------------------- --------------------
April 1999 through March 2004............................. 0%
April 2004 through March 2005............................. 30%
April 2005 through March 2006............................. 40%
April 2006 through March 2007............................. 60%
April 2007 through March 2008............................. 80%
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April 2008 and thereafter................................. 100%]
Stripped Interest Rate--For any Premium Rate Mortgage Loan, the excess, if
any, of the Net Mortgage Rate for such mortgage loan over ____%.
Subordination Level--On any distribution date for any class of Subordinate
Certificates, the percentage obtained by dividing the sum of the Certificate
Principal Balances of all classes of certificates which are subordinate in right
of payment to that class by the sum of the Certificate Principal Balances of all
classes of certificates, in each case immediately prior to that distribution
date.
Subordinate Liquidation Amount--the excess, if any, of the aggregate
Liquidation Principal of all mortgage loans which became Liquidated Mortgage
Loans during the calendar month preceding the month of that distribution date
over the sum of the related Senior Liquidation Amount for that distribution
date.
Subordinate Principal Distribution Amount--for any distribution date and
the Subordinate Certificates, the sum of
o the Subordinate Percentage for the Subordinate Certificates of the
Principal Payment Amount for the mortgage loans, exclusive of the
portion thereof attributable to the Class P Principal Distribution
Amount;
o the Subordinate Prepayment Percentage of the Principal Prepayment
Amount for the mortgage loans, exclusive of the portion thereof
attributable to the Class P Principal Distribution Amount; and
o the Subordinate Liquidation Amount for the mortgage loans less the
Class P Deferred Amounts required to be paid to the Class P
Certificates on that distribution date.
Any reduction to a Subordinate Principal Distribution Amount described
above shall first offset amounts of the related Principal Payment Amounts,
second the related Subordinate Liquidation Amounts and then the related
Principal Prepayment Amounts.
Subordinate Percentage--For any distribution date, the difference between
100% and the related Senior Percentage for that date.
Payments on Mortgage Loans; Accounts
On or prior to the closing date, the trustee will establish a Certificate
Account, which shall be maintained with the trustee in trust for the benefit of
the certificateholders. On or prior to each distribution date, as specified in
the pooling and servicing agreement, the master servicer will withdraw from the
Collection Account the aggregate Available Funds on deposit in that Collection
Account for such distribution date and will deposit those amounts in the
Certificate Account. See "The Trust Funds--Collection Account and Certificate
Account" in the prospectus.
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Distributions
Distributions on the certificates will be made by the trustee on the ____
day of each month, or if that day is not a business day, on the first business
day thereafter, commencing in ___________ ____, to the persons in whose names
such certificates are registered at the close of business on the last business
day of the month preceding the month of such distribution date.
Distributions on each distribution date will be made by check mailed to
the address of the person entitled to those distributions as it appears on the
applicable certificate register. In the case of a certificateholder who holds
100% of a class of certificates or who holds a Class X Certificate or who holds
certificates with an aggregate initial certificate balance of $1,000,000 or more
and who has so notified the trustee in writing in accordance with the pooling
and servicing agreement, distributions on each distribution date will be made by
wire transfer in immediately available funds to the account of that
certificateholder at a bank or other depository institution having appropriate
wire transfer facilities The final distribution in retirement of the
certificates will be made only upon presentment and surrender of those
certificates at the corporate trust office of the trustee.
Priority of Distributions Among Certificates
Distributions will in general be made to the extent of the Available Funds
in the order and priority as follows:
o first, to the Class P Certificates, a certain portion of the
principal received for each Class P Mortgage Loan, as described in
"--Distributions of Principal" in this prospectus supplement;
o second, to the Senior Certificates entitled to interest, accrued and
unpaid interest, as described in "--Distributions of Interest" in
this prospectus supplement;
o third, to the Senior Certificates entitled to principal, other than
the Class P Certificates, in the order described for the Senior
Certificates as described in "--Distributions of Principal--Senior
Principal Distribution Amount";
o fourth, to the Class P Certificates, any Class PO Deferred Amounts;
o fifth, to each class of Subordinate Certificates, interest and then
principal in increasing order of numerical class designation, with
both interest and principal being paid to one class before any
payments are made to the next class; and
o sixth, to the Class A-R Certificates, the remainder (which is
expected to be zero) of all Available Funds.
Distributions of interest and principal to the Senior Certificates will be
based on payments received or advanced for the mortgage loans.
Distributions of Interest
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The pass-through rate for each interest-bearing class of Offered
Certificates for each distribution date is as listed or described on page S-___
of this prospectus supplement.
The Class A-2 Certificates will also be referred to as the Accrual
Certificates. Interest will accrue on each of the Accrual Certificates during
each Interest Accrual Period at a per annum rate of ____%. However, that
interest will not be distributed on the Accrual Certificates until the Class A-2
Accrual Termination Date. Interest so accrued and unpaid will be added to the
Certificate Principal Balance of the Accrual Certificates on the related
distribution date.
The interest payable to the Class X Certificates is based on the weighted
average of the Stripped Interest Rates of the Premium Rate Mortgage Loans.
The notional amount of the Class X Certificates with respect to any
distribution date will equal the product of:
o the aggregate Stated Principal Balance, as of the second preceding
due date after giving effect to Scheduled Payments for that due
date, whether or not received, or for the initial distribution date,
as of the cut-off date, of the Premium Rate Mortgage Loans; and
o a fraction, the numerator of which is the weighted average of the
Stripped Interest Rates for the Premium Rate Mortgage Loans as of
that due date and the denominator of which is ____%.
On each distribution date, to the extent of funds available for that
distribution date, each interest-bearing class of certificates will be entitled
to receive an amount--in the case of the Accrual Certificates, have that
interest added to its Certificate Principal Balance until the Class A-2 Accrual
Termination Date--allocable to interest for the related Interest Accrual Period.
This amount for any interest-bearing class will be equal to:
o the sum of interest at the applicable Pass-Through Rate on the
related Certificate Principal Balance or notional amount, as the
case may be, and
o the sum of the amounts, if any, by which the amount described in the
clause above on each prior distribution date exceeded the amount
actually distributed as interest on that prior distribution dates
and not subsequently distributed.
The Class P Certificates will not bear interest.
The interest entitlement described above for each interest-bearing class
of certificates will be reduced by Net Interest Shortfalls experienced by the
related mortgage loans or, for the Subordinate Certificates, the related
mortgage loans, for that distribution date.
Accrued interest to be distributed or added to principal, as the case may
be, on any distribution date will be calculated, in the case of each
interest-bearing class of certificates, on the basis of the related Certificate
Principal Balance or notional amount, as applicable, immediately prior
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to that distribution date. Interest will be calculated and payable on the basis
of a 360-day year divided into twelve 30-day months.
In the event that, on a particular distribution date, Available Funds
applied in the order described above under "--Priority of Distributions Among
Certificates" are not sufficient to make a full distribution or addition to
principal, as the case may be, of the interest entitlement on the certificates,
interest will be distributed or added to principal, as the case may be, on each
class of certificates of equal priority based on the amount of interest each of
the classes would otherwise have been entitled to receive or accrete in the
absence of such shortfall. Any of those unpaid amounts will be carried forward
and added to the amount holders of each of those classes of certificates will be
entitled to receive or accrete on the next distribution date. A shortfall of
this nature could occur, for example, if losses realized on the mortgage loans
were exceptionally high or were concentrated in a particular month. Any such
unpaid amount will not bear interest.
Distributions of Principal
General. On each distribution date, certificateholders will be entitled to
receive principal distributions from the Available Funds to the extent and in
the priority described in this prospectus supplement. See "--Priority of
Distributions Among Certificates" in this prospectus supplement.
For each distribution date and each principal prepayment in full, the
related prepayment period will be the calendar month preceding the month in
which the related distribution date occurs. For each distribution date and each
partial principal prepayment, the related prepayment period will be the month
preceding the month in which the related distribution date occurs.
On each distribution date, to the extent of Available Funds for that
distribution date, up to the amount of the related Senior Principal Distribution
Amount for such distribution date, will be distributed as principal to the
following classes of Senior Certificates in the following order of priority:
o first, to the Class A-R Certificates, until the class principal
balance of that class has been reduced to zero;
o second, to the Class A-3 Certificates, the Class A-3 Lockout
Principal Distribution Amount, until the class principal balance of
that class has been reduced to zero;
o third, sequentially, to the Class A-1, Class A-2 and Class A-4
Certificates, in that order, until the respective class principal
balance of that class is reduced to zero; and
o fourth, to the Class A-3 Certificates, any remaining portion of the
Senior Principal Distribution Amount, until the class principal
balance of that class is reduced to zero.
Notwithstanding the foregoing, on each distribution date on and after the
Senior Credit Support Depletion Date, the Senior Principal Distribution Amount
will be distributed, concurrently, as principal to the Senior Certificates
(other than the Class P Certificates and the Class X Certificates) pro rata, in
accordance with their respective class principal balances immediately prior
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to that distribution date.
The Class X Certificates will not be entitled to receive any distributions
of principal.
Subordinate Principal Distribution Amount. On each distribution date, to
the extent of Available Funds for that distribution date, up to the amount of
the Subordinate Principal Distribution Amount for that distribution date, will
be distributed as principal of the Subordinate Certificates. Except as provided
in the following paragraph, each class of Subordinate Certificates will be
entitled to receive its pro rata share, based upon its respective Certificate
Principal Balance, of that Subordinate Principal Distribution Amount, in each
case to the extent of the amount available from Available Funds for distribution
of principal of that class. Distributions of principal of the Subordinate
Certificates will be made on each distribution date sequentially to the classes
of Subordinate Certificates in the order of their numerical class designation,
beginning with the class with the lowest numerical class designation, until each
class of Subordinate Certificates has received its respective pro rata share of
the Subordinate Principal Distribution Amount for that distribution date.
For each class of Subordinate Certificates, if on any distribution date
the related Subordination Level of that class is less than such percentage as of
the closing date, no distributions of principal prepayments in full and partial
principal prepayments will be made to any class or classes of Subordinate
Certificates junior to that class. The amount otherwise distributable to the
those classes relating to those principal prepayments in full and partial
principal prepayments will be allocated among the remaining classes of
Subordinate Certificates, pro rata, based upon their respective Certificate
Principal Balances.
Residual Certificates. The Class A-R Certificates will remain outstanding
for so long as the trust shall exist, whether or not they are receiving current
distributions of principal or interest. In addition to distributions of interest
and principal as described above, on each distribution date the holders of the
Class A-R Certificates will be entitled to receive Available Funds remaining
after payment of interest and principal on the Senior Certificates, Class PO
Deferred Amounts on the Class P Certificates and interest and principal on the
Subordinate Certificates for that distribution date, as described above. It is
not anticipated that there will be any significant amounts remaining for any
distribution.
Allocation of Losses
On each distribution date, the applicable Class P Fraction of any Realized
Loss, including any Excess Loss, on a Class P Mortgage Loan will be allocated to
the related Class P Certificates until the Certificate Principal Balance of that
class is reduced to zero The amount of that Realized Loss, other than an Excess
Loss, allocated on or prior to the Senior Credit Support Depletion Date will be
treated as a Class PO Deferred Amount. To the extent funds are available on that
distribution date or on any future distribution date from amounts that would
otherwise be allocable to the Subordinate Principal Distribution Amount, Class
PO Deferred Amounts will be paid on the related Class P Certificates prior to
distributions of principal on the Subordinate Certificates. See "--Priority of
Distributions Among Certificates" in this prospectus supplement. Any
distribution relating to unpaid Class PO Deferred Amounts will not further
reduce the Certificate Principal Balance of the
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Class P Certificates. The Class PO Deferred Amounts will not bear interest. The
Certificate Principal Balance of the class of Subordinate Certificates then
outstanding with the highest numerical class designation will be reduced by the
amount of any payments in respect of Class PO Deferred Amounts. After the Senior
Credit Support Depletion Date, no new Class PO Deferred Amounts will be created
for the related Class P Certificates.
On each distribution date, any Realized Loss, other than the Class P
Fraction thereof, if applicable, other than any Excess Loss, will be allocated
first to the Subordinate Certificates, in decreasing order of their numerical
class designations beginning with the class of Subordinate Certificates then
outstanding with the highest numerical class designation, in each case until the
Certificate Principal Balance of the respective class of certificates has been
reduced to zero; and then to the Senior Certificates, other than the Class X and
Class P Certificates and the Subordinate Certificates, pro rata, based upon
their respective Class Certificate Balances.
On each distribution date, Excess Losses, other than the Class P Fraction
of Excess Losses if applicable, will be allocated pro rata among the classes of
Senior Certificates, other than the Class X and Class P Certificates, based upon
their respective Certificate Principal Balances.
Because principal distributions are paid to certain classes of Senior
Certificates before other classes of Certificates, holders of such Senior
Certificates that are entitled to receive principal later bear a greater risk of
being allocated Realized Losses on the mortgage loans than holders of classes
that are entitled to receive principal earlier.
On each distribution date, if the aggregate Certificate Principal Balance
of all Senior Certificates exceeds the aggregate Stated Principal Balance of the
mortgage loans after giving effect to distributions of principal and the
allocation of all losses to the Senior Certificates on that distribution date,
such excess will be deemed a principal loss and will be allocated to the most
junior class of Subordinate Certificates then outstanding.
[Cross-Collateralization
Cross-Collateralization due to rapid prepayments in one Loan Group
On each distribution date prior to the reduction of the aggregate
Certificate Principal Balance of the Subordinate Certificates to zero, but after
the date on which the aggregate Certificate Principal Balance of the Group I or
Group II Senior Certificates (other than the related Class P Certificates) has
been reduced to zero, all principal on the mortgage loans relating to the Senior
Certificates that have been paid in full, after distributions of principal to
the Class P Certificates of that Certificate Group, will be paid to the Senior
Certificates (other than the related Class P Certificates) of the other
Certificate Group provided, however, that principal will not be distributed as
described above if on that distribution date (a) the Subordinate Percentage for
that distribution date is greater than or equal to 200% of the Subordinate
Percentage as of the closing date and (b) the average outstanding principal
balance of the Group I Loans and the Group II Loans delinquent 60 days or more
over the last six months, as a percentage of the related Subordinate Loan Group
Component Balance, is less than 50%. If principal from either the Group I Loans
or the Group II Loans is distributed to the Senior Certificates of the other
Loan Group according to this paragraph, the Subordinate Certificates
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will not receive such principal amount.
The "Subordinate Loan Group Component Balance" for the Group I or Group II
Loans at any time will equal the excess, if any, of the then outstanding
aggregate Stated Principal Balance of the mortgage loans in the applicable loan
group over the then outstanding aggregate Certificate Principal Balance of the
Group I or Group II Senior Certificates, as applicable.
Cross-Collateralization due to disproportionate realized losses in one Loan
Group
If on any distribution date the aggregate Certificate Principal Balance of
either the Group I or Group II Senior Certificates, other than the Certificate
Principal Balance of the related Class P Certificates, is greater than the
aggregate Stated Principal Balance of the mortgage loans in the related loan
group less the applicable Class P Fraction of each Class P Mortgage Loan in that
loan group (the "Undercollateralized Group"), then (1) the portion of the
Available Funds in respect of principal on the mortgage loans in the other loan
group (the "Overcollateralized Group"), after distributions of principal to the
Senior Certificates of the Overcollateralized Group, will be distributed to the
Senior Certificates of the Undercollateralized Group will be distributed to the
Senior Certificates of the Undercollateralized Group ,other than the related
Class P Certificates, until the aggregate Certificate Principal Balance of the
Senior Certificates of the Undercollateralized Group equals the aggregate Stated
Principal Balance of the mortgage loans in the related loans group less the
applicable Class P Fraction of each Class P Mortgage Loan in that loan group and
(2) the Available Funds of the Overcollateralized Group will be further reduced,
after distributions of interest to the Senior Certificates of the
Overcollateralized Group, in an amount equal to one month's interest on the
amount by which the Undercollateralized Group is undercollateralized at 6.50%
per annum and such amount will be added to the Available Funds of the
Undercollateralized Group. Consequently, the Subordinate Certificates will not
receive any distributions of principal until the Undercollateralized Group is no
longer undercollateralized.]
Optional Termination
The Depositor will have the right to repurchase all remaining mortgage
loans and REO Properties in the trust, effecting early retirement of the
certificates, subject to the aggregate Stated Principal Balance of those
mortgage loans and REO Properties at the time of repurchase being less than __%
of the aggregate Stated Principal Balance of the mortgage loans as of the
cut-off date. In the event the depositor exercises that option, the purchase
price distributed for each certificate will be 100% of its then outstanding
principal balance plus any Class PO Deferred Amounts in the case of the Class P
Certificates and, in the case of an interest-bearing certificate, any unpaid
accrued interest on that Certificate Principal Balance or notional amount, as
applicable, at the applicable Pass-Through Rate. In each case, the purchase
price distributed for each certificate will be subject to reduction as provided
in the pooling and servicing agreement if the purchase price is based in part on
the appraised value of any REO Properties and that appraised value is less than
the Stated Principal Balance of the related mortgage loans. Distributions on the
certificates relating to any such optional termination will first be paid to the
Senior Certificates and then to the Subordinate Certificates. The proceeds from
that distribution may not be sufficient to distribute the full amount to which
each class of certificates is entitled if the purchase price is based in part on
the appraised value of any REO Property and that appraised value is less than
the Stated Principal Balance of the
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related mortgage loan.
The Trustee
[Name of trustee] will be the trustee under the pooling and servicing
agreement. The depositor and the master servicer may maintain other banking
relationships in the ordinary course of business with [name of 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.
Restrictions on Transfer of the Class A-R Certificates
The Class A-R Certificates will be subject to the restrictions on transfer
described in the prospectus under "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates--Tax and
Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations". The pooling and servicing agreement provides that the Class A-R
Certificates, in addition to certain other classes of certificates, may not be
acquired by an ERISA Plan. See "ERISA Considerations" herein. Each Class A-R
Certificate will contain a legend describing the foregoing restrictions.
Yield, Prepayment and Maturity Considerations
The effective yields to the holders of the interest-bearing certificates
will be lower than the yields otherwise produced by the applicable rate at which
interest is passed through to the holders and the purchase price of these
certificates because monthly distributions will not be payable to the holders
until the ____ day, or, if either such day is not a business day, the following
business day, of the month following the month in which interest accrues on the
mortgage loans without any additional distribution of interest or earnings on
the certificates relating to that delay.
Delinquencies on the mortgage loans which are not advanced by or on behalf
of the master servicer because amounts, if advanced, would be nonrecoverable,
will adversely affect the yield on the certificates. Because of the priority of
distributions, shortfalls resulting from delinquencies not so advanced will be
borne first by the Subordinate Certificates in the reverse order of their
numerical class designations, and then by the Senior Certificates. If, as a
result of those shortfalls, the aggregate of the Certificate Principal Balances
of the Senior Certificates exceeds the aggregate Stated Principal Balances of
the mortgage loans, the Certificate Principal Balance of the Subordinate
Certificates then outstanding with the highest numerical class designation will
be reduced by the amount of that excess.
Net Interest Shortfalls will adversely affect the yields on the related
interest-bearing classes of certificates. Any Net Interest Shortfall allocated
to the Class A-2 Certificates will reduce the Class A-2 Accrual Amount, reducing
the amount of funds available for distribution of principal to the classes of
Senior Certificates entitled to receive those distributions.
The likelihood that mortgage loans will become delinquent and the rate of
any subsequent
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foreclosures may be affected by a number of factors related to the mortgagor's
personal circumstances, including unemployment or change in employment, or, in
the case of self-employed mortgagors relying on commission income, fluctuations
in income, marital separation and a mortgagor's equity in the related mortgaged
property. In addition, delinquency and foreclosure experience may be sensitive
to adverse economic conditions, either nationally or regionally, may exhibit
seasonal variations and may be influenced by the level of interest rates as they
affect real estate sales activity. Regional economic conditions, including
declining real estate values, may particularly affect delinquency and
foreclosure experience on the mortgage loans to the extent that the related
mortgaged properties are concentrated in certain geographic areas.
Net Interest Shortfalls will adversely affect the yields on the Offered
Certificates to which they relate. In addition, although all losses initially
will be borne by the Subordinate Certificates in decreasing order of their
numerical class designations, either directly or through distributions in
respect of Class PO Deferred Amounts on the Class P Certificates, Excess Losses
on the mortgage loans will be borne by all classes of the Senior Certificates on
a pro rata basis. Moreover, since the Subordinate Principal Distribution Amount
for each distribution date will be reduced by the amount of any distributions on
that distribution date relating to Class PO Deferred Amounts, the amount
distributable as principal on each of those distribution dates to each class of
Subordinate Certificates then entitled to a distribution of principal will be
less than it otherwise would be in the absence of those Class PO Deferred
Amounts. As a result, the yields on the Offered Certificates will depend on the
rate and timing of Realized Losses, including Excess Losses. Excess Losses could
occur at a time when one or more classes of Subordinate Certificates are still
outstanding and otherwise available to absorb other types of Realized Losses.
See "Description of the Certificates--Allocation of Losses" in this prospectus
supplement.
Prepayment Considerations and Risks
The rate of principal payments on the Offered Certificates, the aggregate
amount of distributions on the Offered Certificates and the yields to maturity
of the Offered Certificates will be related to the rate and timing of payments
of principal on the mortgage loans. The rate of principal payments on the
mortgage loans will in turn be affected by the amortization schedules of the
mortgage loans and by the rate of principal prepayments, including for this
purpose prepayments resulting from refinancing, liquidations of the Mortgage
Loans due to defaults, casualties, condemnations and repurchases by the Seller
or Master Servicer. [The mortgage loans may be prepaid by the mortgagors at any
time without a prepayment penalty. The mortgage loans are subject to the
"due-on-sale" provisions included therein. However, the master servicer may
choose not to accelerate a mortgage loan upon the conveyance of the related
mortgaged property if the master servicer would make a similar decision for a
comparable mortgage loan held for its own account. See "The Mortgage Pool" in
this prospectus supplement.
Prepayments, liquidations and purchases of the mortgage loans, including
any optional purchase by the master servicer of a defaulted mortgage loan and
any optional repurchase of the remaining mortgage loans in connection with the
termination of the trust, in each case as described in this prospectus
supplement, will result in distributions on the Offered Certificates of
principal amounts which would otherwise be distributed over the remaining terms
of the mortgage loans. Since the rate of payment of principal on the mortgage
loans will depend on future events and a
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variety of other factors, no assurance can be given as to such rate or the rate
of principal prepayments. The extent to which the yield to maturity of a class
of Offered Certificates may vary from the anticipated yield will depend upon the
degree to which that Offered Certificate is purchased at a discount or premium,
and the degree to which the timing of payments on that Offered Certificate is
sensitive to prepayments, liquidations and purchases of the mortgage loans.
Further, an investor should consider the risk that, in the case of the Class P
Certificates and any other Offered Certificate purchased at a discount, a slower
than anticipated rate of principal payments, including prepayments, on the
mortgage loans could result in an actual yield to that investor that is lower
than the anticipated yield. In the case of the Class X Certificates and any
other Offered Certificate purchased at a premium, a faster than anticipated rate
of principal payments on the mortgage loans could result in an actual yield to
that investor that is lower than the anticipated yield. Investors in the Class X
Certificates should carefully consider the risk that a rapid rate of principal
prepayments on the mortgage loans could result in the failure of those investors
to recover their initial investments.
The rate of principal payments, including prepayments, on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions, including the decision
whether or not to exercise its fights under any "due-on-sale" clause. In
general, if prevailing interest rates were to fall significantly below the
mortgage rates on the mortgage loans, the mortgage loans could be subject to
higher prepayment rates than if prevailing interest rates were to remain at or
above the mortgage rates on the mortgage loans. Conversely, if prevailing
interest rates were to rise significantly, the rate of prepayments on the
mortgage loans would generally be expected to decrease. No assurances can be
given as to the rate of prepayments on the mortgage loans in stable or changing
interest rate environments.
As described in this prospectus supplement under "Description of the
Certificates--Distributions of Principal", the applicable Senior Prepayment
Percentage of the Principal Prepayment Amount, exclusive of the portion of that
Principal Prepayment Amount attributable to the Class P Principal Distribution
Amount, will be initially distributed to the Senior Certificates other than the
Class P Certificates. This may result in all, or a disproportionate percentage
of those principal prepayments being distributed to holders of the Senior
Certificates other than the Class P Certificates and none, or less than their
pro rata share, of those principal prepayments being distributed to holders of
the Subordinate Certificates during the periods of time described in the
definition of "Senior Prepayment Percentage". The Class A-3 Certificates, in
most cases, will not receive any distributions of principal for the first five
years after the closing date.
The timing of changes in the rate of prepayments on the mortgage loans may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments is consistent with an investor's expectation. In
general, the earlier a prepayment of principal on the mortgage loans, the
greater the effect on an investor's yield to maturity. The effect on an
investor's yield as a result of principal payments occurring at a rate higher
(or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Offered Certificates may not be offset
by a subsequent like decrease (or increase) in the rate of principal payments.
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Structuring Assumptions
Unless otherwise specified, the information in the tables in this
prospectus supplement has been prepared on the basis of the following assumed
characteristics of the mortgage loans and the following additional assumptions:
o the mortgage loans have the following characteristics:
Amortized Remaining
Unpaid Net Remaining Term Term to Loan Age
Principal Mortgage Mortgage to Maturity Maturity (in
Balance Rate Rate (in months) (in months) months)
------- ---- ---- ----------- ----------- -------
o the mortgage loans prepay at the specified constant prepayment
assumption described in the following paragraph for the related
class of certificates,
o no defaults in the payment by the mortgagor of principal of and
interest on the mortgage loans are experienced,
o scheduled payments on the mortgage loans are received on the first
day of each month commencing in the calendar month following the
closing date and are computed prior to giving effect to prepayments
received on the last day of the prior month,
o prepayments are allocated as described in this prospectus supplement
without giving effect to loss and delinquency tests,
o there are no Net Interest Shortfalls and prepayments represent
prepayments in full of the mortgage loans and are received on the
last day of each month, commencing in the calendar month of the
closing date,
o the scheduled monthly payment for each mortgage loan has been
calculated based on the assumed mortgage loan characteristics
described in the first table above so that the mortgage loans will
amortize in amounts sufficient to repay the principal balances of
those assumed mortgage loans by its respective amortizing remaining
term,
o the initial Certificate Principal Balance or notional amount, as
applicable, of each class of certificates is as listed under
"Summary Information" in this prospectus supplement,
o interest accrues on each interest-bearing class of certificates at
the applicable interest rate listed or described under "Summary
Information" in this prospectus supplement,
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o distributions are received in cash on the ____ day of each month
commencing in the calendar month following the closing date,
o the closing date of the sale of the Offered Certificates is _____
___, ____,
o the seller is not required to repurchase or substitute for any
mortgage loan,
o the depositor does not exercise any option to repurchase the
mortgage loans described in this prospectus supplement under
"Description of the Certificates--Optional Termination" and
o no class of Subordinate Certificates becomes a Restricted Class.
While it is assumed that each mortgage loan prepays at the specified constant
prepayment assumption, this is not likely to be the case. Moreover,
discrepancies will exist between the characteristics of the actual mortgage
loans which will be delivered to the trustee and characteristics of the mortgage
loans assumed in preparing the tables in this prospectus supplement.
[Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The prepayment model used in this prospectus
supplement represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of mortgage loans. A 100%
prepayment assumption assumes a constant prepayment rate, or CPR, of 4.0% per
annum of the then outstanding principal balance of the mortgage loans, mortgage
loans in the first month of the life of the mortgage loans and an additional
1.09090909%, or precisely 12/11, per annum in each month after that month until
the eleventh month. Beginning in the twelfth month and in each month after that
month during the life of the mortgage loans, a 100% prepayment assumption
assumes a CPR of 16% per annum each month. As used in the table below, a 50%
prepayment assumption assumes prepayment rates equal to 50% of the related
prepayment assumption. Correspondingly, a 200% prepayment assumption assumes
prepayment rates equal to 200% of the related prepayment assumption, and so
forth. The prepayment assumption does not purport to be a historical description
of prepayment experience or a prediction of the anticipated rate of prepayment
of any pool of mortgage loans, including the mortgage loans.]
The sensitivity tables below indicate the sensitivity of the pre-tax
corporate bond equivalent yields to maturity of certain classes of certificates
to various constant prepayment assumptions. The yields set forth in the tables
were calculated by determining the monthly discount rates that, when applied to
the assumed stream of cash flows to be paid on the applicable class of
certificates, would cause the discounted present value of that assumed stream of
cash flows to equal the assumed purchase price of those classes and converting
those monthly rates to corporate bond equivalent rates. Such calculations do not
take into account variations that may occur in the interest rates at which
investors may be able to reinvest funds received by them as distributions on
certain classes of certificates and consequently do not purport to reflect the
return on any investment in any such class of certificates when such
reinvestment rates are considered.
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Sensitivity of the Class P Certificates
The Class P Certificates will be "principal only" certificates and will
not bear interest. As indicated in the table below, a low rate of principal
payments, including prepayments, of the Class P Mortgage Loans will have a
negative effect on the yield to investors in the Class P Certificates.
As described above under "Description of the Certificates--Distributions
of Principal", the Class P Principal Distribution Amount for the Class P
Certificates is calculated by reference to the principal payments, including
prepayments, on the Class P Mortgage Loans. The Class P Mortgage Loans will have
lower Net Mortgage Rates, and lower mortgage rates, than the other mortgage
loans. Mortgage loans with higher mortgage rates tend to prepay at higher rates
than mortgage loans with relatively lower mortgage rates in response to a given
reduction in market interest rates. As a result, the Class P Mortgage Loans may
prepay at lower rates, reducing the rate of payment of principal and the
resulting yield of the Class P Certificates.
The information shown in the following table has been prepared on the
basis of the structuring assumptions and on the assumption that the aggregate
purchase price of the Class P Certificates, expressed as a percentage of initial
Certificate Principal Balance, is ______%.
Sensitivity of the Class P Certificates to Prepayments
(Pre-Tax Yield to Maturity)
CPR
------------------------------------------
0 8 12 16 24
----- ----- ------ ------ ------
It is highly unlikely that all of the mortgage loans will have the
characteristics assumed or that the mortgage loans will prepay at any constant
rate until maturity or that all of the mortgage loans will prepay at the same
rate or time. As a result of these factors, the pre-tax yield on the Class P
Certificates is likely to differ from those shown in the table above, even if
all of the applicable mortgage loans prepay at the indicated percentages of the
prepayment assumption. No representation is made as to the actual rate of
principal payments on the Class P Mortgage Loans for any period or over the life
of the certificates or as to the yield on the Class P Certificates. Investors
must make their own decisions as to the appropriate prepayment assumptions to be
used in deciding whether to purchase a class of Class P Certificates.
Sensitivity of the Class X Certificates
As indicated in the table below, the yields to investors on the Class X
Certificates will be sensitive to the rate of principal payments, including
prepayments, of the Premium Rate Mortgage Loans, particularly those with high
Net Mortgage Rates. The mortgage loans generally can be prepaid at any time. On
the basis of the assumptions described below, the yield to maturity on the Class
X Certificates would be approximately 0% if prepayments were
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to occur at a constant rate of approximately ____% of the CPR. If the actual
prepayment rate of the mortgage loans were to exceed the applicable level for as
little as one month while equaling that level for the remaining months, the
investors in the Class X Certificates would not fully recoup their initial
investments.
As described above under "Description of the Certificates--Distribution of
Interest", the pass-through rate of the Class X Certificates in effect from time
to time is calculated by reference to the Net Mortgage Rates of the Premium Rate
Mortgage Loans. Mortgage loans with higher mortgage rates tend to prepay at
higher rates than mortgage loans with relatively lower mortgage rates in
response to a given change in market interest rates. As a result, the Premium
Rate Mortgage Loans may prepay at higher rates, reducing the pass-through rate
and notional amount of the Class X Certificates.
The information shown in the following table has been prepared on the
basis of the structuring assumptions which assume no Realized Losses, and on the
assumption that the purchase prices, expressed as a percentage of initial
notional amount, of the notional amount certificates is ____%, not including
interest. However, accrued interest has been added to such price in calculating
the yields shown in the table below.
Sensitivity of the Class X Certificates to Prepayments
(Pre-Tax Yields to Maturity)
CPR
------------------------------------------
0 8 12 16 24
----- ----- ------ ------ ------
------------------------------------------
It is highly unlikely that all of the mortgage loans will have the
characteristics assumed or that the mortgage loans will prepay at any constant
rate until maturity or that all of the mortgage loans will prepay at the same
rate or time. As a result of these factors, the pre-tax yield on the Class X
Certificates is likely to differ from those shown in the table above, even if
all of the mortgage loans prepay at the indicated percentages of the prepayment
assumption. No representation is made as to the actual rate of principal
payments on the mortgage loans for any period or over the lives of the Class X
Certificates or as to the yield on the Class X Certificates. Investors must make
their own decisions as to the appropriate prepayment assumptions to be used in
deciding whether to purchase the Class X Certificates.
Weighted Average Lives of the Offered Certificates
The weighted average life of any class of certificates is determined by:
o multiplying the amount of the reduction, if any, of the Certificate
Principal Balance of that certificate on each distribution date by
the number of years from the date of issuance to that distribution
date,
o summing the results and
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o dividing the sum by the aggregate amount of the reductions in
Certificate Principal Balance of that class referred to in the first
clause.
For a discussion of the factors which may influence the rate of payments,
including prepayments, of the mortgage loans, see "--Prepayment Considerations
and Risks" in this prospectus supplement and "Yield, Prepayment and Maturity
Considerations" in the prospectus.
In general, the weighted average lives of the Offered Certificates will be
shortened if the level of prepayments of principal of the mortgage loans
increases. However, the weighted average lives of the Offered Certificates will
depend upon a variety of other factors, including the timing of changes in that
rate of principal payments and the priority sequence of distributions of
principal of the classes of certificates. See "Description of the
Certificates--Distribution of Principal" in this prospectus supplement.
The interaction of the foregoing factors may have different effects on
various classes of Offered Certificates and the effects on any class may vary at
different times during the life of that class. Accordingly, no assurance can be
given as to the weighted average life of any class of Offered Certificates.
Further, to the extent the prices of the Offered Certificates represent
discounts or premiums to their respective original Certificate Principal
Balances, variability in the weighted average lives of those classes of Offered
Certificates will result in variability in the related yields to maturity. For
an example of how the weighted average lives of the classes of Offered
Certificates may be affected at various constant prepayment assumptions, see
"--Decrement Tables" in the following paragraph.
Decrement Tables
The following tables indicate the percentages of the initial Certificate
Principal Balances of the classes of Offered Certificates, other than the Class
X Certificates, that would be outstanding after each of the dates shown at
various constant prepayment assumptions and the corresponding weighted average
lives of those classes. The tables have been prepared on the basis of the
structuring assumptions. It is not likely that all of the mortgage loans will
have the characteristics assumed, that all of the mortgage loans will prepay at
the constant prepayment assumption specified in the tables or at any constant
rate or that all of the mortgage loans will prepay at the same rate. Moreover,
the diverse remaining terms to maturity of the mortgage loans could produce
slower or faster principal distributions than indicated in the tables at the
specified constant prepayment assumptions, even if the weighted average
remaining term to maturity of the mortgage loans is consistent with the
remaining terms to maturity of the mortgage loan specified in the structuring
assumptions.
[Decrement Tables]
Last Scheduled Distribution Date
The last scheduled distribution date for the certificates is the
distribution date in __________, which is the distribution date in the month
after the scheduled maturity date for the latest maturing
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mortgage loan. Since the rate of distributions in reduction of the Certificate
Principal Balance or notional amount of each class of Offered Certificates will
depend on the rate of payment, including prepayments, of the mortgage loans, the
Certificate Principal Balance or notional amount of that class could be reduced
to zero significantly earlier or later than the last scheduled distribution
date. The rate of payments on the mortgage loans will depend on their particular
characteristics, as well as on prevailing interest rates from time to time and
other economic factors, and no assurance can be given as to the actual payment
experience of the mortgage loans. See "--Prepayment Considerations and Risks"
and "--Weighted Average Lives of the Offered Certificates" in this prospectus
supplement and "Yield, Prepayment and Maturity Considerations" in the
prospectus.
The Subordinate Certificates
The weighted average lives of, and the yields to maturity on the
Subordinate Certificates, in descending order of their numerical class
designations, will be sensitive to the rate and timing of mortgagor defaults and
the severity of ensuing losses on the mortgage loans. If the actual rate and
severity of losses on the mortgage loans are higher than those assumed by a
holder of a Subordinate Certificate, the actual yield to maturity of that
certificate may be lower than the yield expected by such holder based on that
assumption. The timing of losses on the mortgage loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the mortgage loans are consistent with an investor's
expectations. Usually, the earlier a loss occurs, the greater the effect on an
investor's yield to maturity. Realized Losses on the mortgage loans will reduce
the Certificate Principal Balance of the applicable class of Subordinate
Certificates to the extent of any losses allocated to that class, as described
under "Description of the Certificates--Allocation of Losses", without the
receipt of cash attributable to that reduction. In addition, shortfalls in cash
available for distributions on the Subordinate Certificates will result in a
reduction in the Certificate Principal Balance of the class of Subordinate
Certificates then outstanding with the highest numerical class designation after
giving effect to all distributions and allocations of losses, as described in
this prospectus supplement under "Description of the Certificates--Allocation of
Losses". As a result of those reductions, less interest will accrue on that
class or classes of Subordinate Certificates than otherwise would be the case.
The yield to maturity of the Subordinate Certificates will also be affected by
the disproportionate allocation of the Principal Prepayment Amount to the Senior
Certificates, Net Interest Shortfalls and other cash shortfalls in Available
Funds and distributions of funds to the holders of the Class P Certificates
otherwise available for distributions on the Subordinate Certificates to the
extent of reimbursement for Class PO Deferred Amounts. See "Description of the
Certificates--Allocation of Losses" in this prospectus supplement.
If on any distribution date the related Subordination Level for any class
of Subordinate Certificates is less than that percentage as of the closing date,
all principal payments in full and partial principal prepayments, available for
distribution on the Subordinate Certificates will be allocated solely to that
class and all other classes of Subordinate Certificates with lower numerical
class designations, accelerating the amortization of that class relative to that
of the Restricted Classes and reducing the weighted average lives of such
classes of Subordinate Certificates receiving those distributions. Accelerating
the amortization of the classes of Subordinate Certificates with lower numerical
class designations relative to the other classes of Subordinate Certificates is
intended to preserve the availability of the subordination provided by those
other classes.
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Additional Information
The depositor intends to file certain additional yield tables and other
computational materials for one or more classes of Offered Certificates with the
Securities and Exchange Commission, or the Commission, in a report on Form 8-K.
Such tables and materials were prepared by the underwriter at the request of
certain prospective investors, based on assumptions provided by, and satisfying
the special requirements of, those prospective investors. Those tables and
assumptions may be based on assumptions that differ from the structuring
assumptions. Accordingly, those tables and other materials may not be relevant
to or appropriate for investors other than those specifically requesting them.
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Credit Enhancement
Subordination of Certain Classes
The subordination of the Subordinate Certificates to the Senior
Certificates and the further subordination within the Subordinate Certificates
is intended to provide holders of certificates with a higher relative payment
priority protection against Realized Losses other than Excess Losses. In
addition, the Subordinate Certificates will provide limited protection against
Special Hazard Losses, and against Bankruptcy Losses and Fraud Losses on the
mortgage loans up to the applicable Special Hazard Loss Coverage Amount,
Bankruptcy Loss Coverage Amount and Fraud Loss Coverage Amount, respectively, as
described below.
The Subordinate Certificates will provide protection to the Senior
Certificates of higher relative priority against Bankruptcy Losses on the
mortgage loans in an initial amount expected to be up to approximately
$___________, or the Bankruptcy Loss Coverage Amount, Fraud Losses on the
mortgage loans in an initial amount expected to be up to approximately
$___________, or the Fraud Loss Coverage Amount, and Special Hazard Losses on
the mortgage loans in an initial amount expected to be approximately
$___________, or the Special Hazard Loss Coverage Amount.
The Special Hazard Loss Coverage Amounts will be reduced, from time to
time, to an amount equal on any distribution Date to the lesser of:
o the greatest of
o 1% of the aggregate of the principal balances of the mortgage
loans,
o twice the principal balance of the largest mortgage loan and
o the aggregate principal balances of the mortgage loans secured
by mortgaged properties located in the single California
postal zip code area having the highest aggregate principal
balance of any such zip code area and
o such Special Hazard Loss Coverage Amount as of the closing date less
the amount, if any, of Special Hazard Losses allocated to the
certificates since the closing date.
All principal balances for the purpose of this definition will be calculated as
of the first day of the month preceding that distribution date after giving
effect to scheduled installments of principal and interest on the mortgage loans
then due, whether or not paid.
The Fraud Loss Coverage Amounts will be reduced, from time to time, by the
amount of Fraud Losses on mortgage loans allocated to the related certificates.
In addition, on each anniversary of the cut-off date, the Fraud Loss Coverage
Amounts will be reduced as follows:
o on the first, second, third and fourth anniversaries of the cut-off
date, to an amount equal to the lesser of
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<PAGE>
o 1% of the then current Stated Principal Balances of the
mortgage loans and
o the excess of such Fraud Loss Coverage Amount as of the
preceding anniversary of the cut-off date (or, in the case of
the first anniversary, as of the cut-off date) over the
cumulative amount of Fraud Losses allocated to the
certificates since that preceding anniversary or the cut-off
date, as the case may be, and
o on the fifth anniversary of the cut-off date, to zero.
The Bankruptcy Loss Coverage Amount will be reduced, from time to time, by
the amount of Bankruptcy Losses on mortgage loans allocated to the related
certificates.
The amount of coverage provided by the Subordinate Certificates for
Special Hazard Losses, Bankruptcy Losses and Fraud Losses as described above may
be canceled or reduced from time to time for each of the risks covered, provided
that the then current ratings of the certificates assigned by the rating
agencies are not adversely affected by those losses. In addition, a reserve fund
or other form of credit enhancement may be substituted for the protection
provided by the Subordinate Certificates for Special Hazard Losses, Bankruptcy
Losses and Fraud Losses.
As used in this prospectus supplement, a deficient valuation is a
bankruptcy proceeding whereby the bankruptcy court may establish the value of
the mortgaged property at an amount less than the then outstanding principal
balance of the mortgage loan secured by that mortgaged property or may reduce
the outstanding principal balance of a mortgage loan. In the case of a debt
service reduction, the amount of the secured debt could be reduced to that
value. The holder of that mortgage loan thus would become an unsecured creditor
to the extent the outstanding principal balance of that mortgage loan exceeds
the value so assigned to the mortgaged property by the bankruptcy court. In
addition, certain other modifications of the terms of a mortgage loan can result
from a bankruptcy proceeding, including the reduction of the amount of the
monthly payment on the related mortgage loan. Notwithstanding the foregoing, no
such occurrence shall be considered a reduction of the amount of the monthly
payment on the related mortgage loan or deficient valuation so long as the
master servicer is pursuing any other remedies that may be available for the
related mortgage loan, and that mortgage loan is not in default for payment due
under that mortgage loan or scheduled monthly payments of principal and interest
are being advanced by the master dervicer without giving effect to any reduction
of the amount of the monthly payment on the related mortgage loan or deficient
valuation.
Use of Proceeds
The depositor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the mortgage loans.
S-59
<PAGE>
Material Federal Income Tax Consequences
For federal income tax purposes, the trust will be treated as a REMIC. The
assets of the REMIC will consist of the mortgage loans and all other property in
the trust. The REMIC will issue the Regular Certificates, which will be
designated as the regular interests in the REMIC. The Class A-R Certificates
will represent the beneficial ownership of the residual interest in the REMIC.
See "Description of the Certificates--REMIC Structure" in this prospectus
supplement.
The Regular Certificates generally will be treated as debt instruments
issued by the REMIC for federal income tax purposes. Income on the Regular
Certificates must be reported under an accrual method of accounting.
The Class P Certificates will be treated for federal income tax purposes
as having been issued with an amount of original issue discount, or OID, equal
to the difference between their principal balance and their issue price.
Although the tax treatment is not entirely certain, Class X Certificates will be
treated as having been issued with OID for federal income tax purposes equal to
the excess of all expected payments of interest on those certificates over their
issue price. Although unclear, a holder of a Class X Certificate may be entitled
to deduct a loss to the extent that its remaining basis exceeds the maximum
amount of future payments to which that certificateholder would be entitled if
there were no further prepayments of the mortgage loans. The remaining classes
of regular certificates, depending on their respective issue prices, as
described in the prospectus under "Material Federal Income Tax Consequences",
may be treated as having been issued with OID for federal income tax purposes.
For purposes of determining the amount and rate of accrual of OID and market
discount, the trust intends to assume that there will be prepayments on the
mortgage loans at ___% CPR. No representation is made as to whether the mortgage
loans will prepay at the foregoing rate or any other rate. See "Yield,
Prepayment and Maturity Considerations" in this prospectus supplement and
"Material Federal Income Tax Consequences" in the prospectus. Computing accruals
of OID in the manner described in the prospectus may, depending on the actual
rate of prepayments during the accrual period, result in the accrual of negative
amounts of OID on the certificates issued with OID in an accrual period. Holders
will be entitled to offset negative accruals of OID only against future OID
accrual on those certificates.
The IRS has issued regulations under Sections 1271 to 1275 of the Internal
Revenue Code, generally addressing the treatment of debt instruments issued with
OID. Purchasers of the regular certificates should be aware that the OID
regulations and Section 1272(a)(6) of the Internal Revenue Code do not
adequately address certain issues relevant to, or are not applicable to,
securities such as the regular certificates.
If the holders of any Regular Certificates are treated as holding those
certificates at a premium, those holders should consult their tax advisors
regarding the election to amortize bond premium and the method to be employed.
As is described more fully under "Material Federal Income Tax
Consequences" in the prospectus, the Offered Certificates will represent
qualifying assets under Sections 856(c)(4)(A) and 7701(a)(19)(C) of the Internal
Revenue Code, and net interest income attributable to the Offered Certificates
will be "interest on obligations secured by mortgages on real property" within
the
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<PAGE>
meaning of Section 856(c)(3)(B) of the Internal Revenue Code, to the extent the
assets of the trust are assets described in these sections. The Regular
Certificates will represent qualifying assets under Section 860G(a)(3) if
acquired by a REMIC within the prescribed time periods of the Internal Revenue
Code.
The holders of the residual certificates must include the taxable income
of the REMIC in their federal taxable income. The resulting tax liability of the
holders may exceed cash distributions to those holders during certain periods.
All or a portion of the taxable income from a residual certificate recognized by
a holder may be treated as "excess inclusion" income, which, with limited
exceptions, is subject to U.S. federal income tax.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions, or thrift institutions, to use net
operating losses and other allowable deductions to offset their excess inclusion
income from REMIC residual certificates that have "significant value" within the
meaning of the REMIC regulations, effective for taxable years beginning after
December 31, 1995, except for residual certificates continuously held by a
thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for that residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
the excess inclusions for the year. Third, the amount of any alternative minimum
tax net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have those rules apply only to tax
years beginning after August 20, 1996.
Furthermore, the Small Business Job Protection Act of 1996, as part of the
repeal of the bad debt reserve method for thrift institutions, repealed the
application of Section 593(d) of the Internal Revenue Code to any taxable year
beginning after December 31, 1995.
Also, purchasers of a residual certificate should consider carefully the
tax consequences of an investment in residual certificates discussed in the
prospectus and should consult their own tax advisors for those consequences. See
"Material Federal Income Tax Consequences--Taxation of Owners of REMIC Residual
Certificates" in the prospectus. Specifically, prospective holders of residual
certificates should consult their tax advisors regarding whether, at the time of
acquisition, a residual certificate will be treated as a "noneconomic" residual
interest, a "non- significant value" residual interest and a "tax avoidance
potential" residual interest. See "Material Federal Income Tax
Consequences--Taxation of Owners of REMIC Residual Certificates--Noneconomic
REMIC Residual Certificates", "Material Federal Income Tax
Consequences--Taxation of Owners of REMIC Residual Certificates--Mark-to-Market
Rules", "--Excess Inclusions" and "--Foreign Investors in REMIC Certificates" in
the prospectus. Additionally, for information regarding prohibited transactions
and treatment of Realized Losses, see "Material Federal Income Tax
Consequences--Taxation of Owners of REMIC Residual Certificates--Prohibited
Transactions and Other Possible REMIC Taxes" and "--Taxation of Owners of REMIC
Regular Certificates--Realized
S-61
<PAGE>
Losses" in the prospectus.
Some specific federal income tax consequences relating to the certificates
will be passed upon for the depositor by __________.
ERISA Considerations
Any plan fiduciary which proposes to cause an employee benefit plan
subject to ERISA and/or to Section 4975 of the Internal Revenue Code to acquire
any of the Offered Certificates should consult with its counsel about the
potential consequences under ERISA, and/or the Internal Revenue Code, of the
plan's acquisition and ownership of those certificates. See "ERISA
Considerations" in the prospectus. Section 406 of ERISA and Section 4975 of the
Internal Revenue Code prohibits parties in interest relating to an employee
benefit plan subject to ERISA and/or to Section 4975 of the Internal Revenue
Code from engaging in certain transactions involving that plan and its assets
unless a statutory, regulatory or administrative exemption applies to the
transaction. Section 4975 of the Internal Revenue Code imposes certain excise
taxes on prohibited transactions involving plans and other arrangements,
including, but not limited to, individual retirement accounts, described under
that Section. ERISA authorizes the imposition of civil penalties for prohibited
transactions involving plans not subject to the requirements of Section 4975 of
the Internal Revenue Code.
Certain employee benefit plans, including governmental plans and some
church plans, are not subject to ERISA's requirements. Accordingly, assets of
those plans may generally be invested in the Offered Certificates without regard
to the ERISA considerations described in this prospectus supplement and in the
prospectus, subject to the provisions of other applicable federal and state law.
Any of these plans that are qualified and exempt from taxation under Sections
401 (a) and 501 (a) of the Internal Revenue Code may nonetheless be subject to
the prohibited transaction rules described in Section 503 of the Internal
Revenue Code.
Except as noted above, investments by plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a plan's investments be made in
accordance with the documents governing the plan. A fiduciary that decides to
invest the assets of a plan in the Offered Certificates should consider, among
other factors, the extreme sensitivity of the investment to the rate of
principal payments, including prepayments, on the mortgage loans.
The U.S. Department of Labor has granted an individual administrative
exemption to the underwriter under the Exemption from some of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Internal Revenue Code for the initial purchase, the holding and the
subsequent resale by plans of certificates in pass-through trusts that consist
of certain receivables, loans and other obligations that meet the conditions and
requirements of the Exemption. The Exemption applies to mortgage loans like the
mortgage loans in the trust.
For a general description of the Exemption and the conditions that must be
satisfied for the Exemption to apply, see "ERISA Considerations" in the
prospectus.
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<PAGE>
It is expected that the Exemption will apply to the acquisition and
holding by plans of the Senior Certificates, other than the Class A-R
Certificates, and that all conditions of the Exemption other than those within
the control of the investors, will be met. In addition, as of the date hereof,
there is no single mortgagor that is the obligor on five percent of the mortgage
loans included in the trust by aggregate unamortized principal balance of the
assets of the trust.
Because the characteristics of the Class B-1, Class B-2 and Class B-3
Certificates will not meet the requirements of PTCE 83-1, as described in the
prospectus, or the Exemption, and may not meet the requirements of any other
issued exemption under ERISA, the purchase and holding of the Class B-1, Class
B-2 and Class B-3 Certificates by a plan or by individual retirement accounts or
other plans subject to Section 4975 of the Internal Revenue Code may result in
prohibited transactions or the imposition of excise taxes or civil penalties.
Consequently, transfers of the Class B-1, Class B-2 and Class B-3 Certificates
will not be registered by the trustee unless the trustee receives the following:
o a representation from the transferee of that certificate, acceptable
to and in form and substance satisfactory to the Trustee, to the
effect that that transferee is not an employee benefit plan subject
to Section 406 of ERISA or a plan or arrangement subject to Section
4975 of the Internal Revenue Code, nor a person acting on behalf of
that plan or arrangement nor using the assets of that plan or
arrangement to effect that transfer;
o if the purchaser is an insurance company, a representation that the
purchaser is an insurance company which is purchasing those
certificates with funds contained in an "insurance company general
account", as that term is defined in Section V(e) of Prohibited
Transaction Class Exemption 95-60, or PTCE 95- 60, and that the
purchase and holding of those certificates are covered under
Sections I and III of PTCE 95-60, or
o an opinion of counsel satisfactory to the trustee that the purchase
or holding of that certificate by a plan, any person acting on
behalf of a plan or using that plan's assets, will not result in the
assets of the trust being deemed to be "plan assets" and subject to
the prohibited transaction requirements of ERISA and the Internal
Revenue Code and will not subject the trustee to any obligation in
addition to those undertaken in the pooling and servicing agreement.
The representation as described above shall be deemed to have been made to the
trustee by the transferee's acceptance of a Class B-1, Class B-2 or Class B-3
Certificate, or by any beneficial owner who purchases an interest in those
certificates registered in book-entry form. In the event that the representation
is violated, or any attempt to transfer to a plan or person acting on behalf of
a plan or using that plan's assets is attempted without the opinion of counsel,
the attempted transfer or acquisition shall be void and of no effect.
Prospective plan investors should consult with their legal advisors
concerning the impact of ERISA and the Internal Revenue Code, the applicability
of the Exemption, and the potential consequences in their specific
circumstances, prior to making an investment in the Offered
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<PAGE>
Certificates. Moreover, each plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Offered Certificates is appropriate for the Plan, taking into
account the overall investment policy of the plan and the composition of the
plan's investment portfolio.
Method of Distribution
Subject to the terms and conditions described in the underwriting
agreement between the depositor and [name of underwriter], an affiliate of the
depositor, the depositor has agreed to sell to the underwriter, and the
underwriter has agreed to purchase from the depositor, the Offered Certificates.
The underwriting agreement provides that the obligation of the underwriter
to pay for and accept delivery of the Offered Certificates is subject to, among
other things, the receipt of certain legal opinions and to the conditions, among
others, that no stop order suspending the effectiveness of the depositor's
registration statement shall be in effect, and that no proceedings for that
purpose shall be pending before or threatened by the Commission.
The distribution of the Offered Certificates by the underwriter will be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined, in each case, at the time of sale. The
proceeds to the depositor from the sale of the Offered Certificates will be
approximately ____% of the initial aggregate Certificate Principal Balance of
the Offered Certificates, plus accrued interest, before deducting expenses
payable by the depositor. The underwriter may effect those transactions by
selling its certificates to or through dealers, and those dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the underwriter for whom they act as agent. In connection with the sale of
the Offered Certificates, the underwriter may be deemed to have received
compensation from the depositor in the form of an underwriting discount. The
underwriter and any dealers that participate with the underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters and
any profit on the resale of the Offered Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
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,
as amended, or contribute to payments required to be made for the
indemnification.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue or will
provide investors with a sufficient level of liquidity. The primary source of
information available to investors concerning the Offered Certificates will be
monthly statements discussed in the prospectus under "The Agreements--Reports to
Securityholders", which will include information as to the outstanding principal
balance of the Offered Certificates and the status of the applicable form of
credit enhancement. There can be no assurance that any additional information
regarding the Offered Certificates will be available through any other source.
In addition, the depositor is not aware of any source through which price
information about the Offered Certificates may adversely affect the liquidity of
the Offered
S-64
<PAGE>
Certificates, even if a secondary market for the Offered Certificates becomes
available.
Legal Matters
The validity of the certificates, including material federal income tax
consequences relating to the certificates, will be passed upon for the depositor
by Thacher Proffitt & Wood, New York, New York. Thacher Proffitt & Wood will
pass upon certain legal matters on behalf of the underwriter.
Ratings
[It is a condition of the issuance of the Offered Certificates that they
receive from [S&P and DCR] as indicated:
Rating Agency
----------------------
Class [S&P] [DCR]
------------------- ------- -------
A-1................ AAA AAA
A-2................ AAA AAA
A-3................ AAA AAA
A-4................ AAA AAA
P.................. AAAr AAA
X.................. AAAr AAA
A-R................ AAA AAA
B-1................ __ AA
B-2................ __ A
B-3................ __ BBB
The ratings assigned by DCR to mortgage pass-through certificates address
the likelihood of the receipt by certificateholders of all distributions to
which they are entitled under the transaction structure. DCR's ratings reflect
its analysis of the riskiness of the mortgage loans and its analysis of the
structure of the transaction as described in the operative documents. DCR's
ratings do not address the effect on the certificates' yield attributable to
prepayments or recoveries on the underlying mortgage loans. Further, the ratings
on the Class X Certificates do not address whether investors will recoup their
initial investment. The rating assigned by DCR to the Class P Certificates only
addresses the return of its Certificate Principal Balance. The rating assigned
by DCR to the Class A-R Certificates only addresses the return of its
Certificate Principal Balance and interest on that class at its stated
pass-through rate.
The ratings assigned by S&P to mortgage pass-through certificates address
the likelihood of the receipt of all distributions on the mortgage loans by the
related certificateholders under the agreements that those certificates are
issued. S&P's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with those certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by those
certificates. S&P's ratings on those certificates do not, however, constitute a
statement regarding frequency of prepayments on the related mortgage
S-65
<PAGE>
loans. The "r" symbol is appended to the rating by S&P of those certificates
that S&P believes may experience high volatility or high variability in expected
returns due to non-credit risks. The absence of any "r" symbol in the ratings of
the other Offered Certificates should not be taken as an indication that those
certificates will exhibit no volatility or variability in total return.
The ratings of the rating agencies do not address the possibility that, as
a result of principal prepayments, certificateholders may receive a lower than
anticipated yield. Further, the ratings on the Class X Certificates do not
address whether investors will recoup their initial investment.
The ratings assigned to the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A rating is not
a recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the rating agencies.
The depositor has not requested a rating of the Offered Certificates by
any rating agency other than the S&P and DCR. There can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by that other rating
agency. The rating assigned by that other rating agency to the Offered
Certificates could be lower than the respective ratings assigned by the rating
agencies.
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<PAGE>
---------------------
Series ____-_
DLJ Mortgage Acceptance Corp.
Depositor
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES ____-_
$_______________________
(Approximate)
------------------------
PROSPECTUS SUPPLEMENT
------------------------
[Name of Underwriter]
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the Series ____-_ Mortgage Pass-Through Certificates in any
state where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Series ____-_ Mortgage Pass-Through Certificates and with
respect to their unsold allotments or subscriptions. In addition, all dealers
selling the Series ____-_ Mortgage Pass-Through Certificates will be required to
deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
____________ __, ____
<PAGE>
- --------------------------------------------------------------------------------
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION
Preliminary Prospectus Supplement dated May 26, 1999 [Version 2]
Prospectus Supplement (to Prospectus Dated ______ ___, ____)
____________ TRUST SERIES ____-_
Issuer
DLJ MORTGAGE ACCEPTANCE CORP.
Depositor
[NAME OF MASTER SERVICER]
Master Servicer
MORTGAGE-BACKED NOTES, SERIES ____-_
$____________
(Approximate)
- ----------------------------
You should carefully
review the information in
"Risk Factors" on page
S-_ in this prospectus
supplement and page _ in
the prospectus.
This prospectus
supplement, together with
the accompanying
prospectus, will constitute
the complete prospectus.
- ----------------------------
The Trust will issue:
o [One] class of senior Class A Notes.
o [Three classes of Class M Notes, which are subordinate to the senior
notes. Each class of Class M Notes, if any, with a lower numerical
designation.]
The Notes:
o Represent indebtedness of a trust, whose assets are primarily a pool of
fixed rate, first lien residential mortgage loans.
o Offered to the public are listed under the heading "Offered Certificates"
in the table on page S-_.
Risks:
o The yield on the Class M Notes are extremely sensitive to the rate and
timing of principal prepayments, as discussed in "Risk Factors" in this
prospectus supplement.
[The Underwriter], as underwriter, will buy the offered notes from DLJ Mortgage
Acceptance Corp. at a price equal to ____% of their face value. DLJ Mortgage
Acceptance Corp. will pay the expenses related to the issuance of the notes from
these proceeds. The underwriter will sell the offered notes purchased by it from
time to time in negotiated transactions at varying prices determined at the time
of sale.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
[The Attorney General of the State of New York has not passed on or endorsed the
merits of this offering. Any representation to the contrary is unlawful.]
[Name of Underwriter]
______ ___, ____
<PAGE>
TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT
Summary Information..........................................................S-
Risk Factors.................................................................S-
The Mortgage Pool............................................................S-
Description of the Notes.....................................................S-
Glossary of Terms............................................................S-
Yield, Prepayment and Maturity
Considerations............................................................S-
Credit Enhancement...........................................................S-
The Issuer...................................................................S-
The Seller...................................................................S-
The Owner Trustee............................................................S-
The Indenture Trustee........................................................S-
The Servicing Agreement......................................................S-
The Indenture and Owner Trust
Agreement...............................................................S-
Material Federal Income Tax
Considerations............................................................S-
Method of Distribution.......................................................S-
Legal Matters................................................................S-
Ratings......................................................................S-
Legal Investment.............................................................S-
ERISA Considerations.........................................................S-
Annex I......................................................................A-1
Page
----
PROSPECTUS
Additional Information.......................................................
Prospectus Supplement........................................................
Incorporation of Certain Documents By
Reference. ..............................................................
Summary of the Prospectus....................................................
Description of the Securities................................................
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 Agreements...............................................................
Certain Legal Aspects of Loans...............................................
Material Federal Income Tax
Considerations...........................................................
State and Other Tax Consequences.............................................
ERISA Considerations.........................................................
Legal Investment.............................................................
Legal Matters................................................................
The Depositor................................................................
Use of Proceeds .............................................................
Plan of Distribution.........................................................
S-2
<PAGE>
Summary Information
This summary highlights selected information from this prospectus supplement and
does not contain all of the information to make your investment decision. Please
read this entire prospectus supplement and the accompanying prospectus carefully
for additional information about the offered notes.
Mortgage-Backed Notes, Series ____-_
<TABLE>
<CAPTION>
Initial Notes
Class Note Note Interest Initial Rating of Notes
Principal Rate (per Designations and
Balance annum) ____ Rating ____ Rating Features Form
- ---------------------------------------------- ----------- ----------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Offered
Notes
[A-1 $ % AAA AAA] Senior Book Entry
[M-1 % AA AA] Subordinate Book Entry
[M-2 % A A] Subordinate Book Entry
[M-3 % N/A BBB] Subordinate Book Entry
Total $
Offered
Notes
Non-Offered
Equity
Certificates
B-1 $ % N/A BB Subordinate Physical
Total $
Offered
Notes and
Non-Offered
Equity
Certificates
</TABLE>
- ----------
All balances are subject to a variance of 5%.
S-3
<PAGE>
Depositor
o DLJ Mortgage Acceptance Corp.
Seller
o [Name of Seller] will sell the mortgage loans to the depositor.
Master Servicer
o [Name of Master Servicer] will initially service all of the mortgage loans
directly.
Issuer
o DLJ MBN Trust _______-____.
Owner Trustee
o [Name of Owner Trustee].
Indenture Trustee
o [Name of Indenture Trustee].
Cut-off Date
o _____ 1, ____.
Closing Date
o _____ __,____.
Determination Date
o With respect to the mortgage loans, the ____ day of each month or if that
day is not a business day, the next business day.
Distribution Date
o Beginning on _____ 25, ____ and thereafter on the 25th day of each month
or if that day is not a business day, the next business day.
On each distribution date, you will be entitled to the following:
o interest at the pass-through rate that accrued during the related accrual
period.
o interest due on a prior distribution date that was not paid.
Your interest entitlement may be reduced as a result of prepayments on the
mortgage loans and certain types of losses on the mortgage loans.
Principal Distributions
Principal distributions are payable on each distribution date. The priority and
amount of principal distributions varies from class to class. Shortfalls in
available funds may result in a class receiving less than what is due. [The
calculation of the amount a class is entitled to receive on each distribution
date is described in this prospectus supplement under "Description of the
Notes--Distributions of Principal."]
Credit Enhancement
Credit enhancement in the form of subordination should reduce delays in
distributions and losses on certain classes of notes. The subordination feature
will support the classes of notes in varying degrees.
There are two types of subordination in this transaction:
1. The senior notes will receive distributions of interest and principal
prior to distributions of interest and principal to the subordinate notes.
Also, on each distribution dates each class of subordinate notes will
receive its interest and principal distribution before any other class of
subordinate notes with a higher numerical class designation; and
S-4
<PAGE>
2. Losses resulting from the liquidation of defaulted mortgage loans (other
than any losses from special hazards, mortgagor fraud or mortgagor
bankruptcy that are above set limits) will be the following allocated to
the subordinate notes in the following order until their class balance has
been reduced to zero:
o Class M-3
o Class M-2
o Class M-1
In addition, the credit enhancement in the form of overcollateralization should
also reduce delays in distributions and losses on certain classes of notes.
Although the aggregate principal balance of the mortgage loans is $___________,
the issuer is issuing only $___________ aggregate principal amount of notes. The
excess amount of such aggregate principal balance of the mortgage loans
represents overcollateralization, which may absorb specified amounts of certain
losses on the mortgage loans, if not covered by excess interest. If the level of
overcollateralization falls below what is required, the excess interest
described above will also be paid to the notes as principal. This will reduce
the principal balance of the notes faster than the principal balance of the
mortgage loans so that the required level of overcollateralization is reached.
See "Description of the Notes--Credit Enhancement" and "--Allocation of Losses;
Subordination" in this prospectus supplement for more detail.
S-5
<PAGE>
Record Date
o The last business day of the month preceding the month of a distribution
date.
The Mortgage Pool
On _____ __, ____, the trust will acquire a pool of mortgage loans. As of _____
1, ____, the mortgage pool consists of approximately _____ mortgage loans, with
an aggregate principal balance of approximately $_____. All of the mortgage
loans are secured by residential properties and each is set to mature within __
to __ years of the date it was originated.
Priority of Distributions
Funds available from monthly payments and other amounts received on the mortgage
loans on any distribution date will be distributed to the holders of the
certificates in the following order:
o distribution of interest to the senior notes;
o distribution of principal to the senior notes;
o distribution of interest and principal to each class of subordinate
notes, in order of their numerical class designations, beginning
with the Class M-1 Notes.
See "Description of the Notes" in this prospectus supplement for more detail.
Interest Distributions
Interest accrues on the notes during the calendar month prior to a distribution
date.
Optional Termination
If the aggregate principal balance of the mortgage loans declines below __% of
the total pool principal balance as of the cut-off date, then the depositor may
purchase all of the mortgage loans and the related properties in the trust. If
the depositor purchases all of the mortgage loans, you will receive a final
distribution and then the trust will be terminated.
Equity Certificates
$__________ Trust Certificates, Series ____- __. The certificates will be issued
pursuant to the owner trust agreement, and will represent the beneficial
ownership interest in the issuer. The certificates are not offered under this
prospectus supplement.
Advances
If the master servicer reasonably believes that cash advances can be recovered
from a delinquent mortgagor, then the master servicer will make cash advances to
the trust to cover related delinquent mortgage loan payments. Advances are
intended to maintain a regular flow of scheduled interest and principal payments
on the notes, and not to guarantee or insure against losses.
Federal Income Tax Consequences
For federal income tax purposes, the notes will be treated as debt. The trust
itself will not be subject to tax.
ERISA Considerations
The notes may be eligible for purchase by persons investing assets of employee
benefit plans or individual retirement accounts subject to important
considerations.
Legal Investment
The Class A Notes and Class M-1 Notes will be "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984. [The Class
M-2 and Class M-3 Certificates will not be "mortgage related securities" for
purposes of SMMEA.]
Ratings
The trust will not issue the offered notes unless they have been assigned the
ratings designated on page S-__.
A rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by either rating agency.
S-6
<PAGE>
Risk Factors
This prospectus supplement together with the prospectus will describe the
material risk factors related to your securities. The securities offered under
this prospectus supplement are complex securities. You should possess, either
alone or together with an investment advisor, the expertise necessary to
evaluate the information contained in this prospectus supplement in the context
of your financial situation and tolerance for risk.
[Appropriate Risk Factors as necessary. Possible Risk Factors based on
this form include the following:
You may have to hold your notes to maturity if their marketability is limited.
[The underwriter intends to make a secondary market for the notes, but is not
obligated to do so.] There is currently no secondary market for the offered
notes. We cannot give you any assurance that such a secondary market will
develop or, if it develops, that it will continue. Consequently, you may not be
able to sell your offered notes readily or at prices that will enable you to
realize your desired yield. The market values of the offered notes are likely to
fluctuate; these fluctuations may be significant and could result in significant
losses to you.
The secondary markets for mortgage backed securities have experienced periods of
illiquidity and can be expected to do so in the future. Illiquidity means you
may not be able to find a buyer to buy your securities readily or at prices that
will enable you to realize a desired yield. Illiquidity can have a severely
adverse effect on the prices of securities that are especially sensitive to
prepayment, credit or interest rate risk, or that have been structured to meet
the investment requirements of limited categories of investors.
S-7
<PAGE>
The yield on your notes will vary depending on the rate or prepayments.
The yield to maturity on your notes will be directly related to the rate of
principal payments on the mortgage loans, which will be affected by factors
including:
o the amortization schedules of the mortgage loans;
o the rate of prepayments by mortgagors, including prepayments resulting
from refinancing;
o liquidations of defaulted mortgage loans;
o repurchases of mortgage loans as a result of breaches of representations
and warranties; and
o the optional purchase of the mortgage loans in connection with the
termination of the trust.
The rate of principal payments on pools of mortgage loans is influenced by a
variety of economic, geographic, social and other factors. For example, if
currently offered mortgage rates for similar mortgage loans fall below the
mortgage rates on the mortgage loans, the prepayment rate should increase. On
the other hand, if currently offered mortgage rates rise above the mortgage
rates on the mortgage loans, the prepayment rate should decrease.
S-8
<PAGE>
If the rate of prepayments on the mortgage loans is different than expected,
your yield may be considerably lower than anticipated
We cannot predict the rate at which mortgagors will repay their mortgage loans.
Please consider the following:
o If you are purchasing a note at a discount, your yield may be lower than
expected if principal payments on the mortgage loans occur at a slower
rate than you expected.
o If you are purchasing a note at a premium, your yield may be lower than
expected if principal payments on the mortgage loans occur at a faster
rate than you expected.
o Notes that receive only payments of interest are especially sensitive to
variations in the rate of prepayments. If the rate of prepayments is
faster than you expected, your yield will be lower than expected and you
may not fully recoup your initial investment.
o The earlier a payment of principal occurs, the greater the impact on your
yield. For example, if you purchase a note at a premium, although the
average rate of principal payments is consistent with your expectations,
if the rate of principal payments occurs initially at a rate higher than
expected, which would adversely impact your yield, a subsequent reduction
in the rate of principal payments will not offset any adverse yield
effect.
See "Yield, Prepayment and Maturity Considerations" in this prospectus
supplement for more detail.
The value of your notes may be reduced if losses are higher than expected.
If the performance of the mortgage loans is substantially worse than assumed by
the rating agencies, the ratings of any class of the notes may be lowered in the
future. This would probably reduce the value of those notes. Neither the
depositor, the master servicer nor any other entity will have any obligation to
supplement any credit enhancement, or to take any other action to maintain any
rating of the notes.
S-9
<PAGE>
Subordinate Notes
Before purchasing subordinate notes, you should consider the following factors
that may negatively impact your yield:
o The subordinate notes are not entitled to a proportionate share of
principal prepayments on the mortgage loans until the beginning of the
_____ year after the closing date. In addition, if losses on the mortgage
loans exceed stated levels, classes of subordinate notes with higher
numerical class designations will not receive a principal distribution.
o Losses resulting from the liquidation of defaulted mortgage loans, other
than excess losses resulting from special hazards, mortgagor fraud or
mortgagor bankruptcy, will be allocated to the subordinate notes in
reverse order of numerical class designation, until the class balance has
been reduced to zero. A loss allocation results in a reduction in a class
balance without a corresponding distribution of cash to the holder. Also,
the lower class balance will result in less interest accruing on the
notes.
o The earlier in the transaction that a loss on a mortgage loan occurs, the
greater the reduction in yield.
o These risks are more severe for the classes of subordinate certificates
with higher numerical class designations.
See "Description of the Notes" and "Yield, Prepayment and Maturity
Considerations" in this prospectus supplement for more detail.
S-10
<PAGE>
[Geographic Concentration
Approximately ___% of the mortgage loans, by principal balance as of _____ __,
____, are secured by properties located in California. If the California
residential real estate market should 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
increase, as compared to such rates in a stable or improving real estate market.
Also, California is more susceptible to certain types of uninsurable hazards,
such as earthquakes, brush fires, floods, mudslides and other natural disasters.
If these occur, the rates of delinquency, foreclosure, bankruptcy and loss on
the mortgage loans may increase.]
Some capitalized terms used in this prospectus supplement have the
meanings given below under "Description of the Notes--Glossary of Terms" or in
the prospectus under "Glossary."
S-11
<PAGE>
Important Notice About Information Presented in this
Prospectus Supplement and the Prospectus
We provide information to you about the offered notes in two separate documents
that progressively provide more detail:
o the prospectus, which provides general information, some of which may not
apply to your series of certificates; and
o this prospectus supplement, which describes the specific terms of your
series of notes.
If the description of your notes in this prospectus supplement differs from the
related description in the prospectus, you should rely on the information in
this prospectus supplement.
S-12
<PAGE>
The Mortgage Pool
General
The mortgage pool will consist of approximately _____ conventional, one-
to four-family, fixed-rate mortgage loans secured by first liens on residential
real properties, the mortgaged properties, and having an aggregate principal
balance as of the cut-off date of approximately $___________. The mortgage loans
have original terms to maturity of not greater than [30] years. References to
percentages of the mortgage loans, unless otherwise noted, are calculated based
on the aggregate principal balance of the mortgage loans as of the cut-off date.
The mortgage loans to be included in the mortgage pool will be acquired by
the depositor on the closing date from the seller. See "--Underwriting
Standards; Representations" and "The Seller" in this prospectus supplement.
The mortgage loans typically have scheduled monthly payments due, with
respect to each mortgage loan, on the first day of the month. The day on which
scheduled monthly payments are due is referred to as the due date. Each mortgage
loan will contain a customary due-on-sale clause or will be assumable by a
creditworthy purchaser of the related mortgaged property.
No mortgage loan is subject to a buydown agreement.
Approximately ____% of the mortgage loans are Balloon Loans. Each Balloon
Loan is a fixed rate mortgage loan that amortizes over ___ months, but the final
Balloon Payment on each Balloon Loan is due and payable on the ___ month. The
amount of the Balloon Payment on each Balloon Loan is substantially in excess of
the amount of the scheduled monthly payment on that Balloon Loan for the period
prior to the due date of the Balloon Payment.
The average principal balance of the mortgage loans at origination was
approximately $_______. No mortgage loan had a principal balance at origination
greater than approximately $________ or less than approximately $______. The
average principal balance of the mortgage loans as of the cut-off date was
approximately $_______.
The mortgage loans had mortgage rates as of the cut-off date ranging from
approximately ____% per annum to approximately _____% per annum, and the
weighted average mortgage rate was approximately ______% per annum. The weighted
average loan-to-value ratio of the mortgage loans at origination was
approximately _____%. At origination, no mortgage loan will have a loan-to-value
ratio greater than approximately _____% or less than approximately ____%.
The weighted average remaining term to maturity of the mortgage loans will
be approximately __ years and __ months as of the cut-off date. None of the
mortgage loans will have a first due date prior to _______ ____ or after
___________ ____, or will have a remaining term to maturity of less than __
years or greater than __ years as of the cut-off date. The latest maturity date
of any mortgage loan is __________ ____.
S-13
<PAGE>
The mortgage loans are expected to have the following characteristics as
of the cut-off date (the sum in any column may not equal the total indicated due
to rounding). As of the closing date, no more than 5% of the mortgage pool, by
aggregate principal balance, will deviate from the characteristics set forth in
this prospectus supplement.
Principal Balances of the Mortgage Loans at Origination
<TABLE>
<CAPTION>
% of
Number Aggregate Original Aggregate Original
Range ($) of Loans Principal Balance Principal Balance
- --------- -------- ------------------- ------------------
<S> <C> <C> <C>
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
Total . . . . . . . . . . . . . . . . .
</TABLE>
Principal Balances of the Mortgage Loans as of the Cut-off Date
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Range ($) of Loans the Cut-off Date the Cut-off Date
- --------- -------- ------------------ -----------------
<S> <C> <C> <C>
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
. . . . . . . . . . .
Total. . . . . . . . . . . . . . . . .
</TABLE>
S-14
<PAGE>
Mortgage Rates of the Mortgage Loans as of the Cut-off Date
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Mortgage Rate (%) of Loans the Cut-off Date the Cut-off Date
- ----------------- -------- ------------------ -----------------
<S> <C> <C> <C>
......................................
......................................
......................................
......................................
......................................
Total........................
</TABLE>
Original Loan-to-Value Ratios of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Loan-to-Value Ratio (%) of Loans the Cut-off Date the Cut-off Date
- ----------------------- -------- ------------------ -----------------
<S> <C> <C> <C>
.....................................
.....................................
.....................................
.....................................
Total.......................
</TABLE>
Geographic Distribution of the Mortgaged Properties
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Location of Loans the Cut-off Date the Cut-off Date
- -------- -------- ------------------ -----------------
<S> <C> <C> <C>
.....................................
.....................................
.....................................
.....................................
.....................................
Total.......................
</TABLE>
Mortgaged Property Types of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Property Type of Loans the Cut-off Date the Cut-off Date
- ------------- -------- ------------------ -----------------
<S> <C> <C> <C>
.....................................
.....................................
.....................................
.....................................
.....................................
.....................................
Total.......................
</TABLE>
S-15
<PAGE>
Mortgaged Property Occupancy Status of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Occupancy Status of Loans the Cut-off Date the Cut-off Date
- ---------------- -------- ------------------ -----------------
<S> <C> <C> <C>
.....................................
.....................................
Total.......................
</TABLE>
The occupancy status of a mortgaged property is as represented by the
mortgagor in its loan application.
Loan Purpose of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Loan Purpose of Loans the Cut-off Date the Cut-off Date
- ------------ -------- ------------------ -----------------
<S> <C> <C> <C>
.....................................
.....................................
.....................................
Total.......................
</TABLE>
Loan Programs of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Loan Program of Loans the Cut-off Date the Cut-off Date
- ------------ -------- ------------------ -----------------
<S> <C> <C> <C>
.....................................
.....................................
.....................................
Total.......................
</TABLE>
Risk Categories of the Mortgage Loans
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Balance Principal Balance
Number Outstanding as of Outstanding as of
Risk Categories of Loans the Cut-off Date the Cut-off Date
- --------------- -------- ------------------ -----------------
<S> <C> <C> <C>
.....................................
.....................................
.....................................
.....................................
.....................................
Total.......................
</TABLE>
Underwriting Standards; Representations
The mortgage loans will be acquired by the depositor on the closing date
from the seller. The information presented below with regard to the seller's
underwriting standards has been provided to the depositor or compiled from
information provided to the depositor by the seller. As to the information
regarding the seller's underwriting standards, none of the issuer, the
depositor, the master servicer, the owner trustee, the indenture trustee or any
of their respective affiliates has made
S-16
<PAGE>
or will make any representation as to the accuracy or completeness of that
information.
[Discussion of the seller's Underwriting Standards used to originate the
mortgage loans.]
Representations
The seller will make representations and warranties as of the closing date
with respect to the mortgage loans, and will be obligated to repurchase any of
the mortgages loan when a material breach of the representations and warranties
it has made has occurred, other than those breaches which have been cured. For a
discussion of the representations and warranties made and the repurchase
obligation, see "Loan Underwriting Procedures and Standards--Representations and
Warranties" in the prospectus.
Additional Information
The description in this prospectus supplement of the mortgage pool and the
mortgaged properties is based upon the mortgage pool as constituted as of the
close of business on the cut-off date, as adjusted for the scheduled principal
payments due on or before the cut-off 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 depositor deems their removal necessary or
desirable, and may be prepaid at any time. A limited number of other mortgage
loans may be included in the mortgage pool prior to the issuance of the notes
unless including those mortgage loans would materially alter the characteristics
of the mortgage pool as described in this prospectus supplement. The depositor
believes that the information set forth in this prospectus supplement will be
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 some other characteristics of the mortgage loans may
vary.
S-17
<PAGE>
Description of the Notes
General
DLJ MBN Trust Series ____-__, Mortgage-Backed Notes, Series ____-__ will
consist of [four classes of notes, designated as (i) the Class A Notes and (ii)
the Class M-1 Notes, the Class M- 2 Notes and the Class M-3 Notes. The Class M-1
Notes, the Class M-2 Notes and the Class M-3 Notes are collectively referred to
as the Subordinate Notes]. The notes will be issued by the issuer pursuant to
the indenture, dated as of ________ __, ____, between the issuer and the
indenture trustee. Only the notes are offered by this prospectus supplement.
Trust Certificates, Series ____- __, the equity certificates, will be issued
pursuant to the owner trust agreement, dated as of ________ __, ____, between
the depositor and the owner trustee. The equity certificates will represent the
beneficial ownership interest in the issuer. The equity certificates are not
being offered by this prospectus supplement and will be delivered on the closing
date to the ____________, as partial consideration for the conveyance of the
mortgage loans by ____________ to the depositor.
Distributions on the offered notes will be made on the_____ of each month,
or, if such day is not a business day, on the next succeeding business day,
beginning in _______ ____. Each day on which distributions on the offered notes
are made is referred to as a payment date.
The notes represent non-recourse debt obligations of the issuer secured by
the trust estate, which consists primarily of a segregated pool of conventional,
one- to four-family, fixed-rate first lien mortgage loans having an aggregate
principal balance as of the cut-off date of approximately $___________. Proceeds
of the trust estate will be the sole source of payments on the notes.
The Class A Notes, the Class M-1 Notes, the Class M-2 Notes and the Class
M-3 Notes will have an aggregate initial note balance of approximately
$___________, approximately $_________, approximately $__________ and
approximately $__________, respectively, in each case subject to a permitted
variance of plus or minus 5%. The Note Interest Rates on the notes are
adjustable, subject to the Maximum Note Interest Rate and the Available Interest
Rate, and will be calculated for each payment date as described under "--Note
Interest Rate" herein. The final maturity date of the notes is the payment date
occurring in _______ ____.
The notes will be issued, maintained and transferred on the book-entry
records of DTC and its participants in minimum denominations of $[10,000] and
integral multiples of $[1.00] in excess thereof.
The notes will initially be represented by one or more global notes
registered in the name of the nominee of DTC. That nominee, together with any
successor clearing agency selected by the depositor, will be referred to as the
clearing agency, except as provided in this prospectus supplement. The depositor
has been informed by DTC that DTC's nominee will be CEDE & Co., or CEDE. No
person acquiring an interest in any class of the notes will be entitled to
receive a note representing that person's interest, except as set forth in this
prospectus supplement under "--Definitive Notes". Unless and until definitive
notes are issued under the limited circumstances described in this prospectus
supplement:
S-18
<PAGE>
o all references to actions by noteholders with respect to the notes
shall refer to actions taken by DTC upon instructions from its
participants, and
o all references in this prospectus supplement to payments, notices,
reports and statements to noteholders with respect to the notes
shall refer to payments, notices, reports and statements to DTC or
CEDE, as the registered holder of the notes, for payment to note
owners in accordance with DTC procedures. See "--Registration" and
"--Definitive Notes" in this prospectus supplement.
Any definitive notes will be transferable and exchangeable at the offices
of the indenture trustee. No service charge will be imposed for any registration
of transfer or exchange, but the indenture trustee may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
with the transfer or exchange.
All payments to holders of the notes, other than the final payment on any
class of notes, will be made by or on behalf of the indenture trustee to the
persons in whose names the notes are registered at the close of business on each
record date. The record date for each payment date:
o for the notes, other than any definitive notes, will be the close of
business on the business day immediately preceding that payment date
or
o for the definitive notes will be the close of business on the last
business day of the month preceding the month in which that payment
date occurs.
These payments will be made either:
o by check mailed to the address of each noteholder as it appears in
the note register or
o upon written request to the indenture trustee at least five business
days prior to the relevant record date by any holder of notes having
an aggregate initial note balance that is in excess of the lesser
of:
o $5,000,000 or
o two-thirds of the initial aggregate note balance of that class
of notes, by wire transfer in immediately available funds to
the account of the noteholder specified in the request.
The final payment on any class of notes will be made in like manner, but
only upon presentment and surrender of those notes at the corporate trust office
of the indenture trustee or any other location specified in the notice to
noteholders of final payment.
S-19
<PAGE>
Registration
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended. DTC was created to hold securities for its
participating organizations, or participants, and to facilitate the clearance
and settlement of securities transactions between participants through
electronic book entries, thereby eliminating the need for physical movement of
notes. Participants include securities brokers and dealers (including [Name of
Underwriter]), banks, trust companies and clearing corporations. Indirect access
to the DTC system is also available to others, including banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a participant, either directly or indirectly. These entities are referred to as
indirect participants.
Note owners that are not participants or indirect participants but desire
to purchase, sell or otherwise transfer ownership of, or other interests in, the
notes may do so only through participants and indirect participants. In
addition, note owners will receive all payments of principal of and interest on
the notes from the indenture trustee through DTC and DTC participants. The
indenture trustee will forward payments to DTC in same day funds and DTC will
forward those payments to participants in next day funds settled through the New
York Clearing House. Each participant will be responsible for disbursing those
payments to indirect participants or to note owners. Unless and until definitive
notes are issued, it is anticipated that the only holder of the notes will be
CEDE, as nominee of DTC. Note owners will not be recognized by the indenture
trustee as noteholders, as such term is used in the indenture, and note owners
will be permitted to exercise the rights of noteholders only indirectly through
DTC and its participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers of notes among
participants and to receive and transmit payments of principal of, and interest
on, the notes. Participants and indirect participants with which note owners
have accounts with respect to the notes similarly are required to make
book-entry transfers and receive and transmit their payments on behalf of their
respective note owners. Accordingly, although note owners will not possess
definitive notes, DTC's rules provide a mechanism by which note owners through
their participants and indirect participants will receive payments and will be
able to transfer their interest.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and on behalf of certain banks, the ability of a
note owner to pledge notes to persons or entities that do not participate in the
DTC system, or to otherwise act with respect to its notes, may be limited due to
the absence of physical notes for the notes. In addition, under a book-entry
format, note owners may experience delays in their receipt of payments since
payment will be made by the indenture trustee to CEDE, as nominee for DTC.
Under its rules, DTC will take action permitted to be taken by a
noteholder under the indenture only at the direction of one or more participants
to whose DTC account the notes are credited. Cedel or the Euroclear operator, as
the case may be, will take any other action permitted to be taken by a
noteholder under the indenture on behalf of a Cedel participant or Euroclear
S-20
<PAGE>
participant only in accordance with its relevant rules and procedures and
subject to the ability of the relevant depositary to effect those actions on its
behalf through DTC. Additionally, under its rules, DTC will take actions with
respect to specified voting rights only at the direction of and on behalf of
participants whose holdings of notes evidence the specified voting rights. DTC
may take conflicting actions with respect to voting rights to the extent that
participants whose holdings of notes evidence those voting rights, authorize
divergent action.
DTC management is aware that some computer applications, systems and
similar the like that are dependent upon calendar dates, including dates before,
on and after January 1, 2000, may encounter Y2K problems. DTC has informed its
participants and other members of the financial community that it has developed
and is implementing a program so that its systems, as they relate to the timely
payment of distributions, including principal and income payments, to
securityholders, book-entry deliveries and settlement of trades within DTC,
continue to function appropriately. This program includes a technical assessment
and a remediation plan, each of which is complete. Additionally, DTC's plan
includes a testing phase, which is expected to be completed within appropriate
time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to, issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on which DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed its participants that it is contacting and will
continue to contact third party vendors from whom DTC acquires services to:
o impress upon them the importance of such services being Y2K
compliant and
o determine the extent of their efforts for Year 2000 remediation,
and, as appropriate, testing, of their services.
In addition, DTC is in the process of developing those contingency plans
as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to its participants for informational purposes only and is not intended
to serve as a representation, warranty or contract modification of any kind.
The issuer, the depositor, the master servicer, the seller, the owner
trustee, the indenture trustee and their respective affiliates will have no
liability for any actions taken by DTC or its nominee or Cedel or Euroclear,
including, without limitation, actions for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the notes held
by CEDE, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to those beneficial ownership interests.
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Definitive Notes
Definitive notes will be issued to note owners or their nominees, rather
than to DTC or its nominee, only if:
o the depositor advises the indenture trustee in writing that DTC is
no longer willing or able to discharge properly its responsibilities
as clearing agency with respect to the notes and the depositor is
unable to locate a qualified successor
o the depositor, at its option, advises the indenture trustee in
writing that it elects to terminate the book-entry system through
DTC, or
o after the occurrence of an Event of Default, note owners
representing in the aggregate not less than 51% of the voting rights
of the notes advise the indenture trustee and DTC through
participants, in writing, that the continuation of a book-entry
system through DTC, or any successor, is no longer in the note
owners' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the indenture trustee is required to notify all note owners through
participants of the availability of definitive notes. Upon surrender by DTC of
the definitive notes representing the notes and receipt of instructions for
re-registration, the indenture trustee will reissue the notes as definitive
notes issued in the respective principal amounts owned by individual note
owners, and thereafter the indenture trustee will recognize the holders of those
definitive notes as noteholders under the indenture. These definitive notes will
be issued in minimum denominations of $10,000, except that any beneficial
ownership represented by a note in an amount less than $10,000 immediately prior
to the issuance of a definitive note shall be issued in a minimum denomination
equal to the amount represented by that note.
Book-Entry Facilities
Note owners may elect to hold their interests in the notes through DTC in
the United States or through Cedel or Euroclear in Europe, if they are
participants of those systems, or indirectly through organizations which are
participants in those systems. The notes of each class will be issued in one or
more notes which equal the aggregate note balance of that class and will
initially be registered in the name of Cede, the nominee of DTC. Cedel and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in Cedel's and Euroclear's names on the books of
their respective depositaries which in turn will hold their positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank will act as depositary for Cedel and Chase will act as depositary for
Euroclear. In these capacities, Citibank and Chase are collectively referred to
as the European depositaries.
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. These credits or any transactions in securities settled
during this processing will be reported to the relevant Euroclear participants
or Cedel participants on that business day. Cash received in Cedel or Euroclear
as a
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result of sales of securities by or through a Cedel participant or Euroclear
participant to a participant will be received with value on the DTC settlement
date but will be available in the relevant Cedel or Euroclear cash account only
as of the business day following settlement in DTC.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Cedel participants and Euroclear participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositary. However, these cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
relevant depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel participants and Euroclear participants may not deliver instructions
directly to the European depositaries.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations, or Cedel
participants, and facilitates the clearance and settlement of securities
transactions between Cedel participants through electronic book-entry changes in
accounts of Cedel participants, eliminating the need for physical movement of
notes. Transactions may be settled in Cedel in any of 28 currencies, including
United States dollars. Cedel provides to its Cedel participants, among other
things, services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. Cedel
interfaces with domestic markets in several countries. As a professional
depository, Cedel is subject to regulation by the Luxembourg Monetary Institute.
Cedel participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust companies,
clearing corporations and other organizations. Indirect access to Cedel is also
available to others, including banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Cedel participant,
either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment, eliminating
the need for physical movement of notes and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in any of 32
currencies, including United States dollars. Euroclear includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries similar to the arrangements for
cross-market transfers with DTC described in the second and third preceding
paragraphs. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York, the Euroclear operator, under contract with
Euroclear Clearance Systems S.C., a Belgian cooperative corporation. All
operations are conducted by the Euroclear operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the
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Euroclear operator, not the cooperative. The cooperative establishes policy for
Euroclear on behalf of Euroclear participants. Euroclear participants include
banks, including central banks, securities brokers and dealers and other
professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial relationship
with a Euroclear participant, either directly or indirectly.
The Euroclear operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As a result,
it is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law. These terms and conditions govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from Euroclear, and receipts of
payments with respect to securities in Euroclear. All securities in Euroclear
are held on a fungible basis without attribution of specific notes to specific
securities clearance accounts. The Euroclear operator acts under the terms and
conditions only on behalf of Euroclear participants, and has no record of or
relationship with persons holding through Euroclear participants.
Payments with respect to notes held through Cedel or Euroclear will be
credited to the cash accounts of Cedel participants or Euroclear participants in
accordance with the relevant system's rules and procedures, to the extent
received by the relevant depositary. These payments will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of notes among participants of DTC, Cedel and
Euroclear, they are under no obligation to perform or continue to perform these
procedures and these procedures may be discontinued at any time. See Annex I to
this prospectus supplement.
Glossary of Terms
Allocated Realized Loss Amount--For any class of Subordinate Notes and any
payment date, the sum of (i) any Realized Loss allocated to that class of
Subordinate Notes on that payment date and (ii) any Allocated Realized Loss
Amount for that class remaining unpaid from previous payment dates plus accrued
interest on those amounts at the Note Accrual Rate for that class.
Available Interest Rate--For any payment date, a rate per annum equal to
the fraction, expressed as a percentage. The numerator is the Current Interest
Payment Amount for that payment date, and the denominator is the aggregate note
balance of the notes immediately prior to that payment date multiplied by the
actual number of days elapsed in the related Interest Accrual Period and divided
by 360.
Available Payment Amount--For any payment date, the sum, net of amounts
reimbursable from the Available Payment Amount to the master servicer, the
servicers, the indenture trustee or the owner trustee, of:
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o the aggregate amount of scheduled monthly payments on the mortgage
loans due on the related due date and received on or prior to the
related determination date, after deduction of the Master Servicing
Fee and the Indenture Trustee Fee;
o unscheduled payments in respect of the mortgage loans, including
prepayments, insurance proceeds, liquidation proceeds and proceeds
from repurchases of and substitutions for the mortgage loans
occurring during the preceding calendar month; and
o all P&I Advances with respect to the mortgage loans received for
such payment date.
The holders of the equity certificates will be entitled to all prepayment
charges received on the mortgage loans and those amounts will not be available
for distribution on the notes.
Bankruptcy Loss--A Deficient Valuation or a Debt Service Reduction.
Class A Principal Payment Amount--For any payment date on or after the
Stepdown Date and on which a Trigger Event is not in effect, an amount equal to
the excess of:
o the note balance of the Class A Notes immediately prior to that
payment date over
o the lesser of:
o the product of (i) _____% and (ii) the aggregate principal
balance of the mortgage loans as of the last day of the
related due period and
o the aggregate principal balance of the mortgage loans as of
the last day of the related due period minus $_________.
Class M-1 Principal Payment Amount--For any payment date on or after the
Stepdown Date and on which a Trigger Event is not in effect, an amount equal to
the excess of:
o the sum of:
o the note balance of the Class A Notes, after taking into
account the payment of the Class A Principal Payment Amount on
that payment date and
o the note balance of the Class M-1 Notes immediately prior to
that payment date over:
o the lesser of:
o the product of (i) _____% and (ii) the aggregate principal
balance of the mortgage loans as of the last day of the
related due period and
o the aggregate principal balance of the mortgage loans as of
the last day of the
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related due period minus $_________.
Class M-2 Principal Payment Amount--For any payment date on or after the
Stepdown Date and on which a Trigger Event is not in effect, an amount equal to
the excess of:
o the sum of:
o the note balance of the Class A Notes, after taking into
account the payment of the Class A Principal Payment Amount on
that payment date,
o the note balance of the Class M-1 Notes, after taking into
account the payment of the Class M-1 Principal Payment Amount
on that payment date and
o the note balance of the Class M-2 Notes immediately prior to
that payment date over
o the lesser of:
o the product of (i) _____% and (ii) the aggregate principal
balance of the mortgage loans as of the last day of the
related due period and
o the aggregate principal balance of the mortgage loans as of
the last day of the related due period minus $__________.
Class M-3 Principal Payment Amount--For any payment date on or after the
Stepdown Date and on which a Trigger Event is not in effect, an amount equal to
the excess of:
o the sum of:
o the note balance of the Class A Notes, after taking into
account the payment of the Class A Principal Payment Amount on
that payment date,
o the note balance of the Class M-1 Notes, after taking into
account the payment of the Class M-1 Principal Payment Amount
on that payment date,
o the note balance of the Class M-2 Notes, after taking into
account the payment of the Class M-2 Principal Payment Amount
on that payment date and
o the note balance of the Class M-3 Notes immediately prior to
that payment date over
o the lesser of:
o the product of _____% and the aggregate principal balance of
the mortgage
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loans as of the last day of the related due period and
o the aggregate principal balance of the mortgage loans as of
the last day of the related due period minus $__________.
Credit Enhancement Percentage--For any payment date, the percentage
obtained by dividing (x) the sum of the Overcollateralized Amount and the
aggregate note balance of the Subordinate Notes by (y) the aggregate principal
balance of the mortgage loans, calculated after taking into account payments of
principal on the mortgage loans and payment of the Principal Payment Amount to
the notes on that payment date.
Current Interest Payment Amount--For any payment date, an amount equal to
interest collections or advances on the mortgage loans during the related due
period, net of the master servicing fee and the indenture trustee fee.
Event of Default--Notwithstanding the prospectus, under the indenture, an
Event of Default relating to the notes is:
o the failure of the issuer to pay the Interest Payment Amount, the
Principal Payment Amount or any Overcollateralization Increase
Amount on any payment date, in each case to the extent that funds
are available on that payment date to make those payments, which
continues unremedied for a period of five days;
o the failure by the issuer on the final maturity date to reduce the
note balances of any notes then outstanding to zero;
o a default in the observance or performance of any covenant or
agreement of the issuer in the indenture and the continuation of any
of these defaults for a period of thirty days after notice to the
issuer by the indenture trustee or by the holders of at least 25% of
the voting rights of the notes;
o any representation or warranty made by the issuer in the indenture
or in any certificate or other writing delivered pursuant thereto
having been incorrect in any material respect as of the time made,
and the circumstance in respect of which the representation or
warranty being incorrect not having been cured within thirty days
after notice thereof is given to the issuer by the indenture trustee
or by the holders of at least 25% of the voting rights of the notes;
or
o some events of bankruptcy, insolvency, receivership or
reorganization of the issuer.
Indenture Trustee Fee--The sum of
o interest accrued at the Indenture Trustee Fee Rate on the Scheduled
Principal Balance of each mortgage loan, payable monthly, and
o any interest or other income earned on funds held in the Certificate
Account, to the
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extent not payable as compensation to the related servicer, as
provided in the indenture.
Indenture Trustee Fee Rate--___% per annum.
Interest Accrual Period--For any payment date, the period commencing on
the payment date of the month immediately preceding the month in which that
payment date occurs, or, in the case of the first period, commencing on the
closing date, and ending on the day preceding that payment date.
Interest Carry Forward Amount--For any class of notes and any payment
date, any shortfall in payment of interest represented by the excess, if any, of
the Interest Payment Amount that would be payable on that class at the
applicable Note Accrual Rate over the Interest Payment Amount actually paid on
that class at the Available Interest Rate, together with any shortfall in
payment of interest remaining unpaid from previous payment dates plus interest
accrued thereon at the related Note Accrual Rate.
Interest Determination Date--For each Interest Accrual Period, the second
business day preceding that Interest Accrual Period.
Interest Payment Amount--For the notes of any class on any payment date,
interest accrued during the related Interest Accrual Period on the note balance
of those notes immediately prior to that payment date at the then-applicable
Note Interest Rate for that class.
Master Servicing Fee--Accrued interest at the Master Servicing Fee Rate on
the Scheduled Principal Balance of each mortgage loan, payable monthly.
Master Servicing Fee Rate--___% per annum in the case of each ____-____
mortgage loan and ____% per annum in the case of each other mortgage loan.
Maximum Note Interest Rate--___% per annum.
Net Monthly Excess Cashflow--For any payment date, the sum of:
o any Overcollateralization Reduction Amount and
o the excess of:
o the Available Payment Amount for that payment date over
o the sum for that payment date of the aggregate of the Interest
Payment Amounts payable to the holders of the notes and the
sum of the amounts described in clauses (b)(1) through (3) of
the definition of Principal Payment Amount.
Note Accrual Rate--For any class of notes and any payment date, the lesser
of the rate
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described for that class in clause (1) of the definition of Note Interest Rate
for that class and the Maximum Note Interest Rate.
Note Interest Rate--For the Class A Notes, a rate per annum equal to the
lesser of (i) One- Month LIBOR plus ____%, in the case of each payment date
through and including the payment date on which the aggregate note balance is
reduced to less than __% of the aggregate initial note balance, or One-Month
LIBOR plus ____%, in the case of any payment date thereafter, (ii) the Available
Interest Rate for that payment date and (iii) the Maximum Note Interest Rate.
For the Class M-1 Notes, a rate per annum equal to the lesser of (i)
One-Month LIBOR plus ____%, in the case of each payment date through and
including the payment date on which the aggregate note balance is reduced to
less than __% of the aggregate initial note balance, or One- Month LIBOR plus
____%, in the case of any payment date thereafter, (ii) the Available Interest
Rate for that payment date and (iii) the Maximum Note Interest Rate.
For the Class M-2 Notes, a rate per annum equal to the lesser of (i)
One-Month LIBOR plus ____%, in the case of each payment date through and
including the payment date on which the aggregate note balance is reduced to
less than __% of the aggregate initial note balance, or One- Month LIBOR plus
____%, in the case of any payment date thereafter, (ii) the Available Interest
Rate for that payment date and (iii) the Maximum Note Interest Rate.
For the Class M-3 Notes, a rate per annum equal to the lesser of (i)
One-Month LIBOR plus ____%, in the case of each payment date through and
including the payment date on which the aggregate note balance is reduced to
less than __% of the aggregate initial note balance, or One- Month LIBOR plus
_____%, in the case of any payment date thereafter, (ii) the Available Interest
Rate for that payment date and (iii) the Maximum Note Interest Rate.
See "--Calculation of One-Month LIBOR" in this prospectus supplement.
One-Month LIBOR--As of any Interest Determination Date, the London
interbank offered rate for one-month U.S. dollar deposits which appears on the
Dow Jones Telerate Page 3750 as of 11:00 a.m., London time, on that date.
Overcollateralization Increase Amount--For the notes and any payment date,
any amount of Net Monthly Excess Cashflow actually applied as an accelerated
payment of principal to the extent the Required Overcollateralized Amount
exceeds the Overcollateralized Amount as of that payment date.
Overcollateralization Reduction Amount--The amount by which the
Overcollateralized Amount exceeds the Required Overcollateralized Amount.
Overcollateralized Amount--For any payment date, the excess, if any, of
(a) the aggregate principal balance of the mortgage loans immediately following
that payment date over (b) the note balance of the notes, after taking into
account the payment of the amounts described in clauses (b)(1) through (4) of
the definition of Principal Payment Amount on that payment date.
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P&I Advance--Any advance made or caused to be made by the master servicer
on or before each payment date of its own funds, or funds in the Certificate
Account that are not included in the Available Payment Amount for that payment
date, in an amount equal to the aggregate of all payments of principal and
interest, net of the Master Servicing Fee, that were due during the related due
period on the mortgage loans serviced by the master servicer and that were
delinquent on the related determination date, plus amounts representing assumed
payments not covered by any current net income on the mortgaged properties
acquired by foreclosure or deed in lieu of foreclosure.
Principal Payment Amount--For any payment date, other than the final
maturity date and the payment date immediately following the acceleration of the
notes due to an Event of Default, the lesser of:
(a) the excess of the Available Payment Amount over the aggregate of
the Interest Payment Amounts for the notes; and
(b) the sum of:
(1) the principal portion of all scheduled monthly
payments on the mortgage loans due during the related due
period, whether or not received on or prior to the related
determination date;
(2) the principal portion of all proceeds received
during the related Prepayment Period in respect of the
repurchase of a mortgage loan, or, in the case of a
substitution, amounts representing a principal adjustment, as
contemplated in the servicing agreements;
(3) the principal portion of all other unscheduled
collections, including insurance proceeds, liquidation
proceeds and all full and partial principal prepayments,
received during the related Prepayment Period, to the extent
applied as recoveries of principal on the mortgage loans;
(4) the principal portion of any Realized Losses
incurred or deemed to have been incurred on any mortgage loans
in the calendar month preceding that payment date to the
extent covered by Net Monthly Excess Cashflow for that payment
date; and
(5) the amount of any Overcollateralization Increase
Amount for that payment date;
minus
(6) the amount of any Overcollateralization Reduction
Amount for that payment date.
For the final maturity date or the payment date immediately following the
acceleration of the notes due to an Event of Default, the amount necessary to
reduce the note balance of any notes
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outstanding to zero. In no event will the Principal Payment Amount with respect
to any payment date be (x) less than zero or (y) greater than the
then-outstanding aggregate note balance of the notes. The Principal Payment
Amount for the first payment date will include approximately $_________
collected by the servicers in respect of prepayments on the mortgage loans
during the _________ ____ Prepayment Period.
Realized Losses--Any Bankruptcy Losses and with respect to any defaulted
mortgage loan that is finally liquidated through foreclosure sale, disposition
of the related mortgaged property, if acquired by deed in lieu of foreclosure,
or otherwise, the amount of loss realized, if any, will equal the portion of the
unpaid principal balance remaining, if any, plus interest thereon through the
last day of the month in which the mortgage loan was finally liquidated, after
application of all amounts recovered, net of amounts reimbursable to the
servicers for P&I Advances, servicing advances and servicing fees, towards
interest and principal owing on the mortgage loan.
Reference Banks--Leading banks selected by the indenture trustee and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market:
o with an established place of business in London,
o which have been designated as such by the indenture trustee and
o not controlling, controlled by, or under common control with, the
depositor or the issuer.
Required Overcollateralized Amount--The level at which the
Overcollateralized Amount is required to be maintained under the indenture.
Reserve Interest Rate--The rate per annum that the indenture trustee
determines to be either:
o the arithmetic mean, rounded upwards if necessary to the nearest
whole multiple of 0.0625%, of the one-month U.S. dollar lending
rates which New York City banks selected by the indenture trustee
are quoting on the relevant Interest Determination Date to the
principal London offices of leading banks in the London interbank
market or
o in the event that the indenture trustee can determine no such
arithmetic mean, the lowest one-month U.S. dollar lending rate which
New York City banks selected by the indenture trustee are quoting on
such Interest Determination Date to leading European banks.
Scheduled Principal Balance--With respect to any mortgage loan as of any
date of determination, the principal balance of the mortgage loan 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:
o the principal portion of all monthly payments due on or before the
date of determination, whether or not received
o all amounts allocable to unscheduled principal that were received
prior to the
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calendar month in which the date of determination occurs and
o any Bankruptcy Loss occurring out of a deficient valuation that was
incurred prior to the calendar month in which the date of
determination occurs.
Stepdown Date--For any payment date, the later to occur of (x) the payment
date occurring in _______ ____ and (y) the first payment date on which the
Credit Enhancement Percentage, calculated for this purpose only after taking
into account payments of principal on the mortgage loans, but prior to any
payment of the Principal Payment Amount to the notes then entitled to payments
of principal on that payment date, is greater than or equal to _____%.
Trigger Event--For any payment date, if the percentage obtained by
dividing
o the principal amount of mortgage loans delinquent 60 days or more by
o the aggregate principal balance of the mortgage loans, in each case,
as of the last day of the previous calendar month
exceeds the lesser of (i) _____% of the Credit Enhancement Percentage and (ii)
______%.
Interest Payments on the Notes
To the extent of the Current Interest Payment Amount, in the priorities
listed below, the holders of each class of notes will be entitled to receive on
each payment date interest payments in an amount equal to the Interest Payment
Amount for that class. On each payment date, the Current Interest Payment Amount
will be distributed in the following order of priority:
o first, to the holders of the Class A Notes, the Interest Payment
Amount for those notes;
o second, to the extent of the Current Interest Payment Amount
remaining after payment of the Interest Payment Amount for the Class
A Notes, to the holders of the Class M-1 Notes, the Interest Payment
Amount for the Class M-1 Notes;
o third, to the extent of the Current Interest Payment Amount
remaining after payment of the Interest Payment Amounts for the
Class A Notes and the Class M-1 Notes, to the holders of the Class
M-2 Notes, the Interest Payment Amount for the Class M-2 Notes; and
o fourth, to the extent of the Current Interest Payment Amount
remaining after payment of the Interest Payment Amounts for the
Class A Notes, the Class M-1 Notes and the Class M-2 Notes, to the
holders of the Class M-3 Notes, the Interest Payment Amount for the
Class M-3 Notes.
For any payment date, to the extent that the aggregate of the Interest
Payment Amounts for the notes is limited by the Current Interest Payment Amount
for the related due period, the holders of some classes of notes may receive an
Interest Payment Amount calculated at the Available
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Interest Rate rather than at the applicable Note Accrual Rate for those classes
and that payment date. The Interest Carry Forward Amount, if any, for any class
of the notes for any payment date is payable to the extent of available funds
remaining after some other payments on the notes on that payment date, but
before any payments on the equity certificates on that payment date. See
"--Overcollateralization Provisions" in this prospectus supplement.
All payments of interest on the notes will be based on a 360-day year and
the actual number of days in the applicable Interest Accrual Period.
The note balance of a note outstanding at any time represents the then
maximum amount that the holder of that note is entitled to receive as payments
allocable to principal from the cash flow on the mortgage loans and the other
assets in the trust estate.
The Note Interest Rate and the Note Accrual Rate for the notes for the
current related Interest Accrual Period, to the extent it has been determined,
and for the immediately preceding Interest Accrual Period may be obtained by
telephoning the indenture trustee at __________.
Calculation of One-Month LIBOR
On each Interest Determination Date, the indenture trustee will determine
One-Month LIBOR for the next Interest Accrual Period. If the rate does not
appear on Telerate Page 3750, the rate for that day will be determined on the
basis of the offered rates of the Reference Banks for one-month U.S. dollar
deposits, as of 11:00 a.m., London time, on that Interest Determination Date.
The indenture trustee will request the principal London office of each of the
Reference Banks to provide a quotation of its rate. If on that Interest
Determination Date two or more Reference Banks provide the offered quotations,
One-Month LIBOR for the related Interest Accrual Period shall be the arithmetic
mean of those offered quotations , rounded upwards if necessary to the nearest
whole multiple of 0.0625%. If on that Interest Determination Date fewer than two
Reference Banks provide offered quotations, One-Month LIBOR for the related
Interest Accrual Period shall be the higher of (x) One-Month LIBOR as determined
on the previous Interest Determination Date and (y) the Reserve Interest Rate.
As used in this section, business day means a day on which banks are open
for dealing in foreign currency and exchange in London and New York City.
The establishment of One-Month LIBOR on each Interest Determination Date
by the indenture trustee and the indenture trustee's calculation of the rate of
interest applicable to the notes for the related Interest Accrual Period shall,
in the absence of manifest error, be final and binding.
Principal Payments on the Notes
On each payment date, the Principal Payment Amount will be distributed to
the holders of the notes then entitled to payments of principal.
On each payment date (a) prior to the Stepdown Date or (b) on which a
Trigger Event is in effect, the Principal Payment Amount shall be distributed:
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o first, to the Class A Notes, until their note balance has been
reduced to zero;
o second, to the Class M-1 Notes, until their note balance has been
reduced to zero;
o third, to the Class M-2 Notes, until their note balance has been
reduced to zero; and
o fourth, to the Class M-3 Notes, until their note balance has been
reduced to zero.
On each payment date (a) on or after the Stepdown Date and (b) on which a
Trigger Event is not in effect, the holders of the Class A Notes and the
Subordinate Notes shall be entitled to receive payments in respect of principal
to the extent of the Principal Payment Amount in the following amounts and order
of priority:
o first, the lesser of (x) the Principal Payment Amount and (y) the
Class A Principal Payment Amount, shall be distributed to the
holders of the Class A Notes, until their note balance has been
reduced to zero;
o second, the lesser of (x) the excess of (1) the Principal Payment
Amount over (2) the amount distributed to the holders of the Class A
Notes pursuant to clause first above and (y) the Class M-1 Principal
Payment Amount, shall be distributed to the holders of the Class M-1
Notes, until their note balance has been reduced to zero;
o third, the lesser of (x) the excess of (1) the Principal Payment
Amount over (2) the sum of the amounts distributed to the holders of
the Class A Notes pursuant to clause first above and to the holders
of the Class M-1 Notes pursuant to clause second above and (y) the
Class M-2 Principal Payment Amount, shall be distributed to the
holders of the Class M-2 Notes, until their note balance has been
reduced to zero; and
o fourth, the lesser of (x) the excess of (1) the Principal Payment
Amount over (2) the sum of the amounts distributed to the holders of
the Class A Notes pursuant to clause first above, to the holders of
the Class M-1 Notes pursuant to clause second above and to the
holders of the Class M-2 Notes pursuant to clause third above and
(y) the Class M-3 Principal Payment Amount, shall be distributed to
the holders of the Class M-3 Notes, until their note balance has
been reduced to zero.
On the final maturity date or the payment date immediately following the
acceleration of the notes due to any Event of Default, principal will be payable
on each class of notes in an amount equal to the note balance of that class on
that payment date. On the final maturity date or the payment date immediately
following the acceleration of the notes due to any Event of Default, amounts in
respect of accrued interest, Interest Carry Forward Amounts and Allocated
Realized Loss Amounts will also be payable on each class of notes in the
priorities set forth in the indenture. There can be no assurance, however, that
sufficient funds will be available on any of those dates to retire the note
balances and pay those other amounts.
The allocation of payments in respect of principal to the Class A Notes on
each payment date
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(a) prior to the Stepdown Date or (b) on which a Trigger Event has occurred,
will have the effect of accelerating the amortization of the Class A Notes
while, in the absence of Realized Losses, increasing the respective percentage
interest in the principal balance of the mortgage loans evidenced by the
Subordinate Notes and the Overcollateralized Amount. Increasing the respective
percentage interest in the trust estate of the Subordinate Notes and the
Overcollateralized Amount relative to that of the Class A Notes is intended to
preserve the availability of the subordination provided by the Subordinate Notes
and the Overcollateralized Amount.
Credit Enhancement
The credit enhancement provided for the benefit of the holders of the
notes consists of subordination, as described under "--Allocation of Losses;
Subordination" in this section, and overcollateralization, as described under
"--Overcollateralization Provisions" in this section.
The rights of the holders of the Subordinate Notes and the equity
certificates to receive payments will be subordinated, to the extent described
under "--Allocation of Losses; Subordination" in this section, to the rights of
the holders of the Class A Notes. This subordination is intended to enhance the
likelihood of regular receipt by the holders of the Class A Notes of the full
amount of interest and principal to which they are entitled and to afford those
holders protection against Realized Losses.
The protection afforded to the holders of the Class A Notes by means of
the subordination of the Subordinate Notes and the equity certificates will be
accomplished by (i) the preferential right of the holders of the Class A Notes
to receive on any payment date, prior to payment on the Subordinate Notes and
the equity certificates, payments in respect of interest and principal, subject
to available funds, and (ii) if necessary, the right of the holders of the Class
A Notes to receive future payments of amounts that would otherwise be payable to
the holders of the Subordinate Notes and the equity certificates.
In addition, the rights of the holders of Subordinate Notes with lower
numerical class designations will be senior to the rights of holders of
Subordinate Notes with higher numerical class designations, and the rights of
the holders of all of the Subordinate Notes to receive payments in respect of
the mortgage loans will be senior to the rights of the holders of the equity
certificates, in each case to the extent described under "--Allocation of
Losses; Subordination" in this section. This subordination is intended to
enhance the likelihood of regular receipt by the holders of Subordinate Notes
with lower numerical class designations relative to the holders of Subordinate
Notes with higher numerical class designations, and by the holders of all of the
Subordinate Notes relative to the holders of the equity certificates, of the
full amount of interest and principal to which they are entitled and to afford
those holders protection against Realized Losses, as described under
"--Allocation of Losses; Subordination" in this section.
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Overcollateralization Provisions
The weighted average mortgage rate for the mortgage loans, adjusted to
reflect the Master Servicing Fee and the Indenture Trustee Fee payable from
interest received or advanced on the mortgage loans, is generally expected to be
higher than the weighted average of the Note Interest Rates on the notes. As a
result, excess interest collections will be generated which, in the absence of
Realized Losses, will not be necessary to fund interest payments on the notes.
The indenture requires that, on each payment date, the Net Monthly Excess
Cashflow, if any, be applied on that payment date as an accelerated payment of
principal on class or classes of notes then entitled to receive payments in
respect of principal, but only to the limited extent described in this section.
For any payment date, any Net Monthly Excess Cashflow, or, in the case of
clause first below, the Net Monthly Excess Cashflow exclusive of any
Overcollateralization Reduction Amount, shall be paid as follows:
o first, to the holders of the class or classes of notes then entitled
to receive payments in respect of principal, in an amount equal to
the principal portion of any Realized Losses incurred or deemed to
have been incurred on the mortgage loans;
o second, to the holders of the class or classes of notes then
entitled to receive payments in respect of principal, in an amount
equal to the Overcollateralization Increase Amount;
o third, to the holders of the Class A Notes, in an amount equal to
the Interest Carry Forward Amount for the Class A Notes;
o fourth, to the holders of the Class M-1 Notes, in an amount equal to
the Interest Carry Forward Amount for the Class M-1 Notes;
o fifth, to the holders of the Class M-1 Notes, in an amount equal to
the Allocated Realized Loss Amount for the Class M-1 Notes;
o sixth, to the holders of the Class M-2 Notes, in an amount equal to
the Interest Carry Forward Amount for the Class M-2 Notes;
o seventh, to the holders of the Class M-2 Notes, in an amount equal
to the Allocated Realized Loss Amount for the Class M-2 Notes;
o eighth, to the holders of the Class M-3 Notes, in an amount equal to
the Interest Carry Forward Amount for the Class M-3 Notes;
o ninth, to the holders of the Class M-3 Notes, in an amount equal to
the Allocated Realized Loss Amount for the Class M-3 Notes and
o tenth, to the holders of the equity certificates as provided in the
indenture.
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<PAGE>
As of the closing date, the aggregate principal balance of the mortgage
loans as of the cut-off date will exceed the aggregate note balance of the notes
by an amount equal to approximately $_________. This amount represents
approximately ____% of the aggregate principal balance of the mortgage loans as
of the cut-off date, which is the initial amount of overcollateralization
required to be provided by the mortgage pool under the indenture. In the event
that Realized Losses are incurred on the mortgage loans, those Realized Losses
may result in an overcollateralization deficiency since the Realized Losses will
reduce the principal balance of the mortgage loans without a corresponding
reduction to the aggregate note balance of the notes. In this event, the
indenture requires the payment from Net Monthly Excess Cashflow, subject to
available funds, of an amount equal to any overcollateralization deficiency,
which shall constitute a principal payment on the notes in reduction of their
note balances. This has the effect of accelerating the amortization of the notes
relative to the amortization of the mortgage loans, and of increasing the
Overcollateralized Amount.
On and after the Stepdown Date and provided that a Trigger Event is not in
effect, the Required Overcollateralized Amount may be permitted to decrease, or
step down, below the initial $_________ level to a level equal to approximately
____% of the then current aggregate outstanding principal balance of the
mortgage loans, after giving effect to principal payments to be distributed on
that payment date, subject to a floor of $_________. In the event that the
Required Overcollateralized Amount is permitted to step down on any payment
date, the indenture provides that a portion of the principal which would
otherwise be distributed to the holders of the notes on that payment date shall
be distributed to the holders of the equity certificates, subject to the
priorities set forth above. With respect to each such payment date, the
Principal Payment Amount will be reduced by the Overcollateralization Reduction
Amount after taking into account all other payments to be made on that payment
date, which amount shall be distributed as Net Monthly Excess Cashflow pursuant
to the priorities set forth above. This has the effect of decelerating the
amortization of the notes relative to the amortization of the mortgage loans,
and of reducing the Overcollateralized Amount. However, if on any payment date a
Trigger Event is in effect, the Required Overcollateralized Amount will not be
permitted to step down on that payment date.
Allocation of Losses; Subordination
Any Realized Loss on the mortgage loans will be allocated on any payment
date:
o first, to Net Monthly Excess Cashflow
o second, to the Overcollateralized Amount
o third, to the Class M-3 Notes
o fourth, to the Class M-2 Notes and
o fifth, to the Class M-1 Notes.
The indenture does not permit the allocation of Realized Losses to the
Class A Notes. Investors in the Class A Notes should note that although Realized
Losses cannot be allocated to the Class A Notes, under certain loss scenarios
there will not be enough principal and interest collected on the mortgage loans
to pay the Class A Notes all interest and principal amounts to which they are
then entitled.
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Once Realized Losses have been allocated to the Subordinate Notes, those
Realized Losses will not be reinstated thereafter. However, Allocated Realized
Loss Amounts may be paid to the holders of those classes of notes, after certain
distributions to the holders of the Class A Notes and Subordinate Notes with
lower numerical class designations, but before the equity certificates are
entitled to any distributions.
Any allocation of a Realized Loss to a note will be made by reducing its
note balance by the amount so allocated on the payment date in the month
following the calendar month in which that Realized Loss was incurred.
Notwithstanding anything to the contrary described in this prospectus
supplement, in no event will the note balance of any note be reduced more than
once in respect of any particular amount both (1) allocable to those notes in
respect of Realized Losses and (2) payable as principal to the holder of those
notes from Net Monthly Excess Cashflow.
P&I Advances
P&I Advances are required to be made only to the extent they are deemed by
the master servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making these P&I Advances is to
maintain a regular cash flow to the noteholders, rather than to guarantee or
insure against losses. The master servicer will not be required to make any P&I
Advances with respect to reductions in the amount of the monthly payments on the
mortgage loans due to bankruptcy proceedings or the application of the Relief
Act.
All P&I Advances will be reimbursable to the master servicer from late
collections, insurance proceeds and liquidation proceeds from the mortgage loan
as to which the unreimbursed P&I Advance was made. In addition, any P&I Advances
previously made in respect of any mortgage loan that are deemed by the master
servicer to be nonrecoverable from related late collections, insurance proceeds
or liquidation proceeds may be reimbursed to the master servicer out of any
funds in the Certificate Account prior to the payments on the notes. In the
event that the master servicer fails in its obligation to make any required
advance, the indenture trustee will be obligated to make the advance, in each
case to the extent required in the servicing agreement.
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<PAGE>
Yield, Prepayment and Maturity Considerations
General Prepayment Considerations
The rate of principal payments on the notes, the aggregate amount of
payments on the notes and the yield to maturity of the notes will be related to
the rate and timing of payments of principal on the mortgage loans. The rate of
principal payments on the mortgage loans will in turn be affected by the
amortization schedules of the mortgage loans and by the rate of principal
prepayments on the mortgage loans, including for this purpose, payments
resulting from refinancings, liquidations of the mortgage loans due to defaults,
casualties, condemnations and repurchases, whether optional or required, by the
depositor, the seller or the majority holder of the equity certificates, as the
case may be. The mortgage loans generally may be prepaid by the mortgagors at
any time.
Prepayments, liquidations and repurchases of the mortgage loans will
result in payments in respect of principal to the holders of the class or
classes of notes then entitled to receive those payments that otherwise would be
distributed over the remaining terms of the mortgage loans. See "Yield,
Prepayment and Maturity Considerations" in the prospectus. Since the rates of
payment of principal on the mortgage loans will depend on future events and a
variety of factors, as described more fully in this section and in the
prospectus under "Yield, Prepayment and Maturity Considerations", no assurance
can be given as to the rate of principal payments or the rate of principal
prepayments. The extent to which the yield to maturity of any class of notes may
vary from the anticipated yield will depend upon the degree to which those notes
are purchased at a discount or premium and the degree to which the timing of
payments on those notes is sensitive to prepayments on the mortgage loans.
Further, an investor should consider, in the case of any note purchased at a
discount, the risk that a slower than anticipated rate of principal payments on
the mortgage loans could result in an actual yield to that investor that is
lower than the anticipated yield. In the case of any note purchased at a
premium, an investor should consider the risk that a faster than anticipated
rate of principal payments could result in an actual yield to that investor that
is lower than the anticipated yield. In general, the earlier a prepayment of
principal is made on the mortgage loans, the greater the effect on the yield to
maturity of the notes. As a result, the effect on an investor's yield of
principal payments occurring at a rate higher or lower than the rate anticipated
by the investor during the period immediately following the issuance of the
notes would not be fully offset by a subsequent like reduction or increase in
the rate of principal payments.
It is highly unlikely that the mortgage loans will prepay at any constant
rate until maturity or that all of the mortgage loans will prepay at the same
rate. Moreover, the timing of prepayments on the mortgage loans may
significantly affect the actual yield to maturity on the notes, even if the
average rate of principal payments experienced over time is consistent with an
investor's expectation.
The rate of payments, including prepayments, on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the mortgage rates on the
mortgage loans, the rate of prepayment, and refinancing, would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
mortgage rates on the mortgage loans, the rate of prepayment on the mortgage
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<PAGE>
loans would be expected to decrease. Other factors affecting prepayment of
mortgage loans include changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. There can be no certainty as to the rate of prepayments on the
mortgage loans during any period or over the life of the notes. See "Yield,
Prepayment and Maturity Considerations" in the prospectus.
Because principal payments are paid to some classes of notes before other
classes, holders of classes of notes having a later priority of payment bear a
greater risk of losses , because those notes will represent an increasing
percentage of the trust estate during the period prior to the commencement of
payments of principal on the notes, than holders of classes having earlier
priorities for payment of principal. As described under "Description of the
Notes--Principal Payments on the Notes" in this prospectus supplement, prior to
the Stepdown Date, all principal payments on the mortgage loans will be
allocated to the Class A Notes. Thereafter, as further described in this
prospectus supplement, subject to the delinquency triggers described in this
prospectus supplement, all principal payments on the mortgage loans will be
allocated among all classes of the notes then outstanding as described under
"Description of the Notes--Principal Payments on the Notes" in this prospectus
supplement.
In general, defaults on mortgage loans are expected to occur with greater
frequency in their early years. In addition, default rates may be higher for
mortgage loans used to refinance an existing mortgage loan. In the event of a
mortgagor's default on a mortgage loan, there can be no assurance that recourse
will be available beyond the specific mortgaged property pledged as security for
repayment. See "The Mortgage Pool--Underwriting Standards; Representations" in
this prospectus supplement.
Special Yield Considerations
The Note Interest Rate for each class of the notes adjusts monthly based
on One-Month LIBOR as described under "Description of the Notes--Calculation of
One-Month LIBOR" in this prospectus supplement, subject to the Maximum Note
Interest Rate and the Available Interest Rate. Because of the application of the
Maximum Note Interest Rate and the Available Interest Rate, increases in the
Note Interest Rate on the notes may be limited for extended periods or
indefinitely in a rising interest rate environment. The interest due on the
mortgage loans during any due period may not equal the amount of interest that
would accrue at One-Month LIBOR plus the applicable spread on the notes during
the related Interest Accrual Period. As a result of the foregoing as well as
other factors, including the prepayment behavior of the mortgage pool, relative
increases in One- Month LIBOR or relative decreases in the weighted average of
the mortgage rates on the mortgage loans (i) could cause the Current Interest
Payment Amount generated by the mortgage pool to be less than the aggregate of
the Interest Payment Amounts that would otherwise be payable on the notes,
leading one or more classes of notes to incur Interest Carry Forward Amounts, or
(ii) could cause the Maximum Note Interest Rate to apply to one or more classes
of notes.
As described under "Description of the Notes--Allocation of Losses;
Subordination" in this prospectus supplement, amounts otherwise distributable to
holders of the Subordinate Notes may be made available to protect the holders of
the Class A Notes against interruptions in payments due
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<PAGE>
to some mortgagor delinquencies, to the extent not covered by P&I Advances.
Those delinquencies may affect the yield to investors on classes of Subordinate
Notes and, even if subsequently cured, will affect the timing of the receipt of
payments by the holders of those classes of Subordinate Notes. In addition, a
larger than expected rate of delinquencies or losses will affect the rate of
principal payments on each class of Subordinate Notes. See "Description of the
Notes--Principal Payments on the Notes" in this prospectus supplement.
Weighted Average Lives
Weighted average life refers to the amount of time that will elapse from
the date of issuance of a security until each dollar of principal of that
security will be repaid to the investor. The weighted average life of each class
of notes will be influenced by the rate at which principal on the mortgage loans
is paid, which may be in the form of scheduled payments or prepayments,
including repurchases and prepayments of principal by the borrower as well as
amounts received by virtue of condemnation, insurance or foreclosure with
respect to the mortgage loans, and the timing of those payments or prepayments.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement
assumes a prepayment rate for the mortgage loans of __% CPR. The Constant
Prepayment Rate model, or CPR, assumes that the outstanding principal balance of
a pool of mortgage loans prepays at a specified constant annual rate or CPR. In
generating monthly cash flows, this rate is converted to an equivalent constant
monthly rate. To assume __% CPR or any other CPR percentage is to assume that
the stated percentage of the outstanding principal balance of the pool is
prepaid over the course of a year. No representation is made that the mortgage
loans will prepay at __% CPR or any other rate.
The tables following the next paragraph indicate the percentage of the
initial note balance of the notes that would be outstanding after each of the
dates shown at various percentages of CPR and the corresponding weighted average
lives of such notes. The tables are based on the following assumptions:
o the mortgage pool consists of __ mortgage loans with the
characteristics set forth below;
o payments on the notes are received, in cash, on the _____ day of
each month, commencing in _______ ____;
o the mortgage loans prepay at the percentages of CPR indicated;
o no defaults or delinquencies occur in the payment by mortgagors of
principal and interest on the mortgage loans;
o none of the majority holder of the equity certificates, the seller,
the master servicer or any other person purchases from the trust
estate any mortgage loan or redeems the notes pursuant to any
obligation or option under the indenture, the servicing
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agreements or any other agreement except as indicated in footnote
two in the tables below, and no partial early redemption of the
notes occurs with respect to the ___________ mortgage loans;
o scheduled monthly payments on the mortgage loans are received on the
first day of each month commencing in _______ ____, and are computed
prior to giving effect to any prepayments received in the prior
month;
o prepayments representing payment in full of individual mortgage
loans are received on the last day of each month commencing in
________ ____, and include 30 days' interest thereon;
o the scheduled monthly payment for each mortgage loan is calculated
based on its principal balance, mortgage rate, original term to
stated maturity and remaining term to stated maturity such that the
mortgage loan will amortize in amounts sufficient to repay the
remaining principal balance of that mortgage loan by its remaining
term to stated maturity;
o the notes are purchased on ________ __, ____; and
o the Master Servicing Fee Rate is as shown in the Assumed Mortgage
Loan Characteristics table below and the Master Servicing Fee is
payable monthly and the Indenture Trustee Fee Rate is equal to
______% per annum and the Indenture Trustee Fee is paid monthly.
The assumptions listed above are collectively referred to in this
prospectus supplement as the modeling assumptions.
Assumed Mortgage Loan Characteristics
Principal Balance Original Term Remaining Term Master Servicing
as of the Mortgage to Maturity to Maturity Fee Rate
Cut-off Date Rate (%) (Months) (Months) (%)
------------ -------- -------- -------- ---
There will be discrepancies between the characteristics of the actual
mortgage loans and the characteristics assumed in preparing the tables. Any
discrepancy may have an effect upon the percentages of the initial note balance
outstanding, and the weighted average lives, of the notes set forth in the
tables. In addition, since the actual mortgage loans included in the mortgage
pool will
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have characteristics that differ from those assumed in preparing the tables set
forth below and since it is not likely the level of One-Month LIBOR will remain
constant as assumed, the notes may mature earlier or later than indicated by the
tables. In addition, as described under "Description of the Notes--Principal
Payments on the Notes" in this prospectus supplement, the occurrence of the
Stepdown Date or a Trigger Event will have the effect of accelerating or
decelerating the amortization of the notes, affecting the weighted average lives
of the notes. Based on the foregoing assumptions, the tables indicate the
weighted average lives of the notes and set forth the percentages of the initial
note balance of the notes that would be outstanding after each of the payment
dates shown, at various percentages of CPR. Neither the prepayment model used
herein nor any other prepayment model or assumption purports to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the mortgage loans included
in the mortgage pool. Variations in the prepayment experience and the balance of
the mortgage loans that prepay may increase or decrease the percentages of
initial note balances, and weighted average lives, shown in the following
tables. Such variations may occur even if the average prepayment experience of
all the mortgage loans equals any of the specified percentages of CPR.
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<PAGE>
PERCENT OF INITIAL NOTE BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF CPR
<TABLE>
<CAPTION>
Class A Notes Class M-1 Notes
---------------------------- ----------------------------
Payment Date 0% 15% 28% 35% 45% 0% 15% 28% 35% 45%
- ------------ ---- ----- ----- ----- ----- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date..........
......................
......................
......................
......................
Weighted Average Life
in Years............
Weighted Average Life
in Years............
<CAPTION>
Class M-2 Notes Class M-3 Notes
---------------------------- ----------------------------
Payment Date 0% 15% 28% 35% 45% 0% 15% 28% 35% 45%
- ------------ ---- ----- ----- ----- ----- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Date..........
......................
......................
......................
......................
Weighted Average Life
in Years............
Weighted Average Life
in Years............
</TABLE>
- ----------
The first row listing the weighted average life of a note as shown above, is
determined by (a) multiplying the amount of each payment of principal by the
number of years from the date of issuance of the note to the related payment
date, (b) adding the results and (c) dividing the sum by the initial note
balance of the notes.
The second weighted average life shown above was calculated as described in the
preceding sentence but assumes the majority holder of the equity certificates
exercises its option to redeem the notes when the aggregate note balance has
been reduced to less than 20% of the initial aggregate note balance. See "The
Indenture and Owner Trust Agreement--Redemption" in this prospectus supplement.
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<PAGE>
There is no assurance that prepayments of the mortgage loans will conform
to any of the levels of CPR indicated in the tables above, or to any other
level, or that the actual weighted average lives of the notes will conform to
any of the weighted average lives set forth in the tables above. Furthermore,
the information contained in the tables with respect to the weighted average
lives of the notes is not necessarily indicative of the weighted average lives
that might be calculated or projected under different or varying prepayment or
One-Month LIBOR assumptions.
The characteristics of the mortgage loans will differ from those assumed
in preparing the tables above. In addition, it is unlikely that any mortgage
loan will prepay at any constant percentage until maturity, that all of the
mortgage loans will prepay at the same rate or at any level for any period of
time. The timing of changes in the rate of prepayments may significantly affect
the actual yield to maturity to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors.
Yield Sensitivity of the Subordinate Notes
If on any payment date, the Overcollateralized Amount and the note
balances of the Class M-3 Notes and the Class M-2 Notes have been reduced to
zero, the yield to maturity on the Class M-1 Notes will become extremely
sensitive to losses on the mortgage loans, and the timing of those losses, that
are covered by subordination, because the entire amount of any Realized Losses,
to the extent not covered by Net Monthly Excess Cashflow, will be allocated to
the Class M-1 Notes. If on any payment date, the Overcollateralized Amount and
the note balance of the Class M-3 Notes have been reduced to zero, the yield to
maturity on the Class M-2 Notes will become extremely sensitive to losses on the
mortgage loans, and the timing of those losses, that are covered by
subordination, because the entire amount of any Realized Losses, to the extent
not covered by Net Monthly Excess Cashflow, will be allocated to the Class M-2
Notes. If on any payment date, the Overcollateralized Amount has been reduced to
zero, the yield to maturity on the Class M-3 Notes will become extremely
sensitive to losses on the mortgage loans, and the timing of those losses, that
are covered by subordination, because the entire amount of any Realized Losses,
to the extent not covered by Net Monthly Excess Cashflow, will be allocated to
the Class M-3 Notes. Once Realized Losses have been allocated to the Subordinate
Notes, the Realized Losses will not be reinstated at a later date. However,
Allocated Realized Loss Amounts may be paid to the holders of those classes of
notes, after certain distributions to the holders of the Class A Notes and
Subordinate Notes with lower numerical class designations, but before the equity
certificates are entitled to any distributions. See "Description of the
Notes--Overcollateralization Provisions" in this prospectus supplement.
Investors in the Subordinate Notes should fully consider the risk that
Realized Losses on the mortgage loans could result in their failure to fully
recover their investments. For additional considerations relating to the yield
on the Subordinate Notes, see "Yield, Prepayment and Maturity Considerations" in
the prospectus.
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<PAGE>
The Issuer
DLJ MBN Trust Series ____-__ is a business trust formed under the laws of
the State of Delaware pursuant to the owner trust agreement, dated as of
________ __, ____, between the depositor and the owner trustee for the
transactions described in this prospectus supplement. The owner 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:
o acquiring and holding the mortgage loans and the proceeds from the
mortgage loans
o issuing the notes and the equity certificates
o making payments on the notes and the equity certificates and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental to or
connected with the foregoing.
The issuer is not expected to have any significant assets other than the
trust estate pledged as collateral to secure the notes. The assets of the issuer
will consist of the mortgage loans pledged to secure the notes. The issuer's
principal offices are in __________, ________, in care of ________________, as
owner trustee.
The Seller
The seller, in its capacity as mortgage loan seller, will sell the
mortgage loans to the depositor pursuant to a mortgage loan purchase agreement,
dated as of _________ __, ____, between the seller and the depositor.
[Seller portfolio history as necessary. Seller portfolio disclosure will include
the following to the extent available:
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The following table lists some information regarding the seller's delinquency
statistics for its one-to-four family residential mortgage portfolio for the
periods presented, excluding mortgage loans held for sale or investment:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------------------
1994 1994 1995 1995 1996 1996 1997 1997 1998 1998
-------- ---------- -------- ---------- ---------- ---------- --------- ---------- -------- ----------
Number Percent of Number Percent of Number of Percent of Number Percent of Number Percent of
of Loans Portfolio of Loans Portfolio Loans Portfolio of Loans Portfolio of Loans Portfolio
-------- ---------- -------- ---------- ---------- ---------- --------- ---------- -------- ----------
<S> <C> <C> <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 -------- ---------- -------- ---------- ---------- ---------- --------- ---------- -------- ----------
======== ========== ======== ========== ========== ========== ========= ========== ======== ==========
<CAPTION>
At March 31,
-------------------
1999 1999
-------- ----------
Number Percent of
of Loans Portfolio
-------- ----------
<S> <C> <C>
Loans delinquent
for:
30-59 days
60-89 days
-------- ----------
90 days and over
Total delinquencies
Foreclosures
pending -------- ----------
======== ==========
</TABLE>
The following table shows the loss experience on the dates indicated for
the seller's one - to four-family residential mortgage portfolio, excluding
loans held for sale or investment:
<TABLE>
<CAPTION>
Total Net Losses Total portfolio
(Millions) (Millions) Loss Ratio
---------------- --------------- ------------
<S> <C> <C> <C>
As of December 31, 1994...................... $ $ %
As of December 31, 1995......................
As of December 31, 1996......................
As of December 31, 1997......................
As of December 31, 1998......................
As of March 31, 1999.........................
</TABLE>
- ----------
The loss ratio represents total net losses for the period as a percentage of the
total portfolio at the end of the period.
There can be no assurance that the delinquency and loss experience of the
mortgage loans will correspond to the delinquency and loss experience of the
seller's portfolio listed in the above tables. The statistics shown above
represent the delinquency and loss experience for the seller's portfolio only
for the periods presented, whereas the aggregate delinquency and loss experience
on the mortgage loans will depend on the results obtained over the life of the
mortgage pool. The
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seller's portfolio includes mortgage loans with a variety of payment and other
characteristics, including geographic location, that are not necessarily
representative of the payment and other characteristics of the mortgage loans.
The seller's portfolio includes mortgage loans underwritten using 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, foreclosures and
losses could be higher than those previously experienced by the seller. 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 for the
mortgage loans.
[The loss and delinquency experience of the seller, as shown in the tables
above, reflects a stable, consistently managed servicing operation. Loss and
delinquency levels during these periods were consistently within the ranges
anticipated by management.]
The Owner Trustee
_________________ is the owner trustee under the owner trust agreement.
The owner trustee is a _________ banking corporation and its principal offices
are located in _____________.
Neither the owner trustee nor any director, officer or employee of the
owner trustee will be under any liability to the issuer or the noteholders under
the owner trust agreement under any circumstances, except for the owner
trustee's own misconduct, gross negligence, bad faith or grossly negligent
failure to act or in the case of the inaccuracy of certain representations made
by the owner trustee in the owner 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 owner trust agreement.
The principal compensation to be paid to the owner trustee in respect of
its obligations under the owner trust agreement will have been paid by or on
behalf of the issuer on or prior to the closing date.
The Indenture Trustee
____________________, a ____________ banking association, will act as
indenture trustee for the notes pursuant to the indenture. The indenture
trustee's offices for notices under the indenture are located at
______________________________ and its telephone number is ______________.
The principal compensation to be paid to the indenture trustee in respect
of its obligations under the indenture will be the Indenture Trustee Fee.
The indenture will provide that the indenture trustee may withdraw funds
from the Certificate Account:
o to reimburse itself for all reasonable out-of-pocket expenses
incurred or made by it, including costs of collection and including
reasonable compensation and expenses,
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disbursements and advances of its agents, counsel, accountants and
experts and
o to reimburse the owner trustee for all reasonable out-of pocket
expenses incurred or made by the owner trustee for all services
rendered by the owner trustee it in the owner trustee's execution of
the trust created under the owner trust agreement and in the
exercise and performance of any of the owner trustee's powers and
duties under the owner trust agreement.
Under the indenture, the issuer, from the assets of the trust estate,
shall indemnify the indenture trustee against any and all loss, liability or
expense, including reasonable attorneys' fees, incurred by the indenture trustee
in connection with the administration of the trust estate and the performance of
the indenture trustee's duties hereunder. The issuer is not required, however,
to reimburse any expense or indemnify against any loss, liability or expense
incurred by the indenture trustee through the indenture trustee's own willful
misconduct, negligence or bad faith.
The Servicing Agreement
The following summary describes certain terms of the servicing agreement,
dated as of __________ __, ____, among the issuer, the indenture trustee 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, those sections or defined terms are thereby
incorporated herein by reference. The depositor will provide to a prospective or
actual noteholder without charge, on written request, a copy, without exhibits,
of the servicing agreement. Requests should be addressed to the DLJ Mortgage
Acceptance Corp., 277 Park Avenue, 9th Floor, New York, New York 10172.
[Discussion of servicing disclosure as necessary. Servicing disclosure may
include the following:
Servicing and Other Compensation and Payment of Expenses
__________________ is the master servicer under the Servicing Agreements.
The master servicer is a ____________ corporation. The master servicer's
principal offices are located in _______________.
The principal compensation to be paid to the master servicer in respect of
its obligations under the servicing agreement is the Master Servicing Fee. As
additional servicing compensation, the master servicer is entitled to retain all
assumption fees and late payment charges in respect of mortgage loans, to the
extent collected from mortgagors, together with any interest or other income
earned on funds held in the Certificate Account, to the extent not payable as
compensation to the indenture trustee, and any escrow accounts in respect of
mortgage loans serviced by it.
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
preceding monthly payment up to the date of the prepayment, instead of for a
full month. When a partial principal prepayment is made on a mortgage
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loan, the mortgagor is not charged interest on the amount of the prepayment for
the month in which the prepayment is made. The master servicer is obligated to
pay from its own funds only those interest shortfalls attributable to full and
partial prepayments by the mortgagors on the mortgage loans, but only to the
extent of the aggregate Master Servicing Fee for the related due period. The
master servicer is obligated to pay some insurance premiums and ongoing expenses
associated with the mortgage pool relating to mortgage loans and incurred by the
master servicer in connection with its responsibilities under the servicing
agreement and is entitled to reimbursement for those payments as provided in the
servicing agreement. As to the mortgage loans serviced by _________, _________
will also be entitled to reimbursement of servicing advances and principal and
interest advances made by it as servicer of those mortgage loans prior to the
cut-off date. See "Servicing of Loans--Servicing Compensation and Payment of
Expenses" in the prospectus for information regarding expenses payable by the
servicer.
[Portfolio History of the master servicer]
[Year 2000 Considerations]
Sale of Defaulted Mortgage Loans
If consent to the operation of the provisions described below shall have
been given by the master servicer, unless the holder of a majority in percentage
interest of the equity certificates, or the directing holder, is the seller or
an affiliate of the seller, in which case consent shall not be required, then
with respect to any mortgage loan that is delinquent in excess of the number of
days provided in the servicing agreement, (1) the directing holder may direct
the master servicer to commence foreclosure and (2) prior to commencement of
foreclosure of any mortgage loan, the master servicer will notify the directing
holder of the proposed foreclosure in order to permit the directing holder the
right to instruct the master servicer to delay the proposed foreclosure. In the
case of the exercise by the directing holder of the right to direct the master
servicer pursuant to either clause (1) or clause (2) above, the directing holder
will provide to the master servicer an appraisal of the related mortgaged
property, or loan appraisal. Within two business days of instructing the master
servicer to commence or delay foreclosure, the directing holder will deposit in
a segregated collateral account maintained with the related servicer for the
benefit of the noteholders an amount equal to ___% of the valuation of the
related mortgage loan plus three months' interest at the related mortgage rate.
While foreclosure is delayed pursuant to the direction of the directing holder,
the directing holder may direct the related servicer to proceed with foreclosure
at anytime.
For any election by the directing holder to delay foreclosure, the
valuation of any mortgage loan shall be the greater of the outstanding principal
balance of the mortgage loan and the fair market value of the mortgage loan as
provided in the related loan appraisal. For any election by the directing holder
to commence foreclosure, the valuation of any mortgage loan shall equal the
outstanding principal balance of that mortgage loan.
Upon the liquidation of the related mortgage loan or the disposition of
the related mortgaged property in accordance with the requirements described in
the related servicing agreement, the related servicer will calculate the amount,
if any, by which the valuation exceeds the actual sales
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price obtained for the related mortgage loan or the mortgaged property, as the
case may be, and the related servicer will withdraw the amount of that excess
from the collateral account and deposit that amount into the related Certificate
Account. If the amount realized pursuant to the above-described procedures
exceeds the valuation, the related servicer will deposit immediately upon
realization from the proceeds that excess into the Certificate Account. The
related servicer shall apply all these amounts as additional liquidation
proceeds pursuant to the related servicing agreement. If any election to delay
foreclosure is to be extended for a period in excess of three months from the
directing holder's direction to the related servicer to delay foreclosure, the
directing holder will be required to deposit in the collateral account in
advance the amount of each additional month's interest at the related mortgage
rate. If the above-described procedures do not result in the mortgage loan being
brought current within six months of the directing holder's direction to the
related servicer to delay foreclosure, the directing holder will be required to
either purchase the mortgage loan for a purchase price equal to its fair market
value as shown on the loan appraisal or allow the related servicer to proceed
with the commencement of foreclosure. Should the directing holder elect to
purchase the mortgage loan, the related servicer will first apply funds on
deposit in the related collateral account towards the purchase price; any
shortage will be paid by the directing holder and any excess will be returned to
it.
For any mortgage loan as to which the directing holder has directed the
related servicer to commence foreclosure or to delay foreclosure, the servicer
may withdraw from the collateral account from time to time amounts necessary to
reimburse itself for all P&I Advances and servicing advances in accordance with
the related servicing agreement. In the event that the related mortgage loan is
brought current, the amounts so withdrawn from the collateral account by the
related servicer as reimbursement for P&I Advances or servicing advances shall
be redeposited in the collateral account by the related servicer and the
servicer shall be reimbursed as provided in the related servicing agreement.
Following foreclosure, liquidation, disposition or the bringing current of the
related mortgage loan, as applicable, all amounts remaining in the collateral
account will be released to the directing holder. In the event that amounts on
deposit in the collateral account are insufficient to cover the withdrawals that
the related servicer is entitled to make for P&I Advances, servicing advances or
for deposit into the Certificate Account, the directing holder will be obligated
to pay those amounts to the related servicer for deposit into the collateral
account. The directing holder may direct that amounts on deposit in the
collateral account be invested in permitted investments. Interest or other
income earned on funds in the collateral account will be paid to the directing
holder and the amount of any loss on those funds will be immediately deposited
into the collateral account by the directing holder when realized. The directing
holder will grant to the related servicer for the benefit of the noteholders a
security interest in the collateral account, all amounts deposited therein or
invested in permitted investments, and all proceeds of the foregoing.
Notwithstanding the foregoing, the provisions described in "--Sale of
Defaulted Mortgage Loans" above shall not be operative in the case of the
mortgage loans serviced by ___________.
Servicer Events of Default
In addition to those Events of Default pertaining to the servicing of the
mortgage loans and described under "The Agreements--Event of Default and Rights
Upon Event of Default" in the
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prospectus, upon the occurrence of certain loss triggers with respect to the
mortgage loans, the master servicer may be removed as servicer of the mortgage
loans serviced by it in accordance with the terms of the servicing agreement. If
the master servicer is removed in connection with an Event of Default applicable
to the master servicer under the terms of the servicing agreement, the owner
trustee will become the successor servicer of the mortgage loans serviced by the
terminated servicer.
The Indenture and Owner Trust Agreement
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 owner trust agreement and
indenture. Whenever particular defined terms of the indenture are referred to,
those defined terms are thereby incorporated herein by reference. The depositor
will provide to a prospective or actual noteholder without charge, on written
request, a copy, without exhibits, of the indenture and the owner trust
agreement. Requests should be addressed to DLJ Mortgage Acceptance Corp., 277
Park Avenue, 9th Floor, New York, New York 10172.
General
The notes will be issued pursuant to the indenture, a form of which is
filed as an exhibit to the registration statement. A current report on Form 8-K
relating to the notes containing a copy of the indenture and the owner trust
agreement as executed will be filed by the depositor with the Commission within
fifteen days of the initial issuance of the notes. Reference is made to the
prospectus for important information in addition to that described in this
prospectus supplement regarding the trust estate, the terms and conditions of
the indenture and the owner trust agreement and the notes. The notes will be
transferable and exchangeable at the corporate trust offices of the indenture
trustee, located in _______________.
Assignment of Mortgage Loans
On or prior to the date the notes are issued, the seller will convey each
mortgage loan to __________, who in turn will convey each mortgage loan to the
depositor, who in turn will convey each mortgage loan to the issuer.
At the time of issuance of the notes, the issuer will pledge all of its
right, title and interest in and to the mortgage loans, including all principal
and interest due on each mortgage loan after the cut-off dates, without
recourse, to the indenture trustee pursuant to the indenture as collateral for
the notes; provided, however, that the seller will reserve and retain all its
right, title and interest in and to principal and interest due on the mortgage
loans on or prior to the cut-off date, whether or not received on or prior to
the cut-off date, and to prepayments received prior to the cut-off date. The
indenture trustee, concurrently with the assignment, will authenticate and
deliver the notes at the direction of the issuer in exchange for, among other
things, the mortgage loans.
The indenture will require the issuer to deliver to the indenture trustee
or to a custodian with respect to each mortgage loan:
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o the mortgage note endorsed without recourse to the indenture trustee
o the original mortgage with evidence of recording indicated on the
mortgage and
o an assignment of the mortgage in recordable form to the indenture
trustee.
The assignments of mortgage loans are required to be recorded by or on behalf of
the seller, at the expense of the seller, in the appropriate offices for real
property records.
Events of Default
Notwithstanding, the prospectus, if an Event of Default occurs and is
continuing, the indenture trustee or the holders of a majority of the voting
rights may declare the note balance of all the notes to be due and payable
immediately. This declaration may, under certain circumstances, be rescinded and
annulled by the holders of a majority in aggregate outstanding voting rights.
If following an Event of Default, the notes have been declared to be due
and payable, the indenture trustee may, in its discretion, notwithstanding the
related acceleration, elect to maintain possession of the collateral securing
the notes and to continue to apply payments on the collateral as if there had
been no declaration of acceleration if the collateral continues to provide
sufficient funds for the payment of principal of and interest on the notes as
they would have become due if the declaration had not been made. In addition,
the indenture trustee may not sell or otherwise liquidate the collateral
securing the notes following an Event of Default, unless:
o the holders of 100% of the then aggregate outstanding voting rights
consent to the sale,
o the proceeds of the sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid at their
respective Note Accrual Rates, on the outstanding notes at the date
of sale or
o the indenture trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the notes as
the payments would have become due if the notes had not been
declared due and payable, and the indenture trustee obtains the
consent of the holders of 66 2/3% of the then aggregate outstanding
voting rights.
In the event that the indenture trustee liquidates the collateral in
connection with an Event of Default, the indenture provides that the indenture
trustee will have a prior lien on the proceeds of any liquidation for unpaid
fees and expenses. As a result, upon the occurrence of an Event of Default, the
amount available for payments to the noteholders would be less than would
otherwise be the case. However, the indenture 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 an Event of Default.
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In the event the principal of the notes is declared due and payable, as
described in this section, the holders of any notes issued at a discount from
par may be entitled to receive no more than an amount equal to the unpaid
principal amount of their notes less the amount of the discount that is
unamortized.
No noteholder will have any right under the indenture to institute any
proceeding with respect to the indenture unless:
o the holder previously has given to the indenture trustee written
notice of default and the continuance of the default;
o the holders of notes of any class evidencing not less than 25% of
the aggregate outstanding note balance constituting that class:
o have made written request upon the indenture trustee to
institute the proceeding in its own name as indenture trustee
thereunder and
o have offered to the indenture trustee reasonable indemnity;
o the indenture trustee has neglected or refused to institute any
proceeding for 60 days after receipt of the request and indemnity;
and
o no direction inconsistent with the written request has been given to
the indenture trustee during the 60 day period by the holders of a
majority of the note balance of that class.
However, the indenture trustee will be under no obligation to exercise any of
the trusts or powers vested in it by the indenture or to institute, conduct or
defend any litigation under the indenture or in relation to the indenture at the
request, order or direction of any of the holders of notes covered by the
indenture, unless the holders have offered to the indenture trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred by the indenture trustee in that action.
Voting Rights
At all times, 100% of all voting rights will be allocated among the
holders of the Class A Notes, or, after the Class A Notes have been paid in
full, the class of Subordinate Notes then outstanding with the lowest numerical
class designation, in proportion to the then outstanding note balances of their
respective notes.
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Optional Redemption
At its option, the majority holder of the equity certificates may redeem
the notes, in whole but not in part, on any payment date on or after the payment
date on which the aggregate note balance is reduced to less than ___% of the
aggregate initial note balance. Any redemption of this type will be paid in cash
at a price equal to the sum of:
o 100% of the aggregate note balance then outstanding,
o the aggregate of any Allocated Realized Loss Amounts on the notes
remaining unpaid immediately prior to that payment date,
o the aggregate of the Interest Payment Amounts on the notes for that
payment date and
o the aggregate of any Interest Carry Forward Amounts for that payment
date.
Upon any optional redemption, the remaining assets in the trust estate
shall be released from the lien of the indenture.
For purposes of payments on the notes and equity certificates on the
payment date of any redemption, the redemption price shall be applied by the
indenture trustee as a final liquidation of each of the mortgage loans and
properties. The redemption price relating to any properties, at their then fair
market value, may result in a shortfall in payment to, and/or the allocation of
Realized Losses to, one or more classes of the notes. Furthermore, the Master
Servicing Fee and the Indenture Trustee Fee, as well as expenses and
reimbursements permitted to be paid from the assets of the trust estate under
the indenture or the applicable servicing agreement, in each case to the extent
payable or reimbursable with respect to the mortgage loans, will be payable from
the amount received relating to the redemption price and therefore, as provided
in the indenture, will be excluded from the Available Payment Amount for the
payment date of the redemption.
In no event will the trust created by the indenture continue beyond the
expiration of 21 years from the death of the survivor of the persons named in
the indenture. See "Description of the Securities--Termination" in the
prospectus.
Material Federal Income Tax Consequences
Upon the issuance of the notes, Thacher Proffitt & Wood, counsel to the
depositor, will deliver its opinion generally to the effect that based on the
application of existing law and assuming compliance with the owner trust
agreement, for federal income tax purposes:
o the notes will be characterized as indebtedness and not as
representing an ownership interest in the trust estate or an equity
interest in the issuer or the depositor and
o the issuer will not be:
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o classified as an association taxable as a corporation for federal
income tax purposes,
o a "publicly traded partnership" as defined in Treasury Regulation
Section 1.7704 or
o a "taxable mortgage pool" within the meaning of Section 7701(i) of
the Internal Revenue Code.
The notes will not be treated as having been issued with original issue
discount. The prepayment assumption that will be used in determining the rate of
amortization of market discount and premium, if any, for federal income tax
purposes will be based on the assumption that 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 "Material Federal Income Tax
Consequences" in the prospectus.
The notes will not be treated as assets described in Section
7701(a)(19)(C) of the Internal Revenue Code or "real estate assets" under
Section 856(c)(4)(A) of the Internal Revenue 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 Internal Revenue Code. The
notes will also not be treated as "qualified mortgages" under Section
860G(a)(3)(C) of the Internal Revenue Code.
Prospective investors in the notes should see "Material Federal Income Tax
Consequences" and "State and Other Tax Consequences" in the prospectus for a
discussion of the application of material federal income and state and local tax
laws to the issuer and purchasers of the notes.
Some specific federal income tax consequences relating to the notes will
be passed upon for the depositor by __________.
Method of Distribution
Subject to the terms and conditions provided in the underwriting
agreement, dated ________ __, ____, the depositor has agreed to sell, and [Name
of Underwriter], the underwriter, has agreed to purchase the notes. The
underwriter is obligated to purchase all notes of the respective classes offered
by this prospectus supplement if it purchases any. The underwriter is an
affiliate of the depositor.
The notes will be purchased from the depositor by the underwriter and will
be offered by the underwriter to the public from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the depositor from the sale of the notes, before deducting
expenses payable by the depositor, will be approximately ___% of the aggregate
initial note balance of the notes. In connection with the purchase and sale of
the notes, the underwriter may be deemed to have received compensation from the
depositor in the form of underwriting discounts.
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The offered notes are offered subject to receipt and acceptance by the
underwriter, to prior sale and to the underwriter's right to reject any order in
whole or in part and to withdraw, cancel or modify the offer without notice. It
is expected that delivery of the offered notes will be made through the
facilities of DTC on or about the closing date.
The underwriting agreement provides that the depositor will indemnify the
underwriter against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended, or will contribute to payments the
underwriter may be required to make relating to that indemnification.
There can be no assurance that a secondary market for the notes will
develop or, if it does develop, that it will continue. The primary source of
information available to investors concerning the notes will be the monthly
statements discussed in the prospectus under "The Agreements--Reports to
Securityholders", which will include information as to the outstanding principal
balance of the notes and the status of the applicable form of credit
enhancement. There can be no assurance that any additional information regarding
the notes will be available through any other source. In addition, the depositor
is not aware of any source through which price information about the notes will
be generally available on an ongoing basis. The limited nature of information
regarding the notes may adversely affect the liquidity of the notes, even if a
secondary market for the notes becomes available.
Legal Matters
Some specific legal matters relating to the notes will be passed upon for
the depositor and the underwriter by Thacher Proffitt & Wood, New York, New
York.
Ratings
It is a condition of the issuance of the notes that the Class A Notes be
rated "AAA" by _____________ and "AAA" by _______________, that the Class M-1
Notes be rated at least "AA" by ____ and at least "AA" by ____, that the Class
M-2 Notes be rated at least "A" by ____ and at least "A" by _____ and that the
Class M-3 Notes be rated at least "BBB" by _____.
The ratings of _____ and _____ assigned to the notes address the
likelihood of the receipt by noteholders of all payments to which the
noteholders are entitled, other than payments of interest to the extent of any
Interest Carry Forward Amounts. The rating process addresses structural and
legal aspects associated with the notes, including the nature of the underlying
mortgage loans. The ratings assigned to the notes do not represent any
assessment of the likelihood that principal prepayments will be made by the
mortgagors or the degree to which the rate of prepayments will differ from that
originally anticipated. The ratings do not address the possibility that
noteholders might suffer a lower than anticipated yield due to non-credit
events.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
notes are subsequently lowered for any reason, no person or entity is obligated
to
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provide any additional credit support or credit enhancement with respect to the
notes.
The depositor has not requested that any rating agency rate the notes
other than as stated in this section. 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 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 as stated in this section.
Legal Investment
The Class A Notes and the Class M-1 Notes will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 for so long as they are rated not lower than the second highest
rating category by a rating agency 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 those entities to invest in "mortgage
related securities", provided that the restricting legislation was enacted prior
to October 3, 1991. Some states have enacted legislation which overrides the
preemption provisions of SMMEA. The Class M-2 Notes and the Class M-3 Notes will
not constitute "mortgage related securities" for purposes of SMMEA.
The depositor makes no representations as to the proper characterization
of the notes for legal investment or other purposes, or as to the ability of
particular investors to purchase the notes under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of the
notes. 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 legal advisors in
determining whether and to what extent the notes constitute a legal investment
or are subject to investment, capital or other restrictions.
See "Legal Investment" in the prospectus.
ERISA Considerations
The Employee Retirement Income Security Act of 1974, as amended and
Section 4975 of the Internal Revenue Code impose some requirements on employee
benefit plans and certain other retirement plans and arrangements, including,
but not limited to, individual retirement accounts and annuities, as well as on
collective investment funds and certain separate and general accounts of
insurance companies in which those plans or arrangements are invested and on
persons who are fiduciaries with respect to such ERISA plans. ERISA and the
Internal Revenue Code prohibit some transactions involving the assets of an
ERISA plan and "disqualified persons", within the meaning of the Internal
Revenue Code and parties in interest, within the meaning of ERISA, who have
specified relationships to the ERISA plan. Accordingly, prior to making an
investment in the notes, investing ERISA plans should determine whether the
issuer, the depositor, the seller, the trust estate, the underwriter, any other
underwriter, the owner trustee, the indenture trustee, the master servicer, the
servicers, any other servicer, any administrator, any provider of credit
support, or any insurer or any of their affiliates is a party in interest with
respect to that ERISA plan and, if so, whether the transaction is subject to one
or more statutory, regulatory or administrative exemptions.
S-58
<PAGE>
Additionally, an investment of the assets of an ERISA plan in securities may
cause the assets included in the trust estate to be deemed ERISA plan assets of
the ERISA plan, and any person with certain specified relationships to the trust
estate to be deemed a party in interest with respect to the investing ERISA
plan. The U.S. Department of Labor has promulgated regulations at 29 C.F.R.
Section 2510.3-101 defining the ERISA plan assets for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and Section 4975 of the Internal Revenue Code.
Under these regulations, generally, when an ERISA plan acquires an "equity
interest" in another entity, for example the trust estate, the underlying assets
of that entity may be considered to be ERISA plan assets. The 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." Although not entirely free from
doubt, it is believed that, as of the date of this prospectus supplement, the
notes will be treated as debt obligations without significant equity features
for the purposes of the regulations. Because of the factual nature of certain of
the above-described provisions of ERISA, the Internal Revenue Code and the
regulations, ERISA plans or persons investing ERISA plan assets should carefully
consider whether that investment might constitute or give rise to a prohibited
transaction under ERISA or the Internal Revenue Code. Any ERISA plan fiduciary
which proposes to cause an ERISA plan to acquire any of the notes should consult
with its counsel with respect to the potential consequences under ERISA and the
Internal Revenue Code of the ERISA plan's acquisition and ownership of those
notes.
S-59
<PAGE>
ANNEX I
Global Clearance, Settlement and Documentation Procedures
Except in limited circumstances, the globally offered DLJ Mortgage
Acceptance Corp., DLJ Trust Series ____-__, Mortgage-Backed Notes, Series
____-__, [Class A, Class M-1, Class M-2 and Class M-3 Notes], the Global
Securities, will be available only in book-entry form. Investors in the Global
Securities may hold the Global Securities through any of DTC, Cedel or
Euroclear. The Global Securities will be traceable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedel and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice, that is seven calendar day settlement.
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
participants holding notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedel and Euroclear, in such capacity,
and as DTC participants.
Non-U.S. holders of Global Securities will be subject to U.S. withholding
taxes unless those holders meet specific requirements and deliver appropriate
U.S. tax documents to the securities clearing organizations or their
participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name
of CEDE as nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their relevant depositary
which in turn will hold those positions in their accounts as DTC participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
A-1
<PAGE>
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to prior mortgage
loan asset-backed notes issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel participants or Euroclear participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and Cedel or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC participant to
the account of a Cedel participant or a Euroclear participant, the purchaser
will send instructions to Cedel or Euroclear through a Cedel participant or
Euroclear participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the relevant depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in the
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
relevant depositary to the DTC participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel participant's or Euroclear
participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date, which would be the preceding day
when settlement occurred in New York. If settlement is not completed on the
intended value date--the trade fails--the Cedel or Euroclear cash debt will be
valued instead as of the actual settlement date.
Cedel participants and Euroclear participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their account one day later. As an alternative, if
Cedel or Euroclear has extended a line of credit to them, Cedel participants or
Euroclear participants can elect not to preposition funds and allow that credit
line to be drawn upon to finance settlement. Under this procedure, Cedel
participants or Euroclear participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset
A-2
<PAGE>
the amount of overdraft charges, although the result will depend on each Cedel
participant's or Euroclear participant's particular cost of funds. Since the
settlement is taking place during New York business hours, DTC participants can
employ their usual procedures for crediting Global Securities to the respective
European depositary for the benefit of Cedel participants or Euroclear
participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC participants a cross-market transaction will
settle no differently than a trade between two DTC participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel participants and Euroclear participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective depositary, to a DTC participant. The seller will send instructions
to Cedel or Euroclear through a Cedel participant or Euroclear participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective depositary, as appropriate, to credit the Global
Securities to the DTC participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in the accrual period and a year assumed to consist to 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of Cedel participant or Euroclear
participant the following day, and receipt of the cash proceeds in the Cedel
participant's or Euroclear participant's account would be back-valued to the
value date, which would be the preceding day, when settlement occurred in New
York. Should the Cedel participant or Euroclear participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date--the trade fails--receipt of the
cash proceeds in the Cedel participant's or Euroclear participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC participants for delivery to Cedel participants or Euroclear
participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
o borrowing through Cedel or Euroclear for one day, until the purchase
side of the trade is reflected in their Cedel or Euroclear accounts,
in accordance with the clearing system's customary procedures
o borrowing the Global Securities in the U.S. from a DTC participant
no later than one day prior to settlement, which would give the
Global Securities sufficient time to be reflected in their Cedel or
Euroclear account in order to settle the sale side of the trade; or
o staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is
at least one day prior to the value date for the sale to the Cedel
participant or Euroclear participant.
A-3
<PAGE>
Material U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through Cedel
or Euroclear, or through DTC if the holder has an address outside the U.S., will
be subject to the 30% U.S. withholding tax that applies to payments of interest,
including original issue discount, on registered debt issued by United States
Persons, unless
o each clearing system, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or
business in the chain of intermediaries between the beneficial owner
and the U.S. entity required to withhold tax complies with
applicable certification requirements and
o the beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
o Exemption for Non-United States Persons (Form W-8). Beneficial
holders of Global Securities that are non-United States
Persons can obtain a complete exemption from the withholding
tax by filing a signed Form W-8 (Certificate of Foreign
Status). If the information shown on Form W-8 changes, a new
Form W-8 must be filed within 30 days of the change.
o Exemption for Non-United States Persons with effectively
connected income (Form 4224). A non-United States Person,
including a non-U.S. corporation or bank with a U.S. branch,
for which the interest income is effectively connected with
its conduct of a trade or business in the United States, can
obtain an exemption from the withholding tax by filing Form
4224 (Exemption from Withholding of Tax on Income Effectively
Connected with the Conduct of a Trade or Business in the
United States).
o Exemption or reduced rate for Non-United States Persons
resident in treaty countries (Form 1001). Non-United States
Persons residing in a country that has a tax treaty with the
United States can obtain an exemption or reduced tax rate,
depending on the treaty terms, by filing Form 1001
(Holdership, Exemption or Reduced Rate Certificate). If the
treaty provides only for a reduced rate, withholding tax will
be imposed at that rate unless the filer alternatively files
Form W-8. Form 1001 may be filed by noteholders or their
agent.
o Exemption for United States Persons (Form W-9). United States
Persons can obtain a complete exemption from the withholding
tax by filing Form W-9 (Payer's Request for Taxpayer
Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security--the clearing agency, in the case of persons holding directly on the
books of the clearing agency. Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year. This summary
does not deal with all aspects of U.S. Federal income tax withholding that may
be relevant to foreign holders of the Global Securities. Investors are advised
to consult their own tax advisors for specific tax advice concerning their
holding and disposing of the Global Securities.
A-4
<PAGE>
DLJ MBN Trust
Series ____-_
DLJ Mortgage Acceptance Corp.
Depositor
MORTGAGE-BACKED NOTES
SERIES ____-_
$__________________________
(Approximate)
____________________________________
PROSPECTUS SUPPLEMENT
____________________________________
[Name of Underwriter]
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the Series ____-_ Mortgage-Backed Notes in any state where
the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Series ____-_ Mortgage-Backed Notes and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
Series ____-_ Mortgage-Backed Notes will be required to deliver a prospectus
supplement and prospectus for ninety days following the date of this prospectus
supplement.
____________ ____, _____
<PAGE>
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION MAY 26, 1999
- --------------------------------------------------------------------------------
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
- --------------------------------------------------------------------------------
Prospectus
DLJ Mortgage Acceptance Corp.
Depositor
Mortgage Pass-Through Certificates
Mortgage-Backed Notes
- --------------------------------------------------------------------------------
You should carefully consider the Risk Factors beginning on Page 5 in this
prospectus.
This prospectus together with the accompanying prospectus supplement will
constitute the full prospectus.
- --------------------------------------------------------------------------------
The depositor may periodically establish trusts to issue securities in series
backed by mortgage collateral.
Each trust will consist primarily of :
o one or more pools of mortgage loans secured by residential
properties, loans secured by manufactured homes, or participation
interests in those loans.
o agency mortgage-backed securities
o private mortgage-backed securities
The Securities in a Series:
o will consist of certificates or notes representing interests in, or
indebtedness of, a trust and will be paid only from the assets of
that trust.
o may include multiple classes of securities with differing payment
terms and priorities
o will have the benefit of credit enhancement.
The securities may be offered to the public through several different methods.
Donaldson, Lufkin & Jenrette Securities Corporation, an affiliate of DLJ
Mortgage Acceptance Corp., may act as agent or underwriter in connection with
the sale of those securities. This prospectus and the accompanying prospectus
supplement may be used by Donaldson, Lufkin & Jenrette Securities Corporation in
secondary market transactions in connection with the offer and sale of any
securities. Donaldson, Lufkin & Jenrette Securities Corporation may act as
principal or agent in those transactions and those sales will be made at
prevailing market prices or otherwise.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
______________, 1999
<PAGE>
Table of Contents
Page
----
Risk Factors..............................................................4
Description of the Securities............................................12
General............................................................12
Distributions on the Securities....................................12
Funding Account....................................................16
Optional Termination...............................................17
Book-Entry Registration............................................18
Yield, Prepayment and Maturity Considerations............................19
Payment Delays.....................................................19
Principal Prepayments..............................................19
Timing of Reduction of Principal Balance...........................19
Interest or Principal Only Securities..............................20
Funding Account....................................................20
Final Scheduled Distribution Date..................................20
Prepayments and Weighted Average Life..............................20
Other Factors Affecting Weighted Average
Life.........................................................21
The Trust Funds..........................................................24
Private Mortgage-Backed Securities.................................25
The Agency Securities..............................................28
The Mortgage Loans.................................................30
The Manufactured Home Loans........................................37
Collection Account and Certificate Account.........................39
Other Funds or Accounts............................................40
Loan Underwriting Procedures and Standards...............................40
Underwriting Standards.............................................40
Loss Experience....................................................43
Representations and Warranties.....................................44
Servicing of Loans.......................................................46
General............................................................46
Collection Procedures; Escrow Accounts.............................47
Deposits to and Withdrawals from the
Collection Account...........................................48
Servicing Accounts.................................................50
Buy-Down Loans, GPM Loans and Other
Subsidized Loans.............................................50
Advances and Limitations Thereon...................................51
Maintenance of Insurance Policies and Other
Servicing Procedures.........................................52
Presentation of Claims; Realization Upon
Defaulted Loans..............................................55
Enforcement of Due-On-Sale Clauses.................................56
Servicing Compensation and Payment of
Expenses.....................................................57
Evidence as to Compliance..........................................58
Certain Matters Regarding the Master
Servicer and the Depositor...................................58
Credit Support...........................................................60
General............................................................60
Subordinate Securities; Subordination
Reserve Fund.................................................61
Overcollateralization..............................................62
Cross-Support Features.............................................62
Insurance..........................................................63
Letter of Credit...................................................63
Financial Guarantee Insurance......................................64
Reserve Funds......................................................64
Description of Mortgage and Other Insurance..............................65
Mortgage Insurance on the Loans....................................65
Hazard Insurance on the Loans......................................69
Bankruptcy Bond....................................................71
Repurchase Bond....................................................72
The Agreements...........................................................72
Assignment of Mortgage Assets......................................72
Repurchase and Substitution of Loans...............................76
Reports to Securityholders.........................................78
Investment of Funds................................................79
Event of Default and Rights Upon Events of
Default......................................................81
The Owner Trustee..................................................84
The Trustee........................................................84
Duties of the Trustee..............................................84
Resignation of Trustee.............................................85
Certificate Account................................................85
Expense Reserve Fund...............................................86
Amendment of Agreements............................................86
Voting Rights......................................................88
REMIC Administrator................................................88
Termination........................................................88
Certain Legal Aspects of Loans...........................................89
Cooperative Loans..................................................90
2
<PAGE>
Page
----
Tax Aspects of Cooperative Ownership...............................91
Foreclosure on Mortgage............................................92
Realizing Upon Cooperative Loan Security...........................94
Rights of Redemption...............................................95
Notice of Sale; Redemption Rights with
Respect to Manufactured Homes................................95
Anti-Deficiency Legislation and Other
Limitations on Lenders.......................................96
Leasehold Considerations...........................................98
Soldiers' and Sailors' Civil Relief Act............................99
Junior Mortgages...................................................99
Due-on-sale Clauses in Mortgage Loans.............................101
Enforceability of Prepayment and Late
Payment Fees................................................101
Equitable Limitations on Remedies.................................102
Applicability of Usury Laws.......................................102
Adjustable Interest Rate Loans....................................102
Environmental Legislation.........................................103
Forfeitures in Drug and RICO Proceedings..........................104
Negative Amortization Loans.......................................104
Manufactured Home Loans...........................................105
Enforcement of Security Interests in
Manufactured Homes..........................................108
Consumer Protection Laws with Respect to
Manufactured Homes..........................................109
Transfer of Manufactured Homes....................................110
Formaldehyde Litigation with Respect to
Manufactured Home Loans ....................................111
Material Federal Income Tax Consequences................................111
General...........................................................111
REMICs............................................................112
Notes ............................................................134
State and Other Tax Consequences........................................135
ERISA Considerations....................................................135
Legal Investment........................................................143
Legal Matters...........................................................145
The Depositor...........................................................145
Use of Proceeds.........................................................145
Plan of Distribution....................................................146
Glossary................................................................148
3
<PAGE>
Risk Factors
The prospectus and related prospectus supplement will describe the
material risk factors related to your securities. The securities offered under
this prospectus and the related prospectus supplement are complex securities.
You should possess, either alone or together with an investment advisor, the
expertise necessary to evaluate the information contained in this prospectus and
the prospectus supplement in the context of your financial situation and
tolerance for risk.
There is no source of payments for your securities other than payments on the
mortgage loans in the trust and any credit enhancement.
When you buy a security, you will not own an interest in or a debt obligation of
DLJ Mortgage Acceptance Corp., the master servicer or any of their affiliates.
You will own an interest in the trust in the case of a series of certificates,
or you will be entitled to proceeds from the trust established in the case of a
series of notes. Your payments come only from assets in the trust. Therefore,
the mortgagors' payments on the mortgage loans included in the trust (and any
credit enhancements) will be the sole source of payments to you. If those
amounts are insufficient to make required payments of interest or principal to
you, there is no other source of payments. Moreover, no governmental agency
either guarantees or insures payments on the securities or any of the mortgage
loans.
You bear the risk of mortgagor defaults; some kinds of mortgage loans may be
especially prone to defaults
Because your securities are backed by the mortgage loans, your investment may be
affected by a decline in real estate values and changes in individual
mortgagor's financial conditions. You should be aware that value of the
mortgaged properties may decline. If the outstanding balance of a mortgage loan
and any secondary financing on the underlying property is greater than the value
of the property, there is an increased risk of delinquency, foreclosure and
losses. To the extent your securities are not covered by credit enhancements,
you will bear all of the risks resulting from defaults by mortgagors. In
addition, several types of mortgage loans which have higher than average rates
of default or loss may be included in the trust that issues your certificate or
note. The following types of loans may be included:
o mortgage loans that are subject to "negative amortization". The
principal balances of these loans may be increased to amounts
greater than
4
<PAGE>
the value of the underlying property. This increases the likelihood
of default;
o mortgage loans that do not fully amortize over their terms to
maturity which are sometimes referred to as balloon loans. Balloon
loans involve a greater degree of risk because the ability of a
mortgagor to make this final payment typically depends on the
ability to refinance the loan or sell the related mortgaged
property;
o adjustable rate mortgage loans and other mortgage loans that provide
for escalating or variable payments by the mortgagor. The mortgagor
may have qualified for those loans based on an income level
sufficient to make the initial payments only. As the payments
increase, the likelihood of default will increase;
o loans secured by second or more junior liens. The cost of
foreclosure on these loans compared to the potential foreclosure
proceeds, after repaying all senior liens, may cause these loans to
be effectively unsecured; and
o mortgage loans that are concentrated in one or more regions, States
or zip code areas of the United States. Those geographic units may
experience weak economic conditions and housing markets. This may
cause higher rates of loss and delinquency.
See "Description of the Mortgage Pool" in the prospectus supplement to see if
any of these or other types of special risk loans are included in the mortgage
pool applicable to your securities.
Credit enhancements may be limited or reduced and this may cause your securities
to bear more risk of mortgagor defaults
The prospectus supplement related to your securities may specify that credit
enhancements will provide some protection to cover various losses on the
underlying mortgage loans. The forms of credit enhancement include (but are not
limited to) the following: subordination of one or more classes of securities to
other classes of securities in the same series evidencing beneficial ownership
in the same pool of collateral
5
<PAGE>
or different pools; having assets in the trust with a greater amount of
aggregate principal balance than the aggregate principal balance of the
securities in a series: an insurance policy on a particular class of securities;
a letter of credit; a mortgage pool insurance policy; a reserve fund; or any
combination of the above. See "Credit Support" in this prospectus. See also
"Credit Enhancements" in the prospectus supplement in order to see what forms of
credit enhancements apply to your securities.
Regardless of the form of credit enhancement, an investor should be aware that:
o The amount of coverage is usually limited;
o The amount of coverage will usually be reduced over time according
to a schedule or formula;
o The particular form of credit enhancements may provide coverage only
to some types of losses on the mortgage loans, and not to other
types of losses;
o The particular form of credit enhancements may provide coverage only
to some certificates or notes and not other securities of the same
series; and
o If the applicable rating agencies believe that the rating on the
securities will not be adversely affected, some types of credit
enhancements may be reduced or terminated.
The ratings of your securities may be lowered or withdrawn, and do not take into
account risks other than credit risks which you will bear.
Any class of securities issued under this prospectus and the accompanying
prospectus supplement will be rated in one of the four highest rating categories
of at least one nationally recognized rating agency. A rating is based on the
adequacy of the value of the trust assets and any credit enhancement for that
class, and reflects the rating agency's assessment of how likely it is that
holders of the class of securities will receive the payments to which they are
entitled. A rating does not constitute an assessment of how likely it is that
principal prepayments on
6
<PAGE>
the underlying loans will be made, the degree to which the rate of prepayments
might differ from that originally anticipated, or the likelihood that the
securities will be redeemed early. A rating is not a recommendation to purchase,
hold, or sell securities because it does not address the market price of the
securities or the suitability of the securities for any particular investor.
A rating may not remain in effect for any given period of time and the rating
agency could lower or withdraw the rating entirely in the future. For example,
the rating agency could lower or withdraw its rating due to:
o a decrease in the adequacy of the value of the trust assets or any
related credit enhancement,
o an adverse change in the financial or other condition of a credit
enhancement provider, or
o a change in the rating of the credit enhancement provider's
long-term debt.
The amount, type, and nature of credit enhancement established for a class of
securities will be determined on the basis of criteria established by each
rating agency rating classes of the securities. These criteria are sometimes
based upon an actuarial analysis of the behavior of similar loans in a larger
group. That analysis is often the basis upon which each rating agency determines
the amount of credit enhancement required for a class. The historical data
supporting any actuarial analysis may not accurately reflect future experience,
and the data derived from a large pool of similar loans may not accurately
predict the delinquency, foreclosure, or loss experience of any a particular
pool of mortgage loans.
The manufactured housing contracts may have higher than expected delinquencies,
defaults or losses which could reduce the yield on your securities.
Your investment in the securities backed by manufactured housing contracts may
be affected by various factors, including:
o General Economic Conditions. Downturns in regional or local economic
conditions historically have caused increased delinquency, defaults
and losses on manufactured housing contracts.
7
<PAGE>
o Depreciation in Value of Manufactured Homes. A manufactured home
generally depreciates over time. As a result, the market value of a
manufactured home may decline faster than the outstanding principal
balance of the loan for that home. If the value of the manufactured
homes securing the contracts declines faster than expected, then
defaults and losses on the contracts may rise. If the losses on the
contracts are not covered by credit enhancement, you will bear all
the risk of loss of default by obligors and will need to look
primarily to the value of the manufactured home to recover the
outstanding principal and unpaid interest on the defaulted contract.
The yield on your securities may be adversely affected by prepayments of the
manufactured housing contracts
There is a risk that the contracts may be prepaid in full or in part at any time
before their scheduled maturity due to various factors, such as:
o homeowner mobility,
o general and regional economic conditions,
o prevailing interest rates, and
o natural disasters.
The prepayment experience on manufactured housing contracts varies greatly and
may affect the average life of the securities. You must not assume that the
contracts will prepay at any particular rate, or at a constant rate.
You could incur losses because the security interest in the manufactured home
may not be perfected
The steps required to perfect a security interest in a manufactured home vary
from state to state. A failure by the related seller to perfect its security
interest in the manufactured homes securing a number of contracts could cause an
increase in losses on the contracts, and you could suffer a loss on your
investment as a result.
You could incur losses because the security interest in the manufactured
The certificate of title to a manufactured home will not name the trustee as the
lienholder or note the trustee's interest on the certificate of title, and the
master servicer will not deliver the
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home may not have been assigned to the trustee
certificate of title to the trustee. As a result, in some states the assignment
of the security interest in the manufactured home to the trustee may not be
effective against various creditors or a trustee, or the security interest may
not be perfected. In addition, the assignment to the trustee of the mortgage or
deed of trust securing land-and-home contracts are not recorded. As a result, in
some states the assignment of the mortgage or deed of trust to the trustee may
not be effective against various creditors or purchasers. If the master
servicer, the trustee or a successor servicer is unable to enforce the security
interest in the manufactured home following a default on a manufactured home
contract, losses on the manufactured home contracts would increase and you could
suffer a loss on your investment as a result.
You could incur losses due to claims under consumer protection laws.
Numerous federal and state consumer protection laws impose requirements on
lenders under installment sales contracts and installment loan agreements such
as the manufactured home contracts. If the lender does not comply with these
requirements, the trust fund or assignee may be liable for amounts due under the
contracts and may be exposed to the right of set-off. A failure by the seller to
comply with these laws could cause an increase in defaults and losses on the
manufactured home contracts, and you could suffer a loss on your investment as a
result.
You may suffer losses due to formaldehyde litigation with respect to
manufactured home loans
Plaintiffs have won judgments in lawsuits alleging personal injury from exposure
to the chemical formaldehyde, which is present in many building materials,
including those components of manufactured housing. The related trust may suffer
a loss due to a successful assertion of that claim. As a result, you could
suffer a loss on your investment.
See "Formaldehyde Litigation with Respect to Manufactured Home Loans" in this
prospectus.
Your yield may be reduced due to the optional redemption of the securities or
the optional repurchase of underlying mortgage loans.
DLJ Mortgage Acceptance Corp., the master servicer or another entity may elect
to repurchase all of the assets of the trust if the aggregate outstanding
principal balance of those assets is less than a percentage of their initial
outstanding principal amount
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specified in the prospectus supplement. This kind of event will subject the
trust related to your securities to early retirement and would affect the
average life and yield of each class of securities in those series. See "Yield,
Prepayment and Maturity Considerations" in this prospectus and in the
accompanying prospectus supplement.
The yield, market price, rating and liquidity of your securities may be reduced
if the provider of any financial instrument defaults or is downgraded.
A trust may include one or more financial instruments such as interest rate or
other swap agreements and interest rate cap or floor agreements. These financial
instruments provide protection against some types of risks or provide specific
cashflow characteristics for one or more classes of a series. The protection or
benefit to be provided by any specific financial instrument will be dependent
on, among other things, the performance of the provider of that financial
instrument. If that provider were to be unable or unwilling to perform its
obligations under the financial instrument, the securityholders of the
applicable class or classes would bear the effects of non-performance, including
the possibility of a material adverse effect on the yield to maturity, the
rating of the market price and liquidity for that class. For example, if a
financial instrument is designed to cover the risk that the interest rates on
the mortgage assets will be less than the interest rate payable on the
securities, and if that financial instrument does not perform, then the
investors will bear the risk that their yield will be reduced. Even if the
provider of a financial instrument performs its obligations thereunder, a
withdrawal or reduction in a credit rating assigned to that provider may
adversely affect the rating of the market price and liquidity of the applicable
class or classes of securities.
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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the securities in two separate documents
that provide progressively more detail:
o this prospectus, which provides general information, some of which
may not apply to your series of securities; and
o the accompanying prospectus supplement, which describes the specific
terms of your series of securities.
If the terms of a particular series of securities vary between this prospectus
and the accompanying prospectus supplement, you should rely on the information
in the prospectus supplement.
You should rely only on the information provided in this prospectus and
the accompanying prospectus supplement, including the information incorporated
by reference. We have not authorized anyone to provide you with different
information. We are not offering the securities in any state where the offer is
not permitted.
We include cross-references in this prospectus and the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The following Table of Contents and the Table of Contents
included in the accompanying prospectus supplement provide the pages on which
these captions are located.
You can find a listing of definitions for capitalized terms used in this
prospectus under the caption "Glossary" beginning on page 148.
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Description of the Securities
General
The securities will be issued in one or more 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 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 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 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
that agreement.
Each series will consist of one or more classes of securities, one or more
of which may consist of accrual securities, floating rate securities, interest
only securities or principal only securities. A series may also include one or
more classes of subordinate securities. A class of subordinate securities will
be offered by this prospectus or by the related prospectus supplement, as
specified, only if rated by a rating agency in at least its fourth highest
applicable rating category. If specified in the related prospectus supplement,
the mortgage assets in a trust may be divided into multiple groups of individual
mortgage assets, or asset groups, which share similar characteristics. These
mortgage assets are aggregated into separate 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 the 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
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
described 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, for floating rate 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.
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Distributions of principal of and interest on securities of a series will
be made by check mailed to securityholders of that 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. However,
distributions may be made by wire transfer in the circumstances described in the
related prospectus supplement, and the final distribution in retirement of a
security will be made only upon presentation and surrender of that security at
the corporate trust office of the trustee for that series or another office of
the trustee as specified in the prospectus supplement. If specified in the
related prospectus supplement, the securities of a series or some classes of a
series may be available only in book-entry form. See "Book-Entry Registration"
in this prospectus.
For information regarding reports to be furnished to securityholders
concerning a distribution, see "The Agreements--Reports to Securityholders."
Single Class Series. For a series other than a multiple class series,
distributions on the securities on each distribution date will, in most cases,
be allocated to each security entitled to those distributions on the basis of
the undivided percentage interest evidenced by that security in the trust 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 related securities
may also vary, due to changes in those rates and due to prepayments on 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 related securities may be fixed, or may vary, to the extent
prepayments cause changes in the weighted average interest rate or pass-through
rate of the mortgage assets. If the mortgage assets have lifetime or periodic
adjustment caps on their respective pass-through rates, then the security
interest rate on the related securities may also reflect those 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. For floating rate securities,
interest distributions will be 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" and "Credit Support"
in this prospectus.
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"
and "Credit Support" in this prospectus. Distributions of interest on a class of
accrual securities will commence only after the related Accrual Termination
Date. On each distribution date prior to and including the Accrual Termination
Date, interest on the class of accrual securities will accrue and the amount of
interest accrued on that distribution date will be added to the principal
balance of that class on the related distribution date. On each distribution
date after the Accrual Termination Date, interest distributions will be made on
classes of accrual securities on the basis of the current principal balance of
that class.
The securities of a multiple class series may include one or more classes
of floating rate securities. The security interest rate of a floating rate
security will be a variable or adjustable rate, subject to a maximum floating
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rate, a minimum floating rate, or both. For each class of floating rate
securities, the related prospectus supplement will describe the initial floating
rate or the method of determining it, the interest accrual period, and the
formula, index, or other method by which the floating rate will be determined.
A series may include one or more classes of interest only securities,
principal only securities, or both. Unless otherwise specified in the relate
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 the distributions, the interest component of the distributions, or
both. Those distributions 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 described in the related prospectus
supplement.
In the case of a multiple class series, the timing, sequential order,
priority of payment or amount of distributions of principal, and any schedule or
formula or other provisions applicable to any of those determinations for each
class of securities shall be as described 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.
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 in this prospectus 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. Subordinate securities will
not be offered by this prospectus or by the related prospectus supplement unless
they are rated in one of the four highest rating categories by at least one
rating agency. As 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.
Categories of Classes of Securities
In general, classes of pass-through securities fall into different
categories. The following chart identifies and describes some typical
categories. The prospectus supplement for a series of securities may identify
the classes which comprise the series by reference to the following categories.
Categories of Classes Description
Principal Types
Accretion directed............. A class that receives principal payments from
the accreted interest from specified accrual
classes. An accretion directed class also may
receive
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principal payments from principal paid on the
underlying mortgage assets or other assets of
the trust fund for the related series.
Component securities........... A class consisting of "components." The
components of a class of component securities
may have different principal and interest
payment characteristics but together constitute
a single class. Each component of a class of
component securities may be identified as
falling into one or more of the categories in
this chart.
Notional amount securities..... A class having no principal balance and bearing
interest on the related notional amount. The
notional amount is used for purposes of the
determination of interest distributions.
Planned principal class or
PACs......................... A class that is designed to receive principal
payments using a predetermined principal balance
schedule derived by assuming two constant
prepayment rates for the underlying mortgage
assets. These two rates are the endpoints for
the "structuring range" for the planned
principal class. The planned principal classes
in any series of securities may be subdivided
into different categories, for example, primary
planned principal classes, secondary planned
principal classes and so forth, having different
effective structuring ranges and different
principal payment priorities. The structuring
range for the secondary planned principal class
of a series of securities will be narrower than
that for the primary planned principal class of
the series.
Scheduled principal class...... A class that is designed to receive principal
payments using a predetermined principal balance
but is not designated as a planned principal
class or targeted principal class. In many
cases, the schedule is derived by assuming two
constant prepayment rates for the underlying
mortgage assets. These two rates are the
endpoints for the "structuring range" for the
scheduled principal class.
Sequential pay................. Classes that receive principal payments in a
prescribed sequence, that do not have
predetermined principal balance schedules and
that under all circumstances receive payments of
principal continuously from the first
distribution date on which they receive
principal payments before or after all other
classes in the same series of securities may be
identified as a sequential pay class.
Strip.......................... A class that receives a constant proportion, or
"strip," of the principal payments on the
underlying mortgage assets or other assets of
the trust fund.
Support class (also
sometimes referred as
"companion classes") ........ A class that receives principal payments on any
distribution date only if scheduled payments
have been made on specified planned principal
classes, targeted principal classes or scheduled
principal classes.
Targeted principal class
or TACs ..................... A class that is designed to receive principal
payments using a predetermined principal balance
schedule derived by assuming a single constant
prepayment rate for the underlying mortgage
assets.
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Interest Types
Lockout........................ A senior class that does not receive principal
payments for a specific period of time.
Fixed rate..................... A class with an interest rate that is fixed
throughout the life of the class.
Floating rate.................. A class with an interest rate that resets
periodically based upon a designated index and
that varies inversely with changes in the index.
Inverse floating rate.......... A class with an interest rate that resets
periodically based upon a designated index that
varies directly with changes in the index.
Variable rate.................. A class with an interest rate that resets
periodically and is calculated by reference to
the rate or rates of interest applicable to
specified assets or instruments, for example,
the mortgage rates borne by the underlying
mortgage loans.
Interest only.................. A class that receives some or all of the
interest payments made on the underlying
mortgage assets or other assets of the trust
fund and little or no principal. Interest only
classes have either a nominal principal balance
or a notional amount. A nominal principal
balance represents actual principal that will be
paid on the class. It is referred to as nominal
since it is extremely small compared to other
classes. A notional amount is the amount used as
a reference to calculate the amount of interest
due on an interest only class that is not
entitled to any distributions of principal.
Principal only................. A class that does not bear interest and is
entitled to receive only distributions of
principal.
Partial accrual................ A class that accretes a portion of the amount of
accrued interest on it, which amount will be
added to the principal balance of the class on
each applicable distribution date, with the
remainder of the accrued interest to be
distributed currently as interest on the class.
The accretion may continue until a specified
event has occurred or until the partial accrual
class is retired.
Accrual........................ A class that accretes the amount of accrued
interest otherwise distributable on the class,
which amount will be added as principal to the
principal balance of the class on each
applicable distribution date. The accretion may
continue until some specified event has occurred
or until the accrual class is retired.
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 after the closing date. The additional loans will be required to
conform to the requirements described in the related agreement or other
agreement providing for that transfer. As specified in the related prospectus
supplement, the transfer may be funded by the establishment of 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 of principal will be deposited in that
account
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to be released as additional loans are transferred. In most cases, all amounts
deposited in a Funding Account will be required to be invested in eligible
investments, as described under "The Agreements--Investment of Funds" in this
prospectus. The amount held in those eligible investments 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 those transfers must be made within 3 months after the closing
date. Amounts set aside to fund those 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 described in that
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
by repurchasing all of the mortgage assets from that trust on or after a date
specified in the related prospectus supplement, or on or after that time as the
aggregate outstanding principal amount of the mortgage assets is less than or
equal to twenty-five percent (25%) of their initial aggregate principal amount.
The repurchase price will be at least equal to the entire unpaid principal
balance, plus accrued and unpaid interest, of the securities that are the
subject of that optional termination. In the case of a trust 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 Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. See
"The Agreements--Termination."
In addition to the optional repurchase of the property in the related
trust, if so specified in the related prospectus supplement, a holder of the
Call Class will have the right, solely at its discretion, to terminate the
related trust and thereby effect early retirement of the certificates of the
series, on any distribution date after the 12th distribution date following the
date of initial issuance of the related series of certificates and until the
date when the optional termination rights of the master servicer and the
depositor become exercisable. The Call Class will not be offered under the
prospectus supplement. Any such call will be of the entire trust at one time;
multiple calls with respect to any series of certificates will not be permitted.
In the case of a call, the holders of the certificates will be paid a price
equal to the Call Price. To exercise the call, the Call Class certificateholder
must remit to the related trustee for distribution to the certificateholders,
funds equal to the Call Price. If those funds are not deposited with the related
trustee, the certificates of that series will remain outstanding. In addition,
in the case of a trust for which a REMIC election or elections have been made,
this termination will be effected in a manner consistent with applicable Federal
income tax regulations and its status as a REMIC. In connection with a call by
the Call Class certificateholder, the final payment to the certificateholders
will be made upon surrender of the related certificates to the trustee. Once the
certificates have been surrendered and paid in full, there will not be any
further liability to certificateholders.
In the event of an optional termination as described in the preceding two
paragraphs, the trust and the securityholders will have no continuing liability
as sellers of assets of the trust fund.
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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 the
prospectus supplement and integral multiples of those minimum denominations.
Each class will be represented by a single security registered in the name of
the nominee of the Depository Trust Company, or 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 securityowner will be entitled to receive
a security issued in fully registered, certificated form, or definitive
security, representing that person's interest in the securities except in the
event that the book-entry system for the securities is discontinued, as
described in the fifth paragraph 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.
Securityowners will only be permitted to exercise the rights of securityholders
indirectly through DTC participants. For 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 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 other organizations. Indirect access to the DTC
system also is available to indirect participants, entities that clear through
or maintain a custodial relationship with a participant.
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 that owner's security to persons or entities that do not participate
in the DTC system, or otherwise take actions relating to that security, may be
limited. In addition, under a book-entry format, securityowners may experience
some delay in their receipt of principal and interest distributions on the
securities since those distributions will be forwarded to DTC and DTC will then
forward those distributions to its participants which in turn will forward them
to indirect participants or securityowners.
Under DTC rules, DTC participants may make book-entry transfers among
participants through DTC facilities for the securities. DTC, as registered
holder, is required to receive and transmit principal and interest distributions
and distributions on the securities. Participants and indirect participants with
which securityowners have accounts for securities similarly are required to make
book-entry transfers and receive and transmit those distributions on behalf of
their respective securityowners. Accordingly, although securityowners will not
possess certificates or notes, the DTC 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 those actions for
holders of a specified interest in the certificates or notes or holders having a
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
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as to other holders of securities to the extent that those 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 for
the securities at any time by giving reasonable notice to the depositor or the
trustee. Under those 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
For any series, a period of time will elapse between receipt of payments
or distributions on the mortgage assets and the distribution date on which those
payments or distributions are passed through to securityholders. This 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 describe an example of the timing of receipts and the
distribution of those receipts to securityholders.
Principal Prepayments
For a series for which the mortgage assets consist of loans or
participation interests in those loans, when a loan prepays in full, the
borrower will in most cases 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. 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 for those 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 on those
securities 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 those 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 those 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.
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Interest or Principal Only Securities
A lower rate of principal prepayments than anticipated will negatively
affect the yield to investors in principal only securities, and a higher rate of
principal prepayments than anticipated will negatively affect the yield to
investors in interest only securities. The prospectus supplement for a series
including those securities will include a table showing the effect of various
levels of prepayment on yields on those securities. The 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, as described under "Description of the Securities--Funding
Account" in this prospectus, and the trust is unable to acquire those additional
loans within any applicable time limit, the amounts set aside for that purpose
may be applied as principal payments on one or more classes of securities of
that 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. 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 the related series, on which the aggregate
principal balance of that 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 that 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 those securities is
paid, which may be in the form of scheduled amortization or prepayments. For
this purpose, prepayments include those prepayments made in whole or in part,
and liquidations due to default.
The rate of principal prepayments on pools of housing loans is influenced
by a variety of economic, demographic, geographic, legal, tax, social and other
factors. The rate of prepayments of conventional housing loans has fluctuated
significantly in recent years. In most cases, 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, those loans are
likely to prepay at rates higher than if prevailing interest rates remain at or
above the interest rates borne by those 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 some of the mortgage assets
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or the security interest rate on the securities may be a number of percentage
points less than interest rates on those 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 CPR prepayment model or the 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 those
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 those loans in the first month of the life of
the loans and an additional 0.2% per annum in each month after that month until
the thirtieth month. Beginning in the thirtieth month and in each month after
that month 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 showing the
weighted average life of each class of that 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 that series that
would be outstanding on specified distribution dates for that series based on
the assumptions stated in that 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 other
rates specified in that prospectus supplement. The 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. Additional Collateral Loans, ARM loans, 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 those type of 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 ARM loans, 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 that negative
amortization and to increase tax
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deductible interest payments. To the extent that any of those mortgage loans
negatively amortize over their respective terms, future interest accruals are
computed on the higher outstanding principal balance of that mortgage loan and a
smaller portion of the scheduled payment is applied to principal than would be
required to amortize the unpaid principal over its remaining term. Accordingly,
the weighted average life of those 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, resulting in accelerated amortization of
that negatively amortizing ARM loan. This acceleration in amortization of the
principal balance of any negatively amortizing ARM loan will shorten the
weighted average life of that mortgage loan. The application of partial
prepayments to reduce the outstanding principal balance of a negatively
amortizing ARM loan 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 only class. The
pooling of negatively amortizing ARM loans 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 ARM loans which comprise or underlie the mortgage
assets experiencing negative amortization while the amortization of other
negatively amortizing ARM loans may be accelerated.
If the loans comprising or underlying the mortgage assets for a series
include ARM loans that permit the borrower to convert to a long-term fixed
interest rate loan, the master servicer, the servicer, the applicable seller,
the private mortgage-backed securities issuer, or PMBS issuer, or another party,
as applicable, may, if specified in the related prospectus supplement, be
obligated to repurchase any loan so converted. This 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 those
mortgage loans, including Additional Collateral Loans, that require Balloon
Payments may default at maturity, or that the maturity of those mortgage loans
may be extended in connection with a workout. For Balloon Loans, payment of the
Balloon Payment, which, based on the amortization schedule of those mortgage
loans, is expected to be the entire or a substantial amount of the original
principal balance, will usually depend on the mortgagor's ability to obtain
refinancing of those mortgage loans, to sell the mortgaged property prior to the
maturity of the Balloon Loan or to otherwise have sufficient funds to pay that
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:
o real estate values,
o the mortgagor's financial situation,
o prevailing mortgage market interest rates,
o the mortgagor's equity in the related mortgaged property,
o tax laws and
o prevailing general economic conditions.
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In most cases, 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 for manufactured home loans will, in most cases,
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 relating 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
only 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 various
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 private mortgage-backed servicer, or
PMBS servicer, of loans underlying private mortgage-backed securities and the
master servicer or the servicer of loans constituting or underlying the mortgage
assets for a series will be required, to the extent it knows of any conveyance
or prospective conveyance of the related residence by any borrower, to enforce
any "due-on-sale" clause applicable to the related loan under the circumstances
and in the manner it enforces those clauses on other similar loans in its
portfolio. FHA loans and VA loans are not permitted to contain "due-on-sale"
clauses and are freely assumable by qualified persons. However, as homeowners
move or default on their housing loans, the mortgaged property is usually 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 in that prospectus supplement may cause an
early termination of the related trust by its repurchase of the remaining
mortgage assets in that trust. See "Description of the Securities--Optional
Termination."
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The Trust Funds
The trust for each series will be held by the trustee for the benefit of
the related securityholders. Each trust will consist of:
o the mortgage assets;
o amounts held from time to time in the Collection Account and the
Certificate Account established for that series;
o mortgaged property;
o any reserve fund for that series, if specified in the related
prospectus supplement;
o the subservicing agreements, if any, relating to loans in the trust;
o any primary mortgage insurance policies relating to loans in the
trust;
o any pool insurance policy, any special hazard insurance policy, any
bankruptcy bond or other credit support relating to the series;
o eligible investment of funds held in any Eligible Account of the
trust, or any guaranteed investment contract for the investment of
those funds; and
o any other instrument or agreement relating to the trust 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;
If so specified in the related prospectus supplement, some of the items listed
above may be held outside of the trust. The value of any guaranteed investment
contract held by a trust will not exceed 10% of the total assets of the trust.
To the extent specified in the related prospectus supplement, Retained
Interests which are received on a private mortgage-backed security or loan
comprising the mortgage assets for a series will not be included in the trust
for that series. Instead, that Retained Interest will be retained by or payable
to the originator, servicer or seller of that private mortgage-backed security
or loan, free and clear of the interest of securityholders under the related
agreement.
Mortgage assets in the trust for a series may consist of any combination
of the following to the extent and as specified in the related prospectus
supplement:
o private mortgage-backed securities;
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o mortgage loans or participation interests in those mortgage loans
and manufactured home loans or participation interests in those
manufactured home loans; or
o Agency Securities.
As of the closing date, no more than 5% of the loans or securities, as
applicable, relative to the aggregate asset pool balance, will deviate from the
characteristics of the loans or securities as described in the prospectus
supplement. 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, under a participation
agreement. See "The Agreements--Assignment of Mortgage Assets."
Any mortgage securities underlying any certificates will (i) either (a)
have been previously registered under the Securities Act, or (b) will be
eligible for sale under Rule 144(k) under the Securities Act, and (ii) will be
acquired in secondary market transactions from persons other than the issuer or
its affiliates. Alternatively, if the mortgage securities were acquired from
their issuer or its affiliates, or were issued by the depositor or any of its
affiliates, then the mortgage securities will be registered under the Securities
Act at the same time as the certificates.
Each trust will be established under either a pooling and servicing
agreement, or an owner trust agreement, that limits the activities of the trust
to those necessary or incidental to the securities. Each trust will issue only
one series of securities, and will not be authorized to incur other obligations.
As a result of the limited purpose and activities of each trust, the possibility
that any trust will be involved in a bankruptcy proceeding is remote.
Private Mortgage-Backed Securities
General. Private mortgage-backed securities may consist of :
o mortgage pass-through certificates, evidencing an undivided interest
in a pool of loans;
o collateralized mortgage obligations secured by loans; or
o pass-through certificates representing beneficial interests in
Agency Securities.
Private mortgage-backed securities will have been issued under a private
mortgage-backed securities agreement, or PMBS agreement. The seller/servicer of
the underlying loans will have entered into the PMBS agreement with the private
mortgage-backed securities trustee, or PMBS trustee. The PMBS trustee or its
agent, or a custodian, will possess the loans underlying that private
mortgage-backed security. Loans underlying a private mortgage-backed security
will be serviced by 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 Fannie Mae- or Freddie Mac-approved servicer and, if FHA loans
underlie the private mortgage-backed securities, approved by HUD as a FHA
mortgagee.
The private mortgage-backed securities issuer, or PMBS issuer, will be a
financial institution or other entity engaged in the business of mortgage
lending, a public agency or instrumentality of a state, local or federal
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government, or a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling housing loans to
those trusts, and selling beneficial interests in those 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, in most
case, be limited to various representations and warranties relating 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 specified 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, ARM loans, or loans having other special payment
features. Loans may be secured by single family property which is property
consisting of one- to four-family attached or detached residential housing
including Cooperative Dwellings, 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:
o no loan will have had a Loan-to-Value Ratio, or LTV ratio, at
origination in excess of 95%,
o each mortgage loan secured by single family property and having a
LTV ratio in excess of 80% at origination will be covered by a
primary mortgage insurance policy,
o each loan will have had an original term to stated maturity of not
less than 10 years and not more than 40 years,
o 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,
o 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
o each loan, other than a Cooperative Loan or a loan secured by a
manufactured home, will be covered by a title insurance policy.
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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 for
the loans underlying the private mortgage-backed securities or for the private
mortgage-backed securities themselves. The type, characteristics and amount of
credit support, if any, will be a function of various 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 includes private mortgage-backed securities will specify:
o the aggregate approximate principal amount and type of the private
mortgage-backed securities to be included in the trust;
o various characteristics of the loans which comprise the underlying
assets for the private mortgage-backed securities including:
o the payment features of those loans, i.e., whether they are
fixed rate or adjustable rate and whether they provide for
fixed level payments or other payment features;
o the approximate aggregate principal balance, if known, of
underlying loans insured or guaranteed by a governmental
entity;
o the servicing fee or range of servicing fees for the loans;
and
o the minimum and maximum stated maturities of the underlying
loans at origination;
o the maximum original term-to-stated maturity of the private
mortgage-backed securities;
o the weighted average term-to-stated maturity of the private
mortgage-backed securities;
o the note interest rate, pass-through or certificate rate or ranges
thereof for the private mortgage-backed securities;
o the weighted average note interest rate, pass-through or certificate
rate of the private mortgage-backed securities;
o the PMBS issuer, the PMBS servicer, if other than the PMBS issuer,
and the PMBS trustee for those private mortgage-backed securities;
o various 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
the private mortgage-backed securities themselves;
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o the terms on which the underlying loans for those 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
o 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 on those loans. All of the Agency Securities in a trust
will be issued or guaranteed by the United States or a United States
government-sponsored agency.
The descriptions of GNMA, Freddie Mac and Fannie Mae Certificates that are
presented in the remaining paragraphs of this subsection are descriptions of
certificates representing proportionate interests in a pool of mortgage loans
and in the payments of principal and interest on those loans. GNMA, Freddie Mac
or Fannie Mae 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
those issuers may issue certificates representing interests in mortgage loans
having characteristics that are different from the types of mortgage loans
described under "The Mortgage Loans" in this prospectus. The terms of any of
those certificates to be included in a trust 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 of those certificates that are actually included in a trust.
GNMA. The Government National Mortgage Association, or GNMA, is a
wholly-owned corporate instrumentality of the United States within the United
States Department of Housing and Urban Development, or HUD. Section 306(g) of
Title III of the National Housing Act of 1934, as amended, or 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 either:
o insured by the Federal Housing Administration, or the FHA, under the
Housing Act or under Title V of the Housing Act of 1949, or
o 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
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to meet its obligations under that 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. In most cases, 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 for any stripped mortgage-backed securities
guaranteed by GNMA or any REMIC securities issued by GNMA. The characteristics
of any GNMA certificates included in the trust for a series of certificates will
be described in the related prospectus supplement.
Freddie Mac. The Federal Home Loan Mortgage Corporation, or Freddie Mac,
is a corporate instrumentality of the United States created pursuant to Title
III of the Emergency Home Finance Act of 1970, as amended, or the FHLMC Act.
Freddie Mac was established primarily for the purpose of increasing the
availability of mortgage credit for the financing of needed housing. The
principal activity of Freddie Mac currently consists of purchasing first-lien,
conventional, residential mortgage loans or participation interests in those
mortgage loans and reselling the mortgage loans so purchased in the form of
guaranteed mortgage securities, primarily Freddie Mac certificates. In 1981,
Freddie Mac initiated its Home Mortgage Guaranty Program under which it
purchases mortgage loans from sellers with Freddie Mac certificates representing
interests in the mortgage loans so purchased. All mortgage loans purchased by
Freddie Mac must meet various standards presented in the FHLMC Act. Freddie Mac
is confined to purchasing, so far as practicable, mortgage loans that it deems
to be of that 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 Freddie Mac
and Freddie Mac certificates. Neither the United States nor any agency of the
United States is obligated to finance Freddie Mac's operations or to assist
Freddie Mac in any other manner.
Freddie Mac Certificates. In most cases, each Freddie Mac 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 Freddie Mac, except for any stripped mortgage-backed
securities issued by Freddie Mac. That pool will consist of mortgage loans:
o substantially all of which are secured by one- to four-family
residential properties or
o if specified in the related prospectus supplement, are secured by
five or more family residential properties.
The characteristics of any Freddie Mac certificates included in the trust for a
series of certificates will be described in the related prospectus supplement.
Fannie Mae. The Federal National Mortgage Association, or Fannie Mae, 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. Fannie
Mae was
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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. Fannie Mae 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 regarding Fannie Mae and Fannie Mae certificates. Although the
Secretary of the Treasury of the United States has authority to lend Fannie Mae
up to $2.25 billion outstanding at any time, neither the United States nor any
agency of the United States is obligated to finance Fannie Mae's operations or
to assist Fannie Mae in any other manner.
Fannie Mae Certificates. In most cases, each Fannie Mae certificate
relating to a series will represent a fractional undivided interest in a pool of
mortgage loans formed by Fannie Mae, except for any stripped mortgage-backed
securities issued by Fannie Mae. Mortgage loans underlying Fannie Mae
certificates will consist of:
o fixed, variable or adjustable rate conventional mortgage loans or
o fixed-rate FHA loans or VA loans.
Those mortgage loans may be secured by either one- to four-family or
multi-family residential properties. The characteristics of any Fannie Mae
certificates included in the trust for a series of certificates will be
described in the related prospectus supplement.
The Mortgage Loans
The trust for a series may consist of mortgage loans or participation
interests in those mortgage loans. If so specified in the related prospectus
supplement, the mortgage loans will have been originated by mortgage lenders
which are Fannie Mae- or Freddie Mac-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 FHA loans which are
fixed rate housing loans secured by the FHA, or VA loans which are housing loans
partially guaranteed by the Department of Veteran Affairs, or the VA, or
conventional loans which are not insured or guaranteed by the FHA or the VA. 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
Loans, GEM Loans, Balloon Loans, Buy-Down Loans, Bi-Weekly Loans or mortgage
loans with other payment characteristics as described under "The Mortgage Loans"
and under "Yield, Prepayment and Maturity Considerations" in this prospectus or
in the related prospectus supplement. ARM loans may have a feature which permits
the borrower to convert the rate on those ARM loans 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 that condominium unit's appurtenant
interest in the common elements.
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The mortgaged properties may include single family property including
detached individual dwellings, individual condominiums, townhouses, duplexes,
row houses, individual units in planned unit developments and other attached
dwelling units. Each single family 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 that tenant-stockholder. See "Certain Legal Aspects of Loans."
If specified in the related prospectus supplement, some of the mortgage
pools may contain mortgage loans secured by junior liens, and the related 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 those proceeds are
sufficient, before the trust as holder of the junior lien receives any payments
on 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 that sale, a bidder at the
foreclosure sale of that 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 those
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, as the holder of the junior lien, and, accordingly,
holders of one or more classes of the securities bear the risk of delay in
distributions while a deficiency judgment against the borrower is obtained and
the risk of loss if the deficiency judgment is not realized upon. Moreover,
deficiency judgments may not be available in some 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 for 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 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
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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 will contain
Additional Collateral Loans. In most cases, the security agreements and other
similar security instruments related to the Additional Collateral for the loans
in a trust will, in the case of Additional Collateral consisting of personal
property, create first liens on that personal property, and, in the case of
Additional Collateral consisting of real estate, create first or junior liens on
that Additional Collateral. Additional Collateral, or the liens on that
Additional Collateral in favor of the related Additional Collateral Loans, may
be greater or less in value than the principal balances of those Additional
Collateral Loans, the appraised values of the underlying mortgaged properties or
the differences, if any, between those principal balances and those appraised
values. The requirements that Additional Collateral be maintained may be
terminated upon the reduction of the LTV Ratios or principal balances of the
related Additional Collateral Loans to pre-determined amounts. Appraised value
means, unless otherwise specified in the related prospectus supplement:
o For mortgaged property securing a single family property, the lesser
of:
o the appraised value determined in an appraisal obtained at
origination of the related mortgage loan, if any, or, if the
related mortgaged property has been appraised subsequent to
origination, the value determined in that subsequent
appraisal, and
o the sales price for the related mortgaged property, except in
circumstances in which there has been a subsequent appraisal;
o For refinanced, modified or converted mortgaged property, the lesser
of:
o 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
o the sales price of the related mortgaged 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
o For 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.
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, 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 includes
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Additional Collateral Loans, the related prospectus supplement will specify the
nature and extent of that Additional Collateral Loans and of the related
Additional Collateral. If specified in that prospectus supplement, the trustee,
on behalf of the related securityholders, will have only the right to receive
various proceeds from the disposition of that Additional Collateral consisting
of personal property and the liens on that personal property 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" in this
prospectus.
Additional Collateral Loans may include:
o DLJdirect ACCOUNT POWER(TM) loans, under which the Additional
Collateral consists of eligible securities held in a DLJdirect
account and pledged by the mortgagor to secure the mortgage loan, or
o DLJdirect FAMILY POWER(TM) loans, under which the Additional
Collateral consists of eligible securities held in a DLJdirect
account and pledged by a family member of the mortgagor to secure
the family members guaranty of the mortgage loan.
Additional Collateral Loans may also include Nest Egg Mortgage Loans(SM).
Those 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 that initial
period, the mortgagor will continue to make interest-only payments on the
mortgage loan until the final scheduled payment on that 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. In most cases, 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:
o 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
o 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 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
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series of securities. In most cases, the following selection criteria shall
apply for the mortgage loans comprising the mortgage assets:
o no mortgage loan will have had a LTV ratio at origination in excess
of 95%;
o no mortgage loan that is a conventional loan secured by a single
family property may have a LTV ratio in excess of 80%, unless
covered by a primary mortgage insurance policy as described in this
prospectus;
o each mortgage loan must have an original term to maturity of not
less than 10 years and not more than 40 years;
o 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
o 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 for the
mortgaged property securing that mortgage loan.
Each mortgage loan will be selected by the depositor for inclusion in a
trust 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 but were not selected for inclusion in that
trust.
The mortgage loans to be included in a trust will, in most cases, be
acquired by the depositor under a Designated Seller Transaction. Those
securities may be sold in whole or in part to seller in exchange for the related
mortgage loans, or may be offered under any of the other methods described in
this prospectus under "Methods of Distribution." The related prospectus
supplement for a trust composed of mortgage loans acquired by the depositor
under a Designated Seller Transaction will in most cases 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 as to that mortgage loan, or any representation as to
the accuracy or completeness of that information provided by the seller and no
assurances are made as to that 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 that insurance or do
not maintain adequate coverage or any insurance proceeds are not applied to the
restoration of the damaged property, damage to that borrower's Cooperative
Dwelling or that cooperative's building could significantly reduce the value of
the collateral securing that Cooperative Note.
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The initial LTV 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 that mortgaged property.
In most cases, for Buy-Down Loans, during the Buy-Down Period when the
borrower is not obligated to pay the full scheduled payment otherwise due on
that loan, each of the Buy-Down Loans will provide for scheduled payments based
on 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 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 payments after the Buy-Down Amounts have been depleted
and, for some Buy-Down Loans, while those Buy-Down Amounts are being depleted.
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 of
that loan and secured by first mortgages on one-to four-family residential
properties.
In most cases, adjustable rate mortgage loans, or ARM loans, will provide
for a fixed initial mortgage rate for either the first six or twelve scheduled
payments. After that period, the mortgage rate is 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 loan, at the time of its origination. An
ARM loan may be convertible into a fixed-rate mortgage loan. To the extent
specified in the related prospectus supplement, any ARM loan so converted may be
subject to repurchase by the seller, the servicer or the master servicer.
ARM loans have features that can cause payment increases that some
borrowers may find difficult to make. However, each of the ARM loans provides
that its mortgage rate may not be adjusted to a rate above the applicable
maximum mortgage rate or below the applicable minimum mortgage rate, if any, for
that ARM loan. In addition, some of the ARM loans provide for Periodic Rate
Caps. Some ARM loans are payable in self-amortizing payments of principal and
interest. Negatively amortizing ARM loans instead provide for limitations on
changes in the scheduled payment on those ARM loans to protect borrowers from
payment increases due to rising interest rates. Those limitations can result in
scheduled payments which are greater or less than the amount necessary to
amortize a negatively amortizing ARM loan 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 loan, then the deferred interest is added to the
principal balance of that ARM loan causing the negative amortization of that ARM
loan, and will be repaid through future scheduled payments. If specified in the
related prospectus supplement, negatively amortizing ARM loans may provide for
the extension of their original stated maturity to accommodate changes in their
mortgage rate. The relevant prospectus supplement
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will specify whether the ARM loans comprising or underlying the mortgage assets
are negatively amortizing ARM loans.
If applicable, the prospectus supplement for each series will specify the
index to be used for any mortgage loans underlying that series.
The related prospectus supplement for each series will provide information
for the mortgage loans as of the cut-off date, including, among other things:
o the aggregate outstanding principal balance of the mortgage loans;
o the weighted average mortgage rate on the mortgage loans, and, in
the case of ARM loans, the weighted average of the current mortgage
rates and the maximum mortgage rates, if any;
o the average outstanding principal balance of the mortgage loans;
o the weighted average remaining term-to-stated maturity of the
mortgage loans and the range of remaining terms-to-stated maturity;
o the range of LTV ratios of the mortgage loans;
o the relative percentage, by outstanding principal balance as of the
cut-off date, of mortgage loans that are Additional Collateral
Loans, ARM loans, Balloon Loans, Buy-Down Loans, GEM Loans, GPM
Loans, Cooperative Loans, conventional loans, Bi-Weekly Loans, FHA
loans and VA loans;
o the percentage of mortgage loans, by outstanding principal balance
as of the cut-off date, that are covered by primary mortgage
insurance policies;
o any pool insurance policy, special hazard insurance policy or
bankruptcy bond or other credit support relating to the mortgage
loans;
o the geographic distribution of the mortgaged properties securing the
mortgage loans;
o the percentage of mortgage loans, by principal balance as of the
cut-off date, that are secured by single family property,
Cooperative Dwellings, investment property and vacation or second
homes; and
o for 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.
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If information of the nature described in the preceding paragraph for the
mortgage loans is not known to the depositor at the time the securities are
initially offered, more general information of the nature described in that
paragraph will be provided in the prospectus supplement. The final specific
information will be presented 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, for each series of
certificates, or the related servicing agreement, owner trust agreement and
indenture, for each series of notes, with the Securities and Exchange
Commission, or the Commission, within 15 days after the initial issuance of
those securities.
The Manufactured Home Loans
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 Fannie Mae- or Freddie Mac-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. Mortgage
loans, including an interest in that mortgage loan, or manufactured home loans,
including an interest in that manufactured home, that are conveyed to the trust
for a series is referred to throughout this prospectus as the "loans."
The manufactured home loans may be conventional loans, FHA loans or VA
loans. Each manufactured home loan will be secured by a manufactured home. In
most cases, the manufactured home loans will be fully amortizing and will bear
interest at a fixed interest rate.
The manufactured homes securing the manufactured home loans, in most
cases, consist of manufactured homes within the meaning of 42 United States
Code, Section 5402(6), which defines a "manufactured home" as "a structure,
transportable in one or more sections, which in the traveling mode, is eight
body feet or more in width or forty body feet or more in length, or, when
erected on site, is three hundred twenty or more square feet, and which is built
on a permanent chassis and designed to be used as a dwelling with or without a
permanent foundation when connected to the required utilities, and includes the
plumbing, heating, air-conditioning, and electrical systems contained therein;
except that such term shall include any structure which meets all the
requirements of this paragraph except the size requirements and with respect to
which the manufacturer voluntarily files a certification required by the
Secretary of Housing and Urban Development and complies with the standards
established under this chapter." In addition, the following restrictions, in
most cases, apply for manufactured home loans comprising or underlying the
mortgage assets for a series:
o no manufactured home loan will have had a LTV ratio at origination
in excess of 95%;
o each manufactured home loan must have an original term to maturity
of not less than three years and not more than 25 years;
o 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
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o 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 for that manufactured home loan.
The initial LTV 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 that manufactured home. For underwriting of manufactured home
loans, see "Loan Underwriting Procedures and Standards." For servicing of
manufactured home loans, see "Servicing of Loans."
The related prospectus supplement for each series will provide information
for the manufactured home loans comprising the mortgage assets as of the cut-off
date, including, among other things:
o the aggregate outstanding principal balance of the manufactured home
loans comprising or underlying the mortgage assets;
o the weighted average interest rate on the manufactured home loans;
o the average outstanding principal balance of the manufactured home
loans;
o the weighted average remaining scheduled term to maturity of the
manufactured home loans and the range of remaining scheduled terms
to maturity;
o the range of LTV ratios of the manufactured home loans;
o 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;
o any pool insurance policy, special hazard insurance policy or
bankruptcy bond or other credit support relating to the manufactured
home loans; and
o 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 in the preceding paragraph for 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 in that
paragraph will be provided in the prospectus supplement. The final specific
information will be presented 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 those securities.
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Collection Account and Certificate Account
In most cases, a separate Collection Account for each series will be
established by the master servicer in the name of the trustee for deposit of:
o all distributions received on the mortgage assets for that series,
o all Advances, other than Advances deposited into the Certificate
Account,
o the amount of cash to be initially deposited in that Collection
Account, if any,
o reinvestment income on those funds and other amounts required to be
deposited in that Collection Account under the related pooling and
servicing agreement or the related servicing agreement and
indenture.
Any reinvestment income or other gain from investments of funds in the
Collection Account will usually be credited to that Collection Account, and any
loss resulting from those investments will be charged to that Collection
Account. That 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 this case, that
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 various payments provided for in the related
pooling and servicing agreement or the related servicing agreement and
indenture. In most cases, 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
relating to 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.
All funds received from the master servicer and all required withdrawals from
any reserve funds and any draws on any financial guarantee insurance for that
series will be deposited into that Certificate Account, pending distribution to
the securityholders. Any reinvestment income or other gain from investments of
funds in the Certificate Account will usually be credited to the Certificate
Account and any loss resulting from those investments will be charged to that
Certificate Account. That 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
permitted withdrawals by the trustee as described in the related agreement, will
be available for remittance to the securityholders. 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 in
that Collection Account will, subject to permitted withdrawals by the
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trustee as specified in the related agreement, be available for remittance to
the securityholders. See also "The Agreements--Certificate Account" in this
prospectus.
Other Funds or Accounts
A trust may include other funds and accounts or a security interest in
various funds and accounts for the purpose of, among other things, paying
administrative fees and expenses of the trust and accumulating funds pending
their distribution. If so specified in the related prospectus supplement, funds
may be established with the trustee for Buy-Down Loans, GPM Loans, or other
loans having special payment features included in the trust in addition to or in
lieu of those 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" in
this prospectus. 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 in this prospectus, except as otherwise described in the
related prospectus supplement.
The person or persons, which may include banks, savings and loan
associations, mortgage bankers, investment banking firms, the Resolution Trust
Corporation, or RTC, the Federal Deposit Insurance Corporation, or the FDIC, and
other sellers of the loans, will make representations and warranties concerning
compliance with those 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 those underwriting
standards and procedures and compliance with other requirements for inclusion in
the trust.
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 of the Secretary of Housing and Urban Development.
Manufactured home loans may have been originated by those 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 described 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.
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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 relating to its assets, liabilities,
income, credit history, employment history and personal information. The
borrower will have also furnished 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. Various
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.
The adequacy of the property financed by the related loan as security for
repayment of that 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 personally inspect the property and 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.
The value of the property being financed, as indicated by the appraisal,
must currently support, and is anticipated to support in the future, the
outstanding loan balance. In most cases, appraisals are required to conform to
the Uniform Standards of Professional Appraisal Practice and the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, or FIRREA, and must
be on forms acceptable to the Fannie Mae and/or Freddie Mac.
Based on the data provided, various 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 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. In most cases, these
guidelines will 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,
for 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 Fannie Mae and Freddie Mac at the time of
origination of the loan, except that the ratio of scheduled payments and other
fixed obligations to monthly gross income may exceed the comparable Fannie Mae
or Freddie Mac limits as specified in the related prospectus supplement.
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For 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. For manufactured home
loans that are conventional loans, the related prospectus supplement will
specify:
o the required minimum downpayment,
o the maximum amount of purchase price eligible for financing,
o the maximum original principal amount that may be financed, and
o the limitations on ratios of borrower's scheduled payment to gross
monthly income and monthly income net of other fixed payment
obligations.
For mortgaged property consisting of vacation or second homes, no income
derived from the property will have been considered for underwriting purposes.
Other 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. ARM loans may involve similar assessments.
To the extent specified in the related prospectus supplement, the
depositor may purchase loans, or participation interests in those loans, for
inclusion in a trust that are underwritten under standards and procedures which
vary from and are less stringent than those described in this prospectus. For
instance, loans may be underwritten under a "limited documentation program," if
specified in the prospectus supplement. For those loans, minimal investigation
into the borrowers' credit history and income profile is undertaken by the
originator and those loans may be underwritten primarily on the basis of an
appraisal of the mortgaged property and LTV ratio on origination. Thus, if the
LTV ratio is less than a percentage specified in the related prospectus
supplement, the originator may forego other 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 describes the underwriting
standards applicable to those mortgage loans.
The underwriting standards applied by the loan originator require that the
underwriting officers be satisfied that the value of the property being
financed, as indicated by an appraisal, currently supports and is anticipated to
support in the future the outstanding loan balance, and provides sufficient
value to mitigate the effects of adverse shifts in real estate values. Some
states where the mortgaged properties may be located have "antideficiency" laws
requiring 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" in this prospectus.
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For the underwriting standards applicable to any mortgage loans, those
underwriting standards, in most cases, include a set of specific criteria under
which the underwriting evaluation is made. However, the application of those
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 those
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 those 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 the conventional loans will continue.
Further, there is no assurance that appreciation of real estate values will
limit loss experiences on non-traditional housing such as 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 that
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 those loans become
equal to or greater than the value of that mortgaged properties, then the actual
rates of delinquencies, foreclosures and losses could be higher than those now
experienced in the mortgage lending industry. In addition, the value of property
securing Cooperative Loans and the delinquency rates for 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" in this prospectus.
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.
To the extent that losses resulting from delinquencies, losses and
foreclosures or repossession of mortgaged property for 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 in this prospectus or in the
related prospectus supplement, those losses will be borne by holders of the
securities of that 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
The seller, or other party as described in the related prospectus
supplement, will represent and warrant to the depositor and the trustee
regarding the mortgage loans comprising the mortgage assets in a trust, upon
delivery of the mortgage loans to the trustee under a trust, among other things,
that:
o any required hazard and primary mortgage insurance policies were
effective at the origination of that mortgage loan, and that policy
remained in effect on the date of purchase of that mortgage loan
from the seller by or on behalf of the depositor;
o 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 that mortgage loan and
that 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 that mortgage loan is located
in an area where those policies are often not available, there is in
the related mortgage file an attorney's certificate of title
indicating, subject to those permissible exceptions set forth in
that certificate, the first lien status of the mortgage;
o the seller has good title to the mortgage loan and the 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;
o 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;
o the related mortgaged property is free from material damage and at
least in adequate repair;
o there are no delinquent tax or assessment liens against the related
mortgaged property;
o that mortgage loan is not more than 30 days' delinquent as to any
scheduled payment of principal and/or interest;
o if a primary mortgage insurance policy is required for that mortgage
loan, that mortgage loan is the subject of that policy; and
o that 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 concerning 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
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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" in this prospectus. For a Cooperative Loan, the seller, or other
party as described in the related prospectus supplement, will represent and
warrant that (a) 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 (b) the related
Cooperative Dwelling is free of material damage and in good repair.
For each manufactured home loan, the seller, or other party as described
in the related prospectus supplement, will represent and warrant, among other
things that:
o 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;
o as of the date of the transfer and assignment, the manufactured home
loans are subject to no offsets, defenses or counterclaims;
o 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;
o as of the date of the transfer and assignment, each manufactured
home loan constitutes a valid first lien on the related manufactured
home and that manufactured home is free of material damage and is in
good repair;
o as of the date of the 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
o for 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 that insurance have been paid in full.
Upon the discovery of the breach of any representation or warranty made by
the master servicer concerning a loan that materially and adversely affects the
interest of the securityholder in that loan, the seller, or other party as
described in the prospectus supplement, will be obligated to cure that breach in
all material respects, repurchase that loan from the trustee, or deliver a
qualified substitute mortgage loan as described under "The
Agreements--Assignment of Mortgage Assets" in this prospectus. See "Risk
Factors--Limited Obligations and Assets of the Depositor" in this prospectus. 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
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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 that loan. If so specified
in the related prospectus supplement, the master servicer may be obligated to
enforce those obligations rather than the trustee or PMBS trustee.
Servicing of Loans
General
Customary servicing functions for loans constituting the mortgage assets
in the trust will be provided by the master servicer directly or through one or
more servicers subject to supervision by the master servicer. If the master
servicer is not directly servicing the loans, then the master servicer will:
o administer and supervise the performance by the servicers of their
servicing responsibilities under their subservicing agreements with
the master servicer;
o maintain any standard or special hazard insurance policy, primary
mortgage insurance bankruptcy bond or pool insurance policy required
for the related loans; and
o advance funds as described under "Advances" in this prospectus.
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 various responsibilities to that 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 for any
participation securities which constitute the mortgage assets. The master
servicer may be an affiliate of the depositor. The master servicer and each
servicer will usually be required to be a Fannie Mae- or Freddie Mac-approved
seller/servicer and, in the case of FHA loans, approved by HUD as an FHA
mortgagee.
The master servicer will be paid the 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 subservicing agreement
if the master servicer elects to perform those servicing functions itself.
The master servicer, at its election, may pay itself the Servicing Fee for
a series for each mortgage loan either by:
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o withholding the Servicing Fee from any scheduled payment of interest
prior to the deposit of that payment in the Collection Account for
that series,
o withdrawing the Servicing Fee from the Collection Account after the
entire scheduled payment has been deposited in the Collection
Account, or
o requesting that the trustee pay the Servicing Fee out of amounts in
the Certificate Account.
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, and follow
the collection procedures as it follows for comparable loans held in its own
portfolio. Consistent with the preceding sentence, the master servicer may, in
its discretion:
o waive any assumption fee, late payment charge, or other charge in
connection with a loan and
o arrange with a mortgagor a schedule for the liquidation of
delinquencies by extending the due dates for scheduled payments on
that loan. However, the master servicer shall first determine that
the 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, if a material default occurs or a payment default is reasonably
foreseeable, the master servicer will be permitted, subject to any specific
limitations required by the related pooling and servicing agreement or servicing
agreement and described in the related prospectus supplement, to modify, waive
or amend any term of that mortgage loan, including deferring payments, extending
the stated maturity date or otherwise adjusting the payment schedule, provided
that the modification, waiver or amendment (1) is reasonably likely to produce a
greater recovery for that mortgage loan on a present value basis than would
liquidation and (2) will not adversely affect the coverage under any applicable
instrument of credit enhancement.
In most cases, the master servicer, to the extent permitted by law, will
establish and maintain 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 those payments under the loan
related documents, in which case the master servicer would not be required to
establish any Escrow Account for those loans. Withdrawals from the Escrow
Accounts are to be made:
o to effect timely payment of taxes, assessments, mortgage and hazard
insurance,
o to refund to borrowers amounts determined to be overages,
o to pay interest to borrowers on balances in the Escrow Account to
the extent required by law,
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o to repair or otherwise protect the property securing the related
loan and to clear and terminate that Escrow Account.
The master servicer will be responsible for the administration of the Escrow
Accounts and, in most cases, will make advances to that account when a
deficiency exists in that account.
Deposits to and Withdrawals from the Collection Account
In most cases, the Collection Account will be an Eligible Account and the
funds held in that account may be invested, pending remittance to the trustee,
in eligible investments. The master servicer will usually be entitled to receive
as additional compensation any interest or other income earned on funds in the
Collection Account.
In most cases, the master servicer will deposit into the Collection
Account for each series on the business day after 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. After the cut-off
date, the master servicer will deposit into the Collection Account after the
date of receipt of those scheduled payments, 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 that cut-off date:
o All payments on account of principal, including prepayments, on
those loans;
o All payments on account of interest on those loans net of any
portion of that payment 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;
o All Insurance Proceeds and all amounts received by the master
servicer in connection with the liquidation of defaulted loans
or property acquired relating to those defaulted loans,
whether through foreclosure sale or otherwise. This includes
all payments in connection with those loans received from the
mortgagor, other than 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
Liquidation Expenses;
o Any Buydown Funds, and, if applicable, investment earnings on
the Buydown Funds required to be paid as described in this
prospectus;
o All proceeds of any mortgage loan in that trust purchased, or,
in the case of a substitution, other 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;
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o All amounts required to be deposited in that trust in
connection with any losses on eligible investments pursuant to
the related pooling and servicing agreement or servicing
agreement; and
o All other amounts required to be deposited in that trust
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 various purposes, as specified in the related
pooling and servicing agreement or servicing agreement, which, in most cases,
will include the following, except as otherwise provided in that agreement:
o to make deposits to the Certificate Account in the amounts and in
the manner provided in the pooling and servicing agreement or
servicing agreement;
o to reimburse itself for Advances, including amounts advanced for
taxes, insurance premiums or similar expenses as to any mortgaged
property, out of late payments or collections on the related
mortgage loan for which those Advances were made;
o to pay to itself unpaid Servicing Fees, out of payments or
collections of interest on each mortgage loan;
o 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;
o to pay to itself or the seller all amounts received on to each
mortgage loan purchased, repurchased or removed under 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;
o 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 limitations described in the related pooling and
servicing agreement or servicing agreement as described in the
related prospectus supplement;
o to reimburse itself, the trustee or the depositor for 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;
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o to make any other withdrawals permitted by the related pooling and
servicing agreement or servicing agreement and described in the
related prospectus supplement; and
o to clear the Collection Account of amounts relating to the
corresponding loans in connection with the termination of the trust
pursuant to the pooling and servicing agreement or servicing
agreement.
Servicing Accounts
In those cases where a servicer is servicing a mortgage loan, the servicer
will usually establish and maintain 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 subservicing 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 for each mortgage
loan, after deducting from that remittance an amount equal to the servicing
compensation and unreimbursed expenses and advances to which it is then entitled
pursuant to the related subservicing agreement, to the extent not previously
paid to or retained by it. In addition on each of those dates the servicer will
be required to remit to the master servicer any amount required to be advanced
pursuant to the related subservicing agreement, and the servicer will also be
required to remit to the master servicer, within one business day of receipt,
the proceeds of any principal Prepayments and all Insurance Proceeds and
Liquidation Proceeds.
Buy-Down Loans, GPM Loans and Other Subsidized Loans
For each Buy-Down Loan, if any, included in a trust the master servicer
will deposit all Buy-Down Amounts in a Buy-Down Fund. The amount of that
deposit, together with investment earnings on that deposit at the rate specified
in the related prospectus supplement, will provide sufficient funds to support
the payments on that 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 in
that account 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. A Buy-Down Fund, in most cases, will not
be included in or deemed to be a part of the trust.
The terms of some of the loans may provide for the contribution of subsidy
funds by the seller of the related mortgaged property or by another entity. The
master servicer will deposit the subsidy funds in a Subsidy Fund for that loan.
Unless otherwise specified in the related prospectus supplement, the terms of
the 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 that loan. Neither the master servicer, any servicer nor the
depositor will be obligated to add to that Subsidy Fund any of its own funds.
The Subsidy Fund, in most cases, will not be included in or deemed to be a part
of the trust.
If the depositor values any GPM Loans deposited into the trust for a
multiple class series on the basis of that 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 GPM Fund complying with the
requirements described above for the Collection Account an amount which,
together with reinvestment income on that amount at the rate described in
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the related prospectus supplement, will be sufficient to cover the amount by
which payments of principal and interest on those GPM Loans assumed in
calculating payments due on the securities of that multiple class series exceed
the scheduled payments on those GPM Loans. The trustee will withdraw amounts
from the GPM Fund for a series upon a prepayment of those GPM Loan as necessary
and apply those amounts to the payment of principal and interest on the
securities of that series. Neither the depositor, the master servicer nor any
servicer will be obligated to supplement the GPM Fund should amounts in that
account and investment earnings on those amounts prove insufficient to maintain
the scheduled level of payments, in which event, distributions to the
securityholders may be affected. The GPM Fund, in most cases, will not be
included in or deemed to be part of the trust.
For 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 an Advance for delinquent
payments of principal of and interest on a loan. Unless otherwise specified in
the related prospectus supplement, neither the master servicer nor any servicer
will be obligated to make Advances, and that obligation may be limited in
amount, may be limited to advances received from the servicers, if any, or may
not be activated until a particular 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 for that 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 for
which that Advance was made. If an Advance is made and subsequently determined
to be nonrecoverable from late collections, proceeds of insurance polices or
Liquidation Proceeds from the related loan, the servicer or master servicer will
be entitled to reimbursement from other funds in the Certificate Account,
Collection Account or Servicing Account, as the case may be, or from a specified
reserve fund as applicable, to the extent specified in the related prospectus
supplement. For any multiple class series, so long as the related subordinate
securities remain outstanding and subject to other limitations as described in
the related prospectus supplement, those 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 usually be required to pay interest on the principal amount
prepaid only to the date of that 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. That principal prepayment, together with a full scheduled payment of
interest on that prepayment to the extent of the adjustment or advance, will be
distributed to securityholders on the related distribution date. If the amount
necessary to include
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a full scheduled payment of interest as described in the second preceding
sentence 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 some 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" in this prospectus. In most cases,
coverage will be in an amount at least equal to the greater of (1) the amount
necessary to avoid the enforcement of any co-insurance clause contained in the
policy or (2) 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 that REO Property. No
earthquake or other additional insurance will be required of any borrower or
will be maintained on REO Property acquired for a defaulted loan, other than
under those applicable laws and regulations as shall at any time be in force and
shall require for 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:
o the outstanding principal balance of the loan or
o 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 that coverage
at the mortgagor's cost and expense and to seek reimbursement for that cost and
expense from the mortgagor.
Any amounts collected by the master servicer or the servicer, as the case
may be, under those 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
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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 that series, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a standard hazard insurance
policy for each loan or related REO Property. This blanket policy may contain a
deductible clause, in which case the master servicer will, in the event that
there has been a loss that would have been covered by that policy absent that
deductible clause, deposit in the Collection Account the amount not otherwise
payable under the blanket policy because of the application of that 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. In most cases, 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 that insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to that borrower's Cooperative Dwelling or that
Cooperative's building could significantly reduce the value of the collateral
securing that 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. In most cases, 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 that insurance or do not maintain adequate
coverage or any insurance proceeds are not applied to the restoration of damaged
property, any damage to that borrower's condominium unit or the related
condominium building could significantly reduce the value of the collateral
securing that 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 specified in the related prospectus
supplement, in full force and effect for 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. However, if the cost of that 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 so 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. Some characteristics of the special
hazard insurance policy are described under "Description of Mortgage and Other
Insurance--Hazard Insurance on the Loans."
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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 for each conventional loan secured
by single family property for which that coverage is required for as long as the
related mortgagor is obligated to maintain that primary mortgage insurance under
the terms of the related loan. The master servicer will not cancel or refuse to
renew that 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 that cancelled or nonrenewed
policy is maintained with a Qualified Insurer.
Primary insurance policies will be required for manufactured home loans
only to the extent described in the related prospectus supplement. If primary
mortgage insurance is to be maintained for manufactured home loans, the master
servicer will be required to maintain that insurance as described above. For
further information regarding the extent of coverage under a primary mortgage
insurance policy, see "Description of Mortgage and Other Insurance--Mortgage
Insurance on the Loans."
FHA Insurance and VA Guarantees. To the extent specified in the related
prospectus supplement, all or a portion of the loans may be insured by the FHA
or guaranteed by the VA. The master servicer will be required to take steps that
are reasonably necessary to keep that 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 for 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 that 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 Freddie Mac or Fannie Mae 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. However, 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 so 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. Typical terms of the pool
insurance policy are described under "Description of Mortgage and Other
Insurance--Mortgage Insurance on the Loans."
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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 after those efforts maintain a bankruptcy bond or similar insurance or
guaranty in full force and effect throughout the term of the related agreement,
unless coverage under that bankruptcy bond 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 the
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" in this prospectus.
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 for 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 relating to 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 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 the foreclosure or other conversion, the
master servicer will follow those practices and procedures as it deems necessary
or advisable and as are normal and usual in its servicing activities for
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:
o that restoration or foreclosure will increase the Liquidation
Proceeds of the related mortgage loan available to the
securityholders after reimbursement to itself for those expenses,
and
o that those expenses will be recoverable by it either through
Liquidation Proceeds or the proceeds of insurance.
Notwithstanding anything to the contrary in this prospectus, in the case of a
trust 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 that 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, or 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 will have no ability to do so and neither the master
servicer nor any servicer will be required to do so.
For 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 of those remedies if it determines that one remedy is
more likely to result in a greater recovery. If that mortgage loan is an
Additional Collateral Loan, the master servicer, or the related servicer,
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if the lien on the Additional Collateral for that 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 that 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 under a breach of a
representation and warranty, that mortgage loan will be removed from the related
trust 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:
o that restoration will increase the Liquidation Proceeds of the loan
after reimbursement of the expenses incurred by that servicer or the
master servicer, and
o that those 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, in most cases, 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" in this
prospectus. 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 that
approval could limit the number of potential purchasers for those shares and
otherwise limit the trust's ability to sell and realize the value of those
shares.
For 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 that
loss is not covered by other credit support, a loss may be experienced by the
trust.
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 that prospective
conveyance and prior to the time of the consummation of that conveyance,
exercise the trustee's right to accelerate the maturity of that loan under the
applicable "due-on-sale" clause, if any, unless the master servicer reasonably
believes that the clause is not enforceable under applicable law or if the
enforcement of that clause would result in loss of coverage under any primary
mortgage insurance policy. If those 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 that property has been or is about to be conveyed, pursuant to which
that person becomes liable
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under the loan and pursuant to which the original borrower is released from
liability and that 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. In most cases, the master servicer or any servicer will be entitled
to additional servicing compensation 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 in this prospectus.
In most cases, the master servicer will pay the fees of the servicers, if
any, and various expenses incurred in connection with the servicing of the
loans, including, without limitation:
o the payment of the fees and expenses of the trustee and independent
accountants,
o payment of insurance policy premiums and the cost of credit support,
if any, and
o payment of expenses incurred in enforcing the obligations of
servicers and sellers and in the preparation of reports to
securityholders.
Some of these expenses may be reimbursable under 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 on the related loans or from specific
recoveries of costs.
The master servicer will be entitled to reimbursement for various expenses
incurred by it in connection with the liquidation of defaulted loans. The
related trust will suffer no loss by reason of those 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 under those insurance policies has been exhausted, the
related trust will suffer a loss to the extent that Liquidation Proceeds, after
reimbursement of the master servicer's expenses, are less than the outstanding
principal balance of and unpaid interest on the related loan which would be
distributable to 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, that 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.
In most cases, 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
that series.
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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 specified 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. If there has been material
noncompliance with those servicing standards or a material default in the
fulfillment of any obligation, that statement shall include a description of
that noncompliance or specify that known default, as the case may be, and the
nature and status of the default. The 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 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 that firm that, unless otherwise
specified in the related prospectus supplement, on the basis of an examination
by that 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 specified in the Uniform Single Attestation
Program for Mortgage Bankers during the preceding year is fairly stated in all
material respects, subject to those exceptions and other qualifications that, in
the opinion of that firm, those accounting standards require it to report. In
rendering its statement that 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 that statement, for those
servicers which also have been the subject of that 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.
In most cases, 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 under that agreement are no longer
permissible under applicable law or except in connection with a permitted
transfer of servicing. This 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" in this prospectus.
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In most cases, 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 that assignment or delegation:
o is qualified to sell loans to and service mortgage loans for Fannie
Mae or Freddie Mac;
o has a net worth of not less than $10,000,000;
o is acceptable to each rating agency for purposes of maintaining its
then-current ratings of the securities;
o is reasonably acceptable to the trustee; and
o 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 that 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 that agreement.
To the extent that the master servicer transfers its obligations to a
wholly-owned subsidiary or affiliate, that subsidiary or affiliate need not
satisfy the criteria described above. However, in that 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 the successor or surviving entity meets the
requirements for a successor master servicer described in the preceding
paragraph.
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 or the securityholders for any action
taken or for failing to take any action in good faith under the related
agreement or for errors in judgment. However, neither the master servicer, the
depositor, nor any other person will be protected against any breach of warranty
or representations made by that party under the related agreement or the failure
to perform its obligations in compliance with any standard of care described 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 under that
agreement. 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 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 under that agreement or by reason of reckless
disregard of obligations and duties under that agreement. 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
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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 that action which it may deem necessary or desirable for
the related agreement and the rights and duties of the parties to that agreement
and the interests of the securityholders under that agreement. In that event,
the legal expenses and costs of that action and any liability resulting from
that action will be expenses, costs, and liabilities of the trust and the master
servicer or the depositor will be entitled to be reimbursed for those expenses,
costs and liabilities out of the Collection Account, or the Certificate Account,
if applicable.
Credit Support
General
For any series, credit support may be provided for one or more classes of
that series 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 that 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 the amounts and having the 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 adequacy of any
Additional Collateral provided in connection with any Additional Collateral
Loan, subject to the limitations described in that 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 on those securities at the security interest rate. If
losses occur which exceed the amount covered by credit support or which are not
covered by credit support, those losses will be borne by the securityholders. If
credit support is provided for a series, the related prospectus supplement will
include a description of:
o the amount payable under that credit support,
o any conditions to payment under that credit support not otherwise
described in this prospectus,
o the conditions under which the amount payable under that credit
support may be reduced and under which that credit support may be
terminated or replaced, and
o the material provisions of any agreement relating to that credit
support.
Additionally, the related prospectus supplement will provide some information on
the issuer of any third-party credit support, including:
o a brief description of its principal business activities,
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o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business,
o if applicable, the identity of regulatory agencies which exercise
primary jurisdiction over the conduct of its business, and
o 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 the 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. The
Subordinated Amount will usually increase whenever there is distributed to the
subordinate securityholders amounts for which subordination payments have
previously been paid to the senior securityholders, which will occur when
subordination payments for delinquencies and some 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. That 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 some 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 some provisions of the federal
bankruptcy code, 11 United States Code 101 et seq., and regulations promulgated
under the federal bankruptcy code, or 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.
For 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. In most cases, the Subordination Reserve Fund
will not be a part of the trust. If the Subordination Reserve Fund is not a part
of the trust, the trustee will have a security interest in that Subordination
Reserve Fund 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 described in the related
prospectus supplement.
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Moneys deposited in any Subordination Reserve Fund will be invested in
Eligible Reserve Fund Investments. Any reinvestment income or other gain from
those investments will usually be credited to the Subordination Reserve Fund for
that series, and any loss resulting from those investments will be charged to
that 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 described in the related prospectus
supplement, including the amount of any initial deposit to that Subordination
Reserve Fund, the required reserve fund balance to be maintained in the
Subordination Reserve Fund, 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 that series. That 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 some 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 those 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. The related prospectus supplement for a series which includes
a cross-support feature will describe the manner and conditions for applying
that cross-support feature. As to any trust that includes a cross-support
feature, only assets of the trust will be used to provide cross-support, and
cross-support will be provided only to securities issued by the trust. A trust
will not provide a cross-support feature that benefits securities issued by any
other trust, and a trust will not receive cross-support from any other trust.
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Insurance
Credit support for 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 insurance policy, for all loans comprising or underlying
the mortgage assets for a series, or those loans that have specified
characteristics. Those insurance policies include primary mortgage insurance and
standard hazard insurance and may, if specified in the related prospectus
supplement, include:
o a pool insurance policy covering losses in amounts in excess of
coverage of any primary insurance policy,
o a special hazard insurance policy covering risks not covered by
standard hazard insurance policies,
o a bankruptcy bond covering a number of losses resulting from the
bankruptcy of a borrower and application of various provisions of
the Bankruptcy Code,
o 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,
o 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.
Letter of Credit
The letter of credit, if any, for a series of securities will be issued by
the letter of credit bank specified in the related prospectus supplement. Under
the letter of credit, the letter of credit bank will be obligated to honor
drawings under the letter of credit in an aggregate fixed dollar amount, net of
unreimbursed payments under that letter of credit, equal to the percenatge
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. 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 various 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 under that letter of credit. The obligations of the letter of credit
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. 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
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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, for a series of securities will be
provided by one or more insurance companies. That financial guarantee insurance
will guarantee, for 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 described 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 for a series, in which cash,
a letter of credit, Eligible Reserve Fund Investments, a demand note or a
combination of the foregoing, 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 in those reserve funds 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 that series by each rating agency rating that 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 various 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 various 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 that 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.
Moneys deposited in any reserve funds will be invested in Eligible Reserve
Fund Investments, except as otherwise specified in the related prospectus
supplement. Any reinvestment income or other gain from those investments will
usually be credited to the related reserve fund for that series, and any loss
resulting from those investments will be charged to that reserve fund. However,
that 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." In most cases, the reserve fund, if any, for a series will not be a
part of the trust.
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Additional information concerning any reserve fund will be provided in the
related prospectus supplement, including the initial balance of that 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 under those insurances are general descriptions only and do
not purport to be complete.
Mortgage Insurance on the Loans
Unless otherwise specified in the related prospectus supplement, all
mortgage loans that are conventional loans secured by single family property and
which had initial LTV ratios of greater than 80% will be covered by primary
mortgage insurance policies providing coverage on the amount of each of those
mortgage loans in excess of 75% of the original appraised value of the related
mortgaged property and remaining in force until the principal balance of that
mortgage loan is reduced to 80% of that original appraised value.
A pool insurance policy will be obtained if so specified in the related
prospectus supplement to cover any loss, subject to limitations described in
this prospectus, 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" in this prospectus. Neither the primary
mortgage insurance policies nor any pool insurance policy will insure against
losses sustained in the event of a personal bankruptcy of the borrower under a
mortgage loan. See "Certain Legal Aspects of Loans" in this prospectus. Those
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 those
losses are not covered by the pool insurance policy or other credit support for
that series, those 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"
in this prospectus. Other hazard risks will not be insured and the occurrence of
those 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 insurer will differ from those
in primary mortgage insurance policies issued by other primary insurers, each
primary mortgage insurance policy, in most cases, will pay either:
o the insured percentage of the loss on the related mortgaged
property;
o the entire amount of that loss, after receipt by the primary insurer
of good and merchantable title to, and possession of, the mortgaged
property; or
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o at the option of the primary insurer under various 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, after that date, 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 the date the mortgage loan would have been discharged in full if
the default had not occurred or an approved sale.
The amount of the loss as calculated under a primary mortgage insurance policy
covering a mortgage loan will generally consist of the unpaid principal amount
of that mortgage loan and accrued and unpaid interest on that mortgage loan and
reimbursement of various expenses, less:
o 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,
o hazard insurance proceeds in excess of the amount required to
restore that mortgaged property and which have not been applied to
the payment of the mortgage loan,
o amounts expended but not approved by the primary insurer,
o claim payments previously made on that mortgage loan, and
o unpaid premiums and 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:
o advance or discharge hazard insurance premiums and, as necessary and
approved in advance by the primary insurer, real estate taxes,
protection and preservation expenses and foreclosure and related
costs;
o 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
o 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,
in most cases, will require that the master servicer or servicer maintain, or
cause to be maintained, coverage under a primary mortgage insurance policy to
the extent this 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
LTV Ratio at origination in excess of 80% and was not the subject of a primary
mortgage insurance policy, was not included in any exception to that standard
disclosed in the related prospectus supplement, and that the mortgage loan has a
then current LTV Ratio in excess of 80%, then the master
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servicer or the servicer is required to use its reasonable efforts to obtain and
maintain a primary mortgage insurance policy to the extent that this kind of
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
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 upon foreclosure, or other acquisition of possession, and
conveyance of the mortgaged premises to HUD or upon assignment of the defaulted
mortgage loan to HUD. 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, and
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 the
mortgagee for tax, insurance and similar payments made by it and to deduct
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 some 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
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issued by the VA under this program is 50% of the original principal amount of
the mortgage loan up to a 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 specified amounts. The
amount of that additional coverage will be specified 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 under
that policy 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 those policies. The related
prospectus supplement will describe any provisions of a pool insurance policy
which are materially different from those described in this prospectus.
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
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 that have LTV
ratios at the time of origination in excess of 80% and that a claim under that
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, in most
cases, will be:
o the amount of the unpaid principal balance of the defaulted mortgage
loan immediately prior to the sale of the mortgaged property,
o the amount of the accumulated unpaid interest on that mortgage loan
to the date of claim settlement at the contractual rate of interest,
and
o advances made by the insured as described above less a number of
specified payments.
An approved sale is:
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o 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,
o a foreclosure or trustee's sale of the mortgaged property at a price
exceeding the maximum amount specified by the pool insurer,
o the acquisition of the mortgaged property under the primary mortgage
insurance policy by the mortgage insurer, or
o the acquisition of the mortgaged property by the pool insurer.
As a condition precedent to the payment of any loss, the insured must
provide the pool insurer with good and merchantable title to the mortgaged
property. If any mortgaged property securing a defaulted mortgage loan is
damaged and the proceeds, if any, from the related standard hazard insurance
policy or the applicable special hazard insurance policy, if any, are
insufficient to restore the damaged mortgaged property to a condition sufficient
to permit recovery under the pool insurance policy, the master servicer will not
be required to expend its own funds to restore the damaged property unless it
determines that the restoration will increase the proceeds to the
securityholders on liquidation of the mortgage loan after reimbursement of the
master servicer for its expenses, and that these 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 by that policy.
The amount of claims paid includes 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"
in this prospectus. 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,
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 relating to a
delinquent loan would not be recoverable from the proceeds of the liquidation of
that loan or otherwise, it will not be obligated to make an advance for that
delinquency since the Advance would not be ultimately recoverable by it. See
"Servicing of Loans--Advances and Limitations Thereon."
Mortgage Insurance for 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 relating 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. That coverage,
in most case, will be in an amount equal to the lesser of the principal
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balance of that 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 those
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 in the next
paragraph and under "Special Hazard Insurance Policy" and "Other Hazard-Related
Insurance; Liability Insurance," or upon the extent to which information in this
regard is furnished to the master servicer or the servicer by mortgagors.
In most cases, 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 of those terms and conditions are dictated by respective state laws.
Those 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 other cases, vandalism. The foregoing list is merely indicative of some
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 that mortgage loan, the pooling and
servicing agreement or servicing agreement, in most cases, requires the master
servicer or servicer to cause to be maintained for that mortgage loan serviced,
flood insurance as described under "Servicing of Loans--Maintenance of Insurance
Policies and Other Servicing Procedures."
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 for
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 those 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 that manufactured home or the principal balance due
from the mortgagor on the related manufactured home loan, whichever is less.
That 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 maintain
at its expense hazard insurance for that manufactured home or indemnify the
trustee against any damage to that manufactured home prior to resale or other
disposition.
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Special Hazard Insurance Policy. Although the terms of those 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 that damage is not
covered by the standard hazard insurance policy or any flood insurance policy,
if applicable, required to be maintained for that 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 (a) the cost of repair or replacement of that property or (b) upon transfer
of the property to the special hazard insurer, the unpaid principal balance of
that loan at the time of acquisition of that property by foreclosure or deed in
lieu of foreclosure, plus accrued interest to the date of claim settlement and
expenses incurred by the master servicer or the servicer for that property. If
the unpaid principal balance plus accrued interest and various expenses is paid
by the special hazard insurer, the amount of further coverage under the special
hazard insurance policy will be reduced by that 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 that amount. Special hazard insurance policies
typically do not cover losses occasioned by war, civil insurrection, various
governmental actions, errors in design, faulty workmanship or materials, except
under specific circumstances, nuclear reaction, flood if the mortgaged property
is in a federally designated flood area, chemical contamination and other risks.
Restoration of the property with the proceeds described under (a) in the
preceding paragraph is expected to satisfy the condition under the pool
insurance policy that the property be restored before a claim that the pool
insurance policy may be validly presented for the defaulted loan secured by that
property. The payment described under (b) in the preceding paragraph will render
unnecessary presentation of a claim relating to that 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
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.
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 that loan. The amount
of the secured debt could be reduced to that value, and the holder of that loan
thus would become an unsecured creditor to the extent the outstanding principal
balance of that loan exceeds the value so assigned to the property, and any
related Additional Collateral, by the bankruptcy court. In addition, other
modifications of the terms of a loan can result from a bankruptcy proceeding.
See "Certain Legal Aspects of Loans" in this prospectus. If so provided in the
related prospectus supplement, the master servicer will obtain a bankruptcy bond
or similar insurance contract for proceedings relating to borrowers under the
Bankruptcy Code. The bankruptcy bond will cover some losses resulting from a
reduction by a bankruptcy court of scheduled payments of principal of and
interest on a loan or a reduction by that court of the principal amount of a
loan and will cover some unpaid interest on the amount of that 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
secured by single unit primary residences. That amount will be reduced by
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payments made under that bankruptcy bond relating to those 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 that loan. That 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 specific 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,
those 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 for a series. That assignment will include
all principal and interest due on or for the mortgage assets after the cut-off
date specified in the related prospectus supplement, except for any Retained
Interests. The trustee will, concurrently with that 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--Private Mortgage-Backed
Securities" in this prospectus. Each private mortgage-backed security will be
identified in the mortgage certificate schedule appearing as an exhibit to the
related agreement, which will specify the original principal amount, outstanding
principal balance as of the cut-off date, annual pass-through rate or interest
rate and maturity date 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:
o that the information contained in the mortgage certificate schedule
is true and correct in all material respects;
o that, immediately prior to the conveyance of the private
mortgage-backed securities, the depositor had good title thereto,
and was the sole owner of those private mortgage-backed securities,
subject to any Retained Interests;
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o that there has been no other sale by it of that private
mortgage-backed securities; and
o that there is no existing lien, charge, security interest or other
encumbrance, other than any Retained Interest, on those 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 for a series. That assignment will include all principal
and interest due on or for 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 deliver or
cause to be delivered to the trustee, or, as specified in the related prospectus
supplement, the custodian:
o the mortgage note for each mortgage loan endorsed without recourse
to the order of the trustee or in blank;
o the original mortgage with evidence of recording indicated on that
mortgage note, except for any mortgage not returned from the public
recording office, in which case a copy of that mortgage will be
delivered, together with a certificate that the original of that
mortgage was delivered to the recording office; and
o an assignment of the mortgage in recordable form and, if applicable,
any riders or modifications to the mortgage note and mortgage,
together with other documents as described in the related agreement.
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The trustee, or, if so specified in the related prospectus supplement, the
custodian, will hold those 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, that recording is not required to protect the
trustee's interest in the mortgage loan. As promptly as possible, the depositor
will cause that 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 that time, at the price
described above for 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.
For any mortgage loans which are Cooperative Loans, the depositor will
cause to be delivered to the trustee, its agent, or a custodian:
o the related original cooperative note endorsed to the order of the
trustee,
o the original security agreement, the proprietary lease or occupancy
agreement,
o the recognition agreement,
o an executed financing agreement,
o 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 the mortgage loan schedule
appearing as an exhibit to the related agreement. That mortgage loan schedule
will specify, among other things, for each mortgage loan:
o the original principal amount and unpaid principal balance as of the
cut-off date;
o the current interest rate;
o the current scheduled payment of principal and interest; the
maturity date of the related mortgage note;
o if the mortgage loan is an ARM loan, the minimum mortgage rate, the
maximum mortgage rate, if any, and the Periodic Rate Cap; and
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o 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
due on or for the manufactured home loans after the cut-off date specified in
the related prospectus supplement. Each manufactured home loan will be
identified in the loan schedule appearing as an exhibit to the related
agreement. That loan schedule will specify, for each manufactured home loan,
among other things:
o the original principal balance and the outstanding principal balance
as of the close of business on the cut-off date;
o the interest rate;
o the current scheduled payment of principal and interest; and
o the maturity date of the manufactured home loan.
In addition, for 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 that
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. Those representations
and warranties will include:
o that the information contained in the loan schedule provides an
accurate listing of the manufactured home loans and that the
information about those manufactured home loans listed in that loan
schedule is true and correct in all material respects at the date or
dates when that information is furnished;
o that, immediately prior to the conveyance of the manufactured home
loans, the depositor had good title to, and was sole owner of, those
manufactured home loans, subject to any Retained Interests;
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o that there has been no other sale by it of those manufactured home
loans and that the manufactured home loan is not subject to any
lien, charge, security interest or other encumbrance;
o if the master servicer will not directly service the manufactured
home loans, each subservicing agreement entered into with a servicer
for 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
o the depositor has obtained from each of the master servicer, the
servicer, the originator of the manufactured home loans or other
entity that is the seller of the related manufactured home loan
representations and warranties relating to some information about
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 those representations and warranties are inaccurate in
any material respect. See "Loan Underwriting Procedures and
Standards" in this prospectus.
Assignment of Participation Securities. The depositor will cause any
securities which evidence a participation interest in a loan, 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 for 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:
o that the information contained in the participation security
schedule is true and correct in all material respects;
o that, immediately prior to the conveyance of the participation
securities, the depositor had good title to and was sole owner of
the participation security;
o that there has been no other sale by it of the participation
security; and
o that the participation security is not subject to any existing lien,
charge, security interest or other encumbrance, other than any
Retained Interests.
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 that defect within 60 days from the date the master servicer was notified
of the defect by the trustee, or within another period specified in the related
prospectus supplement, the related servicer or seller if, and to the extent it
is obligated
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to do so under the related servicing agreement or mortgage loan sale agreement
will, not later than 90 days or within another 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 relating to that
repurchase from the trustee at a price equal to the outstanding principal
balance of that mortgage loan, or, in the case of a foreclosed mortgage loan,
the outstanding principal balance of that mortgage loan immediately prior to
foreclosure, plus accrued and unpaid interest to the date of the next scheduled
payment on that 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 the
loan from the trust and substitute in its place one or more other loans
provided, however, that:
o for a trust for which no REMIC election is made, that substitution
must be effected within 120 days of the date of initial issuance of
the securities, and
o for a trust for which a REMIC election or elections are made, the
trustee must have received a satisfactory opinion of counsel that
the substitution will not result in a prohibited transactions tax
under the Internal Revenue Code or cause the trust to lose its
status as a REMIC, or in the case of a trust consisting of two or
more REMICs, that the substitution will not cause that 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:
o 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;
o an interest rate not lower than and not more than 1% of the interest
rate of the deleted loan;
o have a LTV Ratio at the time of substitution no higher than that of
the deleted loan at the time of substitution;
o have a remaining term to maturity not greater than, and not more
than one year less than, that of the deleted loan; and
o comply with all of the representations and warranties specified in
the related agreement as of the date of substitution. The related
agreement may include additional requirements relating to ARM loans
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.
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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 about loans which comprise the mortgage
assets for a series. See "Loan Underwriting Procedures and
Standards--Representations and Warranties" in this prospectus. If the related
seller, or other party, cannot cure a breach of those representations and
warranties in all material respects within 60 days after notification by the
master servicer, the depositor or the trustee of that breach, and if the breach
is of a nature that materially and adversely affects interest of the
securityholders in that loan, the seller is obligated to cure, substitute or
repurchase the affected mortgage loan if those seller is required to do so under
the applicable agreement.
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 after that distribution date as is practicable, a statement providing, to
the extent applicable to any series as specified in the related agreement, among
other things:
o as applicable, either (A) the amount of the distribution allocable
to principal on the mortgage assets, separately identifying the
aggregate amount of any principal prepayments included in that
distribution 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 of each class and the aggregate
unpaid principal amount of each class following that distribution;
o as applicable, either (A) the amount of the 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;
o the amount of servicing compensation for the mortgage assets paid
during the Due Period commencing on the due date to which that
distribution relates and the amount of servicing compensation during
that period attributable to penalties and fees;
o for accrual securities, prior to the Accrual Termination Date in
addition to the information specified in (B) of the first clause
above of this paragraph, the amount of interest accrued on those
securities during the related Interest Accrual Period and added to
the principal balance of those securities;
o in the case of floating rate securities, the floating rate
applicable to the distribution being made;
o 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 that distribution relates;
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o 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 that distribution relates;
o if applicable, the amount of coverage under any pool insurance
policy as of the close of business on the applicable distribution
date;
o if applicable, the amount of coverage under any special hazard
insurance policy as of the close of business on the applicable
distribution date;
o if applicable, the amount of coverage under any bankruptcy bond as
of the close of business on the applicable distribution date;
o in the case of any other credit support described in the related
prospectus supplement, the amount of coverage of that credit support
as of the close of business on the applicable distribution date;
o 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;
o 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 that distribution date, after giving effect
to distributions made on that date; and
o any other information as specified in the related agreement.
In addition, within a reasonable period of time after the end of each
calendar year the master servicer, in most cases, will furnish to each
securityholder of record at any time during that 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 concerning the
master servicer's servicing of the loans. See "Servicing of Loans--Evidence as
to Compliance" in this prospectus.
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 that
series, which may include, without limitation:
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o direct obligations of, or obligations fully guaranteed as to
principal and interest by, the United States or any agency or
instrumentality of the United States, provided that those
obligations are backed by the full faith and credit of the United
States;
o 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 of the United States 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 the lower category as
will not result in the downgrading or withdrawal of the ratings then
assigned to the securities by each rating agency;
o 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 or of any state of
the United States or the District of Columbia. The short-term
commercial paper of that 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 that
holding company, at the date of acquisition mus have been rated by
each rating agency in its highest short-term rating;
o money market funds or mutual funds organized under the Investment
Company Act of 1940 rated in the highest rating category by each
rating agency;
o repurchase obligation, the collateral of which is held by a third
party or the trustee, for any security described in the first clause
above of this paragraph provided that the long-term unsecured
obligations of the party agreeing to repurchase those obligations
are at the time rated by each rating agency in one of its two
highest long-term rating categories; and
o those other investments which do not adversely affect the rating on
the securities of that series as confirmed in writing by each rating
agency.
Funds held in a reserve fund or Subordinated Reserve Fund may be invested
in 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 for 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 that series are required or may be anticipated to
be required to be applied for the benefit of securityholders of that series.
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" in this prospectus.
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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, in most cases, include:
o any failure by the master servicer to remit to the trustee for
distribution to the securityholders, or distribution to holders of
the equity certificates for a series of notes, of that series any
required payment which continues unremedied for five business days,
or one business day for other required payments, after the giving of
written notice of that failure, requiring the same to be remedied,
to the master servicer by the trustee or the depositor for each
series of certificates or by the trustee or the issuer for each
series of notes, or to the master servicer, the depositor and the
trustee for each series of certificates or to the master servicer,
the issuer and the trustee for each series of notes by the related
holders of securities of that series evidencing at least 25% of
Voting Rights of the securities for the series;
o 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 that failure:
o to the master servicer by the trustee or the depositor for each
series of certificates or by the trustee or the issuer for each
series of notes,
o to the master servicer, the depositor and the trustee for each
series of certificates, or
o to the master servicer, the issuer and the trustee for each series
of notes by the holders of securities of that series evidencing at
least 25% of the Voting Rights of the securities; and
o events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings and actions by the master
servicer indicating its insolvency, reorganization or inability to
pay its obligations.
In most cases, so long as an event of default remains unremedied under the
pooling and servicing agreement or servicing agreement for a series, the trustee
for that series or holders of the related securities evidencing at least 51% of
the aggregate outstanding principal amount of the securities for that series,
the first 51% who provide that 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
for 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. The trustee will then succeed to all the responsibilities, duties
and liabilities of the master servicer under the pooling and servicing agreement
or servicing agreement. The trustee will also 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
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agreement. In most cases, 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 Fannie Mae- or Freddie Mac-approved
mortgage servicing institution with a net worth of at least $10,000,000 or 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. Pending that appointment, the trustee is obligated to act
in that capacity.
No securityholder of a series, solely by virtue of that holder's status as
a securityholder, will have any right under the pooling and servicing agreement
or servicing agreement for that series to institute any proceeding for the
related pooling and servicing agreement or servicing agreement, unless:
o that holder previously has given to the trustee for that series
written notice of default,
o the holders of securities evidencing at least 25% of the aggregate
outstanding principal amount of the securities for that series have
made written request upon the trustee to institute that proceeding
in its own name as trustee under that agreement, and
o the holders of securities evidencing at least 25% of the aggregate
outstanding principal amount of the securities for that series have
offered to the trustee reasonable indemnity, and the trustee for 60
days has neglected or refused to institute that proceeding.
Indenture. In most cases, an event of default under the indenture will
include:
o 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 that
series;
o failure to perform any other covenant of the issuer in the indenture
which continues for a period of 30 days after notice of that
covenant is given in accordance with the procedures described in the
related prospectus supplement;
o any representation or warranty made by the issuer in the indenture
or in any certificate or other writing delivered for or in
connection with that representation or warranty or affecting that
series having been incorrect in a material respect as of the time
made, and the breach is not cured within 30 days after notice of
that breach is given in accordance with the procedures described in
the related prospectus supplement;
o events of bankruptcy, insolvency, receivership or liquidation of the
issuer; or
o any other event of default provided for notes of that series.
If an event of default for 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 that series may declare the
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principal amount of all the notes of that series to be due and payable
immediately. If the notes of that series are accrual securities, the trustee or
the holders of that majority may declare that portion of the principal amount as
may be specified in the terms of that series, as provided in the related
prospectus supplement, to be due and payable. That declaration may, under
various 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 for any series of notes, the notes of
that series have been declared to be due and payable, the trustee may, in its
discretion, notwithstanding that acceleration, elect to maintain possession of
the collateral securing the notes of that series and to continue to apply
payments on that collateral as if there had been no declaration of acceleration
if that collateral continues to provide sufficient funds for the payment of
principal of and interest on the notes of that 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:
o the holders of 100% of the then aggregate outstanding amount of the
notes of that series consent to that sale,
o the proceeds of that sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the
outstanding notes of that series at the date of that sale, or
o the trustee determines that the collateral would not be sufficient
on an ongoing basis to make all payments on those notes as those
payments would have become due if those 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
that 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 liquidation for unpaid fees and expenses. As a result,
upon the occurrence of that 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 that event of
default.
In the event the principal of the notes of a series is declared due and
payable, as described in the second preceding paragraph, the holders of those
notes issued at a discount from par may be entitled to receive no more than an
amount equal to the unpaid principal amount of those notes less the amount of
that discount that is unamortized.
No noteholder or holder of an equity certificate of a series, solely by
virtue of that holder's status as a noteholder or holder of an equity
certificate, will have any right under an owner trust agreement or indenture for
that series to institute any proceeding for that agreement unless that holder
previously has given to the trustee for that 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 that class have
made written request upon the trustee to institute that proceeding in its own
name as trustee under that series and have offered to the trustee reasonable
indemnity, and the trustee for 60 days has neglected or refused to institute for
that proceeding.
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Under the terms of the indenture, if an event of default occurs and is
continuing, senior securityholders may be entitled to exercise specified rights
of the holders of the securities, without the consent of subordinate
securityholders, and the subordinate securityholders may exercise those 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 provided 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 provided 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 various local jurisdictions, the trustee will
have the power to appoint co-trustees or separate trustees of all or any part of
the trust relating to a series of securities. In the event of that appointment,
all rights, powers, duties and obligations conferred or imposed upon the trustee
by the pooling and servicing agreement or indenture relating to that series will
be conferred or imposed upon the trustee and that separate trustee or co-trustee
jointly, or, in any jurisdiction in which the trustee shall be incompetent or
unqualified to perform various acts, singly upon that separate trustee or
co-trustee who shall exercise and perform those 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. Those agents shall
have any or all of the rights, powers, duties and obligations of the trustee
conferred on them by that appointment. However, 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 described in the applicable agreement has
occurred, the trustee is required to perform only those duties specifically
required of it under that 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 those 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 for 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." in this prospectus. 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
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related agreement, or in the exercise of any of its rights or powers, if it has
reasonable grounds for believing that repayment of those funds or adequate
indemnity against that risk or liability is not reasonably assured to it.
Resignation of Trustee
The trustee may resign, upon written notice to the depositor, the master
servicer and to all securityholders; provided, that the 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 that
notice of resignation, the resigning trustee may petition any court of competent
jurisdiction for appointment of a successor trustee. The resigning trustee shall
not resign and be discharged until the time that the successor trustee is
approved by each rating agency. The trustee may also be removed at any time:
o by the depositor, if the trustee ceases to be eligible to continue
as trustee under the related pooling and servicing agreement or
indenture;
o if the trustee becomes insolvent;
o if a tax is imposed or threatened for the trust by any state in
which the trustee or the trust held by the trustee under the related
agreement is located; or
o by the holders of securities evidencing at least 51% of the
aggregate outstanding principal amount of the securities in the
trust 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 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. The Certificate Account will, in most cases, be an
Eligible Account, and the funds held in that account 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. In most cases, the trustee is
permitted from time to time:
o to make withdrawals from the Certificate Account for each series to
remove amounts deposited in that account in error,
o to pay to itself or the master servicer any reinvestment income on
funds held in the Certificate Account to the extent it is entitled,
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o 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,
o to make deposits to any reserve fund,
o to make regular distributions to the securityholders,
o to clear and terminate the Certificate Account, and
o 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 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 in the Expense Reserve Fund 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 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
The pooling and servicing agreement for each series of certificates may be
amended by the depositor, the master servicer, and the trustee for that series,
without notice to or consent of the certificateholders:
o to cure any ambiguity;
o to correct or supplement any provision in that pooling and servicing
agreement which may be defective or inconsistent with any other
provision in that pooling and servicing agreement;
o to make any other provisions regarding matters or questions arising
under that pooling and servicing agreement which are not
inconsistent with any other provisions of that pooling and servicing
agreement; or
o to comply with any requirements imposed by the Internal Revenue
Code.
Any of these amendments, other than for the reason described in the last clause
of this paragraph, must not adversely affect in any material respect the
interests of any certificateholders of that series.
In most cases, the pooling and servicing agreement for each series of
certificates may also be amended by the trustee, the master servicer and the
depositor for that series with the consent of the holders possessing not less
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than 66 2/3% of the aggregate outstanding principal amount of the certificates
of each class of that series affected by that amendment, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of that pooling and servicing agreement or modifying in any manner
the rights of certificateholders of that series. That amendment may not:
o reduce the amount or delay the timing of payments on any certificate
without the consent of the holder of that certificate;
o adversely affect the REMIC status, if a REMIC election or elections
have been made, for the related trust of a series; or
o reduce the aforesaid percentage of aggregate outstanding principal
amount of certificates of each class, the holders of which are
required to consent to that amendment without the consent of the
holders of 100% of the aggregate outstanding principal amount of
each class of certificates affected by that amendment.
Notwithstanding the foregoing, if a REMIC election or elections have been
made for the related trust, 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 the amendment or the exercise of any power
granted to the master servicer, the depositor or the trustee in accordance with
the amendment will not result in the imposition of a tax on the related trust or
any related REMIC or cause that trust or that REMIC to fail to qualify as a
REMIC.
In most cases, the servicing agreement or indenture for each series of
notes may be amended by the parties to that agreement without the consent of any
of the noteholders covered by that agreement:
o to cure any ambiguity;
o to correct, modify or supplement any provision in that agreement
which may be defective or inconsistent with any other provision in
that agreement; or
o to make any other provisions regarding matters or questions arising
under the agreement which are not inconsistent with the provisions
of that agreement, provided that this action will not adversely
affect in any material respect the interests of any noteholder
covered by the agreement.
In most cases, the servicing agreement or indenture for each series of
notes may also be amended by the parties to that agreement with the consent of
the holders evidencing not less than 66 2/3% of the aggregate outstanding
principal amount of the notes of each class of that series affected by that
agreement, for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of that agreement or modifying in any
manner the rights of noteholders of that series. That the amendment may not:
o reduce the amount of or delay the timing of, payments received on
any note without the consent of the holder of that note;
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o adversely affect in any material respect the interests of the
holders of any class of notes in a manner other than as described in
the preceding clause, without the consent of the holders of notes of
that class evidencing not less than 66 2/3% of the aggregate
outstanding principal amount of the notes of each class of that
series affected by that amendment; or
o reduce the aforesaid percentage of aggregate outstanding principal
amount of notes of each class, the holders of which are required to
consent to that amendment without the consent of the holders of 100%
of the aggregate outstanding principal amount of each class of notes
affected by that amendment.
Voting Rights
The related prospectus supplement will describe the method of determining
allocation of voting rights for a series, if other than as described in this
prospectus. If specified in the related prospectus supplement, a provider of
credit enhancement may be entitled to specified voting rights of the
securityholders.
REMIC Administrator
For any multiple class series of certificates as to which a REMIC election
is made, preparation of reports and other administrative duties relating to the
trust 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 those agreements after:
o the later of the final payment or other liquidation of the last
mortgage loan remaining in the trust for that series or the
disposition of all property acquired upon foreclosure or deed in
lieu of foreclosure of any mortgage loan, or
o the repurchase by the master servicer or the depositor, or other
party as specified in the prospectus supplement, from the trustee
for that series of all mortgage loans at that time subject to the
related agreements and all property acquired in connection with any
mortgage loan.
The exercise of that right will effect early retirement of the securities of
that series, but the 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 provided in the related prospectus supplement, of the 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 persons identified in those agreements. 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" in this prospectus.
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Certain Legal Aspects of Loans
The following discussion contains summaries of various legal aspects of
housing loans which are general in nature. Because these legal aspects are
governed by applicable state law, which laws may differ substantially from state
to state, the summaries do not purport to be complete nor to reflect the law 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.
The mortgage loans, other than Cooperative 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 and may have
first, second or third priority. Manufactured housing contracts evidence both
the obligation of the obligor to repay the loan evidenced by those manufactured
housing contracts and grant a security interest in the related manufactured
homes to secure repayment of that loan. However, as manufactured homes have
become larger and often have been attached to their sites without any apparent
intention by the borrowers to move them, courts in many states have held that
manufactured homes may, under various circumstances become subject to real
estate title and recording laws. See "--Manufactured Home Loans" in this section
of the prospectus. In some states, the filing of a mortgage, deed of trust or
deed to secure debt creates a lien or title interest upon the real property
encumbered by the mortgage, deed of trust or deed to secure debt. However, in
other states, the mortgage or deed of trust conveys legal title to the property
respectively, to the mortgagee or to a trustee for the benefit of the mortgagee
subject to a condition subsequent, that is, the payment of the indebtedness
secured by that mortgage or deed of trust. The lien created by the mortgage or
deed of trust is not prior to the lien for real estate taxes and assessments and
other charges imposed under governmental police powers. Priority for those
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, in most cases, 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 in
the next sentence, 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 a number of states, three parties may be involved in a mortgage
financing when title to the property is held by a land trustee who is the land
trustee under a land trust agreement of which the borrower is the beneficiary;
at origination of a mortgage loan, the land trustee, as fee owner of the
property, executes the mortgage and the borrower executes:
o a separate undertaking to make payments on the mortgage note, and
o an assignment of leases and rents. Although a deed of trust is
similar to a mortgage, a deed of trust has three parties: the
trustor, who is the borrower/homeowner, the beneficiary, who is the
lender, and a third-party grantee called the trustee.
Under a deed of trust, the borrower grants the property, irrevocably until the
debt is paid, in trust, often with a power of sale, to the trustee to secure
payment of the obligation. A deed to secure debt typically has two parties,
under which the borrower, or grantor, conveys title to the real property to the
grantee, or lender, often with a power of sale, until the debt is repaid. The
trustee's authority under a deed of trust, the grantee's authority under a deed
to secure debt and the mortgagee's authority under a mortgage are governed by
the law of the state in which the real property
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is located, the express provisions of the deed of trust, mortgage, or the deed
to secure debt, and, in a number of 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 include Cooperative Loans. Each Cooperative
Note evidencing a Cooperative Loan will be secured by a security interest in
shares issued by the related Cooperative and in the related proprietary lease or
occupancy agreement granting exclusive rights to occupy a specific dwelling unit
in the Cooperative's building. The security agreement will create a lien upon,
or grant a security interest in, the Cooperative shares and proprietary leases
or occupancy agreements, the priority of which will depend on, among other
things, the terms of the particular security agreement as well as the order of
recordation and/or filing of the agreement, or the filing of the financing
statements related to that agreement, in the appropriate recording office or the
taking of possession of the Cooperative shares, depending on the law of the
state in which the Cooperative is located. That lien or security interest is
not, in most cases, prior to liens in favor of the cooperative corporation for
unpaid assessments or common charges. That lien or security interest is not
prior to the lien for real estate taxes and assessments and other charges
imposed under governmental police powers.
All Cooperative buildings relating to the Cooperative Loans are usually
located in the State of New York. In most cases, each Cooperative owns in fee or
has a leasehold interest in all the real property and owns in fee or leases the
building and all separate dwelling units in that Cooperative. The Cooperative is
directly responsible for property management and, in most cases, payment of real
estate taxes, other governmental impositions and hazard and liability insurance.
If there is an underlying mortgage(s) on the Cooperative's building or
underlying land, as is usually the case, or an underlying lease of the land, as
is the case in some instances, the Cooperative, as mortgagor or lessee, as the
case may be, is also responsible for fulfilling those mortgage or rental
obligations. An underlying mortgage loan is ordinarily obtained by the
Cooperative in connection with either the construction or purchase of the
Cooperative's building or the obtaining of capital by the Cooperative. The
interest of the occupant under proprietary leases or occupancy agreements as to
which that Cooperative is the landlord is generally subordinate to the interest
of the holder of an underlying mortgage and to the interest of the holder of a
land lease. If the Cooperative is unable to meet the payment obligations:
o arising under an underlying mortgage, the mortgagee holding an
underlying mortgage could foreclose on that mortgage and terminate
all subordinate proprietary leases and occupancy agreements, or
o arising under its land lease, the holder of the landlord's interest
under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements.
In addition, an underlying 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 that
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
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in the property and termination of all proprietary leases and occupancy
agreements. In either event, a foreclosure by the holder of an underlying
mortgage or the termination of the underlying lease could eliminate or
significantly diminish the value of any collateral held by the lender who
financed the purchase by an individual tenant-stockholder of Cooperative shares
or, in the case of the mortgage loans, the collateral securing the Cooperative
Loans.
Each Cooperative is owned by shareholders, referred to as
tenant-stockholders, who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. In most cases, a
tenant-stockholder of a Cooperative must make a monthly rental payment to the
Cooperative pursuant to the proprietary lease, which rental payment represents
that tenant-stockholder's pro rata share of the Cooperative's payments for its
underlying mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a Cooperative and accompanying
occupancy rights may be financed through a Cooperative Loan evidenced by a
Cooperative Note and secured by an assignment of and a security interest in the
occupancy agreement or proprietary lease and a security interest in the related
Cooperative shares. In most cases, 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 under "Realizing on Cooperative Loan Security", upon default of the
tenant-stockholder, the lender may sue for judgment on the Cooperative 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" in this section of the prospectus.
Tax Aspects of Cooperative Ownership
In general, a "tenant-stockholder", as defined in Section 216(b)(2) of the
Internal Revenue Code, of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of Section 216(b)(1) of the Internal Revenue
Code is allowed a deduction for amounts paid or accrued within his taxable year
to the corporation representing his proportionate share of specific interest
expenses and specific real estate taxes allowable as a deduction under Section
216(a) of the Internal Revenue Code to the corporation under Sections 163 and
164 of the Internal Revenue Code. In order for a corporation to qualify under
Section 216(b)(1) of the Internal Revenue Code for its taxable year in which
those items are allowable as a deduction to the corporation, that 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 Internal Revenue 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 that section for any particular year. In
the event that this 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 Internal Revenue Code for those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Internal Revenue Code, the likelihood that this failure would be permitted
to continue over a period of years appears remote.
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Foreclosure on Mortgage Loans
Although a deed of trust or a deed to secure debt may also be foreclosed
by judicial action, foreclosure of a deed of trust or a deed to secure debt, in
most cases, is accomplished by a non-judicial trustee's or grantee's, as
applicable, sale under a specific provision in the deed of trust or deed to
secure debt which authorizes the trustee or grantee, as applicable, to sell the
property upon any default by the borrower under the terms of the note or deed of
trust or deed to secure debt. In addition to any notice requirements contained
in a deed of trust or a deed to secure debt, in some states, prior to a sale the
trustee, or grantee, as applicable, 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 notice of default and notice of sale. In addition, in some states, prior
to that sale, the trustee or grantee, as applicable, must provide notice to any
other individual having an interest of record 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. In most cases, 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 or deed to secure debt is not
reinstated within a specified period, 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 a specified manner prior to the date of trustee's sale. 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 of record 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. In
most cases, 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 various circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
that default was not willful.
Foreclosure of a mortgage, in most cases, is accomplished by judicial
action. The action is usually initiated by the service of legal pleadings upon
all parties having an interest of record in the real property. Delays in
completion of the foreclosure may occasionally result from difficulties in
locating and serving necessary parties, including borrowers located outside the
jurisdiction in which the mortgaged property is located. If the mortgagee's
right to foreclose is contested, the legal proceedings necessary to resolve the
issue can be time-consuming. 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 the case of foreclosure under 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 or grantee, as applicable, is in most cases a public sale. However,
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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.
Rather, it is common for the lender to purchase the property from the trustee or
referee, or grantee, as applicable, for a credit bid less than or equal to the
unpaid 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 unless the lender purchases the property for a lesser
amount in order to preserve its right against a borrower to seek a deficiency
judgment in states where that judgment is available. In the same states, there
is a statutory minimum purchase price which the lender may offer for the
property and, in most cases, state law controls the amount of foreclosure costs
and expenses, including attorneys' fees, which may be recovered by a lender.
After that purchase, subject to the right of the borrower in some states to
remain in possession during the redemption period, the lender will assume the
burdens of ownership, including obtaining casualty insurance, paying taxes and
making those 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 and, in some
states, the lender may be entitled to a deficiency judgment. In some cases, a
deficiency judgment may be pursued in lieu of foreclosure. 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 under those senior mortgages, 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
by a junior mortgagee triggers the enforcement of a "due-on-sale" clause in a
senior mortgage, the junior mortgagee may be required to pay the full amount of
the senior mortgages to the senior mortgagees. Accordingly, for 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 various
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 often 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 often 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 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, in most cases, 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
usually 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.
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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 various costs of that 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 owned by the tenant-stockholder, together with the
rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and, in almost all cases, subject to
restrictions on transfer as described 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 that tenant-stockholder, including
mechanics' liens against the Cooperative's building incurred by that
tenant-stockholder. In most cases, 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 often permits the Cooperative to terminate that lease or agreement in
the event the borrower defaults in the performance of covenants under that lease
or agreement. Typically, the lender and the Cooperative enter into a recognition
agreement which, together with any lender protection provisions contained in the
proprietary lease or occupancy agreement, 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, in most cases, 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 that lease or
agreement until the lender has been provided with notice of and 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 shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under that 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, in most cases, cannot
restrict and does not monitor, could reduce the amount realized upon the sale of
the collateral below the outstanding principal balance of the Cooperative Loan
and accrued and unpaid interest on that Cooperative Loan.
Recognition agreements, in most cases, also provide that in the event the
lender succeeds to the tenant-shareholder's shares and proprietary lease or
occupancy agreement as the result of realizing upon its collateral for a
Cooperative Loan, the lender must obtain the approval or consent of the board of
directors of the Cooperative
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as required by the proprietary lease before transferring the Cooperative shares
and/or assigning the proprietary lease. That approval or consent is usually
based on the prospective purchaser's income and net worth, among other factors,
and may significantly reduce the number of potential purchasers, which could
limit the ability of the lender to sell and realize upon the value of the
collateral. In most cases, the lender is not limited in any rights it may have
to dispossess the tenant-stockholder.
Because of the nature of Cooperative Loans, lenders do not require either
the tenant-stockholder, that is, the borrower or the Cooperative to obtain title
insurance of any type. Consequently, the existence of any prior liens or other
imperfections of title affecting the Cooperative's building or real estate also
may adversely affect the marketability of the shares allocated to the
cooperative dwelling unit in the event of foreclosure.
A foreclosure on the Cooperative shares is accomplished by public sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code, or
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 and the sale price. In most cases, a sale conducted according
to the usual practice of banks selling similar collateral in the same area 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, in most cases, 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" in this section
of the prospectus.
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 borrower and foreclosed junior lienors or
other parties are given a statutory period, usually ranging from six months to
two years, 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.
Notice of Sale; Redemption Rights with Respect to Manufactured Homes
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While state laws do not usually require notice to be given to debtors
prior to repossession, many states require delivery of a notice of default and
notice of the debtor's right to cure defaults before repossession. The law in
most states also requires that the debtor be given notice of sale prior to the
resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC.
Anti-Deficiency Legislation and Other Limitations on Lenders
Various 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 grantee under a deed to secure debt. In some states, including California,
statutes limit the right of the beneficiary, mortgagee or grantee 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. In
the case of a mortgage loan secured by a property owned by a trust where the
mortgage note is executed on behalf of the trust, a deficiency judgment against
the trust following foreclosure or sale under a deed of trust or deed to secure
debt, even if obtainable under applicable law, may be of little value to the
beneficiary, grantee or mortgagee, if there are no trust assets against which
that deficiency judgment may be executed. Some state statutes require the
beneficiary, grantee 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
other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting that security. However in some
of these states, the lender, following judgment on that personal action, may be
deemed to have elected a remedy and may be precluded from exercising remedies
for the security. Consequently, the practical effect of the election
requirement, in those states permitting that election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, in other states, statutory provisions
limit any deficiency judgment against the former borrower following a
foreclosure 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
usually to prevent a beneficiary, grantee, 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. Various state laws also place a limitation on the mortgagee
for late payment charges.
For mortgage loans secured by collateral in addition to the related
mortgaged properties, realization upon the additional collateral may be governed
by the UCC in effect under the law of the state applicable thereto. Some courts
have interpreted the UCC to prohibit or limit a deficiency award in a number of
circumstances, including those in which the disposition of the collateral was
not conducted in a commercially reasonable manner. In some states, the UCC does
not apply to liens upon additional collateral consisting of various types of
personal property, including, for example, bank accounts and, to some extent,
insurance policies and annuities. Realization upon that additional collateral
will be governed by state laws applicable to that additional collateral rather
than by the UCC, and the availability of deficiency awards under those state
laws may be limited. Whether realization upon any Additional Collateral is
governed by the UCC 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 for the related mortgage loans. Those 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 of those mortgaged properties and the
additional collateral concurrently. Some state statutes require secured parties
to exhaust the
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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 those 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 that additional collateral. Further, in some 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 for the other.
Consequently, the practical effect of the election requirement, in those states
permitting that 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. In most cases, 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 Creditor's Rights. In addition
to laws limiting or prohibiting deficiency judgments, numerous other federal and
state 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, under the federal bankruptcy law, all actions
against the debtor, the debtor's property and any co-debtor are automatically
stayed upon the filing of a bankruptcy petition. Moreover, a court with federal
bankruptcy jurisdiction may permit a debtor through its Chapter 11 or Chapter 13
under the Bankruptcy Code rehabilitative plan to cure a monetary default of 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 mortgage loan and final judgment of foreclosure had been entered
in state court, provided no sale of the residence had yet occurred, prior to the
filing of the debtor's 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 mortgage loan default by
permitting the borrower to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property which is not the principal
residence of the debtor may be modified. These courts have allowed modifications
that include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule, forgiving all or a portion of the
debt 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, for any
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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
that 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 tax liens over the lender's
security. This may delay or interfere with the enforcement of rights relating to
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. For mortgage loans secured by collateral in addition to the related
mortgaged properties, those tax liens may in some circumstances provide priority
over the lien on that additional collateral.
Some of the mortgage loans known as high cost 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, if those mortgage loans were originated on or after October 1, 1995,
are not mortgage loans made to finance the purchase of the mortgaged property
and have interest rates or origination costs in excess of prescribed levels.
Purchasers or assignees of any high cost loan could be liable for all claims and
subject to all defenses arising under those provisions that the borrower could
assert against the originator of that high cost loan. 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."
Leasehold Considerations
Mortgage loans may contain leasehold mortgages which are each secured by a
lien on the related mortgagor's leasehold interest in the related mortgaged
property. Mortgage loans secured by a lien on the borrower's leasehold interest
under a ground lease are subject to various risks not associated with mortgage
loans secured by a lien on the fee estate of the borrower. The most significant
of these risks is that if the borrower's leasehold were to be terminated, for
example, as a result of a lease default or the bankruptcy of the ground lessor
or the borrower/ground lessee. The leasehold mortgagee would be left without its
security. In the case of each mortgage loan secured by a lien on the related
mortgagor's leasehold interest under a ground lease, that ground lease contains
provisions protective of the leasehold mortgagee, such as a provision that
requires the ground lessor to give the leasehold mortgagee notices of lessee
defaults and an opportunity to cure them, a provision that permits
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the leasehold estate to be assigned to the leasehold mortgagee or the purchaser
at a foreclosure sale and after that assignment to be assigned by the leasehold
mortgagee or that purchaser at a foreclosure sale to any financially responsible
third party that executes an agreement obligating itself to comply with the
terms and conditions of the ground lease and a provision that gives the
leasehold mortgagee the right to enter into a new ground lease with the ground
lessor on the same terms and conditions as the old ground lease upon any
termination of the old ground lease.
Soldiers' and Sailors' Civil Relief Act
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended, or Relief Act, a mortgagor who enters military service after the
origination of that mortgagor's mortgage loan, including a mortgagor who was in
reserve status and is called to active duty after origination of the mortgage
loan, may not be charged interest, including fees and charges, above an annual
rate of 6% during the period of that mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
mortgagors who are members of the Air Force, Army, Marines, Navy, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to mortgagors
who enter military service, including reservists who are called to active duty,
after origination of the related mortgage loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of the master servicer to collect full amounts of interest on some of
the mortgage loans. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which would
not be recoverable from the related mortgage loans, would result in a reduction
of the amounts distributable to the holders of the related certificates, and
would not be covered by Advances and may not be covered by the applicable form
of credit enhancement provided in connection with the related series of
certificates. In addition, the Relief Act imposes limitations that would impair
the ability of the master servicer to foreclose on an affected mortgage loan
during the mortgagor's period of active duty status, and, under some
circumstances, during an additional three month period after that period of
active duty status. Thus, in the event that the Relief Act or similar
legislation or regulations applies to any mortgage loan which goes into default,
there may be delays in payment and losses on the related certificates in
connection with those certificates. Any other interest shortfalls, deferrals or
forgiveness of payments on the mortgage loans resulting from similar legislation
or regulations may result in delays in payments or losses to securityholders of
the related series.
Junior Mortgages; Rights of Senior Mortgagees
Some of the mortgage loans may be secured by junior mortgages, deeds of
trust or deeds to secure debt, which are junior to senior mortgages, deeds of
trust or deeds to secure debt which are not part of the trust. The rights of the
securityholders, as the holders of a junior mortgage, are subordinate to those
of the mortgagee under the senior mortgage, including the prior rights of the
senior mortgagee to receive hazard insurance and condemnation proceeds and to
cause the property securing the mortgage loan to be sold upon default of the
mortgagor, which may extinguish the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, in some cases, either reinitiates or satisfies the defaulted
senior loan or loans. A junior mortgagee may satisfy a defaulted senior loan in
full or, in some states, may cure that default and bring the senior loan current
thereby reinstating the senior loan, in either event usually adding the amounts
expended to the balance
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due on the junior loan. In most states, absent a provision in the mortgage or
deed of trust, no notice of default is required to be given to a junior
mortgagee. Where applicable law or the terms of the senior mortgage or deed of
trust do not require notice of default to the junior mortgagee, the lack of that
notice may prevent the junior mortgagee from exercising any right to reinstate
the loan which applicable law may provide.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with condemnation proceedings, and to apply those proceeds and awards
to any indebtedness secured by the mortgage or deed of trust, in the order as
the mortgagee may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property is
taken by condemnation, the mortgagee or beneficiary under the underlying senior
mortgages will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of junior mortgages in the order
of their priority.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which are prior to the mortgage
or deed of trust, to provide and maintain fire insurance on the property, to
maintain and repair the property and not to commit or permit any waste of that
property, and to appear in and defend any action or proceeding purporting to
affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee or
beneficiary is given the right under some mortgages or deeds of trust to perform
the obligation itself, at its election, with the mortgagor agreeing to reimburse
the mortgagee for any sums expended by the mortgagee on behalf of the mortgagor.
All sums so expended by a senior mortgagee become part of the indebtedness
secured by the senior mortgage.
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 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.
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Due-on-sale Clauses in Mortgage Loans
In most cases, the loans 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 without the prior consent of mortgagee. 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, or 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 some
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 provides 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, various 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.
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 addition to
limitations imposed by FHA Regulations for contacts partially insured by the FHA
pursuant to Title I, in some states, there are or may be specific limitations
upon the late charges that a lender may collect from a borrower for delinquent
payments. In some states, there are or may be specific limitations upon the late
charges which a lender may collect from a borrower for delinquent payments. Some
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. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states. 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 Office of Thrift Supervision, or 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 for mortgage loans having higher
mortgage rates, may increase the likelihood of refinancing or other early
retirements of the mortgage loans.
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Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. In most cases, the equitable
principles are 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.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 , or Title V, provides that state usury
limitations shall not apply to some types of residential first mortgage loans
originated by some lenders after March 31, 1980. Similar federal statutes were
in effect for 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 impose interest rate limits by
adopting, before April 1, 1983, a law, or constitutional provision, which
expressly rejects an application of the federal law. In addition, even where
Title V is not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on mortgage loans covered by
Title V. Some states have taken action to reimpose interest rate limits or to
limit discount points or other charges.
Usury limits apply to junior mortgage loans in many states.
Adjustable Interest Rate Loans
Alternative mortgage instruments, including adjustable rate mortgage loans
and adjustable rate cooperative loans, and early ownership mortgage loans,
originated by non-federally chartered lenders have historically been subjected
to a variety of restrictions. Those 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, or Title VIII. Title
VIII provides that, notwithstanding any state law to the contrary,
state-chartered banks may originate "alternative mortgage instruments" ,
including ARM loans, in accordance with regulations promulgated by the
Comptroller of the Currency for origination of alternative mortgage instruments
by
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national banks. State chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National Credit
Union Administration, or NCUA, for origination of alternative mortgage
instruments by federal credit unions and all other non-federally chartered
housing creditors, including state-chartered savings and loan associations.
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, for 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 those provisions. Some states have
taken this action.
Environmental Legislation
Under Comprehensive Environmental Response, Compensation and Liability Act
of 1980, or CERCLA, and under state law in some states, a secured party which
takes a deed-in-lieu of foreclosure, purchases a mortgaged property at a
foreclosure sale, or operates a mortgaged property may become liable in some
circumstances for the costs of cleaning up hazardous substances regardless of
whether they have contaminated the property. CERCLA imposes strict, as well as
joint and several, liability on several classes of potentially responsible
parties, including current owners and operators of the property who did not
cause or contribute to the contamination. Furthermore, liability under CERCLA is
not limited to the original or unamortized principal balance of a loan or to the
value of the property securing a loan. Lenders may be held liable under CERCLA
as owners or operators unless they qualify for the secured creditor exemption to
CERCLA. This exemption exempts from the definition of owners and operators those
who, without participating in the management of a facility, hold indicia of
ownership primarily to protect a security interest in the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996, or Conservation Act amended, among other things, the provisions of CERCLA
for lender liability and the secured creditor exemption. The Conservation Act
offers substantial protection to lenders by defining the activities in which a
lender can engage and still have the benefit of the secured creditor exemption.
In order for a lender to be deemed to have participated in the management of a
mortgaged property, the lender must actually participate in the operational
affairs of the mortgaged property. The Conservation Act provides that merely
having the capacity to influence, or unexercised right to control operations
does not constitute participation in management. A lender will lose the
protection of the secured creditor exemption only if it exercises
decision-making control over the borrower's environmental compliance and
hazardous substance handling and disposal practices, or assumes day-to-day
management of substantially all of the operational functions of the mortgaged
property. The Conservation Act also provides that a lender will continue to have
the benefit of the secured creditor exemption even if it forecloses on a
mortgaged property, purchases it at a foreclosure sale or accepts a deed-in-lieu
of foreclosure provided that the lender seeks to sell the mortgaged property at
the earliest practicable commercially reasonable time on commercially reasonable
terms.
Other federal and state laws in some circumstances may impose liability on
a secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property on which
contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and
lead-based paint. Those cleanup costs may be substantial. It is
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possible that those cleanup costs could become a liability of a Trust and reduce
the amounts otherwise distributable to the holders of the related series of
certificates. Moreover, some federal statutes and some states by statute impose
an Environmental Lien. All subsequent liens on that property, in most cases, are
subordinated to the Environmental Lien and, in some states, even prior recorded
liens are subordinated to Environmental Liens. In the latter states, the
security interest of the trustee in a related parcel of real property that is
subject to the Environmental Lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present on any mortgaged property prior to the
origination of the mortgage loan or prior to foreclosure or accepting a
deed-in-lieu of foreclosure. Accordingly, the depositor has not made and will
not make those evaluations prior to the origination of the secured loans.
Neither the depositor nor any replacement servicer will be required by any
agreement to undertake those evaluations prior to foreclosure or accepting a
deed-in-lieu of foreclosure. The depositor does not make any representations or
warranties or assume any liability for the absence or effect of contaminants on
any related real property or any casualty resulting from the presence or effect
of contaminants. However, the depositor will not be obligated to foreclose on
related real property or accept a deed-in-lieu of foreclosure if it knows or
reasonably believes that there are material contaminated conditions on that
property. A failure so to foreclose may reduce the amounts otherwise available
to securityholders of the related series.
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, or RICO, statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984, 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:
o its mortgage was executed and recorded before the commission of the
crime upon which the forfeiture is based, or
o 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.
Negative Amortization Loans
A recent case decided by the United States Court of Appeals, First
Circuit, held that state restrictions on the compounding of interest are not
preempted by the provisions of the Depository Institutions Deregulation and
Monetary Control Act of 1980, or DIDMC, and as a result, a mortgage loan that
provided for negative amortization violated New Hampshire's requirement that
first mortgage loans provide for computation of interest on a simple interest
basis. The holding was limited to the effect of DIDMC on state laws regarding
the compounding of interest and the court did not address the applicability of
the Alternative Mortgage Transaction Parity Act of 1982, which
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authorizes a lender to make residential mortgage loans that provide for negative
amortization. As a result, the enforceability of compound interest on mortgage
loans that provide for negative amortization is unclear. The First Circuit's
decision is binding authority only on Federal District Courts in Maine, New
Hampshire, Massachusetts, Rhode Island and Puerto Rico.
Manufactured Home Loans
Except as otherwise described in this subsection, under the laws of most
states, manufactured housing constitutes personal property and is subject to the
motor vehicle registration laws of the state or other jurisdiction in which the
unit is located. In the few states in which certificates of title are not
required for manufactured homes, security interests are perfected by the filing
of a financing statement under Article 9 of the UCC, which has been adopted by
all states. Those financing statements are effective for five years and must be
renewed prior to the end of each five year period. The certificate of title laws
adopted by the majority of states provide that ownership of motor vehicles and
manufactured housing shall be evidenced by a certificate of title issued by the
motor vehicles department, or a similar entity, of that state. In the states
that have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is perfected by the recording of that interest
on the certificate of title to the unit in the appropriate motor vehicle
registration office or by delivery of the required documents and payment of a
fee to that office, depending on state law.
The master servicer will be required under the related agreement to effect
that notation or delivery of the required documents and fees, and to obtain
possession of the certificate of title, as appropriate under the laws of the
state in which any manufactured home is registered. In the event the master
servicer fails, due to clerical errors or otherwise, to effect that notation or
delivery, or files the security interest under the wrong law, in a few states,
the trustee may not have a first priority perfected security interest in the
manufactured home securing payments on a manufactured home loan. For example,
the master servicer may file the security interest under a motor vehicle title
statute rather than under the UCC. As manufactured homes have become larger and
often have been attached to their sites without any apparent intention by the
borrowers to move them, courts in many states have held that manufactured homes
may, under some circumstances, become subject to real estate title and recording
laws. As a result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the
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
of the UCC or a real estate mortgage under the real estate laws of the state
where the home is located. These filings must be made in the real estate records
office of the county where the home is located. Substantially all of the
manufactured home loans will contain provisions in their loan documents
prohibiting the obligor from permanently attaching the manufactured home to its
site. So long as the obligor does not violate this agreement, a security
interest in the manufactured home will be governed by the certificate of title
laws or the UCC, and the notation of the security interest on the certificate of
title or the filing of a UCC financing statement will be effective to maintain
the priority of the security interest in the manufactured home. If, however, a
manufactured home is permanently attached to its site, other parties could
obtain an interest in the manufactured home that is prior to the security
interest originally retained by the seller and transferred to the depositor.
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The depositor will assign or cause to be assigned a security interest in
the manufactured homes to the trustee, on behalf of the securityholders. Unless
otherwise specified in the related prospectus supplement, neither the depositor,
the master servicer nor the trustee will amend the certificates of title, or
file UCC-3 statements, to identify the trustee, on behalf of the
securityholders, as the new secured party, and neither the depositor nor the
master servicer will deliver the certificates of title to the trustee or note on
those certificates of title the interest of the trustee. Accordingly, the
depositor or the seller will continue to be named as the secured party on the
certificates of title relating to the manufactured homes. In most states, that
assignment is an effective conveyance of that security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the depositor's rights as the secured party. However,
in some states there exists a risk that, in the absence of an amendment to the
certificate of title, or the filing of a UCC-3 statement, that assignment of the
security interest in the manufactured home might not be held to be effective or
that security interest may not be perfected and in the absence of that notation
or delivery to the trustee, the assignment of the security interest in the
manufactured home may not be effective against creditors of the depositor or
seller or a trustee in bankruptcy of the depositor or seller.
In the absence of fraud, forgery, permanent affixation of the manufactured
home to its site, or administrative error by state recording officials, the
notation of the lien of the depositor on the certificate of title or delivery of
the required documents and fees would be sufficient to protect the trustee
against the rights of subsequent purchasers of a manufactured home or subsequent
lenders who take a security interest in the manufactured home. If there are any
manufactured homes as to which the depositor has failed to perfect or cause to
be perfected the security interest assigned to the trust, that security interest
would be subordinate to, among others, subsequent purchasers for value of that
manufactured home and holders of perfected security interests in that
manufactured home. There also exists a risk in not identifying the trustee, on
behalf of the securityholders, as the new secured party on the certificate of
title that, through fraud or negligence, the security interest of the trustee
could be released.
In the event that the owner of a manufactured home moves that house to a
state other than the state in which that 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 that relocation and
thereafter only if and after the owner re-registers the manufactured home in the
new state. If the owner were to relocate a manufactured home to another state
and re-register the manufactured home in that state, and if the depositor did
not take steps to re-perfect its security interest in that state, the security
interest in the manufactured home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
manufactured home; accordingly, the depositor must surrender possession if it
holds the certificate of title to that manufactured home or, in the case of
manufactured homes registered in states that provide for notation of lien, the
depositor would receive notice of surrender if the security interest in the
manufactured home is noted on the certificate of title. Accordingly, the
depositor would have the opportunity to re-perfect its security interest in the
manufactured home in the state of relocation. In states that do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing loans, the master servicer takes steps to effect that re-perfection upon
receipt of notice of re-registration or information from the obligor as to
relocation. Similarly, when an obligor under a manufactured housing conditional
sales contract sells a manufactured home, the obligee must surrender possession
of the certificate of title or it will receive notice as a result of its lien
noted on that certificate of title and accordingly will have an opportunity to
require satisfaction of the related manufactured housing conditional sales
contract before release of the lien. Under each related agreement,
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the master servicer will be obligated to take the steps, at the master
servicer's expense, as are necessary to maintain perfection of security
interests in the manufactured homes.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority even over
a prior perfected security interest in that manufactured home. The depositor
will obtain the representation of the seller that it has no knowledge of those
liens on any manufactured home securing payment on any manufactured home loan.
However, those liens could arise at any time during the term of a manufactured
home loan. No notice will be given to the trustee or noteholders in the event
this kind of lien arises.
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Enforcement of Security Interests in Manufactured Homes
Repossession of a manufactured home is governed by state law. A few states
have enacted legislation that requires that the debtor be given an opportunity
to cure its default, typically 30 days to bring the account current, before
repossession can commence. So long as a manufactured home has not become so
attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of that home in the
event of a default by the obligor will, in most cases, be governed by the UCC,
except in Louisiana. Article 9 of the UCC provides the statutory framework for
the repossession of manufactured housing units. While the UCC as adopted by the
various states may vary in small particulars, the general repossession procedure
established by the UCC is as follows:
o Except in those states where the debtor must receive notice of the
right to cure a default, repossession can commence immediately upon
default without prior notice. Repossession may be effected either
through self-help, that is, peaceable retaking without court order,
or voluntary repossession or through judicial process such as
repossession under court-issued writ of replevin. The self-help
and/or voluntary repossession methods are more commonly employed,
and are accomplished simply by retaking possession of the
manufactured home. In cases in which the debtor objects or raises a
defense to repossession, a court order must be obtained from the
appropriate state court, and the manufactured home must then be
repossessed in accordance with that order. Whether the method
employed is self-help, voluntary repossession or judicial
repossession, the repossession can be accomplished either by an
actual physical removal of the manufactured home to a secure
location for refurbishment and resale or by removing the occupants
and their belongings from the manufactured home and maintaining
possession of the manufactured home on the location where the
occupants were residing. Various factors may affect whether the
manufactured home is physically removed or left on location, such as
the nature and term of any lease of the site on which it is located
and the condition of the unit. In many cases, leaving the
manufactured home on location is preferable, in the event that the
home is already constructed, in order to avoid the cost of removing
the structure. However, in cases where the home is not moved,
expenses for site rentals will usually be incurred.
o Once repossession has been achieved, preparation for the subsequent
disposition of the manufactured home can commence. That disposition
may be by public or private sale provided the method, manner, time,
place and terms of the sale are commercially reasonable.
o Sale proceeds will be applied first to repossession expenses,
including expenses incurred in repossessing, storing, preparing for
sale, refurbishing and selling costs, and then to satisfaction of
the indebtedness. While some states impose prohibitions or
limitations on deficiency judgments if the net proceeds from resale
do not cover the full amount of the indebtedness, the remainder may
be sought from the debtor in the form of a deficiency judgment in
those states that do not prohibit or limit those judgments. The
deficiency judgment is a personal judgment against the debtor for
the deficiency. Occasionally, after resale of a manufactured home
and payment of all expenses and indebtedness, there is a surplus of
funds. In that event, the UCC requires the party suing for the
deficiency judgment to remit the surplus to the debtor. Because the
defaulting owner of a
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manufactured home, in most cases, has very little capital or income
available following repossession, a deficiency judgment is usually
not sought or, if obtained, will be settled at a significant
discount in light of the defaulting owner's limited financial
condition.
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, such as 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, which is
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.
Consumer Protection Laws with Respect to Manufactured Homes
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity Act,
Regulation "B", the Fair Credit Reporting Act and related statutes. These laws
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions. In some cases, this liability may affect an assignee's ability
to enforce the related contract.
Manufactured home loan documents often contain provisions requiring the
obligor to pay late charges if payments are not timely made. In some cases,
federal and state law may specifically limit the amount of late charges that may
be collected. Unless otherwise provided in the related prospectus supplement,
under the related agreement, late charges will be retained by the master
servicer as additional servicing compensation and any inability to collect these
amounts will not affect payments to noteholders.
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Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called Holder-in-Due-Course Rule of the Federal Trade Commission,
or FTC Rule, has the effect of subjecting a seller, and other related creditors
and their assignees, in a consumer credit transaction and any assignee of the
creditor to all claims and defenses that the debtor in the transaction could
assert against the seller of the goods. Liability under the FTC Rule is limited
to the amounts paid by a debtor on the contract, and the holder of the contract
may also be unable to collect amounts still due under that contract.
Most of the manufactured home loans in a trust will be subject to the
requirements of the FTC Rule. Accordingly, the trustee, as holder of the
manufactured home loan, will be subject to any claims or defenses that the
purchaser of the related manufactured home may assert against the seller of the
manufactured home, subject to a maximum liability equal to the amounts paid by
the obligor on the manufactured home loan. If an obligor is successful in
asserting that claim or defense, and if the seller had or should have had
knowledge of that claim or defense, the master servicer will have the right to
require the seller to repurchase the manufactured home loan because of a breach
of its seller's representation and warranty that no claims or defenses exist
that would affect the obligor's obligation to make the required payments under
the manufactured home loan. The seller would then have the right to require the
originating dealer to repurchase the manufactured home loan from it and might
also have the right to recover from the dealer any losses suffered by the seller
for which the dealer would have been primarily liable to the obligor.
Transfer of Manufactured Homes
In most cases, manufactured home loan documents contain provisions
prohibiting the sale or transfer of the related manufactured homes without the
consent of the obligee on the contract and permitting the acceleration of the
maturity of those contracts by the obligee on the contract upon that sale or
transfer to which consent has not been given. Unless otherwise provided in the
related prospectus supplement, the master servicer will, to the extent it has
knowledge of that conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of the related manufactured home
loans through enforcement of due-on-sale clauses, subject to applicable state
law. In some cases, the transfer may be made by a delinquent obligor in order to
avoid a repossession proceeding for a manufactured home.
In the case of a transfer of a manufactured home as to which the master
servicer desires to accelerate the maturity of the related loan, the master
servicer's ability to do so will depend on the enforceability under state law of
the related due-on-sale clause. The Garn-St Germain Act preempts, subject to
exceptions and conditions, state laws prohibiting enforcement of due-on-sale
clauses applicable to the manufactured homes. Consequently, in some
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cases the master servicer may be prohibited from enforcing a due-on-sale clause
relating to some manufactured homes.
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 various kinds of manufactured homes. The
manufactured home loans would be covered if they satisfy a number of 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 on the related unit.
Formaldehyde Litigation with Respect to Manufactured Home Loans
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 those 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 with Respect to Manufactured Homes", the holder of any loan secured by a
manufactured home for 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 due under the loan. The
successful assertion of that claim constitutes a breach of a representation or
warranty of the seller, and the related trust would suffer a loss only to the
extent that:
o the seller breached its obligation to repurchase the loan in the
event an obligor is successful in asserting that claim, and
o the seller, the depositor or the trustee were unsuccessful in
asserting any claim of contribution or subrogation on behalf of the
noteholders 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 those
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
Material 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 under this prospectus where Thacher Proffitt &
Wood, Brown & Wood LLP or Stroock & Stroock & Lavan LLP is identified in the
applicable prospectus supplement as counsel to the depositor. This discussion is
directed solely to securityholders that hold the securities
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as capital assets within the meaning of Section 1221 of the Internal Revenue
Code, and does not purport to discuss all federal income tax consequences that
may be applicable to particular categories of investors, such as banks,
insurance companies and foreign investors, some of which may be subject to
special rules. Further, the authorities on which this discussion, and the
opinion referred to under "REMICs--Classification of REMICs", 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:
o is given for events that have occurred at the time the advice is
rendered and is not given for the consequences of contemplated
actions, and
o is directly relevant to the determination of an entry on a tax
return.
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 in this prospectus. In addition to
the federal income tax consequences described in this prospectus, 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 under this
prospectus.
The following discussion addresses securities of two general types:
o REMIC certificates representing interests in a trust that the
Trustee will elect to have treated as a "real estate mortgage
investment conduit", or REMIC, under Sections 860A through 860G of
the Internal Revenue Code, or the REMIC Provisions, and
o 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 that series and, if a REMIC election, or
elections, will be made for 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, or a portion of that trust, 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
that REMIC. If a REMIC election or elections will not be made for a trust or
some assets of a trust, the federal income tax consequences of the purchase,
ownership and disposition of the related certificates will be described in the
related prospectus supplement if those certificates are offered by that
prospectus supplement.
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The following discussion is based in part upon the rules governing
original issue discount that are presented in Sections 1271-1273 and 1275 of the
Internal Revenue Code and in the Treasury regulations issued under those
sections, or the OID Regulations, and in part upon the REMIC Provisions and the
Treasury regulations issued the REMIC Provisions, which together are referred to
as the REMIC regulations. The OID Regulations do not adequately address all
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 to the effect that, assuming compliance with
all provisions of the related pooling and servicing agreement, the related
trust, or each applicable portion of that trust, will qualify as a REMIC and the
REMIC certificates offered under that REMIC will be considered to evidence
ownership of regular interests or residual interests 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 Internal Revenue Code for that status
during any taxable year, the Internal Revenue Code provides that the entity will
not be treated as a REMIC for that year and after that year. In that event, the
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 under "--Characterization of Investments in REMIC
Certificates." Although the Internal Revenue 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. That
relief, moreover, may be accompanied by sanctions, such as the imposition of a
corporate tax on all or a portion of the trust's income for the period in which
the requirements for that status are not satisfied. The pooling and servicing
agreement for each REMIC will include provisions designed to maintain the
trust's status as a REMIC under the REMIC Provisions.
Characterization of Investments in REMIC Certificates
In most cases, the REMIC certificates will be "real estate assets" within
the meaning of Section 856(c)(4)(A) of the Internal Revenue Code and assets
described in Section 7701(a)(19)(C) of the Internal Revenue Code in the same
proportion that the assets of the REMIC underlying those 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 Internal
Revenue Code to the extent that those certificates are treated as "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Internal Revenue Code.
The determination as to the percentage of the REMIC's assets that constitute
assets described in the foregoing sections of the Internal Revenue Code will be
made for each calendar quarter based on the average adjusted basis of each
category of the assets held by the REMIC during that 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
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Section 860G(a)(3) of the Internal Revenue Code if transferred to a REMIC on
that REMIC's startup day in exchange for regular or residual interests in that
REMIC.
The assets of the REMIC will include, in addition to loans, payments on
loans, including temporary investments of those 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 those
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 those 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
Internal Revenue Code.
Tiered REMIC Structures
For some series of REMIC certificates, two or more separate elections may
be made to treat designated portions of the related trust as REMICs for federal
income tax purposes. Upon the issuance of that series of REMIC 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 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 Internal
Revenue Code, and "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Internal Revenue Code, and whether the income on those
certificates is interest described in Section 856(c)(3)(B) of the Internal
Revenue 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 for REMIC regular
certificates under an accrual method.
Original Issue Discount
Some REMIC regular certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Internal Revenue Code.
Any holders of REMIC regular certificates issued with original issue
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discount generally will be required to include original issue discount in income
as it accrues, in accordance with the "constant yield" method described in this
section, in advance of the receipt of the cash attributable to that income. In
addition, Section 1272(a)(6) of the Internal Revenue Code provides special rules
applicable to REMIC regular certificates and some other debt instruments issued
with original issue discount. Regulations have not been issued under that
section.
The Internal Revenue Code requires that a reasonable prepayment assumption
be used for 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 that 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 Committee Report accompanying the
Tax Reform Act of 1986 indicates that the regulations will provide that the
prepayment assumption used for a REMIC regular certificate must be the same as
that used in pricing the initial offering of that REMIC regular certificate. 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 closing date, the issue price
for that class will be the fair market value of that 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 that 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 that 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
that REMIC regular certificates. If the original issue discount rules apply to
those certificates, the related prospectus supplement will describe the manner
in which those rules will be applied 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 for a period that begins prior to the closing date, a portion
of the purchase price paid for a REMIC regular certificate will reflect that
accrued interest. In those 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 for periods prior to the
closing date is treated as part of the overall cost of that REMIC regular
certificate, and not as a separate asset the cost of which is
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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 that REMIC regular certificate. However, the OID
Regulations state that all or some portion of that 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 that election could be
made unilaterally by a certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC regular certificate will be considered to be
de minimis if it is less than 0.25% of the stated redemption price of the REMIC
regular certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC regular certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of that REMIC regular certificate, by multiplying:
o the number of complete years, rounding down for partial years, from
the issue date until that payment is expected to be made, presumably
taking into account the prepayment assumption, by
o a fraction, the numerator of which is the amount of payment, and the
denominator of which is the stated redemption price at maturity of
that 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 that de minimis original issue discount and a fraction, the
numerator of which is the amount of that 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 that 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 that 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 that 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 that first period, that period
begins on the closing date, a calculation will be made of the portion of the
original issue discount that accrued during that accrual period. The portion of
original issue discount that accrues in any accrual period will equal the
excess, if any, of
o 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
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distributions made on that REMIC regular certificate during the
accrual period of amounts included in the stated redemption price,
over
o the adjusted issue price of that 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:
o 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 for
each mortgage asset in accordance with the prepayment assumption, if
any, described in the participation agreement or other
organizational document under which that mortgage asset was issued,
and
o 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 for each mortgage asset in
accordance with the participation agreement or other organizational document
under which that 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 that certificate, increased by the aggregate amount of original issue
discount that accrued for that certificate in prior accrual periods, and reduced
by the amount of any distributions made on that 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 that day.
A subsequent purchaser of a REMIC regular certificate that purchases that
certificate at a cost, excluding any portion of that 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 for that certificate. However, that daily portion will
be reduced, if that cost is in excess of the REMIC regular certificate's
"adjusted issue price," in proportion to the ratio that excess bears to the
aggregate original issue discount remaining to be accrued on that REMIC regular
certificate. The adjusted issue price of a REMIC regular certificate on any
given day equals:
o the adjusted issue price, or, in the case of the first accrual
period, the issue price, of that certificate at the beginning of the
accrual period which includes that day, plus
o the daily portions of original issue discount for all days during
that accrual period prior to that day, minus
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o any payments of amounts included in the stated redemption price made
during that accrual period prior to that day for that 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 Internal Revenue
Code, such a certificateholder in most cases will be required to allocate the
portion of that 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, that election will
apply to all market discount bonds acquired by that certificateholder on or
after the first day of the first taxable year to which that 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 that
election were made for a REMIC regular certificate with market discount, the
certificateholder would be deemed to have made an election to include currently
market discount in income for all other debt instruments having market discount
that the certificateholder acquires during the taxable year of the election or
after that year. 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 for all debt instruments having amortizable
bond premium that the certificateholder owns or acquires. See "Taxation of
Owners of REMIC regular certificates--Premium." Each of these elections to
accrue interest, discount and premium for a certificate on a constant yield
method or as interest may not be revoked without the consent of the IRS.
However, market discount for a REMIC regular certificate will be
considered to be de minimis for purposes of Section 1276 of the Internal Revenue
Code if that market discount is less than 0.25% of the remaining stated
redemption price of that REMIC regular certificate multiplied by the number of
complete years to maturity remaining after the date of its purchase. In
interpreting a similar rule for 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 for 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." That 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 in this paragraph.
Section 1276(b)(3) of the Internal Revenue 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 various 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:
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o on the basis of a constant yield method,
o 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
o 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 that regulations might have on the tax
treatment of a REMIC regular certificate purchased at a discount in the
secondary market.
To the extent that REMIC regular certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which that discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC regular
certificate in most cases will be required to treat a portion of any gain on the
sale or exchange of that 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 Internal Revenue 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.
That deferred interest expense would not exceed the market discount that accrues
during that taxable year and is, in general, allowed as a deduction not later
than the year in which that market discount is includible in income. If that
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by the 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
that 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 that REMIC regular certificate may elect under Section
171 of the Internal Revenue Code to amortize that premium under the constant
yield method over the life of the certificate. If made, that 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
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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 that 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 will also apply in
amortizing bond premium under Section 171 of the Internal Revenue Code. Those
rules presumably will require use of a prepayment assumption in accruing market
discount for REMIC regular certificates without regard to whether those
certificates have original issue discount.
Realized Losses
Under Section 166 of the Internal Revenue Code, both corporate holders of
the REMIC regular certificates and noncorporate holders of the REMIC regular
certificates that acquire those 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 Internal Revenue Code until that holder's
certificate becomes wholly worthless, that is, 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 for that certificate, without giving effect
to any reductions in distributions attributable to defaults or delinquencies on
the loans until it can be established that the 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 that 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 regarding
the timing and character of that loss or reduction in income.
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 other transactions. See "--Prohibited Transactions
and Other Possible REMIC Taxes." 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 the holder owned that REMIC residual certificate. For this
purpose, the taxable income or net
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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 that
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 under "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 Internal Revenue Code
on the deductibility of "passive activity losses."
A holder of a REMIC residual certificate that purchased that 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 that certificate. Those daily amounts
generally will equal the amounts of taxable income or net loss determined as
described above. The Committee Report indicates that 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 that certificate
from a prior holder of that certificate at a price greater than, or less than,
the adjusted basis, as defined under "Basis Rules, Net Losses and
Distributions," that REMIC residual certificate would have had in the hands of
an original holder of that certificate. The REMIC regulations, however, do not
provide for those modifications.
Any payments received by a holder of a REMIC residual certificate in
connection with the acquisition of that REMIC residual certificate will be taken
into account in determining the income of that holder for federal income tax
purposes. Although it appears likely that this payment would be includible in
income immediately upon its receipt, the IRS might assert that this 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 those payments, holders of REMIC residual certificates should
consult their tax advisors concerning the treatment of those payments for income
tax purposes.
The amount of income REMIC Residual certificateholders will be required to
report, or the tax liability associated with that 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 under "--Excess Inclusions" and
"--Noneconomic REMIC Residual Certificates." The fact that the tax liability
associated with the income allocated to REMIC Residual certificateholders may
exceed the cash distributions received by those REMIC Residual
certificateholders for the corresponding period may significantly adversely
affect those REMIC Residual certificateholders' after-tax rate of return. That
disparity between income and distributions may not be offset by corresponding
losses or 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 Internal Revenue Code, tax rates or character of
the income or loss.
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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 by this prospectus, amortization of any
premium on the loans, bad debt losses for 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 by this prospectus 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
those 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 those 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 for 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 that market discount in income currently as it accrues, on a constant
yield basis. See "--Taxation of Owners of REMIC Regular Certificates" in this
section of the prospectus, which describes a method for accruing that 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 in that loan, determined as described above,
is less than, or greater than, its stated redemption price. That discount will
be includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to that 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 Internal Revenue Code to amortize any premium on the loans. Premium on any
loan to which that election applies may be amortized under a constant yield
method, presumably taking into account the prepayment assumption. Further, that
election would not apply to any loan originated on or before September 27, 1985.
Instead, premium on that loan should be allocated among the principal payments
on that loan and be deductible by the REMIC as those payments become due or upon
the prepayment of that loan.
A REMIC will be allowed deductions for interest, including original issue
discount, on the REMIC regular certificates, which includes any other class of
REMIC certificates constituting "regular interests" in the REMIC not offered by
this prospectus, equal to the deductions that would be allowed if the REMIC
regular certificates, which includes any other class of REMIC Certificates
constituting "regular interests" in the REMIC not offered by this
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prospectus, 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, which includes any other class of REMIC certificates constituting
"regular interests" in the REMIC not offered by this prospectus, described in
that Section will not apply.
If a class of REMIC regular certificates is issued at an Isssue Premium,
the net amount of interest deductions that are allowed the REMIC in each taxable
year relating to the REMIC regular certificates of that class will be reduced by
an amount equal to the portion of the issue premium that is considered to be
amortized or repaid in that year. Although the matter is not entirely certain,
it is likely that issue premium would be amortized under a constant yield method
in a manner analogous to the method of accruing original issue discount
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of a REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions and Other Possible REMIC
Taxes" below. Further, the limitation on miscellaneous itemized deductions
imposed on individuals by Section 67 of the Internal Revenue Code, which allows
those 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 those
expenses will be allocated as a separate item to the holders of REMIC
certificates, subject to the limitation of Section 67 of the Internal Revenue
Code. See "--Possible Pass-Through of Miscellaneous Itemized Deductions." If the
deductions allowed to the REMIC exceed its gross income for a calendar quarter,
that 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 that 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 that REMIC Residual
certificateholder.
A REMIC Residual certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent that net loss exceeds that REMIC
Residual certificateholder's adjusted basis in its REMIC residual certificate as
of the close of that calendar quarter, determined without regard to that 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 Internal Revenue 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 that certificate. To the extent a distribution on a REMIC
residual certificate exceeds that adjusted basis, it will be treated as gain
from the sale of that certificate. Holders of REMIC residual certificates may be
entitled to distributions early in the term of the related REMIC under
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circumstances in which their bases in that REMIC residual certificates will not
be sufficiently large that those distributions will be treated as nontaxable
returns of capital. Their bases in those REMIC residual certificates will
initially equal the amount paid for those REMIC residual certificates and will
be increased by their allocable shares of the taxable income of the REMIC.
However, those bases increases may not occur until the end of the calendar
quarter, or perhaps the end of the calendar year, for which that REMIC taxable
income is allocated to the REMIC Residual certificateholders. To the extent that
REMIC Residual certificateholders' initial bases are less than the distributions
to that REMIC Residual certificateholders, and increases in those initial bases
either occur after those distributions or, together with their initial bases,
are less than the amount of those distributions, gain will be recognized to
those REMIC Residual certificateholders on those 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," in this section of the prospectus. 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 that REMIC residual certificate to
that REMIC Residual certificateholder and the adjusted basis that REMIC residual
certificate would have had in the hands of an original holder, see "--Taxation
of Owners of REMIC Residual Certificates--General."
Excess Inclusions
Any "excess inclusions" for a REMIC residual certificate will be subject
to federal income tax in all events.
In general, the "excess inclusions" for a REMIC residual certificate for
any calendar quarter will be the excess, if any, of:
o the daily portions of REMIC taxable income allocable to that REMIC
residual certificate, over
o the sum of the "daily accruals", as defined below, for each day
during that quarter that the 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 for that REMIC residual certificate before the
beginning of that 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.
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For REMIC Residual certificateholders, an excess inclusion:
o will not be permitted to be offset by deductions, losses or loss
carryovers from other activities,
o will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and
o will not be eligible for any rate reduction or exemption under any
applicable tax treaty for the 30% United States withholding tax
imposed on distributions to REMIC Residual certificateholders that
are foreign investors. See, however, "--Foreign Investors in REMIC
Certificates," in this section of the prospectus.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that:
o 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,
o the alternative minimum taxable of a taxpayer for a taxable year
cannot be less than the amount of excess inclusions for that year,
and
o 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 for those certificates, reduced, but not below zero, by the
real estate investment trust taxable income, within the meaning of Section
857(b)(2) of the Internal Revenue Code, excluding any net capital gain, will be
allocated among the shareholders of that trust in proportion to the dividends
received by those shareholders from that trust, and any amount so allocated will
be treated as an excess inclusion for a REMIC residual certificate as if held
directly by that shareholder. A similar rule will apply for regulated investment
companies, common trust funds and various 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 that transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due for the income on
that "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:
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o 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 for the REMIC residual certificate, which rate is
computed and published monthly by the IRS, on the REMIC residual
certificate equals at least the present value of the expected tax on
the anticipated excess inclusions, and
o the transferor reasonably expects that for each anticipated excess
inclusion the transferee will receive distributions for 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 various restrictions under the
terms of the related pooling and servicing agreement that are intended to reduce
the possibility of that transfer being disregarded. Those restrictions will
require each party to a transfer to provide an affidavit that no purpose of that
transfer is to impede the assessment or collection of tax, including various
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 that 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 that REMIC residual certificate by that
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 that purchaser.
The related prospectus supplement will disclose whether offered REMIC
residual certificates may be considered "noneconomic" residual interests under
the REMIC regulations. However, any disclosure that a REMIC residual certificate
will not be considered "noneconomic" will be based upon various 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 various REMIC residual
certificates to foreign persons.
Mark-to-Market Rules
On December 24, 1996, the IRS released 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 in most cases may not be marked to market.
Possible Pass-Through of Miscellaneous Itemized Deductions
Fees and expenses of a REMIC in most cases 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 those fees and expenses should
be allocated to the holders of the related REMIC regular certificates. Unless
otherwise stated in the related prospectus supplement, those fees and
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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.
For 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:
o an amount equal to that individual's, estate's or trust's share of
those fees and expenses will be added to the gross income of that
holder, and
o that individual's, estate's or trust's share of those fees and
expenses will be treated as a miscellaneous itemized deduction
allowable subject to the limitation of Section 67 of the Internal
Revenue Code, which permits those 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 that 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 Internal Revenue 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:
o 3% of the excess of the individual's adjusted gross income over that
amount or
o 80% of the amount of itemized deductions otherwise allowable for the
taxable year.
The amount of additional taxable income reportable by holders of those
certificates that are subject to the limitations of either Section 67 or Section
68 of the Internal Revenue Code may be substantial. Furthermore, in determining
the alternative minimum taxable income of that 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 that holder's allocable portion of servicing fees and other
miscellaneous itemized deductions of the REMIC, even though an amount equal to
the amount of those fees and other deductions will be included in that holder's
gross income. Accordingly, those 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. Those
prospective investors should carefully consult with their own tax advisors prior
to making an investment in those 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 that REMIC
regular certificate to that certificateholder, increased by income reported by
that certificateholder for that REMIC regular certificate, including
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original issue discount and market discount income, and reduced, but not below
zero, by distributions on that REMIC regular certificate received by that
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, the gain or loss described
will be capital gain or loss provided that REMIC certificate is held as a
capital asset, which in most cases is property held for investment, within the
meaning of Section 1221 of the Internal Revenue 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 that gain does not
exceed the excess, if any, of:
o the amount that would have been includible in the seller's income
for that REMIC regular certificate assuming that income had accrued
thereon at a rate equal to 110% of the "applicable Federal rate", in
most cases, 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 that
certificate, which rate is computed and published monthly by the
IRS, determined as of the date of purchase of that certificate, over
o the amount of ordinary income actually includible in the seller's
income prior to that sale.
In addition, gain recognized on the sale of a REMIC regular certificate by a
seller who purchased that certificate at a market discount will be taxable as
ordinary income in an amount not exceeding the portion of that discount that
accrued during the period that REMIC certificate was held by that 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 Internal Revenue Code, so that gain or loss
recognized from the sale of a REMIC certificate by a bank or thrift institution
to which that 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 the certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Internal Revenue 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 that 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 that 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 Internal Revenue
Code, during the period beginning six months before, and ending six months
after, the date of that sale, the sale will be subject to the "wash sale" rules
of Section 1091 of the Internal Revenue Code. In that event, any loss realized
by the Residual certificateholder on the sale will not be deductible, but
instead will be added to that REMIC Residual certificateholder's adjusted basis
in the newly acquired asset.
Prohibited Transactions and Other Possible REMIC Taxes
The Internal Revenue Code imposes a Prohibited Transaction Tax. In
general, subject to specified exceptions, a prohibited transaction means the
disposition of a loan, the receipt of income from a source other than a loan or
some 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, contributions to a REMIC made after the day on which the
REMIC issues all of its interests could result in the imposition of a
Contributions Tax. Each pooling and servicing agreement will include provisions
designed to prevent the acceptance of any contributions that would be subject to
that 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 any of those taxes 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 relating to
compliance with applicable laws and regulations. That tax not borne by the
master servicer or the trustee will be charged against the related trust,
resulting in a reduction in amounts payable to holders of the related REMIC
certificates.
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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:
o the present value, which is 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 for the
REMIC residual certificate, which rate is computed and published
monthly by the IRS, of the total anticipated excess inclusions for
that REMIC residual certificate for periods after the transfer and
o 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 that transfer, the prepayment assumption and any
required or permitted clean up calls or required qualified liquidation provided
for in the REMIC's organizational documents. That tax would be generally imposed
on the transferor of the REMIC residual certificate, except that where that
transfer is through an agent for a disqualified organization, the tax would
instead be imposed on that agent. However, a transferor of a REMIC residual
certificate would in no event be liable for that tax for 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 the affidavit was false. Moreover, an entity
will not qualify as a REMIC unless there are reasonable arrangements designed to
ensure that:
o residual interests in that entity are not held by disqualified
organizations and
o information necessary for the application of the tax described in
this prospectus will be made available.
Restrictions on the transfer of REMIC residual certificates and 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 for a REMIC residual certificate and a disqualified
organization is the record holder of an interest in that entity, then a tax will
be imposed on that entity equal to the product of:
o the amount of excess inclusions on the REMIC residual certificate
that are allocable to the interest in the pass-through entity held
by that disqualified organization and
o 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 that pass-through entity furnishes to
that pass-through entity:
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o that holder's social security number and a statement under penalty
of perjury that the social security number is that of the record
holder or
o a statement under penalty of perjury that the 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 that 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 that tax generally allowed to pass-through entities.
For these purposes, a "disqualified organization" means:
o the United States, any State or political subdivision of the United
States, 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 Internal
Revenue Code or the Federal Home Loan Mortgage Corporation,
o any organization, other than a cooperative described in Section 521
of the Internal Revenue Code, that is exempt from federal income
tax, unless it is subject to the tax imposed by Section 511 of the
Internal Revenue Code, or
o any organization described in Section 1381(a)(2)(C) of the Internal
Revenue Code.
For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or other entities
described in Section 860E(e)(6) of the Internal Revenue Code. In addition, a
person holding an interest in a pass-through entity as a nominee for another
person will, for that 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 relating 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 that REMIC residual
certificate is less than the REMIC Residual certificateholder's adjusted basis
in that certificate, that REMIC Residual certificateholder should , but may not,
be treated as realizing a loss equal to the amount of that difference, and that
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 Internal
Revenue Code, which may be accomplished by designating in the REMIC's final tax
return a date on which that adoption is deemed to occur, and sells all of its
assets, other than cash, within a 90-day period beginning on that date, the
REMIC will not be subjected to any "prohibited transactions
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taxes" solely on account of that qualified liquidation, provided that the REMIC
credits or distributes in liquidation all of the sale proceeds plus its cash,
other than the amounts retained to meet claims, to holders of Regular and
residual certificates within the 90-day period.
Reporting and Other Administrative Matters
Solely for purposes of the administrative provisions of the Internal
Revenue 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" for the REMIC in all respects.
The trustee, as the tax matters person or as agent for the tax matters
person, subject to various notice requirements and various restrictions and
limitations, in most cases 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 that 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 that 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 that 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 that person and other information.
Reporting of interest income, including any original issue discount, for
REMIC regular certificates is required annually, and may be required more
frequently under Treasury regulations. These information reports in most cases
are required to be sent to various 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 Internal
Revenue Code, securities dealers and other non-individuals will be provided
interest and original issue discount income information and the information
provided 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 that information to be reported
to the IRS. Reporting for 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, in most cases 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 for 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
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holder's purchase price that the REMIC may not have, those 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 Internal Revenue Code at a rate of 31% if recipients
of those payments fail to furnish to the payor certain information, including
their taxpayer identification numbers, or otherwise fail to establish an
exemption from that tax. Final Withholding Regulations, which are generally
effective for 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
presumptions regarding the status of holders when payments to the holders cannot
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 that recipient's federal
income tax. Furthermore, 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 relating to a distribution on a REMIC regular certificate,
provided that the holder complies to the extent necessary with various
identification requirements, including delivery of a statement, signed by the
certificateholder under penalties of perjury, certifying that the
certificateholder is not a United States person and providing the name and
address of that 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 for 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 of the
United States 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 Internal Revenue Code, and which was treated as
a United States
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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 for 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 of accrued original issue discount, to that 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 that United
States shareholder's allocable portion of the interest income received by that
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 for 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 related documents and upon issuance of the
notes, for federal income tax purposes:
o the notes will be treated as indebtedness and
o 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.
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
Internal Revenue 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 Internal Revenue 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 Internal Revenue Code section 856(c)(3)(B).
Taxation of Noteholders
Notes in most cases will be subject to the same rules of taxation as REMIC
regular certificates issued by a REMIC, as described above, except that:
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o income reportable on the notes is not required to be reported under
the accrual method unless the holder otherwise uses the accrual
method and
o 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 "Material
Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
securities offered under this prospectus. 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 as to the
various tax consequences of investments in the securities offered under this
prospectus.
ERISA Considerations
Employee Retirement Income Security Act of 1974, as amended, or ERISA,
imposes fiduciary and prohibited transaction restrictions on employee pension
and welfare benefit plans subject to ERISA, or ERISA plans. Section 4975 of the
Internal Revenue Code imposes similar prohibited transaction restrictions on
qualified retirement plans described in Section 401(a) of the Internal Revenue
Code and on individual retirement accounts, or IRAs, described in Section 408 of
the Internal Revenue Code.
Some 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 Internal Revenue Code, church plans as defined in Section 3(33) of ERISA,
are not subject to the ERISA requirements discussed in this prospectus.
Accordingly, assets of those 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 plan that is a qualified retirement plan
and exempt from taxation under Sections 401(a) and 501(a) of the Internal
Revenue Code, however, is subject to the prohibited transaction rules presented
in Section 503 of the Internal Revenue 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 Internal Revenue Code prohibit a broad
range of transactions involving Parties In Interest, unless a statutory,
regulatory or administrative exemption is available. 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
Internal Revenue Code, unless a statutory, regulatory or administrative
exemption is available.
ERISA Plan Asset Regulations. Transactions involving a trust that issues
securities offered under this prospectus might be deemed to constitute
prohibited transactions under ERISA and the Internal Revenue Code for a Plan
that purchases the securities, if the underlying mortgage assets and other
assets included in the trust are
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deemed to be assets of the Plan. The U.S. Department of Labor, or DOL, has
promulgated ERISA 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 Internal Revenue
Code. Under the ERISA Plan Asset Regulations, in most cases, when a Plan
acquires an "equity interest" in another entity, such as the trust, the
underlying assets of that entity may be considered to be ERISA plan assets
unless exceptions apply. In addition to several exceptions not applicable to an
entity like the trust, a Plan's Assets will not include an undivided interest in
each asset of an entity in which that Plan makes an equity investment if benefit
plan investors, that is, ERISA plans and 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 ERISA plans nor persons investing ERISA plan assets
should acquire or hold securities in reliance upon the availability of any
exception under the ERISA Plan Asset Regulations. The ERISA Plan Asset
Regulations provide that the term "equity interest" means any interest in an
entiy other than an instrument which is treated as indebtedness under applicable
local law and which has no "substantial equity features." Under the ERISA Plan
Asset Regulations, ERISA 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 some of the rules presented in the ERISA Plan Asset Regulations, ERISA 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. 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 for that Plan.
Any person who has discretionary authority or control respecting the
management or disposition of ERISA plan assets, and any person who provides
investment advice for that assets for a fee, is a fiduciary of the investing
Plan. If the mortgage assets and other assets included in a trust constitute
ERISA 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 some affiliates of those entities may be deemed to be a Plan "fiduciary" and
thus subject to the fiduciary responsibility provisions and prohibited
transaction provisions of ERISA and the Internal Revenue Code for the investing
Plan. In addition, if the mortgage assets and other assets included in a trust
constitute ERISA plan assets, the purchase of certificates by a Plan, as well as
the operation of the trust, may constitute or involve a prohibited transaction
under ERISA or the Internal Revenue Code.
The ERISA Plan Asset Regulations provide that where a Plan acquires a
"guaranteed governmental mortgage pool certificate", the Plan's assets include
that certificate but do not solely by reason of the Plan's holdings of that
certificate include any of the mortgages underlying that certificate. The ERISA
Plan Asset Regulations include in the definition of a "guaranteed governmental
mortgage pool certificate" Freddie Mac Certificates, GNMA Certificates and
Fannie Mae Certificates. Accordingly, even if those Agency Securities included
in a trust were deemed to be assets of Plan investors, the mortgages underlying
those Agency Securities would not be treated as assets of those ERISA plans.
Private mortgage-backed securities are not "guaranteed governmental mortgage
pool certificates" within the meaning of the ERISA Plan Asset Regulations.
Potential Plan investors should consult their counsel and review the ERISA
discussion in this prospectus and in the related prospectus supplement before
purchasing those certificates.
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Prohibited Transaction Exemption. The DOL has granted to DLJ a Prohibited
Transaction Exemption 90-83, or Exemption, which in most cases exempts from the
application of the prohibited transaction provisions of Section 406 of ERISA,
and the excise taxes imposed on those prohibited transactions pursuant to
Section 4975(a) and (b) of the Internal Revenue Code, transactions 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, provided that conditions listed 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 for a class of securities.
"Securities" potentially covered by the Exemptions would include certificates,
notes that are treated as "equity interests" under the ERISA Plan Asset
Regulations, and interests issued by a trust that elects to be treated as a
REMIC or FASIT.
The Exemption provides six general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of securities to be
eligible for exemptive relief under the Exemption. First, the acquisition of
securities by a Plan or with ERISA 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. Third, the
securities at the time of acquisition by or with ERISA 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 Credit Rating Company or Fitch IBCA, Inc., the exemption rating
agencies. Fourth, the trustee cannot be an affiliate of any other member of the
Restricted Group. 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 must
represent not more than the fair market value of those 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 that
person's services under the related agreement and reimbursement of that 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 meet the following requirements:
o the trust must consist solely of assets of a type that have been
included in other investment pools;
o securities in those 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
o securities in those other investment pools must have been purchased
by investors other than ERISA plans for at least one year prior to
any Plan's acquisition of securities.
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A fiduciary of any Plan or other investor of ERISA plan assets
contemplating purchasing a certificate or note must make its own determination
that the general conditions described above will be satisfied for that
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 Internal Revenue Code by reason of Sections 4975(c)(1)(A) through (D) of the
Internal Revenue Code) in connection with the direct or indirect sale, exchange,
transfer, holding, acquisition or disposition in the secondary market of
securities by ERISA plans or with ERISA 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 ERISA plan
assets of an "Excluded Plan", as defined below, by any person who has
discretionary authority or renders investment advice for ERISA plan assets of
that Excluded Plan. For purposes of the securities, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group.
If 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 Internal
Revenue Code in connection with:
o 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 for the investment of the
relevant ERISA plan assets in the securities is (a) a mortgagor as
to 5% or less of the fair market value of the assets of the related
trust or (b) an affiliate of that person,
o the direct or indirect acquisition or disposition of securities in
the secondary market by a Plan or an entity investing ERISA plan
assets, and
o the holding of securities by a Plan or an entity investing ERISA
plan assets.
Further, if 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 Sections 4975(a)
and (b) of the Internal Revenue Code by reason of Section 4975(c) of the
Internal Revenue Code for transactions in connection with the servicing,
management and operation of the trusts. The depositor expects that the specific
conditions of the Exemption required for this purpose will be satisfied for 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 Internal Revenue
Code by reason of Section 4975(c) of the Internal Revenue Code, for transactions
in connection with the servicing, management and operation of the trusts,
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 Internal Revenue Code by reason of Sections 4975(c)(1)(A) through
(D) of the Internal Revenue Code if those restrictions would otherwise apply
merely because
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a person is deemed to be a Party In Interest for an investing Plan (or the
investing entity holding ERISA plan assets) by virtue of providing services to
the Plan (or by virtue of having specified relationships to that person) solely
as a result of the ownership of securities by a Plan or the investment of ERISA
plan assets in securities.
On July 21, 1997, the DOL amended the Exemption to extend exemptive relief
to various mortgage-backed and asset-backed securities transactions using
Funding Accounts for trusts issuing pass-through certificates. For the
securities, the amendment in most cases 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, to be
transferred to that trust within the Pre-Funding Period instead of requiring
that all those 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:
o the ratio of the Pre-Funding Limit must be less than or equal
to 25%;
o all Subsequent mortgage loans must meet the same terms and
conditions for eligibility as the original mortgage loans used
to create the trust, which terms and conditions have been
approved by one of the exemption rating agencies;
o the transfer of those Subsequent Mortgage Loans to the trust
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;
o solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate, or Average Interest
Rate, for all of the mortgage loans and Subsequent Mortgage
Loans in the trust 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 on the closing date;
o in order to ensure that the characteristics of the Subsequent
Mortgage Loans are substantially similar to those of the
original mortgage loans:
o 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
o 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 that letter, the independent
accountant must use the same type of procedures as were
applicable to the mortgage loans which were transferred
to the trust as of the closing date;
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o the Pre-Funding Period must end no later than three months or
90 days after the closing date or earlier in various
circumstances if the Funding Accounts falls below the minimum
level specified in the agreement or an event of default
occurs;
o amounts transferred to any Funding Accounts and/or capitalized
interest accounts used in connection with the pre-funding may
be invested only in permitted investments;
o the prospectus or prospectus supplement must describe the
duration of the Pre-Funding Period; and
o 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, must enforce all the rights created in favor of
securityholders of the trust, including employee benefit plans
subject to ERISA.
Before purchasing a certificate or note, a fiduciary of a Plan or other
investor of ERISA plan assets should itself confirm:
o that the securities constitute "certificates" for purposes of the
Exemption and
o that the specific and general conditions provided in the Exemption
and the other requirements provided 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 ERISA plan assets.
Any fiduciary or other Plan investor which proposes to purchase securities
on behalf of or with ERISA plan assets should consult with its counsel for the
potential applicability of ERISA and the Internal Revenue Code to that
investment and the availability of the Exemption or any other prohibited
transaction exemption in connection with that purchase. 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,
that fiduciary or other Plan investor should consider the availability of the
Exemption or Prohibited Transaction Class exemption (PTCE) 83-1, or PTCE 83-1,
for various transactions involving mortgage pool investment trusts. However,
PTCE 83-1 does not provide exemptive relief for securities evidencing interests
in trusts which include Cooperative Loans and may not provide exemptive relief
for securities having certain cash-flow characteristics that may be issued by a
trust. In addition, that 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 for a series of securities may contain
additional information regarding the application of the Exemption, PTCE 83-1, or
any other exemption, for the securities offered by that prospectus
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supplement. There can be no assurance that any of these exemptions will apply
for 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 that 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 some exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Internal Revenue Code,
including the prohibited transaction restrictions imposed by ERISA and the
related excise taxes imposed by the Internal Revenue Code, for transactions
involving an insurance company general account. Pursuant to Section 401(c) of
ERISA, the DOL published Proposed 401(c) Regulations on December 22, 1997,
however the required final regulations have not been issued as of the date of
this prospectus. 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 ERISA 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
Internal Revenue Code on the basis of a claim that the assets of an insurance
company general account constitute ERISA plan assets, unless:
o as otherwise provided by the Secretary of Labor in the Proposed
401(c) Regulations to prevent avoidance of the regulations, or
o an action is brought by the Secretary of Labor for 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 ERISA 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 ERISA plan assets.
In addition, because Section 401(c) does not relate to insurance company
separate accounts, separate account assets are still treated as ERISA plan
assets of any Plan invested in that separate account. Insurance companies
contemplating the investment of general account assets in the securities should
consult with their legal counsel about 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 ERISA 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 some
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
to be deemed ERISA 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 ERISA plan
assets to effect that 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 those securities by or on behalf of
that Plan is permissible under applicable law,
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will not constitute or result in any non-exempt prohibited transaction under
ERISA or Section 4975 of the Internal Revenue 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 that opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of securities by or
on behalf of that Plan is permissible under applicable law, will not constitute
or result in any non-exempt prohibited transaction under ERISA or Section 4975
of the Internal Revenue 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:
o the transferee is an insurance company;
o the source of funds used to purchase that securities is an
"insurance company general account" (as that term is defined in PTCE
95-60);
o the conditions provided in Sections I and III of PTCE 95-60 have
been satisfied; and
o there is no Plan for which the amount of that general account's
reserves and liabilities for contracts held by or on behalf of that
Plan and all other ERISA plans maintained by the same employer, or
any "affiliate" of that employee, as defined in PTCE 95-60, or by
the same employee organization exceed 10% of the total of all
reserves and liabilities of that general account, as determined
under PTCE 95-60, as of the date of the acquisition of those
securities.
An opinion of counsel or certification will not be required for the
purchase of securities registered through DTC. Any purchaser of a security
registered through DTC will be deemed to have represented by that purchase that
either (a) the purchaser is not a Plan and is not purchasing those securities on
behalf of, or with ERISA plan assets of, any Plan or (b) the purchase of those
securities by or on behalf of, or with ERISA 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 Internal Revenue 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 Tax Exempt Investor nonetheless will be subject to
federal income taxation to the extent that its income is "unrelated business
taxable income," or UBTI, within the meaning of Section 512 of the Internal
Revenue 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 "Material 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 ERISA
plan assets should consult with its counsel about the potential applicability of
the fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and the Internal Revenue 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 by this prospectus 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
provided 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, or 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 of the United
States constitute legal investments for those entities. Any class of securities
that represents an interest in a trust 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 those entities in
relation to "mortgage related securities," the securities will constitute legal
investments for entities subject to that legislation only to the extent provided
in that legislation. Some States have enacted legislation which overrides the
preemption provisions of SMMEA. SMMEA provides, however, that in no event will
the enactment of that 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 those securities so long as that
contractual commitment was made or those securities acquired prior to the
enactment of that 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 by those mortgage-related securities, 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 provided in 12 U.S.C.
24 (Seventh), subject in each case to the regulations as the applicable federal
regulatory authority may prescribe.
On April 23, 1998, the Federal Financial Institutions Examination Council
issued the 1998 Policy Statement applicable to all depository institutions,
providing guidelines for investments in "high-risk mortgage securities." The
1998 Policy Statement was adopted by the Federal Reserve Board, the Office of
the Comptroller of the Currency, the FDIC, the NCUA and the OTS with an
effective date of May 26, 1998. The 1998 Policy Statement
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rescinded a 1992 policy statement that had required, prior to purchase, a
depository institution to determine whether a mortgage derivative product that
it was considering acquiring was high-risk, and, if so, required that the
proposed acquisition would reduce the institution's overall interest rate risk.
The 1998 Policy Statement eliminates constraints on investing in "high-risk"
mortgage derivative products and substitutes broader guidelines for evaluating
and monitoring investment risk.
The OTS has issued Thrift Bulletin 13a, entitled "Management of Interest
Rate Risk, Investment Securities, and Derivatives Activities," or TB 13a, which
is effective as of December 1, 1998 and applies to thrift institutions regulated
by the OTS. One of the primary purposes of TB 13a is to require thrift
institutions, prior to taking any investment position to conduct:
o a pre-purchase portfolio sensitivity analysis for any "significant
transaction" involving securities or financial derivatives, and
o a pre-purchase price sensitivity analysis of any "complex security"
or financial derivative.
For the purposes of TB 13a, "complex security" includes, among other things, any
collateralized mortgage obligation or REMIC security, other than any "plain
vanilla" mortgage pass-through security, that is, securities that are part of a
single class of securities in the related pool that are non-callable and do not
have any special features. One or more classes of certificates offered by this
prospectus and by the related prospectus supplement may be viewed as "complex
securities". The OTS recommends that while a thrift institution should conduct
its own in-house pre-acquisition analysis, it may rely on an analysis conducted
by an independent third-party as long as management understands the analysis and
its key assumptions. Further, TB 13a recommends that the use of "complex
securities with high price sensitivity" be limited to transactions and
strategies that lower a thrift institution's portfolio interest rate risk. TB
13a warns that investment in complex securities by thrift institutions that do
not have adequate risk measurement, monitoring and control systems may be viewed
by OTS examiners as an unsafe and unsound practice.
Some classes of securities offered by this prospectus, 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.
Those classes of securities will be identified in the related prospectus
supplement. prospective investors in those classes of securities, in particular,
should consider the matters discussed in the following paragraph.
There may be other restrictions on the ability of some investors either to
purchase various 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 that
investor.
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Legal Matters
Some specific legal matters in connection with the securities offered by
this prospectus 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 in those trusts and acquiring
and selling mortgage assets to those 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 in this prospectus, the only obligations of the depositor
will be pursuant to various representations and warranties relating the mortgage
assets. See "Loan Underwriting Standards--Representations and Warranties" and
"The Agreements--Assignment of Mortgage Assets" in this prospectus. The
depositor will have no ongoing servicing responsibilities or other
responsibilities for 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 for any trust. 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 that loan, or if applicable, the master
servicer or, the servicer. See "Risk Factors" in this prospectus.
Use of Proceeds
The depositor will apply all or substantially all of the net proceeds from
the sale of each series offered by this prospectus 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 those
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.
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Plan of Distribution
The securities offered by this prospectus and by the related prospectus
supplements will be offered in series may be sold directly by the depositor or
may be offered through 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 that 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. The methods are as follows:
o by negotiated firm commitment or best efforts underwriting and
public re-offering by the underwriters;
o by placements by the depositor with institutional investors
through dealers; and
o 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 for those securities.
If underwriters are used in a sale of any securities, other than in
connection with an underwriting on a best efforts basis, those 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 related to the offer and sale of a particular series of securities
will be named on the cover of the prospectus supplement relating to that series
and the members of the underwriting syndicate, if any, will be named in that
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 those 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 various conditions precedent, that the
underwriters will be obligated to purchase those 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 underwriters will indemnify the depositor against
civil liabilities, including liabilities under the Securities Act of 1933, as
amended, or will contribute to payments required to be made in connection with
those civil liabilities.
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The prospectus supplement for any series offered by placements through
dealers will contain information regarding the nature of that offering and any
agreements to be entered into between the depositor and purchasers of securities
of that series.
The depositor anticipates that the securities offered by this prospectus
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 those 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 that reoffer or
sale.
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Glossary
1998 Policy Statement--The revised supervisory statement setting for the
guidelines for investments in "high risk mortgage securities". The 1998 Policy
Statement was adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC, the NCUA and the OTS with an effective
date of May 26, 1998.
401(C) Regulations--The unissued final regulations, for proposed
regulations of the DOL published on December 22, 1997, Section 401(c) of ERISA.
Accrual Termination Date--For a class of accrual securities, the
distribution date on which all securities of the related series with final
scheduled distribution dates earlier than that of that class of accrual
securities have been fully paid, or another date or period as may be specified
in the related prospectus supplement.
Additional Collateral--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--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--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 in this prospectus and in the related prospectus supplement.
Agency Securities--Mortgage-backed securities issued or guaranteed by
GNMA, Fannie Mae, Freddie Mac or other government agencies or
government-sponsored agencies.
Available Distribution Amount--The amount in the Certificate Account,
including amounts deposited in that account from any reserve fund or other fund
or account, eligible for distribution to securityholders on a distribution date.
Balloon Loan--A 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 that assumed amortization term.
Balloon Payment--The payment of all outstanding principal and interest
made at the end of the term of a Balloon Loan.
Bi-Weekly Loan--A mortgage loan which provides for payments of principal
and interest by the borrower once every two weeks.
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Buy-Down Fund--A custodial account, established by the master servicer or
the servicer for a Buy-Down Loan, that meets the requirements described in this
prospectus.
Buy-Down Loan--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 that mortgage loan.
Buy-Down Period--The period in which the borrower is not obligated to pay
the full scheduled payment otherwise due on a Buy-Down Loan.
Buy-Down Mortgage Rate--For any Buy-Down Loan, the hypothetical reduced
interest rate on which scheduled payments are based.
Buy-Down Amounts--For any Buy-Down Loan, the maximum amount of funds that
may be contributed by the Servicer of the that Buy-Down Loan.
Call Certificate--Any Certificate evidencing an interest in a Call Class.
Call Class--A class of certificates under which the holder will have the
right, at its sole discretion, to terminate the related trust resulting in early
retirement of the certificates of the series.
Call Price--In the case of a call with respect to a Call Class, a price
equal to 100% of the principal balance of the related certificates as of the day
of that purchase plus accrued interest at the applicable pass-through rate.
Certificate Account--For 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.
Collection Account--For 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, or from the servicers, if any.
Contributions Tax--The imposition of a tax on the REMIC equal to 100% of
the value of the contributed property. Each pooling and servicing agreement will
include provisions designed to prevent the acceptance of any contributions that
would be subject to the tax.
Cooperative--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--An individual housing unit in a building owned by a
cooperative.
Cooperative Loan--A housing loan made for a Cooperative Dwelling and
secured by an assignment by the borrower/tenant-stockholder, of a security
interest in shares issued by the applicable Cooperative.
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Designated Seller Transaction--A series of securities where the mortgage
loans included in the trust are delivered either directly or indirectly to the
depositor by one or more unaffiliated sellers identified in the related
prospectus supplement.
Disqualified Persons--For these purposes means:
o the United States, any State or political subdivision thereof, any
foreign government, any international organization, or any agency or
instrumentality of the foregoing, but would not include
instrumentalities described in Section 168(h)(2)(D) of the Internal
Revenue Code or Freddie Mac,
o any organization, other than a cooperative described in Section 521
of the Internal Revenue Code, that is exempt from federal income
tax, unless it is subject to the tax imposed by Section 511 of the
Internal Revenue Code,
o any organization described in Section 1381(a)(2)(C) of the Internal
Revenue Code,
o an "electing large partnership," as described in Section 775 of the
Code, or
o any other person so designated by the trustee based upon an opinion
of counsel that the holding of an ownership interest in a REMIC
certificate by that person may cause the related trust or any person
having an ownership interest in the REMIC certificate, other than
that person, to incur a liability for any federal tax imposed under
the Code that would not otherwise be imposed but for the transfer of
an ownership interest in a REMIC certificate to that person.
Eligible Account--An account maintained with a federal or state chartered
depository institution:
o the short-term obligations of which are rated by each rating agency
in its highest rating at the time of any deposit in that account,
o insured by the FDIC to the limits established by that 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 that account, the holders of the
securities will have a claim as to the funds in that account and a
perfected first priority security interest against any collateral
securing those funds that is superior to claims of any other
depositors or general creditors of the depository institution with
which that account is maintained
o 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
o an account or accounts of a depository institution acceptable to the
rating agencies.
Eligible Accounts may bear interest.
150
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Environmental Lien--A lien imposed by federal or state statute, for any
cleanup costs incurred by a state on the property that is the subject of the
cleanup costs.
Escrow Account--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.
Funding Account--An account established for the purpose of purchasing
additional loans.
GEM Loan--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 those increases being applied to principal, and with further
provision for level payments thereafter.
GPM Fund--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 that GPM Loan assumed in calculating
payments due on the securities of the related multiple class series exceed
scheduled payments on that GPM Loan.
GPM Loan--A mortgage loan providing for graduated payments, having an
amortization schedule:
o 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,
o providing for deferred payment of a portion of the interest due
monthly during that period of time, and
o 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.
Insurance Proceeds--Amounts paid by the insurer under any of the insurance
policies covering any loan or mortgaged property.
Interest Accrual Period--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 that series for any distribution date.
Liquidation Expenses--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.
151
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Liquidated Mortgage Loan--A defaulted mortgage loan as to which the master
servicer has determined that all amounts which it expects to recover from or on
account of that mortgage loan, whether from Insurance Proceeds, Liquidation
Proceeds or otherwise have been recovered.
Liquidation Proceeds--Amounts received by the master servicer or servicer
in connection with the liquidation of a mortgage, net of liquidation expenses.
Mark-to-Market Regulations--The final regulations of the IRS, released on
December 24, 1996, relating to the requirement that a securities dealer mark to
market securities held for sale to customers.
Parties in Interest--For a Plan, persons who have specified relationships
to the Plans, either "Parties in Interest" within the meaning of ERISA or
Disqualified Persons within the meaning of the Internal Revenue Code.
Periodic Rate Cap--For any ARM loan, the maximum amount by which mortgage
rate of that ARM loan may adjust for any single adjustment period.
Pre-Funding Period--For the securities, the period in which supporting
payments of the related mortgage loans, having a value equal to no more than 25%
of the total principal amount of those securities, to be transferred to the
related trust instead of requiring that the related mortgage loans be either
identified or transferred on or before the Closing Date, which period will be no
longer than 90 days or three months following the Closing Date.
Pre-Funding Limit--For the securities, the ratio of the amount allocated
to the Funding Account to the total principal amount of the securities, which
must be less than or equal to 25%
Qualified Insurer--A mortgage guarantee or insurance company duly
qualified as a mortgage guarantee or insurance company under the laws of the
states in which the mortgaged properties are located, duly authorized and
licensed in those states to transact the applicable insurance business and to
write the insurance provided.
REO Property--Real property which secured a defaulted loan which has been
acquired upon foreclosure, deed in lieu of foreclosure or repossession.
Retained Interest--For 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 for the related series.
Restricted Group--The group consisting of any underwriter, the master
servicer, any servicer, any subservicer, the trustee and any obligor for assets
of a trust constituting more than 5% of the aggregate unamortized principal
balance of the assets in the trust as of the date of initial issuance of the
securities.
Servicer Account--An account established by a servicer , other than the
master servicer, who is directly servicing loans, into which that servicer will
be required to deposit all receipts received by it relating to the mortgage
assets serviced by that servicer.
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Servicing Fee--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.
Subordinated Amount--The amount, if any, specified in the related
prospectus supplement for a series with a class of subordinate securities, that
the subordinate securities are subordinated to the senior securities of the same
series.
Subordination Reserve Fund--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.
Subsequent Mortgage Loan--Additional mortgage loans transferred to the
related trust after the closing date.
Subsidy Fund--For any loan, a custodial account, which may be
interest-bearing, complying with the requirements applicable to a Collection
Account in which the master servicer will deposit subsidy funds.
Tax-Exempt Investor--Tax-qualified retirement plans described in Section
401(a) of the Internal Revenue Code and on individual retirement accounts
described in Section 408 of the Internal Revenue Code.
Tax-Favored Plans--An ERISA plan that is exempt from federal income
taxation under Section 501 of the Internal Revenue Code.
United States Person--"United States person" means a citizen or resident
of the United States, a corporation, partnership or other entity created or
organized in, or under the laws of, the United States, any state thereof or the
District of Columbia, except, in the case of a partnership, to the extent
provided in regulations, or 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.
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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 $1,112,000
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 $2,522,000
==========
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).
**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. 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.
**** Filed as an exhibit to Registration Statement on Form S-3 (No.333-75921)
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>
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(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>
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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 May 26, 1999.
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 May 26, 1999
- ------------------- (Principal Executive
Leon M. Pollack Officer)
/s/ Marjorie S. White Secretary and Treasurer May 26, 1999
- --------------------- (Principal Financial and
Marjorie S. White Accounting Officer)
/s/ David F. DeLucia Director May 26, 1999
- --------------------
David F. DeLucia
/s/ Steven L. Kantor Director and Senior Vice May 26, 1999
- -------------------- President
Steven L. Kantor
*By: /s/ Steven L. Kantor
--------------------
Steven L. Kantor
Attorney-in-fact
